Money market funds took in a dramatic $73 billion in the eight-day “week” to November 29, data released late Thursday in the US showed.
The outsized haul, which included an extra day due to data collection around the US holiday, counted among the five largest weekly inflows of the year. Institutional government accounted for nearly all of the influx.
Over the past week, the perceived odds of multiple Fed rate cuts in 2024 increased. Policy pivot speculation reached a fever pitch in recent days.
After six straight weekly inflows, total AUM now stands at $5.836 trillion.
You know the story: Money market funds which parked cash in the Fed’s RRP facility have drawn those balances down over the past six months, absorbing a deluge of T-bill supply. That mitigated reserve drain. In fact, despite massive bill issuance and ongoing Fed QT, reserves have actually drifted higher.
The situation should look quite a bit different this time next year, though. On some estimates, RRP usage could fall away completely as early as late-May. At that point, bank reserves will begin to fall assuming QT is still running.
There was $887 billion parked in the RRP garage on Thursday.
Barclays’ Joseph Abate sees the current dynamic (i.e., falling RRP, rising reserves) continuing through mid-2024, when reserves should top out at around $3.6 trillion. What happens next is contingent on where reserves peak and how money funds behave around the onset of Fed cuts.
“The Fed could easily continue QT at its current pace through year-end [2024] without bank reserves becoming scarce,” Abate suggested, adding that $2.9 trillion is probably the minimally comfortable level.
As a quick aside: There was some funding pressure evident around month-end on Thursday. Between banks pulling back and auction settlements, overnight repo jumped.
Also notable: Dealer holdings of bills rose to almost $102 billion ahead of Thanksgiving.
That was the highest since the record, reached in early July.
Finally, borrowing from the Fed’s backstop facilities receded this week, with Bank Term Funding usage falling to $113.87 billion (from a record $114.099 billion the prior week) and discount window borrowing dropping to $2.24 billion (from $2.44 billion).
