After more than 40 years of development, the US money market funds have managed more than $4.6 trillion in assets as of June 2020. It shows that such funds are very successful in investment and cash management.
Their products can bring valuable returns, benefiting many investors. Those retail and institutional investors include financial and non-financial corporations, non-profit organizations, state and local governments.
Development History of US Money Market Funds
The Rise and Background
The rise of it stems from the government’s regulation of bank interest rates, mainly referring to the RegulationQ Act (1933).
After the Great Depression, the government set a ceiling on the interest rate of bank deposits. It aims to prevent high-interest deposits among banks and maintain financial market stability.
The commercial paper market was an instant darling for its ability to skip the banks, connected investors and companies directly. In order to help both small and medium investors also get involved in the commercial paper market, money-based funds appeared. The U.S. money-based funds have yields about 1% higher than bank high-yield savings products.
It is conceivable that money-based funds have become popular. They not only took away bank depositors, but also operated more and more like a bank: you can use your fund account to write checks, even attach debit and credit cards.
Monetary funds did not work so well. In addition to declining earnings, the Reaganboom also led to outflows. Banks also launched a counterattack.
In 1980, President Carter passed the DIDMCA Act. It planned to gradually remove interest rate restrictions within six years. On top of that, various banks also began to launch their own high-yield accounts. Given that the bank’s products are protected by deposit insurance, it also attracted a lot of funds.
With interest rates rising again, they are popular again. In the same time, the first money-market fund in history to fall below net assets appeared.
In fact, some money-based funds all had problems at that time, mainly because they bought structured bills—such products have high returns when interest rates fall, and if interest rates rise sharply, they will suffer serious losses. But this small bank was the most unfortunate one because it didn’t have a strong parent company to back it up.
Current Situation of US Money Market Funds
During the Covid-19 crisis, many measures are taken to protect or enhance liquidity have had an impact on inflows to US money market funds. Government-type funds have become the first choice, with hundreds of billions of dollars invested in such funds.
Institutional high-quality money market funds experienced substantial outflows, while retail high-quality and tax-exempt funds saw smaller outflows.