Bank outflow vs Money Market Fund inflow

4 apr 2023

The bank deposit outflow started since the Fed tightening cycle from March last year until now but got triggered more after the banking crisis a couple of weeks ago. Most of the deposit outflow ended up in the Money market fund assets, of which 80% are US T-bills, cash, or repos collateralized by government securities. This flee-to-safety trend triggered a buy in those government securities and pushed T-yields back in the last couple of weeks.

Suppose this deposit-drain trend continues as the Fed keeps focusing on inflation and raising the terminal rate above 5% and keeps it till the year's end. In that case, there are risks for small and medium-sized banks that they will later have to correct their mistakes by aggressively easing the rate. However, in the short term, this downward repricing for treasury yields may continue for a while as long as the deposit-drain trend stops, and it supports gold for the time being, but I don't think this will last for long and Gold is going to correct itself till the end of the year.