The Banking Crisis Knock-On Effect Has Been a Stampede into Government Money Market Funds – Foiling the Fed’s Effort to Raise Market Interest Rates

[Gunnar Larson]

https://wallstreetonparade.com/2023/03/the-banking-crisis-knock-on-effect-has-been-a-stampede-into-government-money-market-funds-foiling-the-feds-effort-to-raise-market-interest-rates/


By Pam Martens and Russ Martens: March 27, 2023 ~

Jerome Powell (Thumbnail)
Jerome (Jay) Powell, Chairman of the Federal Reserve Board

On Sunday, Financial Times reporters Brooke Masters, Harriet Clarfelt and
Kate Duguid published an article under the headline: “Money market funds
swell by more than $286bn as investors pull deposits from banks.”

This article needs some important clarifications. First is the fact that
money market funds had to be bailed out by the government during both the
2008 financial crisis and the more recent financial panic of 2020 stemming
from the COVID pandemic.

On September 19, 2008 (four days after Lehman Brothers was placed into
bankruptcy), stocks were crashing and investors were in a panic, the
Department of the Treasury announced that it would provide a guarantee for
money market mutual funds, standing behind more than $3.5 trillion in money
market fund assets.

In mid-March 2020, as the share prices of mega banks on Wall Street were
plunging in price and investors were in another panic, the Federal Reserve,
with the required approval of the U.S. Treasury Secretary for emergency
bailout programs from the Fed, established the Money Market Mutual Fund
Liquidity Facility (MMLF). Under the facility, the Boston Fed made loans to
various banks to purchase troubled assets from money market funds. When the
Fed finally released the details of that program, Wall Street On Parade
crunched the numbers and found that just six Wall Street firms received 72
percent of the $162.9 billion in cumulative loans made under the MMLF. The
three largest recipients were Federated, JPMorgan Chase and Morgan Stanley.
(See our full report here.)

MMLF Largest Borrowers

Most Americans are unaware that there are two vastly different kinds of
money market vehicles. There is the “money market account” that one can
hold at a federally-insured bank which is FDIC-insured up to $250,000 per
depositor per bank. If you have multiple FDIC-insured accounts at the same
bank (money market account, checking, savings, certificates of deposit),
they all count toward the $250,000 insurance limit.

There is also the “money market fund” which is an uninsured mutual fund
packed with short-term debt instruments of varying quality.

It was these uninsured money market funds that had to be bailed out during
the 2008-2009 financial crisis on Wall Street and again during the March
2020 financial panic related to the COVID pandemic.

The Financial Times article is talking about the uninsured money market
funds.

So why would Americans be flocking to these uninsured money market funds
during the latest banking panic?

We found our answer in the data released by the Investment Company
Institute (ICI.org). According to ICI’s statistics, $276.49 billion of that
$286 billion reported by the Financial Times (or a whopping 97 percent),
went into a very specific type of money market fund – the kind that holds
short-term debt instruments guaranteed by the U.S. government. These are
referred to as “government money market funds.”

ICI reports that total assets in Government Money Market Funds grew as
follows in the month of March: total assets of $3.98 trillion as of March
9, 2023; total assets of $4.128 trillion as of March 15, 2023; total assets
of $4.26 trillion on March 22, 2023.

According to the ICI’s latest data, Government Money Market Funds in the
U.S. now represent 83 percent of all money market funds. As of March 22,
2023, Government Money Market Fund assets of $4.26 trillion compared to
total assets in all money market funds of $5.13 trillion. According to a
report from the Government Accountability Office (GAO), Government Money
Market Mutual Funds represented 79 percent of all money market funds as of
September 30, 2022. (See chart below.)



This flight to safety is having an unintended consequence. It is throwing a
wrench in the Federal Reserve’s plans to bring down inflation in the U.S.
by hiking its benchmark interest rate. For example, the 6-month U.S.
Treasury bill, which had traded at a yield of 5.29 percent in early March,
is trading this morning at a yield of 4.85 percent – notwithstanding that
the Fed raised its benchmark interest rate (Fed Funds) by another
one-quarter percent on March 22.

Money market mutual funds are required to hold short-term instruments,
typically of less than one year to maturity. Government Money Market Funds
hold lots of U.S. Treasury bills, such as the 6-month T-bill. The demand
for these government instruments of less than one year maturity, is also
likely adding to the inverted yield curve, where short-term government
securities are yielding significantly more than the 30-year U.S. government
bond.
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