Money is not trash. Property invested in US cash market funds hit a document $5tn this month. Buyers rattled by the collapse of three US banks and a disaster of confidence in smaller regional lenders scrambled for protected, liquid options to park their belongings.
About $120bn flooded into US cash market funds within the week to March 15, in accordance with the Funding Firm Institute. That’s the largest weekly influx since April 2020.
A cash market fund is a mutual fund that invests in short-term debt. Whereas they don’t seem to be federally-insured, they’re usually seen as an ultra-safe money substitute.
However what goes in rapidly, can come out simply as quick. The significance of those devices within the monetary plumbing system has prompted the Federal Reserve to step in twice previously 15 years. New rules — aimed toward disorderly runs during times of market stress — needs to be unveiled in April.
The worst panic because the Nice Monetary Disaster is wracking western banking. That makes outcomes massively unpredictable. However optimists consider present inflows into cash market funds carry much less danger than previously.
Previous bouts of instability have been centred on “prime” cash market funds. These spend money on industrial paper (brief time period firm debt), a key supply of short-term financing for a lot of US firms. Sudden mass withdrawals contributed to emphasize within the short-term funding markets.
However publicity to prime funds has been in decline. Greater than 82 per cent of cash fund belongings are actually in authorities funds, which make investments solely in Treasuries or authorities bonds. Buyers have poured almost $145bn into authorities cash market funds and took out $18bn from prime funds.
Another excuse that ought to discourage traders from dashing for the exit: the comparatively excessive returns obtainable on cash market funds. These have steadily elevated because the Fed began elevating rates of interest final yr. An index of the 100 largest cash market funds run by Crane Knowledge, which tracks the trade, reveals yields have climbed on common to 4.4 per cent from 0.02 per cent at the beginning of 2022.
That’s nonetheless operating behind the tempo of US inflation, which clocked in at 6 per cent in February. However these funds, absent an unreasoning stampede out of them, ought to nonetheless provide an honest shelter for nervous capital.
Lex: a sum of the pars train
Please inform the FT’s flagship funding column what its priorities needs to be for its subsequent 90 years by participating in our readership survey.
