The global financial market has been in a state of flux due to the recent collapse of Silicon Valley Bank and Credit Suisse. In March, investors turned to money market funds (MMFs) as a safe haven to park cash. However, data from Refinitiv Lipper and EPFR shows that while the inflows in Europe rose, they paled in comparison to the surge in U.S. MMFs.
The reason for this difference lies in the underdeveloped nature of the euro MMF market relative to the U.S. MMF market, according to a recent report from Reuters.
The U.S. MMF market’s assets doubled between 2014 and 2021, from $2.5 trillion to $5.2 trillion. In contrast, the European MMF market has grown by only 50%, from 1 trillion euros to 1.5 trillion euros.
Furthermore, approximately 90% of U.S. MMFs are invested solely in U.S. government debt, whereas around 90% of European MMFs are prime funds that invest heavily in bank debt.
In March, investors poured $367 billion into U.S. MMFs, while only 17.7 billion euros ($19.35 billion) was invested in euro-denominated MMFs.
Euro MMFs show growth
Despite being an underdeveloped market, the inflows into euro MMFs jumped in March. BlackRock’s euro liquidity fund led the charge with over 2.5 billion euros of inflows.
This suggests that companies and investors are attracted to the funds when things get choppy. David Callahan, head of money markets at Lombard Odier Investment Management, notes that some investors are nervous about putting their money into European MMFs that typically invest in bank debt.
The European Fund and Asset Management Association’s (EFAMA) Deputy Director for Regulatory Policy, Federico Cupelli, believes that there is fundamentally a lack of scalable alternatives to U.S. Treasury markets in Europe.
The credit standing of sovereigns in the EU is not the same, except for the German government. The 2015 euro crisis serves as an example of why this is the case.
ECB Board Member Isabel Schnabel confirmed in late March that the eurozone banks had not seen a general deposit outflow despite the banking tremors.
However, the latest European Central Bank data shows that customers withdrew 143 billion euros from overnight deposits at eurozone banks in February, but they also put 83 billion euros into deposits with a maturity of up to two years.
U.S. MMFs offer greater comfort in times of crisis
U.S. MMFs are a vastly different market compared to their European counterparts. U.S. MMFs only invest in U.S. government debt, an ultra-safe market, whereas European MMFs invest heavily in bank debt.
The recent collapse of Silicon Valley Bank and Signature Bank saw households and businesses pull a record $174.5 billion from U.S. commercial banks in the week to March 15, thereby driving the inflows into U.S. MMFs in March.
Michael Metcalfe, Head of Macro Strategy at State Street Global Markets, says that the investor reaction suggests that investors have more faith in European banks right now than in the U.S.
Also, European banks are more effective in passing on interest rate rises, making it more appealing to customers to keep their money locked up.
