# Explainer-Why European money market funds inflows are lagging behind the U.S. torrent?
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-04-11
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Massive $367B Inflow to US Money Market Funds Amid Market Turmoil
Meta Description: Learn why investors poured billions into U.S. and European money market funds in March amid market turmoil. Find out how MMFs work and why they're a safe
URL: https://financedigest.com/explainer-why-european-money-market-funds-inflows-are-lagging-behind-the-u-s-torrenthtml

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By Harry Robertson

LONDON (Reuters) – Investors poured $367 billion into U.S. [money market](https://www.financedigest.com/6-easy-ways-to-save-money-with-printed-marketing-materials.html "6 easy ways to save money with printed marketing materials") funds in March, according to data provider EPFR, as the collapse of Silicon Valley Bank caused stocks to tumble and called the safety of bank deposits into question.

In Europe, investors put 17.7 billion euros ($19.35 billion) into euro-denominated money market funds in March, Refinitiv Lipper data shows, when the Credit [Suisse crisis](https://www.financedigest.com/explainer-credit-suisse-how-did-it-get-to-crisis-point.html "Explainer-Credit Suisse: How did it get to crisis point?") rocked markets.

That was a big jump from the previous three months, and the [biggest inflow since](https://www.financedigest.com/uk-firms-plan-biggest-pay-rises-since-2012-to-fill-staff-gaps.html "UK firms plan biggest pay rises since 2012 to fill staff gaps") November in the aftermath of the UK’s disastrous budget. But the inflows in Europe pale in comparison to the torrent that swept into U.S. funds.

The lower level of inflows suggests [investors remained confident about Europe’s banks in general despite](https://www.financedigest.com/despite-the-headwinds-investors-have-important-reasons-to-be-cheerful.html "DESPITE THE HEADWINDS, INVESTORS HAVE IMPORTANT REASONS TO BE CHEERFUL") the collapse of Credit Suisse, some analysts said. Other analysts said it was due to the fact that [euro money market](https://www.financedigest.com/how-will-the-ecb-contain-fragmentation-risk-in-euro-area-bond-markets.html "How will the ECB contain fragmentation risk in euro area bond markets?") funds are underdeveloped relative to U.S. funds and are focused more on [private sector](https://www.financedigest.com/dollar-slides-on-contraction-in-private-sector-activity.html "Dollar slides on contraction in private sector activity"), particularly bank, debt.

WHAT IS A MONEY MARKET FUND?

A money market [fund (MMF) is a mutual fund that invests](https://www.financedigest.com/plastic-antibody-developer-strengthens-board-following-further-investment-from-mercia-fund-management.html "“Plastic antibody” developer strengthens board following further investment from Mercia Fund Management") in highly liquid – that is, easy to buy and sell – short-term debt products, such as those issued by governments or highly rated companies. Companies and investors see them as [safe places to park cash](https://www.financedigest.com/analysis-investors-face-expensive-quest-for-year-end-cash-and-safe-assets.html "Analysis-Investors face expensive quest for year-end cash and safe assets").

The [European money market fund](https://www.financedigest.com/collegiate-ac-and-shuman-capital-launch-e300-million-european-student-living-fund.html "Collegiate AC and Shuman Capital launch €300 million European Student Living Fund") sector is far smaller than in the United States. U.S. MMF assets surged to $5.2 trillion in March from $2.5 trillion in 2014.

European-domiciled MMFs – including sterling and [dollar funds – have grown from 1 trillion euros](https://www.financedigest.com/dollar-trims-gains-vs-euro-after-u-s-inflation-data.html "Dollar trims gains vs euro after U.S. inflation data") in assets in 2014 to around 1.5 trillion euros, based on data from the European Fund and Asset Management Association (EFAMA). Of that, [around 40%](https://www.financedigest.com/around-40-of-german-companies-expect-output-decline-in-2023-iw-institute.html "Around 40% of German companies expect output decline in 2023 – IW institute") are euro-denominated funds.

(Graphic: Euro money market inflows rose in March… Euro money market inflows rose in March… – https://www.reuters.com/graphics/EUROZONE-FUNDS/gdvzqnywzpw/chart.png)

U.S. BANK NERVES

The huge flows into U.S. MMFs in March were driven in large part by companies and investors yanking their [money out of banks](https://www.financedigest.com/marketmind-banks-are-leaking-money.html "Marketmind: Banks are leaking money"), analysts have said.

Households and businesses pulled a record $174.5 billion from U.S. commercial banks in the [week to March](https://www.financedigest.com/the-nasdaq-100-on-track-to-have-its-best-week-since-march-2010.html "The Nasdaq 100 On Track to Have its Best Week Since March 2010") 15, as Silicon Valley Bank and Signature Bank both collapsed.

The investor reaction would seem to suggest that investors have got more faith in [European banks](https://www.financedigest.com/european-central-bank-to-raise-deposit-rate-to-3-25-by-mid-year-reuters-poll.html "European Central Bank to raise deposit rate to 3.25% by mid-year: Reuters poll") right now than they do in the U.S,” said Michael Metcalfe, [head of macro strategy at State Street Global](https://www.financedigest.com/new-york-catches-up-with-london-to-head-citys-global-centres-survey.html "New York catches up with London to head City’s global centres survey") Markets.

European [banks are also passing on interest rate rises more effectively](https://www.financedigest.com/banking-turmoil-will-not-have-knock-on-effect-on-commodities-trafigura-cfo.html "Banking turmoil will not have knock-on effect on commodities -Trafigura CFO"), encouraging customers to keep their money locked up, JPMorgan strategist Nikolaos Panigirtzoglou said.

