Two weeks back, I wondered aloud if we were witnessing the early stages of the great “cash-out,” a reference to the long-expected “rotation” out of money market funds and into other assets.
The answer, as it turns out, was “no.” Or, more aptly, “NO!”
Two weeks on from the biggest net redemption since June, US money funds saw their fourth-largest weekly inflow of 2024, a massive $95 billion influx. Unlike the tidal wave that wasn’t in Northern California on Thursday, this tsunami warning was no false alarm.
As the figure shows, US MMFs have seen nearly $123 billion of inflows over the two weeks since the $22 billion redemption mentioned above. (The most recent week counted eight days to make up for a missed day around Thanksgiving.)
Total AUM now sits at an astounding $6.77 trillion. YTD, MMFs have seen almost $885 billion of inflows, a remarkable encore following 2023’s $1.15 trillion haul.
Most of this recent impulse is institutional flows and within those flows, the abandonment of prime products. So, for example, since the end of July, the institutional prime category is down nearly $50 billion, while institutional government has seen nearly half a trillion of inflows.
Eventually, some of the near $7 trillion parked on the sidelines will find its way into IG credit (and IG credit funds haven’t exactly had a hard time gathering assets on their own) and maybe equities too. Or so the story goes. But the slower the Fed is to cut rates, the stickier these balances might ultimately prove.
It’s worth noting that the latest Fed minutes suggested the Committee will lower the RRP rate by 30bps upon delivering the next 25bps rate cut or, in a hold scenario, lower the RRP rate by 5bps (i.e., lower it to match the bottom of the target band). “The idea… is that lower RRP rates would disincentivize MMFs from parking cash in this facility at the Fed and would instead make them willing to lend it in repo, increasing the supply of cash and lowering its price,” perhaps ameliorating front-end rate vol on the turn, BNY Mellon’s John Velis remarked.
If you ask Velis, the math simply doesn’t work, though. “Volumes in the tri-party repo market are around $4 trillion per day,” he noted, which means the $135 billion or so of daily RRP usage is immaterial. “If all the cash in RRP flowed into repo instead, it would be like a drop in the bucket,” Velis went on. “Back in early 2023, when RRP was in the trillions of dollars, such a move from the Fed might have made a difference, but at that time repo rates were not especially elevated or volatile as they are now.”
