The turmoil in regional banks, rising interest rates and savers’ turn away from low-yielding cash deposits have all led to a conspicuous side effect: They’ve prompted a boom in money market inflows, according to a new report by Cerulli Associates.
Whereas the net inflows to money market funds were $168 billion total for the entire year of 2022, these vehicles funds saw a whopping inflow of $362.1 billion in net flows just in March 2023, and a total of $438.7 billion for the first quarter of this year. Cerulli notes that this new fervor for money markets came on the heels of the Silicon Valley Bank and Signature Bank collapses.
Cerulli, the Boston-based research and consulting firm, said money market fund assets increased from $3.6 trillion at the end of 2019 to more than $5.2 trillion by the end of the Q1 2023.
“The Covid-19 pandemic and uncertainty related to equity and taxable fixed-income markets led to a massive boom in money market assets, while, more recently, the run-up in interest rates and the regional banking crisis have given the vehicle tailwinds,” says “The Cerulli Edge: U.S. Monthly Product Trends.”
It’s a rarefied group of firms gobbling up money market assets: The top 10 managers in this space collectively account for 81% of money market assets, led by Fidelity, with $1 trillion in assets, followed by J.P. Morgan with $516.4 billion, BlackRock with $485.9 billion, Goldman Sachs with $442.3 billion and Vanguard with $413.9 billion. The other five are Federated, Schwab Funds, Morgan Stanley, Dreyfus and State Street.
Cerulli notes that the largest money market fund, Fidelity’s Government Money Market Fund, boasts a seven-day yield of 4.48% while the largest prime fund, the Schwab Value Advantage Money Fund, offers a 4.7% seven-day yield. Both those yields are likely to look better than interest rates in a bank account, Cerulli says, something likely not lost on retired or retiring baby boomers in spending mode.
The siren call of money markets has also been the woe of companies like Charles Schwab, which until recently was able to rest on interest income from its cash sweep accounts, which juices money in the Schwab bank from idle client accounts. With money markets paying so much more, there’s been incentive for clients to move this money (a phenomenon known as “cash sorting.”)
“When short-term interest rates rapidly increase, as they did in 2022, the pace at which clients move certain cash balances out of our sweep features and into higher yielding alternatives generally increases,” Schwab said in its annual report in February.
Cerulli also said in its report: “Fidelity and Vanguard benefit from their presence within the retail market and the potential they provide to investors to sweep brokerage account cash into their money market funds. Meanwhile, JPMorgan and Goldman Sachs benefit from their position as credit facilities for corporations, and, as a result, corporate cash managers often look to these firms first for cash management solutions.”
Most of the money market assets Cerulli tabulated, $4.3 trillion of them, are in taxable funds, while prime funds and tax-free funds make up the rest. Prime funds hold riskier commercial paper and floating-rate debt, while the more common taxable funds hold Treasurys and government securities.
Cerulli said in a statement that it “expects money market funds to continue to be an attractive option for short-term cash management and income generation, assuming the Federal Reserve does not significantly reverse its position on fighting inflation and begin cutting interest rates. However, pending regulatory changes and potential market structure issues could present issues for money market managers.”
Yet like everything else, money market funds prompt admonitions of care from some quarters: Janet Yellen, the U.S. Treasury secretary, speaking at an economic policy conference in late March, reminded participants that money market funds can suffer bank runs in times of stress—something that happened during the global financial crisis of 2008 when several funds “broke the buck” and their net asset values fell beneath a dollar a share.
“During the Global Financial Crisis,” said Yellen in her prepared remarks, “anticipated losses on Lehman Brothers commercial paper led to a run on the $62 billion Reserve Primary Fund, the oldest money market fund in the nation. Concerns about Lehman then sparked concerns about commercial paper issued by other banks. This led to runs on other money market funds. A post-mortem report revealed that as many as 28 other funds had NAVs low enough for them to also break the buck.”