What effect did the new rules for money market funds have on investor behavior?

The shift of assets to government money-market funds occurred as a direct response to new rules implemented for money market funds. These rules were designed to enhance the stability and transparency of money market funds, particularly after the financial crisis when investors became wary of the risks associated with prime money-market funds, which invest in corporate debt. Government money-market funds, which invest in government securities, were perceived as safer alternatives due to their lower credit risk and heightened regulatory protections.

As these new rules established stricter liquidity requirements and required certain types of money funds to maintain a floating net asset value (NAV), many investors sought the relative safety and stability of government money market funds over prime money market funds, which could expose them to more volatility. This migration reflects a broader trend of risk aversion among investors, who prioritize capital preservation and liquidity in uncertain economic environments.

Thus, the adjustment in investor behavior towards government money-market funds illustrates a significant shift in market dynamics following regulatory changes aimed at enhancing the resilience of the money market fund sector.