An update on the Canadian money market mutual fund sector

Introduction

Money market mutual funds, also called money market funds (MMFs), are open-ended mutual funds that hold cash and invest in short-term, high-quality debt securities. They aim to provide their investors with stable returns and high liquidity and allow the daily withdrawal of funds. Investors use MMFs for different reasons, including:

• to park cash between investments
• to place their money in a safe investment during periods of market turmoil
• to earn higher interest than traditional deposit accounts

MMFs facilitate credit intermediation by moving cash from households and institutions to borrowers such as governments and corporations. Thus, they provide an important source of short-term funding.

Despite their benefits, MMFs can pose vulnerabilities to the financial system, particularly through:

• Liquidity mismatch: MMFs offer daily redemptions, but some of their assets may be difficult to sell quickly without losses during periods of market stress.
• First-mover advantage: Liquidity mismatch can motivate investors to redeem ahead of others to avoid potential losses from funds selling assets at discounted prices to meet redemptions.

In several notable cases, these vulnerabilities have resulted in MMFs amplifying market stresses. For instance, during both the 2008–09 global financial crisis and the onset of the COVID-19 pandemic, some MMFs in the United States faced sudden and large investor withdrawals (Anadu et al. 2021). These outflows led those MMFs to sell their holdings in secondary markets. This likely contributed to liquidity strains in short-term funding markets and reduced the capacity of MMFs to fund governments and corporations.

In response to instances like these, the Financial Stability Board (FSB) launched a comprehensive review of MMF vulnerabilities. This review resulted in policy recommendations aimed at enhancing MMFs’ resilience. Since then, MMFs have remained a global focus for financial stability, and the FSB has been tracking the progress on implementing the recommendations across jurisdictions (FSB 2021; FSB 2024).

In light of the global attention on MMFs, we examine the Canadian MMF sector. This sector has grown by 180% since 2019, yet it remains less than 3% of the overall Canadian mutual fund sector. Despite the small size of the MMF sector, MMFs hold around 5% of Government of Canada (GoC) treasury bills and 11% of non-government short-term paper. The relatively large presence of MMFs in these markets suggests that MMFs could have a significant impact on liquidity conditions. However, during the market turmoil in March 2020, when MMF outflows in several jurisdictions around the world amplified market stress, Canadian MMFs experienced inflows. This relative stability may reflect the fact that, compared with other jurisdictions, Canada’s MMF sector has a larger share of retail investors. Retail investors may have more stable behaviour than institutional investors, who may liquidate their MMF positions relatively quickly because of a sudden need for cash.

Our analysis aligns with earlier work done by the FSB in which Canada was not identified as a jurisdiction where MMF vulnerabilities could raise significant financial stability concerns. However, given the ongoing international focus on MMFs and their growing role in key short-term funding markets, Bank of Canada staff will continue to periodically review the sector.

Money market mutual funds have experienced high growth

In Canada, MMF assets have grown by 180% since 2019, exceeding the growth rates of life insurers, pension funds and other types of mutual funds (Chart 1). The size of MMFs has generally moved in line with the Bank’s target for the policy rate, suggesting that their recent growth could be related to higher interest rates (Chart 2). However, this trend appears to correlate with some lag, and there have been some brief periods—particularly during times of high market turmoil—when this relationship was less clear. Although the policy rate has been declining since mid-2024, the amount of MMF assets has continued to increase, likely because interest rates remain high relative to historical levels.

High interest rates raise the opportunity cost of holding cash in deposit accounts at commercial banks, which typically offer low interest rates. When rates are high, investors are more likely to shift their cash into investment products that:

• have returns that more closely track the level of interest rates than deposit accounts at commercial banks do
• remain liquid compared with other investment products (Nagel 2016; Nikolaou 2025)

Indeed, during the recent years of higher interest rates, while MMF assets grew, so did other comparable products such as guaranteed investment certificates and high-interest savings account exchange-traded funds. Despite their rapid growth, MMFs remain relatively small, with total assets around $100 billion (Chart 2). This represents only about 3% of the overall Canadian mutual fund sector.1

Money market mutual funds are large holders of Canadian money market securities

Despite the small size of the MMF sector, as MMFs have grown, so has their presence in certain Canadian short-term funding markets. Chart 3 shows that MMFs now hold:

