(Bloomberg) -- US regulators’ swift action in March to ring-fence the banking sector after the collapse of Silicon Valley Bank might have had an unintended consequence of driving cash out of bond funds, by enhancing the appeal of deposits.

That’s the assessment of two Federal Reserve Bank of New York researchers writing in a Liberty Street Economics blog post Tuesday.

Following the March 12 announcement of the SVB rescue plan, bond funds had net daily outflows spread across the entire sector for almost three weeks, Nicola Cetorelli and Sarah Zebar wrote, drawing on Morningstar data to track the activity. While the outflow was probably not sufficient to raise potential financial stability concerns, it does warrant further investigation as even small-scale asset sales could dislocate prices in illiquid markets, they said.

US authorities in March took extraordinary measures to shore up confidence in the financial system, including creating a backstop to protect all depositors as well as the Fed launching a new Bank Term Funding Program. The BTFP, as it is known, offered one-year loans for a range of high-quality assets under easier terms than typically provided, and was seen as a way to prevent fire sales of such securities by banks.

“Bank deposits suddenly became comparatively safer on Monday, March 13, after the facility started to function,” Cetorelli and Zebar said, referring to the BTFP. “Consequently, the value of the liquidity services provided by holdings in bond funds might have diminished relative to those provided by bank deposits.”

‘Closely Intertwined’

Investors in bond funds “may have had an additional incentive to redeem” their money “contributing to abnormally persistent outflows from the bond funds,” they wrote.

Money exiting bond funds was spread across a wide cross-section of the complex, with cumulative net outflows amounting to about $15 billion, the researchers found. 

Government bonds saw a major rally in March as investors flocked to them as a haven amid the banking turmoil. Had that not happened, outflows from bond funds might have been even larger, Cetorelli and Zebar wrote.

“Our analysis highlights how financial intermediation activities seem quite closely intertwined,” they said. “Accordingly, supervisors and regulators may wish to take a more integrated approach to monitoring and regulating financial intermediation activities — one that considers both direct effects and indirect consequences of shocks across a range of institution types.”

Read more: US Backstops Bank Deposits to Avert Crisis After SVB Failure 

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