Want to earn 5% on your cash? Money-market funds are giving online savings accounts a run for their money.

Money-market funds own around 15% of the Treasury-bill market, according to one estimate.

Money-market funds have been luring savers with yields that can beat many bank deposit account rates, and the resolution of the debt-ceiling drama might increase the appeal of these mutual funds, experts say.

These multi-trillion dollar mutual funds — which had an estimated $1.467 trillion in U.S. Treasury securities at the end of April — could buy at least some of the Treasury debt waiting to be issued after a raise to the borrowing limit. If the yields on those Treasurys are high, that may translate to yield increases for the funds.

T-bills are U.S. government debt that matures between four and 52 weeks. Money-market funds own about 15% of the T-bill market, while foreign investors and other investors own more, according to Goldman Sachs

The question is whether that share will increase in the coming months, analysts say.

“Money-market funds are definitely giving competition to the online savings accounts,” said Ken Tumin, founder of DepositAccounts.com. For one thing, the funds “have been doing a lot better at keeping up with the federal funds rate,” which is the Fed’s benchmark interest rate.

The federal funds rate is now at a range of 5%-5.25%.

Bond prices and yields move in opposite directions. The yield on a one-month Treasury bill

was about 5.2% on Monday. Ahead of the debt-ceiling deal, there was a point when some Treasury bill yields were hitting 7% with maturities coming due around the time when the government was projected to run out of enough money to pay all of its bills.

That was an “abnormal spike,” said John Sheehan, portfolio manager of Osterweis Total Return Fund, a mutual fund at Osterweis Capital Management. Sheehan is skeptical the upcoming batch of T-bills will push money-market fund yields higher.

For T-bill yields, “the level is priced-in in the market already in anticipation of that supply,” he said.

Related: Treasury yields higher as investors assess interest rate outlook

How the debt-ceiling deal could impact yields

Last week, the House of Representatives and the Senate passed legislation raising the debt ceiling for two years while capping and cutting other costs. President Joe Biden signed a bill that temporarily suspends the U.S. government’s $31.4 trillion debt ceiling.

Shelly Antoniewicsz, senior director of industry and financial investment at the Investment Company Institute, said the Treasury is expected to issue T-bills now that the debt-ceiling crisis is averted “although how quickly [that happens] will depend on the Treasury.”

“In order to place all this debt, yields on Treasury bills may need to rise. If money-market funds buy the newly issued T-bills, their investors will receive potentially higher yields because money-market funds pass through interest income to their shareholders,” she said.

But if that does happen, don’t expect a sharp surge, said Peter Crane, president of Crane Data, which follows the money-market fund industry. Right now, the annualized 7-day yield is an average of 4.91% for the market’s biggest funds, Crane’s numbers show. 

More high-yielding T-bills in the mix might push up fund yields by “a few basis points,” he estimated. (A basis point is 1/100 of a single percentage point.)

Fed dominates the returns on money-market funds

The Federal Reserve “dominates the returns on money-market funds. Everything else is window dressing,” Crane said, explaining that returns are tied to the Fed’s own short-term policy rate, which it has been increasing sharply to fight inflation.

The Fed will meet in several weeks to decide if it should pause or push ahead with more interest rate increases to fight inflation.

Money market funds had $5.42 trillion in assets through the end of May,up from $5.34 trillion in mid-May and $4.8 trillion in mid-January, according to data from the Investment Company Institute. Of that amount, $1.97 trillion is retail investor money, and $3.44 trillion comes from institutional investors. 

In the wake of the debt-ceiling increase, the Treasury Department needs to replenish its accounts. It is expected to do that by issuing a wave of short-term debt that could total around $1.4 trillion through the end of the year, according to estimates from BofA Global strategists
Some $1 trillion of the debt from Treasury bills could be issued before the end of August, the analysts said.

Given the chance to buy up a mountain of Treasury debt, Crane said money market fund managers would likely do so. “The question is — at what yield?” he said. And it’s also a question what other big-time buyers would also want to buy the debt, Crane added.

How far could Treasury bill yields go?

“Even if T-bill yields don’t rise from where they are now,” Antoniewicsz said “yields on money market funds are still significantly higher than those on money market deposit accounts at banks.”

Last month, the average rate on a savings account was 0.4% while a one-year CD averaged 1.59%, according to the Federal Deposit Insurance Corporation.

But high-yield accounts offer more interest. An online high-yield savings account currently averages 3.98% and a one-year CD averages 4.86%, Tumin said.

Why money market funds are looking more attractive 

Money-market funds and other cash investments have been catching more attention – and more money – for several reasons. The Fed’s rising interest rates since last March have pushed up related rates and yields. Steady yields have also provided solid ground for investors looking to avoid stock-market volatility. Then banking sector wobbles earlier this year flushed many deposits into money market funds.

Money-market funds have conservative risk profiles, but do not have $250,000 FDIC deposit insurance.

At 3.98%, the average annual percentage yield for an online savings account is now over one full percentage point behind the federal funds rate, Tumin noted. “This year, they’ve been lagging a lot.” 

Whatever happens next with yields for money market funds, there’s a limit on what they can provide for investors with long-term goals, said Sheehan. And there’s a risk of going overboard on a portfolio’s allocation to cash, he said.

At this point, the market expects the Fed has either finished or nearly finished raising its key interest rate, Sheehan said. “History says when the Fed stops hiking, interest rates a year after the last hike are significantly lower.”

Investments in cash and cash equivalents, like money-market funds, can reap some return and protect principal in a high-interest rate environment, he said. But investing is an exercise for the long run, he noted.

“If you’re saving for a 10-, 20-year investment horizon, you are exposing yourself to risk by being too conservative,” Sheehan said.