BNY Mellon stepped in to support one of its money market funds amid sharp outflows from parts of the sector this week, buying $1.2bn of the fund’s assets so it had cash to help cover redemptions.

The US bank made the liquidity injection as investors withdrew $6bn from the Dreyfus Cash Management fund in the week ending Thursday, around half of its assets, according to Crane Data.

The fund is a “prime” money market fund that invests in short-term corporate debt, including commercial paper and certificates of deposit. Outflows from these funds have heaped pressure on short-term funding markets as concern about coronavirus has grown, sending borrowing costs higher for companies and US municipalities and prompting a series of interventions from the Federal Reserve.

Investors have shifted instead to the safety of money market funds that invest only in short-term government debt, which are used as a proxy for cash.

BNY Mellon’s move to take $1.2bn of short-term debt held by the Dreyfus fund on to its own balance sheet came after outflows dragged the fund’s assets close to an important liquidity threshold. If prime money market funds’ so-called weekly liquidity falls below 30 per cent, they are allowed to impose restrictions on investors withdrawing funds, including added fees — something that severely crimps the fund’s attractiveness to investors.

“Given the current challenging market environment, money market investors are moving out of prime funds that include commercial debt . . . and into government or Treasury funds,” BNY Mellon said in a statement explaining its support for the Dreyfus fund.

Its action was first reported by Ignites, a Financial Times news service.

“It tells you that the stresses are very acute,” said Mark Cabana, an interest rate strategist at Bank of America. “It tells you that money market funds are under severe stress due to the lack of liquidity in markets and it tells you that all the programs that the Fed is setting up are very much needed.”

Line chart of $bn showing Dreyfus Cash Management fund assets

The Fed’s interventions to stabilise markets this week included a lending facility to backstop money markets, which it announced on Wednesday and expanded on Friday.

After a run on money market funds in the days after the Lehman Brothers collapse in 2008, the sector was split into two buckets — ultra-safe funds that invest only in short-term government debt and a smaller category of “prime” funds that invest in both sovereign debt and short-term commercial paper and bank credit deposits, which offer slightly higher yields but whose value may fluctuate.

Prime funds suffered $85bn in outflows for the week ending Wednesday, while government debt money market funds attracted $249bn, according to data from the Investment Company Institute. Government funds now have assets totalling $2.75tn, compared with $798bn in prime funds.

Outflows from prime funds should begin to reverse once the monetary and fiscal support from the Federal Reserve works its way into the financial system, Mr Crane said. “Outflows have been slowing in the last few days. As long as outflows don’t accelerate, [prime funds] should be able to handle it.”

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