Money market funds resumed their surge to new record highs on Tuesday (after a dip Monday), rising $28.0 billion to a new high of $5.630 trillion. They increased by $357.1 billion in March and have risen by $37.8 billion over the past week (through 4/4). The massive asset shift continues to attract the attention of the non-cash world, with articles and mentions almost too numerous to count. The Wall Street Journal posted two articles Wednesday, and MarketWatch added another one to its coverage. The Journal's "Deposit Outflows Shine Light on Fed Program That Pays Money-Market Funds," explains, "Banks are under pressure from depositors' embrace of money-market funds, pushing a popular Federal Reserve-sponsored financing program into the spotlight. Money-market fund assets are increasing at a record clip. Much of that cash is making its way to the Fed's overnight reverse repurchase facility, which borrows from money funds and other firms in exchange for securities such as Treasurys and then returns the money the next day."
They write, "The program, known on Wall Street as reverse repo, allows financial firms and others to earn interest on large cash balances. But some analysts contend it also is effectively draining funds from the banking system, where it otherwise could be invested or lent out. As of Wednesday, more than $2.2 trillion sat in the Fed's reverse repo facility, paying a 4.8% annualized rate. That is well above the rates on offer at most banks. Some analysts are suggesting the Fed should change the terms of the facility to limit further bank distress."
They quote William Dudley, formerly of the New York Fed, "What's different this time is the money-market funds aren't really as good at recycling money back into the banking system." The WSJ continues, "Other analysts said it wouldn't be appropriate for the Fed to reduce the interest rate on the reverse repo facility to provide relief to banks that have been slow to raise deposit rates."
They state, "The facility has been meeting its core objective of 'providing highly effective control of overnight interest rates,' said Brian Sack, a former senior executive at the New York Fed who helped design the facility. 'I don't think the Fed should be trying to force savers into bank deposits by making the alternatives less attractive. I don't see reducing the reverse repo rate as an appropriate policy step."
The Journal also wrote the brief, "Rush to Money-Market Funds Could Be Search for Safety, Rather than Yield." It says, "With yields of more than 4%, money-market funds have sapped up more than $300 billion of cash as depositors flee banks. But some evidence indicates the migration into cash-like funds after the collapses of Silicon Valley Bank and Signature Bank may have more to do with safety than income."
The article adds, "Prime money-market funds -- which offer higher rates than their government-oriented counterparts by lending to companies -- have shed $24 billion since the start of March, according to data from the Investment Company Institute. Government funds, considered to be safer investments, have received $334 billion. (Note: Prime MMFs have seen inflows of $10.3 billion over the past week through 4/4, according to Crane Data.)
They quote Ryan Weldon, portfolio manager of the IFM US Dollar Liquidity Fund, "In the weeks following Silicon Valley Bank, institutional money managers yanked cash from prime funds.... The flow is very psychological -- some managers thought the excess risk wasn't worth it; better to be safe in government funds."
MarketWatch also writes about MMFs (again) in the oddly-titled, "'It's like cash under the mattress.' But some see systemic risks as money-market funds park trillions with Fed." Their article tells us, "Investors continue piling into money market-mutual funds, causing assets to swell to more than $5.6 trillion as of Tuesday, a record level, according to data provided by Crane Data, a longtime chronicler of the money-market fund space."
It explains, "While the pace of inflows slowed during the second half of March, investors added an additional $242 billion to money-market funds since March 15. These funds typically see outflows in the weeks leading up to tax day, according to Peter Crane, founder of Crane Data, who has been tracking the sector for about 25 years. Much of this is being parked at the Federal Reserve via its overnight reverse repo facility, or 'RRP,' where funds can reap returns as high as 4.8% on an annualized basis, according to data from the New York Fed."
MarketWatch cautions, "The concern is that if investors and savers can nab such attractive yields in money-market funds, they might continue to migrate away from the banking system into a venue where it can't be recirculated into the economy in the form of loans.... `U.S. money-market funds have roughly 40% of their holdings parked in the RRP, Crane said. These funds make up almost all of the $2.2 trillion in the RRP as of Wednesday, per the Fed's data."
They add, "As a result, their weighted average maturity, or 'WAM,' the shorthand used by money-market pros, has declined to just 15 days for the 100 largest money-market mutual funds tracked by Crane, down from 35 days on average in the past decade. Analysts and money-fund portfolio managers say that much of their inflows are coming from bank deposits, which have continued to see outflows. Savers pulled $125.7 billion from the banking system in the week ended March 22, the latest data available from the Fed, representing outflows from banks for nine straight weeks."
Finally, MarketWatch says, "While higher returns might be a welcome change for savers and investors who earned essentially nothing from their deposits for more than a decade following the financial crisis, some experts worry that relatively attractive yields on offer at the RRP could exacerbate concerns about stability in the banking system."
