JPM: MMFs Won't Liquidate Treasuries

May 25 23

J.P. Morgan's latest "Mid-Week US Short Duration Update" tells us, "We fully expect a timely resolution of the debt ceiling constraint. That said, should a technical default occur, we believe MMFs would not be forced to liquidate Treasury securities. It is also not obvious that we will see outflows from MMFs before the drop-dead date as we did in 2011, due to the availability of the RRP as well as due to the still-continuing outflows from bank deposits in aggregate. Treasury MMFs that do not have access to the Fed's ON RRP program have somewhat fewer options to manage their liquidity.... Historically, MMFs have maintained a significant portion of their holdings in T-bills, though this has shifted materially over the past two years, in no small part due to the scaling up of the RRP program. Assuming the debt ceiling quagmire gets resolved, our Treasury strategists foresee a significant increase in net T-bill issuance following a resolution, with the largest increases potentially in shorter-maturity bills, accommodating MMFs' preference for shorter WAMs in the current interest rate environment." It states, "MMFs significantly reduced their footprint as a share of the T-bill market during the first three months of 2023. We estimate buyers that do not have access to the RRP facility continued to increase their holdings of T-bills during 1Q23. Such investors will likely continue to tread carefully in the T-bill market, extending maturities to beyond the X-date in early June. Meanwhile, other investors that may not be as vulnerable to headline risk as MMFs could remain buyers of T-bills.... MMF inflows have continued but meaningfully slowed in April compared to the influx that occurred in the immediate aftermath of the regional bank failures in March. MMFs made up about 95% of a total $2325bn in Fed ON RRP usage at April-end, with front-end supply still tight. Though government MMFs dramatically shifted their T-bill maturity profiles in favor of 1-month bills in April, anecdotally, we think MMFs' bill holdings have extended in May given that the projected X-date has moved earlier."

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