• 5% of GoC treasury bills, a larger share than either life insurers or pension funds, though other mutual funds combined hold approximately 13%
• 11% of non-government short-term paper, such as commercial paper, surpassing the holdings of other mutual funds, life insurers and pension funds, individually

Within MMFs’ holdings of non-government short-term paper, commercial paper has represented an increasingly large share since the phase-out of the Canadian bankers’ acceptance (BA) market (CFIF 2023). From 2022 to 2023, MMFs allocated between 10% and 20% of their assets to BAs. However, starting in June 2023, MMFs reduced their holdings of BAs and simultaneously increased their holdings of commercial paper from around 45% to 60% of their assets (Chart 4). Overall, MMFs’ growing presence in the GoC treasury bill and commercial paper markets suggests that liquidity in these short-term funding markets could be vulnerable to the trading activity of MMFs, particularly in scenarios where MMFs may sell these assets to meet investor withdrawals.

Money market mutual funds did not face net redemptions in March 2020

In this section, we take a close look at the onset of the COVID-19 crisis to assess whether investor withdrawals at MMFs in Canada could have contributed to turmoil in financial markets, as was the case in some other jurisdictions.

We find that Canadian MMFs did not experience net investor outflows in March 2020. Rather, they saw approximately $4 billion in net inflows—the largest monthly net flow, positive or negative, in our sample since 2014 (Chart 5). Even within the month of March 2020, MMFs consistently saw inflows, except for a short period between March 9 and 11.2 Notably, these inflows rose in tandem with the spread between one-month BAs and the Canadian overnight index swap rate, a proxy for short-term funding conditions. An absence of investor withdrawals while short-term funding conditions deteriorated suggests that MMF outflows did not amplify these stresses, unlike the case in some other jurisdictions.

The stability of the MMF sector in March 2020 could be due to its investor base. In jurisdictions such as the United States, the United Kingdom and the euro area, where MMFs have posed greater financial stability risks, institutional investors make up 80%–90% of the investor base (FSB 2024). In contrast, in Canada, retail investors dominate. Chart 6 shows that in 2024, institutional investors held only 14% of the total assets of Canadian MMFs, while retail investors held 65%. The remaining 21% of MMF assets were held by other investment funds.3 Retail investors in MMFs generally exhibit lower sensitivity to market conditions and may be less likely than institutional investors to quickly withdraw their cash. For instance, large asset managers, who may have a greater need for cash during periods of turmoil, are more likely than retail investors to liquidate their positions in MMFs to meet margin calls or to build up their liquidity buffers to adhere to their risk limits (FSB 2024).

Conclusion

Canadian MMFs are small relative to the size of the financial system, yet they play a significant role as investors in certain short-term funding markets. Nevertheless, we find that, unlike in some other jurisdictions, MMFs in Canada did not experience large investor outflows during the COVID-19 crisis. This stability may be supported by the predominantly retail investor base of Canadian MMFs, which contrasts with the situation in some other jurisdictions.

References

Anadu, K., M. Cipriani, R. M. Craver and G. La Spada. 2021. “COVID Response: The Money Market Mutual Fund Liquidity Facility.” Federal Reserve Bank of New York Staff Report No. 980.

Canadian Fixed‑Income Forum (CFIF). 2023. Impact of CDOR Cessation on Bankers’ Acceptance Market.

Financial Stability Board (FSB). 2021. Policy Proposals to Enhance Money Market Fund Resilience: Final Report.

Financial Stability Board (FSB). 2024. “Thematic Review on Money Market Fund Reforms.” Peer Review Report.

Nagel, S. 2016. “The Liquidity Premium of Near-Money Assets.” Quarterly Journal of Economics 131 (4): 1927–1921.

Nikolaou, K. 2025. “Money Market Fund Growth During Hiking Cycles: A Global Analysis.” International Monetary Fund Working Paper No. 2025/150.

Endnotes

Acknowledgements

We thank Jean-Philippe Dion, Alexandra Lai, Stéphane Lavoie and Stephen Murchison for helpful comments and suggestions. We also thank John Bulmer and Paul Redman from the Ontario Securities Commission and Philippe Bergevin from the Autorité des marchés financiers for sharing their perspectives. Finally, we are grateful to Yanis Belkacem for his research assistance.