Yield-hungry investors push US money market assets to register $5.4 trillion

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Assets in US money market funds hit a record high this week as the best yields available in years and the early May collapse of First Republic Bank prompted investors to pile into lower-risk vehicles.

Total net assets of money market funds, which invest in high-quality, short-term debt securities, reached nearly $5.4 trillion on Wednesday, according to data from the Investment Company Institute. The figure increased from less than $5.3 trillion at the end of April to $4.8 trillion at the start of the year.

Investors have rushed into money market funds this year due to the ever higher yields on offer, particularly in government vehicles, fueled by the more aggressive interest rate increases over the decades.

Most of the assets reported by ICI are in government-focused vehicles, which hold Treasuries deemed very low-risk.

According to EPFR, another data provider, money market funds have so far absorbed about $146 billion in May, putting the month on track to have the second-highest inflow since April 2020, when panic-stricken investors they are poured.

In March, money market funds received a whopping $370 billion in the collapse of regional Silicon Valley Bank and Signature Bank, raising questions about the health of the sector at large.

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

The influx of liquidity into money market funds continued even as pressure on the banking system eased and attention shifted to the prospects of a US government default if Washington lawmakers fail to reach an agreement to raise the level of the country debt ceiling. Prices of notes maturing around the time the US is expected to run out of cash plummeted, taking yields above 7%.

The starring role of money market funds in markets this year could continue even after any deal to raise the federal lending limit. After a potential settlement, the Treasury Department would have to borrow large sums of money to replenish its coffers — about $750 billion in Treasuries in the four months following the deal, according to JPMorgan estimates.

Such a wave of issuance would suck liquidity out of the markets, potentially increasing strains on banks and raising funding costs. But money market funds, with large volumes of cash to deploy, could step in.

“To the extent that Treasuries have a wave of supply coming to the market, it will be welcomed with open arms,” ​​said Deborah Cunningham, chief investment officer of global liquidity markets at Federated Hermes.