Money Market Funds: Any Port In A Storm

While much attention has been focused on specific banks since the failure of Silicon Valley Bank (SVB), our challenge has been to project how the effects of SVB’s crisis could disrupt the broader economy. We can now see that skittish bank depositors are redirecting their money into short-term investment products, with uncertain implications for growth.

Money market funds (MMFs) are open-ended mutual funds that invest in liquid, safe assets like U.S. Treasuries and high-rated short-term corporate debt. These funds should not be confused with “money market accounts” that banks offer to consumers, which are FDIC-insured.

Through 2022, as interest rates rose, money market fund returns grew. MMFs can place their cash overnight in the Federal Reserve’s reverse repo facility, currently paying 4.8% annualized interest with no risk. Amid a difficult year in markets and with interest rates paid on bank deposits low, MMFs became very attractive. The failure of SVB has only built on this momentum. In just the two weeks following the SVB-related volatility, more than $230 billion flowed into MMFs.

Though some are questioning the safety of bank deposits, money market funds are not obviously safer. They carry no insurance or guarantee of positive returns. They were a culprit in the acute phase of the financial crisis in September 2008: a leading fund “broke the buck”—that is, took

losses that brought its price below $1—due to its exposure to Lehman Brothers’ debt. Investors’ confidence was shattered as stress emerged in what was thought to be a safe asset class. Following the financial crisis, management practices evolved and regulations were updated.