People have moved billions from bank accounts to money market funds. What are those?
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Over the last few weeks, people have taken hundreds of billions of dollars out of their bank accounts and moved them into something called money market funds. That’s partly motivated by concerns about the stability of the banking sector, but part of it is just the good, old-fashioned desire to make more money.
So what exactly is a money market fund, and how does it work?
A money market fund is a kind of mutual fund. But instead of investing your cash in a bunch of companies, it invests in things that are much, much safer.
“Short-term, very liquid, highly rated securities,” said John Tobin, chief investment officer for Dreyfus, which offers money market funds. He’s talking about debt securities such as short-term Treasury bills, short-term municipal bonds, short-term commercial bonds — emphasis on short-term and low-risk.
“For a mutual fund to call itself a money market fund, it needs to be registered with the [Securities and Exchange Commission] and operate under very strict rules or guidelines,” Tobin said.
Those include rules limiting risk and rules making it easy to get your cash in and out. Over the last three weeks of March, money gushed into these funds.
“Beginning with the week ending March 15, money market mutual funds have taken in about $300 billion,” said Steve Blitz, chief U.S. economist at TS Lombard. “It’s about equal to the amount of deposits that have left the banking system.”
Some investors were scared away from banks after two failed in early March. But money market funds also make more money, while most banks offer almost no interest on regular deposits. Money market funds now offer more than 4% a year. It wasn’t always this way, though.
“Prior to last year, when the Fed started raising interest rates, it didn’t really matter where you had your money — you weren’t earning any interest,” said Katie Nixon, chief investment officer for wealth management at Northern Trust, which also offers money market funds.
When the Federal Reserve started raising interest rates, the rates on all the stuff money markets invest in — Treasury bills and other short-term debt — also went up, so the funds offered better returns. Banks, on the other hand, have a lot of long-term investments that are stuck at low rates, so they’ve been slow to catch up. Also, not many are eager to pay those higher yields on savings if they don’t have to.
But until they do, money goes where money grows.
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