US money market funds shrink by most since week of Lehman collapse

MONEY-market fund assets fell for the second straight week as companies withdrew cash to make delayed income tax payments to the US government.

About US$98.8 billion left US money-market funds in the week till Oct 18, according to data from the Investment Company Institute. That’s the biggest drop since the week Lehman Brothers Holdings collapsed in September 2008, when financial turmoil cascaded through global markets. Total assets dipped to US$5.608 trillion in the past week, versus US$5.706 trillion seven days earlier.

Due to severe weather earlier this year, the Internal Revenue Service (IRS) granted automatic extensions until Oct 16 for taxpayers in most of California and a few counties in other states. The IRS on Tuesday (Oct 17) further postponed the deadline for the victims of last winter’s storms in California.

Investors have piled into money funds ever since the Federal Reserve began one of the most aggressive tightening cycles in decades last year as fund managers have been quicker to pass on the benefits of higher rates than banks.

Last month, officials kept their main policy rate unchanged between 5.25 per cent and 5.5 per cent, the highest in 22 years. They also updated quarterly projections favouring another hike this year and less easing next year than they saw in June, backing the view rates will stay higher for longer to combat inflation.

In a breakdown for the week to Oct 18, government funds, which invest primarily in securities such as Treasury bills, repurchase agreements and agency debt saw assets decline by US$106.5 billion to to US$4.574 trillion. Prime funds, which tend to invest in higher-risk assets such as commercial paper, saw assets increase by US$8.5 billion to US$915 billion. BLOOMBERG