The Surge In Demand For Money Market Funds to Efficiently Store Cash

The Surge In Demand For Money Market Funds to Efficiently Store Cash
Markets
Ben Verschuere - Chief Investment Officer
|
May 9, 2024

There are now more than $6 Trillion in assets allocated to money market funds! To put things in perspective this represents more than 35% of the total deposit sitting with banks.

Given the large inflow, we review here the basics of money market funds as well as the underlying reasons why this asset class is experiencing demand.

What is a Money Market Fund

A money market fund is a type of mutual fund that invests in short-term, low-risk securities such as government bonds, certificates of deposit (CDs), commercial paper, and other highly liquid and safe instruments. These funds are designed to provide investors with a relatively stable investment option that aims to preserve capital while generating yield. Overall Money market funds are known for their liquidity, meaning investors can easily buy or sell shares in the fund, which explains why they are commonly used by large corporations to manage their idle cash. 

Two types of Money Market funds

There are two main types of Money Market funds:


1) Government Backed Money Market Fund: A Government-backed money market fund is a type of money market fund that primarily invests in short-term securities issued or guaranteed by the government or government-sponsored entities (GSEs). These funds typically invest in highly liquid and low-risk instruments such as Treasury bills, Treasury bonds, agency securities (issued by GSEs like Fannie Mae or Freddie Mac), and short-term government bonds.

2) Prime Money Market fund: A prime money market fund is a type of money market mutual fund that invests in short-term, highly liquid securities such as commercial paper, certificates of deposit (CDs), Treasury bills, repurchase agreements, and other short-term debt instruments. The difference compared to Government-backed money market funds comes from the fact they invest not only in government backed securities but also short-term debt securities issued by corporations and financial institutions with strong credit ratings (typically rated A1/P1 or higher by rating agencies like Moody's or S&P).

Why are Money Market Funds Experiencing Large Inflows?

As we can see from the chart, below the total assets under management of money market funds has surged to more than $6Tr, having grown by more than $750Bn over the last year alone.

Money Market Fund Asset Under Management (in $ Billion). Data: Bloomberg

Several factors are behind the recent surge in money market fund demand:

  1. Safety and Stability: Amid economic uncertainties or market volatility, such as the banking troubles last year, investors and businesses are looking for safe havens for their cash. Money market funds are considered safe due to their investments in short-term, low-risk securities 
  2. Higher Yields: Compared to traditional savings accounts or other cash equivalents, money market funds often offer slightly higher yields. With the recent increase in the Fed Fund rate, Money market funds have now become particularly compelling.
  3. Liquidity: Money market funds provide high levels of liquidity, allowing investors to easily access their funds when needed. This makes them attractive for investors looking for short-term investment options without locking up their money for extended periods.
  4. Cash Management: Institutional investors, corporations, and financial institutions often use money market funds for cash management purposes. These funds offer a convenient way to park excess cash reserves while maintaining liquidity and earning a modest return.

Conclusion

As we have seen, money market funds are a compelling alternative to leaving cash in a bank account especially given the higher returns they can provide, as well as their safety. If you are a business, Treasure can help you safely allocate to Government-backed money market funds (more info here). If you are a Fintech, Treasure can help you embed a money market fund offering on your platform to delight your customers with access to liquid, yield generating products (more info here).

‍The information provided is for informational purposes only and should not be construed as investment, financial, legal, or tax advice. This material should not be considered an offer or recommendation to buy or sell a security, or a recommendation of any specific investment or strategy. You should consult your own financial, legal, and tax advisors before engaging in any transaction. While information and sources are believed to be accurate, Treasure does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information. For more information about Treasure, please visit treasurefi.com.

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