People are pouring into money market funds. There is a small risk.

While interest rates remain high, people have been aggressively moving cash into money market funds, exactly the kind of shift that poses problems for banks. It’s a smart move, although not completely risk-free.

The appeal of funds is clear. Stocks look risky, and the prices of all sorts of short-term, cash-like fixed-income assets have risen. The 3-month Treasury rate rose to as high as 5% a few days ago and is now around 4.8%, compared to around 4.4% at the start of the year. Similar interest rates and movements are seen in the one-year government bond.

Total assets in money market funds, whose returns track those in the market for very short-term debt, rose to a record of about $4.9 trillion recently, up from about $4.5 trillion in 2022, according to Bank of America

In the past six months, about $400 billion has flowed into money market funds, the largest inflow in that period since September 2020.

Google searches for “money market fund” recently ran at three times the level seen in September, according to DataTrek. Searches have recently been at their highest level since March 2020, when short-term rates rose at the start of the pandemic.

The problem for banks is that to the extent that people are putting their cash into money market funds, it is not going into bank deposits, the cheapest source of funding for bank loans. And that gives the banks an unpalatable choice. They can either offer to pay higher interest on deposits or replace the lost deposits with more expensive money borrowed elsewhere.

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Either option would make a lender less profitable by reducing the gap between the cost of financing and what it can earn from issuing mortgages and other loans.

The math is simpler for consumers. A 5% annual return doesn’t look bad when no one knows if the stock market will rise or spend the next year in the red.

But there is still some minimal risk in owning money market funds. If the debt ceiling is not raised, the government may default on some payments. That would cause the price of short-term government debt to fall, raising interest rates and weakening the value that investors hold in money market funds.

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“A government standard would certainly be a very big problem, and not just for money market funds,” said Nicholas Colas, co-founder of DataTrek. “We don’t see that happening, but of course it’s a risk.”

The takeaway for investors is that some allocation to money market funds at this point makes sense, but keeping everything in cash is not the best idea.

Write to Jacob Sonenshine at

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