Yield-hungry investors push US money market assets to record $5.4tn

Low-risk cash vehicles absorbed tens of billions of inflows during a season of bank turmoil

US money market fund assets have swelled to a record high this week, as the best yields available in years and the early May collapse of First Republic Bank kept investors piling into the low-risk vehicles.

Total net assets in money market funds, which invest in high-quality, short-dated debt, reached almost $5.4tn as of Wednesday, according to data from the Investment Company Institute. The figure is up from less than $5.3tn in late April and $4.8tn at the start of the year.

Investors have rushed into money market funds this year due to the increasingly high yields on offer, particularly in government vehicles, fuelled by the Federal Reserve’s most aggressive campaign of interest rate rises in decades.

Most of the assets reported by ICI sit in government-focused vehicles, which hold Treasury bills that are deemed to be very low risk.

According to EPFR, another data provider, money market funds have so far absorbed roughly $146bn in May, putting the month on track to have had the second-highest inflows since April 2020, when panicked investors flooded in.

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In March, money market funds received a massive $370bn as the regional Silicon Valley Bank and Signature Bank collapsed, raising questions about the health of the wider sector.

For Shelly Antoniewicz, senior economist at the ICI, rapid inflows into money market funds early this month were likely related to the demise of California-based First Republic, which had $93.5bn of deposits before it was shut down and largely sold to JPMorgan Chase at the beginning of May.

The flood of cash into money market funds has continued even as pressure on the banking system has eased and attention has turned to the prospects of a US government default if lawmakers in Washington fail to reach a deal to raise the country’s debt ceiling. The prices of bills maturing around the time that the US is expected to run out of cash have plummeted, sending yields above 7 per cent.

The starring role of money market funds in markets this year may continue even after any deal to raise the federal borrowing limit. After a potential resolution, the Treasury department is expected to have to borrow vast amounts of cash in order to replenish its coffers — roughly $750bn in Treasury bills in the four months after a deal, according to JPMorgan estimates.

A wave of issuance like that would suck up liquidity in markets, potentially increasing strains on banks and lifting funding costs. But, money market funds, with high volumes of cash to deploy, could step in.

“To the extent that the Treasury has a flood of supply that’s coming to market, it will be received with open arms,” said Deborah Cunningham, chief investment officer of global liquidity markets at Federated Hermes.