In the wake of Silicon Valley Bank’s collapse and the subsequent banking meltdown, cash is king.
Photo Insert: Could cash be regaining its throne as king?
The turmoil that hit financial markets has sent investors running away from markets and toward more liquid alternatives. Money market funds and lowest-risk investment options have seen an influx of cash in recent weeks as investors look for more stable ground, Nicole Goodkind reported for CNN.
These funds invest in short-term securities like government bonds, certificates of deposit — or fixed-term savings accounts — and commercial debt.
The goal of a money market fund is to provide investors with a relatively stable investment option that offers higher returns than traditional savings. But money markets aren’t without risks of their own, especially when they experience a large wave of investors all at once.
Since the Fed began to raise interest rates a year ago, the amount of money in money market funds has increased by roughly $400 billion. The inflows totaled more than $120 billion alone last week. That means a record $5 trillion is currently invested.
The majority of the new money last week came from institutional investors, who put about $101 billion into the funds. Investments from retail investors made up about $20 billion, according to the Investment Company Institute. Still, retail investors could soon pick up the pace.
Goldman Sachs economists wrote in a note on Thursday that Americans could sell as much as $1.1 trillion in stocks this year and put that money into credit and money market assets instead.
But the more money is invested in these funds, the greater the risk that cash could also flow out quickly, creating a money-market liquidity crisis — where funds may not have enough cash on hand to meet those redemptions.