Money Market Cash-cade

Image source: Kovalchuk Oleksandr - Shutterstock, Midjourney

What's going on?

A wave of cash is flowing into money market funds – and it could be set to keep rolling in.

What does this mean?

Money market funds are a kind of financial lifeboat, investing in low-risk assets that are easy to cash out of, like short-term government bonds. And ever since last month’s banking crisis rocked confidence in bank deposits, investors have been clambering into those lifeboats at record speed. Plus, funds like these tick the “returns” box too – rising with the tide of interest rate hikes better than deposit accounts do. No wonder over $300 billion poured into them in just three weeks, then, swelling holdings to a record-breaking $5.2 trillion at the end of March. And Barclays thinks we’ve only just set sail, too: the firm sees another $1.5 trillion flowing into money market funds over the next year.

Why should I care?

Zooming in: Trouble with a capital T.
Investors might be right to move their money. A keen-eyed economist, who predicted the global financial crisis, issued a troubling warning on Thursday – saying that even more banking issues could lie ahead, and adding to worries about deep, underlying problems in the financial system. If that does happen, hedge funds that shorted banking stocks – meaning they borrowed and then sold their shares, hoping to buy them back for less – will be in for a payday. Data out this week showed that last month’s trouble netted them over $7 billion in profit, the biggest windfall the banking sector’s given them since the financial crisis.

The bigger picture: Please, not now.
Another financial fiasco would spell trouble for the global economy, which is already juggling quite a few challenges. After all, the International Monetary Fund shared a pretty dour outlook on Thursday, predicting global economic growth of just 3% over the next five years, as higher interest rates take their toll. That marks the most sluggish medium-term forecast since 1990, with over 90% of advanced economies set for a slowdown.

Originally posted as part of the Finimize daily email.

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