Cash in money market funds may have flocked to government funds since new SEC rules were implemented last year, but it might not have been a flight to safety, according to analysis from the Federal Reserve. That most MMF assets today remain under a stable net asset value regime means theoretically they are still vulnerable to runs.
In October of 2016 the SEC made official rules that were designed to reduce MMFs’ susceptibility to runs. The rules specifically mandated that institutional prime and muni MMFs were to have both a market-based net asset value (vs. a fixed NAV) as well as gates and fees. Government funds were exempt from these rules.
Since the rules were implemented, total net assets in prime and muni MMFs has dropped by half while assets invested in government funds “has soared in the space of ten months, from 41 percent to 76 percent,” according to data from the Federal Reserve.
However, most of the moving assets have gone into higher yielding governments, specifically agency funds, which are those that include Treasuries, agency debt, and repos backed by these securities, while those going into Treasury only funds, i.e., those investing only in Treasuries and Treasury repos, has been modest. The Fed says agency funds have increased from 24.4 percent of the overall industry to 55.4 percent.
“Overall, investors’ shift from prime and muni funds to government—and, in particular, agency—funds means that a large segment of the industry still operates under a stable NAV (and therefore is, in principle, vulnerable to runs),” Federal Reserve analysts wrote in its Liberty Street Economics blog. However, since government funds didn’t experience any runs during the 2008 crisis, the analysts write, this is less likely to occur in any future event (“past performance does not predict future results” notwithstanding). The SEC’s reforms, therefore, “have made runs on MMFs less likely and the industry itself more resilient.”