Investors rushed to the safety of cash amidst the turmoil from the coronavirus.

Investors set up a record-breaking first quarter this year for inflows into U.S. money market funds. These funds gained from the massive risk-off sentiment that prevailed as investors realized the economic repercussions from the coronavirus. Investors dumped stocks and bonds and headed for the safety of money market funds. (Moneycontrol.com)

For the year ended March 30, these funds received $677 billion. Stock funds lost $28.47 billion in this time, while bond funds saw outflows of $33.89 billion.

Investors turn defensive

Obviously, investors preferred to “wait-and-watch” amidst the massive volatility in the stock and bond markets. They preferred the cash-like high liquidity and low risk from MMFs. In fact, during the week ended Wednesday, March 25, they poured in $286 billion of inflows according to data from the Investment Company Institute, as quoted by FT. This was the highest weekly amount ever since 2007.

“It’s natural for investors to want to pause and to make sure they’ve got the cash available to deal with not only their investments but their living expenses,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA.

Prime money market funds see outflows

However, prime MMFs have been under pressure from outflows.  These funds invest in higher-risk short-term corporate bonds and banks’ short term commercial paper. In March, Goldman Sachs Group Inc. (NYSE: GS) pumped more than $1 billion into two of its prime money-market portfolios as investors yanked funds out of riskier assets.

Fidelity closes money market funds to investors

However, the record inflows and a fall in interest rates and Treasury yields compelled Fidelity Investments to bar three of its money market funds to new investments.

It’s a move to save existing investors from the falling interest effect – it’s because newer money would have to be invested in lower-yielding securities. That would, in effect, dilute returns for older investors.

“Restricting inflows will help reduce the number of new Treasury securities that the funds will need to purchase,” Fidelity said in a note to investors. “That’s important because the newer issues generally have lower yields than the funds’ current holdings, and as such, they would affect the funds’ ability to continue to deliver positive net yields to shareholders.”

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