US money market funds took in another $25 billion in the week to August 21, data released late Thursday showed.
This week’s haul was the third consecutive, and pushed total AUM to yet another record high near $6.25 trillion.
Money funds have seen more than $100 billion of inflows in August alone amid volatility in rates and equities, and ahead of an expected Fed cut at the September FOMC meeting.
For 2024, the YTD inflow now stands at $355.4 billion. Inflows since the beginning of 2023 now exceed $1.5 trillion.
Speculation abounds as to when this staggering pile of cash will come off the proverbial sidelines. And where it’ll go once it does. The second question’s probably easier to answer than the first. The only way cash rates are going back to pre-pandemic levels is if there’s an acute crisis, in which case demand for MMFs would obviously rise as market participants flee to safety. There’s presumably a threshold for rates below which some portion of the $6.25 trillion illustrated above will venture out in search of greener pastures, but that threshold’s probably at least 100bps lower than current short-end rates.
Once investors do start re-allocating away from cash, it’ll likely be to IG credit and quality stocks first. Or so said one popular strategist earlier this week.
Note that RRP balances have steadied in recent days after briefly dipping below $300 billion earlier this month. Remember: Until the Fed cuts rates, the RRP offers 5.3%. That looks pretty good right about now, so it’s not surprising to see RRP take-up (i.e., MMF usage of the facility) stabilize.
The RRP rate will obviously fall commensurate with the size of next month’s Fed cut. What the Committee says — or, more accurately, what they convey about their outlook for the economy and the Fed funds trajectory via the new SEP and dot plot — will have implications for the rate on all but the shortest-dated bills. That, BNY Mellon’s John Velis noted in his latest, will inform “expectation[s] for RRP usage into the autumn [which] in turn has implications for the future of QT.”
For months (and months and months) I’ve reiterated that $250 billion is probably the RRP level at which the Fed would be compelled to halt QT altogether. Velis agrees. He adds RRP to total system bank reserves to get a back-of-the-envelope idea about where we are relative to the demarcation line between “abundant” and “ample” reserves, which he pegs at roughly $3 trillion. We’re above that threshold now, but “should RRP drainage resume and balances dip under $200 billion,” the Fed will “have to pay close attention,” Velis cautioned.
Coming quickly back to MMF demand, it’s not likely to let up soon. As Bloomberg’s Alex Harris put it on Thursday evening in the US, “money market funds are likely to remain popular even after the Fed starts reducing rates.” And for now anyway, even the Committee’s doves don’t appear poised to meet the market’s expectations for 100bps of cuts by year-end.
