Money market funds took in more than $78 billion in the week to January 3, the first update of 2024 showed.

It was the largest weekly inflow since SVB collapsed, and pushed total AUM to a new record high just short of $6 trillion.

Given the timing (i.e., around year-end), it’s probably unwise to read a lot into this particular update, but it certainly merits mention.

$64 billion flowed into government funds, split between retail and institutional. Retail prime products saw more than $9 billion of inflows.

As the figure above shows, outflows from MMFs since the regional banking drama in March were few, far between and small, with the exception of a tax-related exodus in mid-October, which reversed over the ensuing weeks.

Regular readers are well apprised of the MMF debate for 2024 which, in a nutshell, is a discussion around the prospects for sideline cash to be a source of funds for asset-buying across equities, credit and bonds. MMF yields are likely to remain elevated for a time, though, which means in the absence of more blockbuster gains for stocks, cash will still be an attractive asset class — hell, MMFs took in $1.3 trillion globally in 2023 even as stocks soared.

To recapitulate, swollen MMF AUM was a source of systemic stability last year, as cash parked in the Fed’s RRP facility absorbed a veritable tsunami of T-bill issuance and facilitated a painless QT. Reserves were steady. That’ll change once RRP is fully drained.

After a spike related to year-end dynamics, RRP balances fell to the lowest since June 2021 on Thursday, at just $664.9 billion. RRP drain since the debt ceiling deal is now around $1.5 trillion.

Generally speaking, markets expect the Fed to consider ending balance sheet runoff when usage falls away entirely. The December FOMC minutes noted that,

Amid the ongoing balance sheet normalization, there had been a further decline over the intermeeting period in use of the ON RRP facility and this reduced usage largely reflected portfolio shifts by money market mutual funds toward higher-yielding investments, including Treasury bills and private-market repo. Several participants remarked that the Committee’s balance sheet plans indicated that it would slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level judged consistent with ample reserves. These participants suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public.

Take that for what it’s worth. Some observers believe the Fed should end runoff before RRP is entirely drained given ambiguity around what constitutes “ample reserves.”

Meanwhile, the free money Fed arb is still attractive. Bank Term Funding Program usage jumped to yet another new record above $141 billion in the week to Wednesday.

Here again, year-end complicates interpretation a bit, but as detailed in these pages several times in recent weeks, banks can theoretically profit from the difference between the rate paid to the Fed to borrow against Treasurys (and agencies) and the rate earned from the Fed on reserves.

That spread reached 57bps on December 28. It was 50bps on Thursday. (The more aggressive rate cut pricing, the juicier the arb. The flip side is that when bets on rate cuts recede, as they have in recent days versus last month’s extremes, the spread shrinks.)

Some believe the Fed will mothball BTFP in March.