Link of The Day
FDIC: Largest Deposit Decline Ever
The Federal Deposit Insurance Corporation recently published its latest "FDIC Quarterly Banking Profile," which says "The net interest margin (NIM) of 3.31 percent was 7 basis points lower than the prior quarter as the average cost of deposits rose more than the average yield on loans. The NIM was 77 basis points higher than the year-ago quarter and, despite the quarterly decline, above the pre-pandemic average of 3.25 percent. The average cost of deposits increased 43 basis points from the prior quarter to 1.42 percent. The increase in the average cost of deposits was slightly lower than the 46 basis-point increase reported in the prior quarter but higher than the 34 basis-point increase in third quarter 2022. The average cost of deposits increased for all Quarterly Banking Profile (QBP) asset size groups relative to the previous quarter." It explains, "Total deposits declined $472.1 billion (2.5 percent) between fourth quarter 2022 and first quarter 2023. The quarterly decline is the largest reduction reported in the QBP since data collection began in 1984. This was the fourth consecutive quarter that the industry reported lower levels of total deposits. A reduction in estimated uninsured deposits (down $663.3 billion, or 8.3 percent) was the primary driver of the quarterly decline. Estimated insured deposits continued to increase (up $255.1 billion, or 2.5 percent) during the quarter. The decline in total deposits in first quarter 2023 was offset by increased wholesale funding (up $661.0 billion, or 14.4 percent) from the previous quarter. Wholesale funding as a percentage of total assets rose from 19.5 percent in fourth quarter 2022 to 22.2 percent in first quarter 2023." Under "Aggregate Condition and income Data, All FDIC-Insured Institutions," the quarterly shows deposits at $18.742 trillion for Q1'23, $19.215 trillion for Q4'22 and $19.932 trillion for Q1'22, an annual decline of -6.0%. The "Insurance Fund Balances and Selected Indicators" table shows estimated insured deposits Q1'23 at $10.481 trillion, Q4'22 showed $10.224 trillion, and Q1'22 showed $10.169T. Uninsured deposits as of Q1'23 was $7.391, Q4'22 $8.058T and Q1'22 was $8.704, a -15.1% change over the past year. See the press release, "FDIC-Insured Institutions Reported Net Income of $79.8 Billion in First Quarter 2023" and FDIC Chairman Martin Gruenberg's comments. See also, The Wall Street Journal's, "Online Banks Are Winning the Deposit War."
ICI: MMF Assets 7th Straight Record
The Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets hitting a record for the 7th week in a row and the 13th week out of the past 15. Assets have risen by $636 billion, or 13.2%, over the past 15 weeks, and they broke the $5.4 billion barrier last week. ICI shows assets up by $722 billion, or 15.2%, year-to-date in 2023, with Institutional MMFs up $416 billion, or 13.6% and Retail MMFs up $306 billion, or 18.2%. Over the past 52 weeks, money fund assets have risen $930 billion, or 20.6%, with Retail MMFs rising by $563 billion (39.6%) and Inst MMFs rising by $368 billion (11.8%). (According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets hit a record $5.865 trillion on Wednesday, 6/7. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.) The weekly release says, "Total money market fund assets increased by $36.63 billion to $5.46 trillion for the week ended Wednesday, June 7, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $18.01 billion and prime funds increased by $15.78 billion. Tax-exempt money market funds increased by $2.84 billion." ICI's stats show Institutional MMFs jumping $24.0 billion and Retail MMFs rising $12.6 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.528 trillion (83.0% of all money funds), while Total Prime MMFs were $813.0 billion (14.9%). Tax Exempt MMFs totaled $115.2 billion (2.1%). ICI explains, "Assets of retail money market funds increased by $12.58 billion to $1.98 trillion. Among retail funds, government money market fund assets increased by $4.38 billion to $1.33 trillion, prime money market fund assets increased by $6.12 billion to $546.32 billion, and tax-exempt fund assets increased by $2.08 billion to $103.93 billion." Retail assets account for over a third of total assets, or 36.3%, and Government Retail assets make up 67.2% of all Retail MMFs. They add, "Assets of institutional money market funds increased by $24.04 billion to $3.47 trillion. Among institutional funds, government money market fund assets increased by $13.62 billion to $3.20 trillion, prime money market fund assets increased by $9.66 billion to $266.71 billion, and tax-exempt fund assets increased by $763 million to $11.28 billion." Institutional assets accounted for 63.7% of all MMF assets, with Government Institutional assets making up 92.0% of all Institutional MMF totals.
