Where $6 Trillion in Cash is Hiding: Why Money Market Funds are Booming

March 04, 2024

The problem with hiding cash under your mattress is that it doesn’t grow under your mattress.

Well, it might grow some bacteria if you leave it there, but it’s not going to spawn more cash.

Dollars don’t breed by themselves.

While we don’t know how much cash is hiding under people’s mattresses or buried in their backyards, we do know how much money is invested in money market funds which are considered in the category of “cash and cash equivalents”.

Are you sitting down?

$6,000,000,000,000+

That’s about double what it was back in “the 10’s”.

Why is so much money there?

There are at least three reasons: income, liquidity, and safety.

Since the Feds have raised interest rates, many are yielding income of around 5% currently. That’s much better than it was back in the extended low interest rate environment after the Financial Crisis. And money market funds yield far more income than sitting in a bank savings account earning next to nothing.

Investors also like these kinds of funds because their money does not get locked up for a long time. For example, you don’t have to wait a year to get your money back like you would in a 12-month Certificate of Deposit.

Their liquidity comes from what they are invested in, namely, “short-term, highly liquid securities, such as Treasury bills, commercial paper, bankers’ acceptances, and CDs.”1 This why they fall into the category of cash equivalents. The money is quickly accessible.

They are also generally considered safe spots for money. I use the word “generally” intentionally. There have been rare occasions where money market funds have “broken the buck” and lost value. Our regulator FINRA, at their website, explains: 

…a retail money market fund manager generally strives to keep the fund’s net asset value (NAV) stable at $1 per share at all times…

Usually, it’s not too difficult to keep the share price at $1, due to the high quality and short-term nature of the debt in which the funds invest. On occasion, a money market fund has “broken the buck,” meaning that its net asset value fell below $1 per share. But fund managers generally prefer to avoid that situation, even if it means stepping in and using their own capital to absorb losses and to keep the fund from breaking the buck.

The last time a money market fund broke the buck was in 2008, when Lehman Brothers declared bankruptcy, leading investors in the $62 billion Reserve Primary Fund to demand $40 billion of their money back. The fund couldn’t cover the losses itself, and a panic about the money market as a whole quickly spread.2

Though money market mutual funds are not FDIC insured and that last buck-breaking moment happened a decade and a half ago, money market funds have only increased in safety since then. Here’s FINRA again back in 2015:

Despite the events of 2008, the money market is considered one of the safest corners of the financial universe — and it’s gotten safer in the last five years, thanks to…new regulations.3

Ahh… sometimes regulations can be a beautiful thing.

Still. They aren’t without potential vulnerabilities during financial stress, as one Ph.D at the Federal Reserve Bank of New York points out.

This massive pile of money in cash equivalents leads to some interesting questions:

  • Is it a further bullish stock market or bond market indicator? Some of those trillions may be put back to work in stocks or bonds.
  • Is it a fear signal revealing that people still don’t want to come-out-and-play in riskier markets?

Forget the big picture. Let’s make it personal.

  • Do you have large amounts of money sitting in actual cash (maybe even under your mattress: gasp!)?
  • Do you have a savings account that is getting bigger and bigger earning next to nothing in a bank that you don’t plan to spend in the short term? If so, should it continue to simply sit there? 
  • Do you have too much in cash or money markets and need to consider other options for diversification and meeting financial goals?

Some think cash and cash equivalents like money market funds are King right now.

They have not been King of Investment Returns lately (with the stock market indexes hitting all-time highs), but those interest yields have been a bit like Prince Charming — offering attractive income amidst the recent shift to a higher interest rate environment.

Some think that environment will change this year. We will have to wait and see.

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Sources:

 1. “In the Market for Money”, October 26, 2015. Accessed online: https://www.finra.org/investors/insights/market-money