New deposits with an agreed maturity can earn 2.31% in the euro zone on average, compared with a [European Central Bank interest rate](https://www.financedigest.com/ecbs-villeroy-rate-hike-signals-strong-confidence-in-european-banks.html "ECB’s Villeroy: rate hike signals strong confidence in European banks") of 3% and a yield on MMFs approaching the ECB rate.

In the U.S., one-year deposits return 2.24%, compared with the Federal Reserve’s [interest rate](https://www.financedigest.com/ecbs-centeno-says-interest-rate-close-to-peaking-if-no-new-shocks.html "ECB’s Centeno says interest rate close to peaking if no new shocks") range of 4.75% to 5%.

The latest [European Central Bank data shows customers withdrew 143 billion euros from overnight deposits at euro](https://www.financedigest.com/dollar-outshines-euro-sterling-amid-european-bank-jitters.html "Dollar outshines euro, sterling amid European bank jitters") zone banks in February, although they also put 83 billion euros into deposits with an agreed maturity of up to two years.

ECB board member Isabel Schnabel said in late March that euro zone banks had not seen a general deposit outflow [despite](https://www.financedigest.com/seven-out-of-ten-uk-adults-aged-25-44-never-seek-advice-on-dealing-with-debts-despite-depending-on-the-bank-of-mum-and-dad.html "Seven out of ten UK adults aged 25-44 never seek advice on dealing with debts despite depending on the bank of mum and dad") the banking tremors.

(Graphic: …but U.S. flows surged – https://www.reuters.com/graphics/EUROZONE-FUNDS/movakynjava/chart.png)

THERE’S NOTHING LIKE THE U.S. TREASURY MARKET

Inflows into European MMFs did jump in March, showing that some companies and investors are drawn to them when things get choppy.

EPFR said BlackRock’s euro liquidity fund was the big winner, with more than 2.5 [billion euros](https://www.financedigest.com/europes-spend-on-energy-crisis-nears-800-billion-euros.html "Europe’s spend on energy crisis nears 800 billion euros") of inflows.

We’re seeing that pick up ourselves,” said David Callahan, head of [money markets at Lombard Odier Investment](https://www.financedigest.com/ethical-property-investment-can-your-money-do-more.html "Ethical property investment: Can your money do more? ") Management.

But Callahan also said some investors are nervous about putting their money into European MMFs, which are typically [invested in bank](https://www.financedigest.com/hsbc-appoints-new-markets-head-amid-wider-investment-bank-reshuffle.html "HSBC appoints new markets head amid wider investment bank reshuffle") debt.

Panigirtzoglou said around 90% of European MMFs are so-called prime [funds that invest](https://www.financedigest.com/norway-wealth-fund-to-consider-investing-in-unlisted-equities.html "Norway wealth fund to consider investing in unlisted equities") “heavily” in bank debt.

In contrast, he said almost 90% of U.S. MMFs only invest in U.S. government debt – a vast and ultra-safe market – giving [investors more comfort](https://www.financedigest.com/chinas-patchy-covid-easing-sows-confusion-but-comforts-investors.html "China’s patchy COVID easing sows confusion but comforts investors") during a crisis.

Federico Cupelli, deputy director for regulatory policy at EFAMA, said: “Sovereigns in the EU do not have the same credit standing, maybe except the German government. You can go back to the 2015 [euro crisis to see](https://www.financedigest.com/euro-7-emissions-proposals-the-sequel-europes-carmakers-dont-want-to-see.html "Euro 7 emissions proposals, the sequel Europe’s carmakers don’t want to see") why that is the case.

“So there’s fundamentally a lack of scalable alternatives existing in Europe. There’s nothing similar to the U.S. Treasury markets.”

HOW IMPORTANT IS REGULATION?

MMFs in Europe and the United States struggled with redemptions in some cases when economies went into lockdown to fight COVID-19 in March 2020, forcing central [banks to inject liquidity](https://www.financedigest.com/boes-bailey-says-bank-reforms-worked-but-questions-about-liquidity-buffers.html "BoE’s Bailey says bank reforms worked but questions about liquidity buffers") into markets to avoid them freezing up.

The European Securities and Markets Authority (ESMA) has laid out suggestions for making the MMF market safer, including potentially getting rid of two types of funds that are seen as less stable, and increasing the amount of highly liquid [assets that funds must hold](https://www.financedigest.com/bahamas-regulator-holds-ftx-assets-pending-delivery-to-customers-creditors.html "Bahamas regulator holds FTX assets pending delivery to customers, creditors").

But Cupelli said proposals that MMFs should hold more public debt bump up against the problem that there is not enough of that debt to go around.

And he said eliminating certain types of funds could limit the potential growth of the MMF market.

A top ESMA official said last [month that reforms to tackle vulnerabilities in MMFs were urgently needed for the sector](https://www.financedigest.com/japans-factory-output-posts-biggest-fall-in-8-months-on-weak-autos-chips-sectors.html "Japan’s factory output posts biggest fall in 8 months on weak autos, chips sectors") to cope better with economic shocks.

[(Reporting by Harry](https://www.financedigest.com/britains-prince-harry-arrives-at-balmoral-itv-reporter.html "Britain’s Prince Harry arrives at Balmoral – ITV reporter") Robertson; Editing by Nick Macfie and Jane Merriman)


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