Echoes Of Massive Money Market Reform

One of the things I try (hopefully with some measure of success) to do is make seemingly esoteric and/or complicated concepts easier to understand. More importantly, I try to make it clear why they matter.

The ironic thing about “niche” markets (i.e. things that only the “pros” know or care about) is that they really aren’t “niche” at all when it comes to how they affect more widely recognized markets and how they shape the policy decisions that grab headlines.

On of my more successful efforts at engaging the “crowd” in a discussion about such matters involved money market reform and the ramifications of that reform for the worsening global dollar shortage. I even managed to successfully pique readers’ interest in cross-currency bases (with the help of a story about drunk Albanian women).

With regard to money market reform, you’ll recall that in October a large shift occurred as prime funds were forced to start marking sh*t to market which essentially meant that if you weren’t in US government debt, you were at risk of “breaking the buck” depending on market conditions. Needless to say, this catalyzed an exodus (something like $800+ billion) from prime funds.



That’s USD funding that’s no longer available for CDs and commercial paper issuers. Clearly, that’s a big deal.

Well, the effects of that epochal shift are still being felt in money markets. Below, find some useful commentary out of Wells on the subject (note the connection to the debt ceiling, etc.).

Via Wells Fargo

Money fund reform and debt ceiling drive richening. It’s good to be the U.S. sovereign, especially when it gets to short term borrowing. Despite the December Fed hike and Mr. Trump’s (inconsistent) pronouncements about “yuge” fiscal stimulus package, the 3-mo T-bill rate is back to the levels of early November, while the 3-mo benchmark LIBOR and OIS rates are 15-20 bps higher (Figure 3). The richness of government debt in the money market sector clearly shows in Figure 4: every single Tbill and coupon issue trades through OIS. May -June T-bills look especially dear. Their rates are 20 bps below OIS and about 5 bps richer than similar maturity coupon issues. We suspect that lingering effects of the 2016 money market reform is one of the culprits here. The shift from prime into government-only money funds may have largely run its course, but the vastly increased buying power of these funds keeps pressuring T-bill rates lower. But there is more to the story. With all the post-election excitement, the “minor” issue of the approaching sovereign debt ceiling remains unresolved. Consequently , the U.S. Treasury may soon need to start paring back T-bill issuance to ensure the debt cap is not violated. The risk of smaller issuance is likely compounding money market reform effects pushing yields lower.





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