Cash is now not trash. Assets invested in US cash market funds hit a file $5tn final week. Investors rattled by the collapse of three US banks and a disaster of confidence in smaller regional lenders scrambled for secure, liquid alternate options to park their property.
About $120bn flooded into US cash market funds within the week to March 15, in accordance with the Investment Company Institute. That is the largest weekly influx since April 2020.
A cash market fund is a mutual fund that invests in short-term debt. While they aren’t federally-insured, they’re typically seen as an ultra-safe money substitute.
But what goes in shortly, 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 guidelines — geared toward disorderly runs during times of market stress — must be unveiled in April.
The worst panic because the Great Financial Crisis is wracking western banking. That makes outcomes massively unpredictable. But optimists imagine present inflows into cash market funds carry much less danger than previously.
Past bouts of instability have been centred on “prime” cash market funds. These spend money on business paper (quick 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.
But publicity to prime funds has been in decline. More than 82 per cent of cash fund property at the moment are in authorities funds, which make investments solely in Treasuries or authorities bonds. Investors have poured almost $145bn into authorities cash market funds and took out $18bn from prime funds.
Another purpose that ought to discourage buyers from dashing for the exit: the comparatively excessive returns accessible on cash market funds. These have steadily elevated because the Fed began elevating rates of interest final 12 months. An index of the 100 largest cash market funds run by Crane Data, which tracks the business, reveals yields have climbed on common to 4.4 per cent from 0.02 per cent initially of 2022.
That continues to be working behind the tempo of US inflation, which clocked in at 6 per cent in February. But these funds, absent an unreasoning stampede out of them, ought to nonetheless supply a good shelter for nervous capital.
Lex: a sum of the pars train
Please inform the FT’s flagship funding column what its priorities must be for its subsequent 90 years by collaborating in our readership survey.