Money-market funds are in high demand. This can't continue for much longer. Investors could do a 180 in the near future, which would be good news for banks.
RBC reports that the total assets of money-market funds (investment vehicles that purchase cash-like securities like short-term Treasury Bills) reached a record high of $5.5 trillion in recent months. This is the highest ever recorded.
The sheer amount of money is impressive, but so is the speed at which it grew. Money-market funds assets were at $4.5 trillion earlier this year. This was a level where people had stopped investing in these funds several times over the last few years and instead bought other assets, like stocks.
In just a few short weeks, it jumped by $1 trillion. This was the biggest increase since early 2019. This surge was at the expense bank deposits which fell to around $17 trillion earlier this week, from about $18 trillion.
Most people do this because of the yield. Early March, the yield on a 1-month Treasury Bill was 4.7%. The panic in the banking sector erupted at that time, and money-market funds with high yields and zero risk became more attractive than stocks.
This rush won't last long. The problems of the banks seem to be subsiding. This should stabilize the economy, and improve the outlook on riskier assets with higher potential, like corporate bonds and stock. Short-term interest rates have also fallen from their peak.
The yield of the 1-month Treasury Bill has dropped to around 4.5%. This is consistent with the notion that the Federal Reserve could cut rates or delay increasing them. Investors are betting on the Fed to ease up its fight against inflation, even though the markets believe that the banking problem is under control.
Riskier assets now offer greater potential rewards.
It seems that the rush into cash-like investments has already begun to slow down. Bank of America reports that a net $61.5 billion was poured into money market funds in the past week. This is down from $126 billion just a week earlier. Yuri Seliger is a credit strategist with BofA. He wrote that this decrease'suggests a possible moderation in outflows of bank deposits'.
This would be a welcome development, as the banks' current problems are primarily due to the loss of fixed-income investments and the shrinking deposit base caused by the interest rate increases over the last year.
A team of BofA analysts wrote: 'The Next Bubble...Money Market Fund AUM', referring the assets under management. It could be helpful to some struggling lenders.