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Déjà Vu: Money Market Assets, Fed Bank Backstop Usage Hit New Records
Do you ever have déjà vu, Mrs. Lancaster?
Pick your favorite Phil Connors quote to describe another Xerox-esque update on money market fund flows.
US money funds took in $31.74 billion in the week to May 31, the latest data from ICI, released late Thursday showed. Total assets rose to $5.42 trillion, another new record.
Money funds have seen inflows every week since SVB collapsed with the exception of a large outflow around tax day. For the second week, inflows were dominated by instituti
I’m curious, what is the reasoning for thinking that most of the coming T-bill issuance deluge will be funded from the RRP? If that is the consensus?
Based on a few sell side reports I read, the consensus is TGA rebuild will be coming from Reserve instead of MMF.
There are 3 factors MMF takes into account when it comes to whether they want to extend duration: 1) yield spread between T-bill and OIS 2) repo rates 3) View of US future interest rate path. Most banks argue that the current high yield spread will soon diminish as debt ceiling debate is behind us and given that MMF only holds around 15% of outstanding T-bill, the only factor MMF will consider is the future rate path. Given it is not clear in the near term, MMF will not be inclined to extend duration.
BAML is in the opposite camp and they “strongly believe” 90% of TGA rebuild will come from ON RRP. Their arguments are two-fold: 1) in Jan 2023 we have a sharp TGA rebuild(241bn T-bill supply) while ON RRP dropped in the same time and Reserve remain flat. 2) yield spread looks attractive. I disagree with their first argument as that behavior of MMF is due to in Jan, market is expecting Fed will hold and interest rate will not rise further, thus MMF is happy to extend their duration. For their second point, it is a bit tricky because as more buyers come back, you just don’t know how many yield pick up you will have comparing to OIS.
On top of these, historical data shows that TGA and Reserve has a beta of -0.8. My view tilts toward that in the short term, more will be coming from reserve, which will further deteriorate global liquidity condition. Going forward, QT will have a higher impact.
Thank you very much!