In the wake of Silicon Valley Bank's collapse and subsequent banking meltdown, cash is king. The turmoil inflicted on financial markets has sent cautious investors running away from volatile markets and toward more liquid alternatives.
Money market funds, widely thought to be one of the safest, lowest-risk investment options, have seen an influx of cash in recent weeks as investors look for more stable ground.
These funds invest in short-term securities like government bonds, certificates of deposit — or fixed-term savings accounts — and commercial debt. The goal of a money market fund is to provide investors with a relatively stable investment option that offers higher returns than traditional savings.
But money markets aren't without risks of their own, especially when they experience a large wave of investors all at once.
What's happening: Since the Fed began to raise interest rates a year ago, the amount of money in money market funds has increased by roughly $400 billion. The inflows totaled more than $120 billion alone last week, according to Apollo Global Management. That means a record $5 trillion is currently invested.
The majority of the new money last week came from institutional investors, who put about $101 billion into the funds. Investments from retail investors made up about $20 billion, according to the Investment Company Institute.
Still, retail investors could soon pick up the pace. Goldman Sachs economists wrote in a note on Thursday that Americans could sell as much as $1.1 trillion in stocks this year and put that money into credit and money market assets instead.
Not-so-safe haven: But the more money there is invested in these funds, the greater the risk that cash could also flow out quickly, creating a money-market liquidity crisis — where funds may not have enough cash on hand to meet those redemptions.
Money market funds are deeply interconnected with the wider financial system, and often face the same risks as banks.
They typically invest in securities with maturities of 90 days or less, meaning they are very sensitive to changes in interest rates. They also invest heavily in commercial debt — if there's a significant economic downturn the issuers could default on their obligations.
Recent meltdowns: Money markets last experienced a meltdown in the pandemic-induced panic of 2020 that required the US Department of the Treasury and the Federal Reserve to step in to prevent a destabilizing rapid withdrawal of money from the funds.
Funds that aren't banks "can take the existing stress in the financial system and amplify it," said US Treasury Secretary Janet Yellen at the time.
Regulations and updates were suggested by the Treasury in the wake of the turmoil, but the vulnerabilities exposed during the panic have yet to be addressed. New proposals for increasing investor safety are expected to be unveiled by the Securities and Exchange Commission next month.
The Federal Deposit Insurance Corporation, a US government agency that insures deposits in banks and savings associations, does not insure cash invested in money market funds. Those funds are also not guaranteed by the US government.
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