Letter: Why wor­ries on money mar­ket funds are over­done

Wil­liam Cohan’s opin­ion piece (“Vigil­ance is needed on money mar­ket funds”, On Wall Street, Septem­ber 23) wor­ries that money mar­ket funds cur­rently offer high yields only in exchange for higher risk. And, he sug­gests, investors who have “swarmed” to money mar­ket funds don’t under­stand this. Really? Let’s check the facts.

First, yields on money mar­ket funds have risen sharply in recent months not because of risk, but because of mon­et­ary policy. Fed­eral Reserve tight­en­ing over the past 18 months has raised US short-term interest rates to more than 5 per cent. Money mar­ket funds invest in short-term secur­it­ies and pass along the mar­ket-based yields on those invest­ments to investors. The FT itself made this point in a recent art­icle.

Second, so far in 2023, money mar­ket fund assets have grown about $900bn. The vast major­ity of this is inves­ted in short-term Treas­ury and agency secur­it­ies, invest­ments in the Fed’s reverse repur­chase agree­ment RRP facil­ity, and to a lesser extent in com­mer­cial paper issued by global, sys­tem­ic­ally import­ant banks (G-SIBs). One might have thought Cohan would view that as a source of strength for money mar­ket funds, con­sid­er­ing his appar­ent pre­dilec­tion for gov­ern­ment safety nets.

Third, have investors “swarmed” into money mar­ket funds because they have what Cohan refers to as a “human instinct to creep up the risk scale in exchange for a higher yield”? No. Argu­ably, it’s the reverse.

Investors turned to money mar­ket funds fol­low­ing the col­lapse of Sil­icon Val­ley Bank in March this year. More broadly, by choos­ing money mar­ket funds, investors have gained higher yields while redu­cing the interest rate risk of hold­ing long-term bonds and the volat­il­ity risk of hold­ing stocks.

Fourth, aver­age bank deposit rates remain well below money mar­ket fund yields. Unless deposit rates become more com­pet­it­ive — and reg­u­lat­ory head­winds includ­ing bank cap­ital stand­ards and Fed­eral Deposit Insur­ance Cor­por­a­tion insur­ance premi­ums work against that — investors will favour the money mar­ket fund value pro­pos­i­tion.

Money mar­ket fund investors are not the simplistic act­ors Cohan sug­gests. They recog­nise that such funds offer a con­veni­ent, con­ser­vat­ively man­aged, diver­si­fied way of get­ting expos­ure to the attract­ive short-term yields the Fed has provided.

Sean Collins
Chief Eco­nom­ist, Invest­ment Com­pany Insti­tute
Wash­ing­ton, DC, US