Money-market funds swell to record $5.4 trillion as assets pour in at fastest pace since pandemic after SVB collapse

Assets held by money-market mutual funds swelled to a record high $5.4 trillion last week as inflows hit the fastest pace since the start of the COVID-19 pandemic following the collapse of Silicon Valley Bank.

This latest milestone marks the culmination of what has been a banner year for money funds. What started as a trickle of inflows last March after the Federal Reserve delivered its first interest-rate hike since 2018 has surged into a flood, with more than $460 billion flowing into money funds since mid-March 2022 as the Fed has hiked its policy rate by nearly 5 percentage points, according to Crane.

Nearly half of that sum — $228 billion — has arrived since the start of 2023, and the rapid inflows seen during the two weeks through Friday has coincided with a flight of deposits from regional lenders, exacerbating a trend of shrinking bank deposits that started in 2022.

Cash is king

When rates were at rock-bottom levels, keeping money in cash was seen as a drag on portfolio returns. But now, even Wall Street luminaries like Bridgewater Associates founder Ray Dalio — who once encouraged investors to keep their money in stocks and bonds by declaring that “cash is trash” — have changed their tune.

Dalio said during an interview last month that cash is now more attractive than stocks and bonds. Others including Neuberger Berman Portfolio Manager Steve Eisman have echoed that claim.

See: Stocks are tumbling. Why ‘cash’ yielding more than it has since 2007 could be king.

During the week that ended on Friday, investors dumped $129.3 billion into money-market funds, the fastest weekly pace since the pandemic, as the collapse of SVB triggered what one money-fund portfolio manager described as an “awakening” among investors. During the prior week, investors added more than $20 billion, bringing the two-week total north of $150 billion.

All of the inflows accrued to funds that invest exclusively in Treasurys or municipal bonds, Crane data showed. So-called “prime” funds, which buy short-term corporate and bank debt, actually saw money leave in favor of government funds, which are believed to be safer, according to Peter Crane, president of Crane Data.

Crane, who has monitored money-market mutual funds for more than half of their five-decade existence, said he believes the pickup in the pace of inflows has been driven by concerns about the stability of regional U.S. lenders triggered by the collapse of Silicon Valley Bank.

Banks suffered $620 billion in unrealized losses on their bond portfolios as of the end of 2022, according to the most recent data available from the Federal Deposit Insurance Corp. On Tuesday, Treasury Secretary Janet Yellen promised further government support for any banks suffering deposit runs.

‘Maturities are as short as they’ve ever been’

Money-market funds are now, on average, offering annualized returns north of 4%, Crane said as portfolio managers aim to keep their funds’ duration as extremely short-term levels.

Typically, money-fund rates are far more attractive than interest rates that investors receive in their checking and savings accounts. Data from showed the average interest rate on bank savings accounts is a paltry 0.2%.

But Crane said investors are also responding to the perceived safety of money-market funds, which invest in short-dated bonds that are easier to hold to maturity.

SVB collapsed after it was forced to sell part of its bond portfolio, stocked with seemingly safe Treasurys and mortgage bonds, at a loss of roughly $2 billion after higher interest rates spurred losses in the long-dated bonds.

A run on deposits accelerated shortly after the bank disclosed that it would need to raise money to offset this loss.

See: Why Silicon Valley Bank collapsed

“The higher rate is one thing, but safety is also a factor,” Crane told MarketWatch during a phone interview. “Banks are buying three-year Treasurys. Money funds are buying three-week Treasurys.”

One longtime money-fund portfolio manager said the money-fund inflows that followed the collapse of SVB reflect a growing awareness of this disparity among investors.

“Part of the reason why the deposits have been leaving is simply an awakening that happened in the market with the news of SVB,” said Deborah Cunningham, a longtime money-fund portfolio manager who is chief investment officer for global liquidity markets at Federated Hermes.

Crane said money funds are currently parking as much as 40% of their assets with the Fed’s overnight reverse repo facility, allowing them to earn annualized yields north of 4.5%, according to data from the New York Fed.

“Pretty much everybody in the money market space is rolling overnight repos at this point that’s just been the strategy,” Cunningham said.

“Maturities are about as short as they have ever been,” Crane added.

Money funds time to shine

Investors’ newfound love of cash and cash-equivalent investments is being driven by the fact that, since last summer, yields on short-dated Treasury debt have eclipsed yields on longer-dated bonds due to the inversion of the Treasury yield curve, Crane and others said.

The rate on the six-month Treasury bill

topped 5% in February for the first time since 2007. Although a rally in bonds in recent weeks has caused the gap between short- and long-term yields to narrow, the yield on the six-month bill remains at 4.890%, while the 10-year Treasury note

is currently yielding 3.548%, according to FactSet data.

Since March of last year, $468 billion has flowed into money-market funds. Nearly half of that sum — $228 billion — has arrived since the start of the year, according to Crane.

At the same time, deposits in the banking system have trickled out as most banks haven’t materially raised the interest rates they offered to customers.

As of January, the latest data available, cash and cash-equivalent deposits in the banking system stood at roughly $17.4 trillion, a decline of $1 trillion from January 2022, according to data that’s released by the Federal Reserve with a lag.

That’s not a coincidence, Crane and others said as the inverted yield curve, uncertainty about how much further the Fed might raise interest rates, and fears about banking-sector stability have created conditions that are uniquely favorable for money-market funds.

Crane and others expect that the deposit flight worsened in March as banks rushed to borrow money from the Fed’s discount window at a record pace.

In one sign of potential stress, banks borrowed a combined $165 billion from the Fed’s discount window and its new Bank Term Funding Program.

Judith Raneri, who manages the Gabelli U.S. Treasury Money Market Fund, said her fund has seen “huge inflows” over the past two weeks, which she characterized as a reaction to the failure of SVB and two other U.S. banks. She told MarketWatch that she expects inflows to continue, although at a somewhat slower pace.

Some bank deposits offer interest rates as high as 5%

To be sure, investors willing to keep their money parked at smaller online or regional lenders can still reap returns on their cash that are higher than what’s on offer in the money-market fund space, data from showed.

UFB Direct, a division of Axos Bank, offers an annual percentage yield of just over 5% on its bank deposits, the most attractive interest rate of any U.S. bank, according to Bankrate.

By comparison, the JPMorgan Chase & Co. Liquid Assets Money Market fund, a prime fund, offers a 7-day yield of 4.6%, the most attractive rate offered by the retail money funds tracked by Crane Data.

Despite this, deposits have moved away from regional lenders and into large money-center banks like Bank of America Corp.

in recent weeks, as MarketWatch has reported.

That’s a sign that investors are giving priority to the perceived safety of money-center banks, said Greg McBride, chief financial analyst at, in a phone interview.

“The bigger banks tend to have pretty uncompetitive deposit payouts because they don’t need to pay up for deposits,” McBride said. “If you want a better interest rate, then you need to shop around,” he said.

U.S. stocks were modestly higher Tuesday as bank jitters eased, with the Dow Jones Industrial Average

up around 163 points, or 0.5%, while the S&P 500

gained 0.8% and the Nasdaq Composite

advanced 1.1%.