Money market funds, the lifeblood of wholesale funding markets, are recovering their nerve. With assets under management of $4,200bn, these low-risk, low-return funds supply critical liquidity to the banking system. In the wake of Lehman Brothers’ collapse, which caused one fund to “break the buck” and prompted a wave of redemptions, money market funds pulled in their horns, often doubling the amount they invested on an overnight-only basis. The more they avoided longer maturities, the harder it became for banks to lend to each other. And the longer the freeze persisted, the more companies risked finding themselves starved of cash.

Green shoots have started to poke through the permafrost. Money market funds have begun to extend the maturity of their investments, aggressively buying one-month and three-month commercial paper. This has happened for two reasons. First, the spectacular plunge in interest rates and stiff competition from banks for deposits has forced funds to look further along the yield curve for any significant return. Second, government intervention, notably the Federal Reserve’s backstopping of asset-backed commercial paper, has recreated a liquid secondary market, providing comfort to funds that remain at risk of sudden redemptions from flighty investors.