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.
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.
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. 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.
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. 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.
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.
Mutual funds have expanded to a record $5.4 trillion on the heels of Silicon Valley Bank's failure.