After SVB’s Collapse, Money-Market Funds Record $5.4 Trillion In Assets

As a result of Silicon Valley Bank's collapse, money-market mutual fund assets jumped to a record $5.4 trillion last week, the biggest increase since the COVID-19 pandemic began.

‍

In the last year, money funds have seen a banner year culminating with this latest milestone. As the Fed hiked its policy rate by nearly five percentage points since mid-March 2022, more than $460 billion has flowed into money funds since mid-March 2022. As a result, what started as a trickle in March has now turned into a flood.

‍

Over half of that sum -- $228 billion -- has arrived since the start of 2023, while a flight of regional bank deposits has also been taking place during the last two weeks, exacerbating a trend in declining bank deposits.

‍

The keeping of money in cash used to be perceived as a stumbling block for portfolio returns when the rates were at rock-bottom levels. In recent years, Wall Street luminaries like Bridgewater Associates founder Raymond Dalio have shifted their tune and declared that "cash is trash." Instead of encouraging investors to hold their money in stocks and bonds, he now says they are keeping their funds in stocks and bonds.

‍

Last month, during an interview with CNBC, Dalio said he now believes cash outperforms stocks and bonds as a tool for investing. Additionally, Steve Eisman, an asset manager with Neuberger Berman, made the same claim.

‍

It was estimated that investors poured $129.3 billion into money-market funds during the week that ended on Friday, the fastest pace ever since the pandemic began in 1999, when the collapse of SVB triggered an "awakening" among investors, according to one money-fund manager. Investors added more than $20 billion in the capital during the previous week, bringing the total amount of investment in the past two weeks to over $150 billion.

‍

The Crane Data shows that all of the infusions came from funds that were invested exclusively in Treasury bonds and municipal bonds. There was actually a shift in the money in favor of government funds, which are regarded as safer, instead of "prime" funds, which buy short-term corporate and bank debt. According to Peter Crane, president of Crane Data, the money actually left such funds in favor of government funds.

‍

It is Crane's belief that the pickup in the pace of inflows triggered by concern about the stability of regional U.S. lenders, triggered by Silicon Valley Bank's collapse, is a consequence of concerns about the stability of money-market mutual funds, which have existed for more than half their five-decade existence.

‍

As of the end of 2022, the Federal Deposit Insurance Corporation reported that banks had suffered $620 billion in unrealized losses on their bond portfolios. It was said Tuesday that Treasury Secretary Janet Yellen would provide more assistance to banks experiencing deposit runs.

‍

It's the shortest maturity period ever'

‍

As portfolio managers attempt to keep their funds' duration as short as possible, money-market funds now, on average, offer annualized returns north of 4%, Crane said.

‍

The average interest rate on bank savings accounts is a paltry 0.2% according to Bankrate.com, which shows money-fund rates are far more attractive than interest rates on checking and savings accounts.

‍

Crane said investors also respond to short-dated bonds that are easier to hold to maturity, which is invested in money-market funds.

‍

The SVB collapsed after losing roughly $2 billion on long-term bonds on account of higher interest rates, which caused losses in SVB's bond portfolio, which included Treasurys and mortgage bonds.

‍

Following the bank's disclosure that it needed to raise money to offset its losses, a run on deposits accelerated.

‍

Banks are buying three-year Treasury securities. Money funds are buying three-week Treasury securities, Crane told MarketWatch. "The higher rate is one thing, but safety is another."

‍

Inflows into money funds following the collapse of SVB reflect an awareness of this disparity among investors, according to one longtime money-fund portfolio manager.

‍

Deborah Cunningham, head of global liquidity markets at Federated Hermes and a longtime money fund portfolio manager, said that part of the reason deposits have been leaving is the awakening in the market caused by the news of SVB.

‍

According to New York Fed data, money funds park about 40% of their assets with the Fed's overnight reverse repo facility, earning annualized yields of over 4.5%.

‍

According to Cunningham, "at this point, everyone is rolling overnight repos."

‍

According to Crane, maturities have never been shorter.

‍

Due to the inversion of the Treasury yield curve, individuals are becoming more attracted to cash and cash-equivalent investments since last summer, Crane and others said.

‍

It was the first time in seven years that the yield on the six-month Treasury bill exceeded 5% in February. In spite of the recent rally in bonds, which has caused the gap in yields between short- and long-term securities to narrow, according to FactSet data, the yield on the six-month Treasury note remains 4.890%, and the 10-year Treasury note yields 3.548% today.

‍

There has been a staggering amount of money flowing into money-market funds since March of last year. Crane estimates that nearly half of that amount -- $228 billion -- has come in since the start of the year.

‍

As well, deposits in the banking system are beginning to trickle out due to the fact that most banks haven't raised their interest rates for their customers in a substantial way.

‍

Data from the Federal Reserve, which is released with a lag after the data is released by the Securities and Exchange Commission, show that at the end of January, the amount of cash and cash equivalents in the banking system stood at $17.4 trillion, a decline of $1 trillion from January 2022, according to the latest data available.

‍

Money-market funds are thriving because of the inverted yield curve, uncertainty about further interest rate hikes from the Fed, and concerns about banking sector stability, Crane and others stated.

‍

The Fed's discount window was flooded with money in March as banks rushed for money at a record pace. This exacerbated the deposit flight, Crane and others believe.

‍

The Fed's Bank Term Funding Program and discount window combined to lend banks $165 billion.

‍

Her fund has seen "huge inflows" over the past two weeks, as a result of the failure of SVB and two other U.S. banks, according to Judith Raneri, manager of the Gabelli U.S. Treasury Money Market Fund. According to her, inflows are expected to continue, but at a slightly slower rate.

‍

Interest rates on bank deposits can reach 5% in some cases

‍

Bankrate.com data shows investors can still earn higher returns on their cash if they keep their money in smaller online or regional lenders than money-market funds.

‍

It is the most attractive interest rate among U.S. banks, according to Bankrate, to deposit with UFB Direct, a subsidiary of Axos Bank.

‍

In comparison, the most attractive yield among retail funds tracked by Crane Data is offered by JPMorgan Chase & Co. Liquid Assets Money Market fund.

‍

MarketWatch reports that, despite these developments, deposits are moving from regional lenders to large national banks like Bank of America Corp. (BAC).

‍

Bankrate.com's chief financial analyst Greg McBride says investors are valuing money-center banks' perceived safety.

‍

Because bigger banks do not need to pay up for deposits, they tend to have relatively uncompetitive deposit payouts, he said. "If you want a better interest rate, then shop around."

‍

The Dow Jones Industrial Average rose around 163 points, or 0.5%, after bank jitters eased Tuesday, along with the S&P 500 and Nasdaq Composite, which both gained 0.8% and 1.1%, respectively. The Dow Jones Industrial Average rose to 720.6 points, or 0.9%, after losing 168 points Monday.