Money market funds saw a rare outflow in the week to January 17, data released late Thursday in the US showed.
The $14.12 billion net redemption was the first in a month and only the third since mid-October. It was solely attributable to institutional outflows from government funds.
Total AUM, which ran to a new record high just short of $6 trillion last week, retreated to $5.96 trillion.
The debate around if and when MMFs will see sustained outflows continues, as does the discussion around whether the mountain of ostensible “dry powder” can serve as a source of funds to push equities higher.
This is a bit of a broken record but: History suggests outflows from MMFs won’t start in earnest until well after the first Fed cut. And yields still look attractive compared to cash alternatives.
Note that globally, money market funds were off to a galloping start to 2024 on the flows front. Specifically, “cash” saw $182 billion of inflows over 2024’s first two weeks, a record.
That, after inflows of $1.3 trillion in 2023.
Meanwhile, RRP balances were $618.2 billion on Thursday. Usage of the Fed facility continues to make new “since 2021” lows on a weekly basis. On Tuesday, balances fell to just $583.1 billion.
Recent Fed rhetoric (not to mention the December FOMC minutes) made it clear the Committee is cognizant of the extent to which the pace of RRP drain should matter (a lot) when it comes to deciding on when to begin tapering QT. Once facility usage falls away entirely, incremental balance sheet runoff will begin to affect reserves, at which point QT won’t be “painless” anymore as it was for most of 2023.
Meanwhile, Bank Term Funding Program borrowing hit yet another new record this week. Balances rose sharply to $161.5 billion.
It was the largest week-to-week increase since the aftermath of the regional banking crisis.
Regular readers know the story: This is an arbitrage opportunity for banks. As Fed cut speculation builds, market pricing for easing is reflected in the rate charged by the Fed for facility loans. As that rate falls, the spread with the rate banks earn on reserves rises.
That’s the “free money Fed arb” I mention every week. Note that rate cut bets for 2024 reached ~180bps late last week. The spread between the BTFP rate and IORB was a record 64bps on Monday.
The Fed is generally expected to mothball the facility in March, rather than extend it. After all, the emergency’s over.
But make no mistake: You’ll hear “BTFP” again at some point. It’ll be re-heated and served along with the rest of the Fed’s alphabet soup whenever the next crisis shows up.
