Cash, near-cash, and new risky assets

Less than a month ago there were a lot of funds and short-term securities that would be considered close money substitutes. Of course, there are differences, but the pricing distinctions were minor. Those days are over. The range of what is considered near-money explodes when there is a crisis. Any perceived similarities are out the window. Money is not all alike, and investors, if they don't know already, should appreciate the differences. 

One of the roles of the central bank is to close dislocations between near-moneys because the impact of money dispersion on the real economy can be significant. The transfer of funds across broad money may not show up in statistics but will spill-over to lending. Now funds are growing through for all definitions of money, but there are winners and losers.

Money market prime funds have seen outflows of over $100 billion this month on a $700 billion base. Government money market funds have increased by $400 billion over the same period. The prime funds hold commercial paper while government funds do not. This change in flows is one of the reasons for the Fed's commercial paper program. 

Investor withdrawals from these funds forced the liquid assets ratio to dangerous levels. A fall below 30% would have allowed for restrictions on withdrawals which would have ended any illusions on whether these funds were near money. We are seeing banks buy assets from their money funds to ensure that they do not fall below the 30 percent weekly liquidity assets ratio. (See Goldman Sachs purchase of assets form Square Money Market Fund and Square Prime Obligations Fund, and BNY Mellon purchase of assets form their Dreyfus Cash Management fund.) 

The CME and other Financial Market Utilities (FMUs) are pulling money from their banks and placing funds at the Fed where they can receive the interest on excess reserves (IOER), a meager 10 bps. This drains bank reserves but gets the FMUs something closer to true safe cash, a better store of value than demand deposits. 

Investors are making strong distinctions between secured and unsecured overnight funds as measured by yield spreads. Clearly, if the demand for safe assets like Treasury bills is strong enough, yields can turn negative. These yield spreads and the pricing of money distinctions will close as we move away from the crisis, but right now, protecting liquidity and a store of value is paramount with many investors and they are not being irrational.