Cunningham on Money Fund Inflows
Federated Hermes' Deborah Cunningham appeared in a video update recently entitled, "Seeking relative safety: Regional bank collapses fueled inflows to money market funds." She is asked, "What's driving the recent significant inflows into liquidity products?" Cunningham answers, "I think initially, the flows began because of Silicon Valley Bank's collapse, and the concern over whether people's deposits were safe. What I think was then determined by those that continued to own deposits at that point, was that deposits were very lagging from an interest rate perspective. So, money market funds are known as some of the safest vehicles for liquidity products in the marketplace. They offer a lot of diversification, they offer current yield on a daily basis at par, and that's something that deposit products are not offering at this point. Current yields in money market funds are 4 to 5%, which represent where money market yields themselves are, compared to many deposit products in the marketplace that at the time of Silicon Valley Bank's collapse, were probably south of 1%. So, I think ... what was initially concern for safety, from a deposit perspective for investors in the marketplace, then turned into something more like realization that there was a better product out there that was providing a better return." The interview also asks, "Are there signs of lingering stress in the banking sector? She responds, "I would say not in the banking sector itself, but definitely with individual banks. For instance, Silicon Valley Bank, when it released its earnings, also showed a very large drop in deposits, and that was quantified in their earnings information. Now, contrast that to other small and large regionals, in addition to the large money center banks, many of which had increases in deposits, and all of which looked much better from an asset liability match standpoint, as well as diversification across their sectors. So, I think to some degree, it amplified that Silicon Valley Bank itself was, to some degree, a bit of an anomaly compared to the much larger banking sector in the US, which in fact, is at one of its healthiest phases right now in the last 20 years. The capital quality, the level of asset quality within the banks, the asset liability matching process, all of those things are working in favor of almost all of the banks at this point. So, the stress itself in the banking sector has largely been removed." See also Cunningham's recent commentary, "The Coming Deluge," which discusses expected T-bill issuance.
Weekly Money Fund Portfolio Holdings
Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of June 2) includes Holdings information from 62 money funds (down 4 from a week ago), which totals $2.747 trillion (up from $2.515 trillion) of the $5.839 trillion in total money fund assets (or 47.0%) tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.604 trillion (up from $1.458 trillion a week ago), or 58.4%; Treasuries totaling $660.1 billion (up from $630.3 billion one week ago), or 24.0%, and Government Agency securities totaling $265.7 billion (up from $237.3 billion), or 9.7%. Commercial Paper (CP) totaled $68.4 billion (up from a week ago at $57.1 billion), or 2.5%. Certificates of Deposit (CDs) totaled $63.9 billion (up from $48.7 billion a week ago), or 2.3%. The Other category accounted for $58.0 billion or 2.1%, while VRDNs accounted for $27.6 billion, or 1.0%. The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $951.9 billion (34.6%), the US Treasury with $660.1 billion (24.0% of total holdings), Federal Home Loan Bank with $214.4B (7.8%), Fixed Income Clearing Corp with $177.2B (6.5%), JP Morgan with $54.8B (2.0%), Federal Farm Credit Bank with $43.7B (1.6%), Barclays PLC with $41.7B (1.5%), Goldman Sachs with $36.5B (1.3%), RBC with $34.4B (1.3%) and BNP Paribas with $33.7B (1.2%). The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($290.0B), JPMorgan US Govt MM ($273.1B), Fidelity Inv MM: Govt Port ($188.2B), Morgan Stanley Inst Liq Govt ($159.3B), BlackRock Lq FedFund ($149.8B), JPMorgan 100% US Treas MMkt ($124.0B), Dreyfus Govt Cash Mgmt ($116.6B), Allspring Govt MM ($102.5B), Fidelity Inv MM: MM Port ($101.6B) and BlackRock Lq T-Fund ($97.5B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Money Fund Yields Inch Up to 4.91%
