US Regulators' Actions May Have Driven Cash Out of Bond Funds

According to Yahoo News, US regulators' quick response in March to protect the banking sector following the collapse of Silicon Valley Bank may have unintentionally driven cash out of bond funds by making deposits more appealing. This is the conclusion of two Federal Reserve Bank of New York researchers who wrote in a Liberty Street Economics blog post on Tuesday. After the announcement of the SVB rescue plan on March 12, bond funds experienced net daily outflows across the entire sector for nearly three weeks, according to Nicola Cetorelli and Sarah Zebar, who used Morningstar data to track the activity. While the outflow may not have been large enough to raise potential financial stability concerns, it does warrant further investigation, as even small-scale asset sales could disrupt prices in illiquid markets. In March, US authorities took extraordinary measures to bolster confidence in the financial system, including creating a backstop to protect all depositors and the Fed launching a new Bank Term Funding Program (BTFP). The BTFP offered one-year loans for a range of high-quality assets under more lenient terms than typically provided, and was seen as a way to prevent fire sales of such securities by banks. Cetorelli and Zebar stated that bank deposits became comparatively safer on Monday, March 13, after the BTFP began operating. As a result, the value of the liquidity services provided by holdings in bond funds may have decreased relative to those provided by bank deposits. Investors in bond funds may have had an additional incentive to redeem their money, contributing to abnormally persistent outflows from the bond funds. The researchers found that money leaving bond funds was spread across a wide cross-section of the complex, with cumulative net outflows totaling approximately $15 billion.