Investors have fallen back in love with money market mutual funds — and that must be warming the heart of Fidelity Investments, the biggest player in the $5.5 trillion industry.
In the past six months, investors big and small poured more than $500 billion into money market funds, according to industry tracker Crane Data. The overwhelming majority of that cash went into a type of money fund that holds very safe short-term government debt and related securities, the Westborough firm’s data show.
Individual investors cozied up to the government money market funds starting last year as the Federal Reserve’s aggressive interest rate increases pushed their yields higher, said Crane Data chief executive Peter Crane. Retail government money market funds returned an annualized 4.2 percent last week, up from a measly 0.2 percent before the central bank started boosting rates, he said.
But institutional investors were shocked into action on March 10 by the twin failures of Silicon Valley Bank and Signature Bank. Over the next nine days, businesses, investment firms, and other organizations put $228 billion into institutional government money market funds, more than they had all year before the bank blowups.
“None of the big guys gave them a second thought a couple of weeks ago,” said Crane, referring to government money market funds. “Since Silicon Valley Bank there has just been a flood of cash.”
Fidelity, the Boston financial services giant, has been the biggest beneficiary of investors’ renewed affection for money funds, which are structured much like stock or bond mutual funds and function like interest-paying bank accounts with one big exception: they aren’t insured by the Federal Deposit Insurance Corp.
Customers have added $153 billion to its money market funds since September, bringing its total money fund assets to $1.1 trillion, more than double that of its nearest rival, BlackRock.
The impact to Fidelity’s revenue could be substantial, Crane said. Money funds are charging fees that average about 0.3 percent. While that might seem minuscule, a year ago most fund managers were waiving or deeply discounting fees just to hold onto customers.
Some back of the envelope math: a fee of 0.3 percent on a trillion dollars equals $3 billion.
As retail investors chase yields, the move into money market funds by big investors is driven largely by fear. Bank accounts are insured up to $250,000 by the FDIC, but many institutions have much more than that stashed in banks. When Silicon Valley Bank went under, streaming company Roku had $487 million, or 26 percent, of its $1.9 billion in cash in the bank.
While government money market funds aren’t insured, their holdings are considered super-safe: cash, US Treasuries and related debt, and securities issued or guaranteed by the US government or its agencies.
Remember: While you can withdraw at any time, money fund yields fluctuate along with Treasury market interest rates. To lock in a yield you’ll need to tie up your money for a stretch.
Some 1-year bank certificates of deposit, which are FDIC insured, are paying 4 to 5 percent. A 6-month Treasury bill, backed by the US government, carries a 4.8 percent yield if held to maturity.
Crane said it’s impossible to track where the inflows into government money funds are coming from, but it’s not a wild guess that a lot of the cash had been parked in bank accounts.
According to the Fed, commercial bank deposits have fallen by $418 billion since September to $17.9 trillion as of March 15. About half of all bank deposits are uninsured.
“Businesses are moving uninsured deposits,” said Greg McBride, chief financial analyst at Bankrate.com, a personal finance website. “There is not a mass movement of consumers.”
Ironically, there was a mass exodus of customers out of money market funds in 2008 when the Reserve Primary fund lost money following the Lehman Brothers bankruptcy. It was a rare instance of a retail money fund “breaking the buck,” or falling below the $1 net asset value such funds try to maintain, and sparked a run across the industry.
Let’s note two important differences from 2008: Reserve Primary was a prime fund, meaning it was allowed to hold corporate debt, which is more risky than government securities. And in response to Reserve Primary’s breaking the buck — its net assets value fell to 97 cents on losses from Lehman’s commercial paper — regulators imposed new rules on money funds, including an increase in the amount of cash and easily sellable assets they must keep on their books.
In other words, that was then, this is now.
And no one knows that better than Fidelity.
Larry Edelman can be reached at firstname.lastname@example.org. Follow him on Twitter @GlobeNewsEd.