Chasing Returns: Why Money Market Funds Boomed During 2022–2024 Rate Hike Cycles

The IMF study finds that the global growth of money market funds during 2022–2024 was primarily driven by their yield advantage over bank deposits, not by panic from banking turmoil. Investors increasingly favored MMFs for higher returns, especially in U.S. dollar-denominated and private debt funds.

In a sweeping new analysis from the International Monetary Fund (IMF), conducted by Kleopatra Nikolaou and supported by contributions from institutions such as the Federal Reserve, European Central Bank, and Bank for International Settlements, the growth dynamics of money market funds (MMFs) during global monetary tightening cycles have come under the microscope. Drawing on data from nine countries with major MMF markets, the study reveals that the recent boom in MMFs, particularly from 2022 to 2024, has been fueled primarily by investor pursuit of yield rather than panic-induced withdrawals from traditional banking. MMFs have emerged as preferred vehicles for cash management amid rising interest rates, challenging long-standing assumptions about their role during financial stress.

The Yield Advantage: A Silent Catalyst for Capital Reallocation

The paper's central thesis is that MMFs have benefited massively from a phenomenon known as the “MMF yield advantage”, the widening gap between MMF returns and the interest paid on bank deposits. As central banks globally raised policy rates in response to post-pandemic inflation, MMFs, due to their short-term, market-sensitive assets, were able to pass on those higher yields to investors much faster than banks. In contrast, banks often lag in adjusting deposit rates, constrained by sticky pricing structures, excess reserves, or concentrated market power. This yield differential, referred to in the paper as the MMF spread, became increasingly influential in investor decisions, triggering a shift from bank accounts to MMFs across the U.S., Europe, Latin America, and Asia-Pacific. In jurisdictions like Brazil and Mexico, where deposit rates have historically trailed behind policy rates, this effect was particularly strong.

Banking Turmoil in 2023: Not a Flight to Safety

One of the most compelling contributions of the study is its analysis of the 2023 banking sector turmoil, notably the collapse of Silicon Valley Bank in the U.S. and Credit Suisse in Europe. While media narratives suggested a flight to safety as investors rushed to MMFs, the data tells a more nuanced story. The research finds that when adjusted for yield advantage and macroeconomic factors, the inflows into MMFs during the crisis months were actually lower than during previous hiking periods. Rather than fear-driven moves, investors were simply responding to better returns. Interestingly, the crisis did make investors more alert to yield disparities, particularly in the U.S., but did not catalyze an exceptional surge based on safety concerns alone. In Europe, the response was even more muted, with both inflows and sensitivity to yield differentials remaining largely unchanged.

Public vs Private Debt MMFs: Yield Trumps Safety

Another layer of insight is provided through the analysis of MMF structure, specifically, whether funds invest in public (government) or private (corporate or bank) debt. In the U.S., government MMFs have become dominant due to regulatory reforms following the 2008 global financial crisis and again in 2015 and 2023. These public debt funds offer safety and liquidity, often guaranteeing principal at par. However, outside the U.S., especially in Europe and Latin America, private debt MMFs dominate, offering slightly higher yields but with more redemption restrictions and credit exposure. The study finds that when MMF spreads rise, investors, even in the U.S., gravitate toward private debt MMFs, willing to trade off some safety for higher returns. During the post-SVB months, public MMFs saw reduced inflows relative to their private counterparts, further reinforcing the idea that yield is the leading force behind investor behavior in MMFs today.

The Global Dollar Preference and Policy Implications

A particularly striking finding is the global preference for U.S. dollar-denominated MMFs, even in jurisdictions where local-currency funds are available. In financial centers such as Ireland and Luxembourg, dollar funds attracted significantly greater inflows than their euro-denominated peers. The study quantifies this by showing that USD-denominated MMFs outside the United States experienced an 11 percent higher growth rate on average compared to other currency types. This reinforces the U.S. dollar’s centrality in global cash management and its perception as a stable, liquid asset, even when yield considerations are paramount. It also points to a structural asymmetry in global finance that continues to favor the dollar, irrespective of local policy rates.

The broader policy implications are profound. As monetary tightening accelerates flows from banks to MMFs, central banks may find traditional tools of policy transmission, such as deposit rate channels, less effective. Banks losing deposits could cut lending, affecting credit supply and amplifying the effects of rate hikes. Additionally, the growing dominance of large, private-debt-heavy MMFs raises concerns about concentration and liquidity risks. Regulators may need to enforce more stringent transparency and liquidity requirements while educating investors about the varying risk-return profiles of different MMF structures. In this evolving financial landscape, MMFs are no longer marginal players or mere alternatives; they are central instruments in global liquidity management, and their growth trajectory could reshape the very mechanics of monetary policy and financial stability.