Money-Market Funds Are The Next 'Bubble' To Pop

Money-market funds are experiencing a rush of interest from investors at the moment. That can't last long-and soon investors will be doing a one-eighty, which will have a positive impact on banks as well. 

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In recent weeks, RBC has reported that the total assets held in money-market funds have reached close to $5.5 trillion, which is the highest amount the fund industry has ever seen as a result of the investment of cash-like securities, such as short-term Treasury bills. 

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Astonishing is not just the sheer amount of money contained in the funds, but also how quickly the total has grown in recent years. As of early this year, money-market funds have assets of approximately $4.5 trillion, a level at which people have stopped investing more money into them several times, opting to instead purchase other assets such as stocks, a level that was reached a few times.

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There has been a marked increase in the amount of money in circulation this year after starting out around $1.1 trillion at the end of the last year. This was the biggest growth since early 2020. The surge occurred at the expense of bank deposits, which have been lost and halved from around $18 trillion to about $17 trillion as of earlier this week.  

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There is one main reason why people are doing this, which is yield. Banks have been reluctant to increase savings rates for years, and at the time of writing, the one-month Treasury bill yielded 4.7%. During that time, there was an outbreak of banking panic, causing money-market funds, which yielded high incomes and zero risk, to appear more appealing than stocks at the time. 

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We are nearing the end of the rush to buy corporate bonds and stock, and short-term rates are beginning to fall. The economy is beginning to stabilize, and banks' problems seem to be subsiding, improving the outlook for riskier, higher-potential assets.

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It appears likely that the Federal Reserve may reduce or pause its rate increases, based on the fact that the yield on the 1-month Treasury bill has dropped to approximately 4.5%. The Fed may ease up on its fight against inflation to avoid an economic disaster, no matter how unlikely. Even though markets feel pretty certain that the banking issue is under control, investors are betting that they will be able to avoid an economic disaster.

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Investing in riskier assets now has a greater potential reward. 

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Money-market funds received a net injection of $61.5 billion this past week, a drop from around $126 billion the previous week. This shows a calming down of the rush into cash-like assets. According to BofA's credit strategist, Yuri Seliger, this decrease “suggests a moderating in bank deposits outflows.” 

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As a result of interest-rate increases in the past year and shrinking deposit bases, banks' current problems are mainly the result of losses in fixed-income investments.

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In another report, BofA strategists dubbed money market funds the next bubble. Banks that are struggling could benefit from deflating the fund AUM.