Money market fund flows are starting to get choppy.
After a mammoth inflow last week, more than $20 billion hit the exits in the week to July 12, data released on Thursday evening in the US showed.
This week’s outflow was concentrated almost entirely in institutional government, which bled $29.37 billion. Retail government funds notched a minuscule outflow.
Prime funds, by contrast, took in more than $10 billion, split evenly between institutional and retail investors.
The prior week’s $44 billion haul was the largest since late May, and pushed total assets to a new record. This week’s redemptions negated about half of that influx, and took total assets down to $5.45 trillion, still a staggering sum.
I should quickly mention that the SEC this week debated updated rules for the industry which will eventually be subject to fresh regulations including higher liquidity requirements and new liquidity fees. The regulator backed away from imposing “swing pricing,” a controversial measure. As some analysts were quick to point out, you can’t regulate away the risk of runs on some types of funds. In a real panic, investors simply don’t want their money tied up in commercial paper, for example. Naturally, banks will argue the best way to address the problem is to give dealers need more leeway to deploy their balance sheets. Failing that, Fed intervention is really all that can backstop non-government funds in the event liquidity dries up for certain assets.
Anyway, all the usual commentary still applies. What happens to the $5.45 trillion in money fund assets has implications for everything from equities to the sustainability of Fed QT. Note that “just” $1.767 trillion was parked at the Fed’s RRP facility Thursday. That was the lowest in 15 months.
Ostensibly, Treasury’s cash rebuild is proceeding in a benign fashion. As a reminder, the ideal outcome is RRP drain as opposed to reserve bleed. That is: It’d be better if the Treasury refill is funded primarily through RRP transformation, which is to say money fund assets.
It’s worth considering how the incoming data, and the read-through of that data for monetary policy, plays into all this. Thursday’s bill auctions “will mature during the period between this month’s FOMC meeting and the September FOMC meeting, and the decline in rate hike expectations for September following the CPI data and the PPI data helped lift demand,” Oxford Economics wrote. One argument for why cash might not leave RRP for bills centered on the notion that the Fed would continue to hike. The cooler the inflation data, the less likely it is that the Fed keeps hiking beyond July.
Speaking of the Fed, usage of the Bank Term Funding Program (the facility created to shore up liquidity during March’s regional banking turmoil) rose back above $102 billion, after falling for the first time in nine weeks.
Discount window borrowing, which is almost irrelevant at this point, fell to the lowest since last year.
The Fed’s overall balance sheet was basically unchanged, and is now around $437 billion lighter than it was on March 22, in the wake of the bank drama.
