Money market funds’ assets have grown by $1 trillion so far this year, the Financial Times reported, and are poised to end this year with an additional $1.5 trillion if the current pace of deposits continues.
The funds have raised their interest rates as the U.S. Federal Reserve and other central banks have hiked theirs. Funds now pay as much as 5 percent—their highest rates in at least 15 years—while the average return on savings at American banks was 0.56 percent on 11 September, according to Bankrate.
While the trend is worldwide, it concentrates in the U.S., according to data from research service EPFR.
Savers have capitalized on the highest rates in years while also preserving safety: the funds typically invest in short-term, highly rated securities such as U.S. treasury notes.
Investors also are storing cash in the funds, away from equity markets’ volatility, falling prices for commodities and other assets, and uncertainty over the U.S. economy.
The funds’ inflow reflects “one trillion dollars of doubt” about the economic future and that of riskier investment venues, US Bank analysts wrote in a note.
“The inflows to cash reflect a tremendous amount of doubt as to whether it’s a soft or hard landing, whether the Fed’s done or not done [raising interest rates], whether it’s a bull market or still a bear,” Michael Hartnett, a Bank of America securities strategist, said in comments quoted by the FT.
“Those big questions haven’t been resolved,” he pointed out. “Until they are, and you can get 5 percent risk-free in money market funds, it’s going to attract inflows.”
In the U.S., transfers into money markets accelerated last spring following the rapid collapse of three banks, marking two of the three biggest bank failures this century.
In March alone, money market funds took in $372 billion, the FT noted.
“With relatively high short-term interest rates likely to continue for some time, we would expect investors to continue to make use of money market funds,” Shelly Antoniewicz, the Investment Company Institute’s deputy chief economist, said to the FT.
TREND FORECAST: Money markets’ popularity and U.S. Treasuries are robbing banks of cash at a time when they desperately need it.
Considering how high real inflation is running and how high the Fed’s interest rates are, the banks are paying saving depositors next to nothing. According to Bankrate, “The national average yield for savings accounts is 0.56 percent APY,” thus, people are pulling their money out of banks.
At the same time, regulators are pushing banks to set aside larger cash reserves to cover the rising number of loans expected to go bad. (See “U.S. Consumers Continue to Pile Up Huge Credit Card Debts” in this issue.)
Also, inflation is driving up banks’ operating costs.
All of these factors leave banks with less cash to lend, limiting their ability to make money and turn a profit—a prospect that turns off investors, which deflates banks’ stock prices.
We continue to see a growing number of banks selling themselves to competitors to avoid outright failure. However, more banks will fail, pressuring the already-strapped Federal Deposit Insurance Corp. to cover depositors’ losses.
As more banks fail, more money will flee them. That sets up the prospect of old-fashioned bank runs increasing in the U.S. over the next three years… that will be accelerated by the Office Building Bust. See:
- “TOP TREND 2023, OFFICE BUILDING BUST: THE COMMERCIAL REAL ESTATE FACE OFF” (28 Mar 2023)
- “SPOTLIGHT: OFFICE BUILDING BUST” (18 Apr 2023)
- “SPOTLIGHT, TOP TREND 2023: OFFICE BUILDING BUST” (16 May 2023)
- “TOP TREND 2023: OFFICE BUILDING BUST” (13 Jun 2023)
- “SPOTLIGHT, TOP TREND 2023: OFFICE BUILDING BUST” (18 Jul 2023)
- “SPOTLIGHT, TOP TREND 2023: OFFICE BUILDING BUST” (25 Jul 2023)
- “SPOTLIGHT, TOP TREND 2023: OFFICE BUILDING BUST” (1 Aug 2023)
- “ECONOMIC UPDATE – MARKET OVERVIEW” (8 Aug 2023)