Depositors have started to move their money from bank accounts to money market funds, in part because of ongoing concerns about the banking crisis and also offers of higher returns, according to a recent report from financial services company Morningstar.
The Morningstar Research (Thailand) report found signs of increasing capital movement from deposit accounts, which provide low yields, following the collapse of California-based Silicon Valley Bank (SVB) in early March.
Some US$355 billion flowed into money market funds in March, the largest inflow into this type of fund since the outbreak of Covid-19, according to the report.
“In every financial crisis, this cycle returns,” Morningstar noted.
“Back in March 2020, when stock exchanges entered a bear market and debt instruments fell dramatically, $686 billion and $392 billion flowed into money market funds in March and April, respectively.”
Higher returns attract investments to money market funds, whose assets are sovereign bonds and government bonds, while bank deposits offer yields of less than 0.5%.
“It is not merely concern about rising risks in financial markets, but also more attractive rates of return,” said Morningstar.
During the 2008 global financial crisis, money flowed out of stock markets to money market funds. The research firm said more capital movements to money market funds took place in the first quarter this year.
“Capital began to flow into money market funds in search of higher returns starting in December last year, with the trend continuing to March,” said the report.
“Obviously, after the banking crisis in the West erupted, it accelerated the flow of money into money market funds.”
As interest rates continue to increase, the price of debt instruments, including money market funds, decreases.
As a result, money market funds currently provide a higher return than depositing money with a bank, said Morningstar.
The collapse of SVB and other US banks raised concerns among depositors. The Federal Deposit Insurance Corporation (FDIC) set the bank deposit insurance ceiling at $250,000 per person.
However, investing in other markets through wealth management or brokerages can help diversify depositors’ risks and offer greater returns than FDIC investment protection, depending on individual companies’ policies and procedures, according to Morningstar.