Money fund yields inched higher again over the past week, digesting the last remnants of the Federal Reserve's May 2nd 25 basis point rate hike. Our Crane 100 Money Fund Index (7-Day Yield) was up 2 bps to 4.91% in the week ended Friday, 6/2, after increasing by 4 bps the week prior. Yields are up from 4.90% on May 31, 4.64% on April 30, 4.61% on March 31, 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. They've increased from 3.59% on Nov. 30, from 2.88% on Oct. 31 and from 2.66% on Sept. 30. A number of the top-yielding money market funds now yield above the 5.0% level, and a few more may move above this level in coming days as they begin extending maturities. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 689), shows a 7-day yield of 4.79%, up 2 bps in the week through Friday. Prime Inst MFs were unchanged at 4.97% in the latest week. Government Inst MFs rose by 1 bp to 4.88%. Treasury Inst MFs up 5 bps for the week at 4.81%. Treasury Retail MFs currently yield 4.60%, Government Retail MFs yield 4.57%, and Prime Retail MFs yield 4.81%, Tax-exempt MF 7-day yields were up 22 bps at 3.06%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (6/2), just one money fund (out of 819 total) yields under 2.0%; 43 funds yield between 2.00% and 2.99% with $21.4 billion, or 0.4%; 93 funds yield between 3.00% and 3.99% ($100.2 billion, or 1.7%), 503 funds yield between 4.0% and 4.99% ($2.783 trillion, or 47.7%) and 179 funds now yield 5.0% or more ($2.935 trillion, or 50.3%). Over the past week, 25 funds are now yielding above the 5.0% mark (though many are private and not listed in our "Highest-Yielding Funds" table above) and we expect more to follow in coming days. Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.59% after rising 3 bps three weeks ago. The latest Brokerage Sweep Intelligence, with data as of June 2, shows that there were no changes over the past week. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
NY Fed Updates Reverse Repo List
The Federal Reserve Bank of New York sent out a statement entitled, "Reverse repo counterparties list updated," which says, "Goldman Sachs Investor Money Market Fund, JNL Government Money Market Fund and JNL/WMC Government Money Market Fund have been added to the list of reverse repo counterparties, effective June 2, 2023." Money funds on the Fed's RRP counterparty list now include: AB Government Money Market Portfolio; Allspring Govt MMF, Heritage MMF, Money Market Fund, and Treasury Plus MMF; BlackRock Liquidity Funds: FedFund, T-Fund, TempCash, and TempFund; BlackRock Money Market Master Portfolio and Treasury Money Market Master Portfolio; Dreyfus Cash Management, Dreyfus Government Cash Management, Dreyfus Institutional Preferred Government Money Market Fund, Dreyfus Treasury and Agency Liquidity Money Market Fund and Dreyfus Treasury Obligations Cash Management; American Funds U.S. Govt MMF and Capital Group Central Cash Fund; Cavanal Hill Government Securities Money Market Fund and Cavanal Hill U.S. Treasury Fund; Schwab Govt MF, Retirement Govt MF, Treasury Oblig MF, Value Advantage MF and Variable Share Price MF; Columbia Short-Term Cash Fund; DFA Short Term Investment Fund; DWS Govt & Agen Fund and Deutsche Government Cash Mgmt Portfolio; Edward Jones Money Market Fund; Federated Hermes Capital Reserves Fund, Government Obligations Fund, Government Obligations Tax-Managed Fund, Government Reserves Fund, Inst Prime Obligations Fund, Inst Prime Value Obligations Fund, Municipal Obligations Fund, Prime Cash Obligations Fund, Tax-Free Obligations Fund, Treasury Obligations Fund and Trust for U.S. Treasury Obligs; Fidelity Cash Central Fund, Securities Lending Cash Central Fund, Government Portfolio, Money Market Portfolio, Treasury Portfolio, Government MMF, Money Market Fund, Treasury Money Market Fund, Govt Cash Reserves, Govt MMF and VIP Govt MMP; Franklin MM Port; Goldman Sachs Financial Square Government Fund, Money Market Fund, Prime Obligations Fund, Treasury Obligations Fund, Treasury Solutions Fund, and Investor MMF; HSBC U.S. Govt MMF; Invesco Govt and Agency Port, Govt MMF, Premier US Govt MP and Treasury Port; JNL Govt MMF and JNL/WMC Govt MMF, JPMorgan Liquid Assets MMF, Prime MMF, Tax Free MMF, U.S. Govt MMF and U.S. Treasury Plus MMF; Western Asset Govt Port, Liquid Reserves Port and US Treas Reserves Port; Morgan Stanley Institutional Liquidity Funds Govt Port, Govt Securities Port, Prime Portfolio, and Treasury Port; Northern U.S. Govt MMF, US Govt Select MMF, Govt Port, Govt Select Port, and Treasury Port; PIMCO Government Money Market Fund; PGIM Inst MMF; Principal Govt MMF; RBC Funds U.S. Govt MMF; SSgA Institutional Liquid Reserve Portfolio, Inst US Govt MMF, State Street Navigator Securities Lending Govt MMP and Treasury Plus Money Market Portfolio; T. Rowe Price Cash Reserves Fund, Government Money Fund, Govt Reserve Fund, Treasury Reserve and U.S. Treasury Money Fund; UBS Govt Master Fund, Limited Purpose Cash Inv Fund, Prime Master Fund and Treasury Master Fund; First American Govt Obligations Fund and Treasury Obligations Fund; Vanguard Treasury MMF, Market Liquidity Fund, Cash Reserves Federal MMF, Federal MMF and Money Market Portfolio; and Wilmington U.S. Govt MMF.
Moody's AAA for Lombard Odier USD
A press release entitled, "Moody's assigns Aaa-mf rating to LO Funds (CH) - Short-Term Money Market (USD)," tells us that, "Moody's Investors Service has assigned an Aaa-mf rating to LO Funds (CH) - Short-Term Money Market (USD), a short-term variable net asset value (VNAV) money market fund domiciled in Switzerland and managed by Lombard Odier Asset Management (Switzerland) SA. The Fund's primary objective is to preserve capital, provide high liquidity, and achieve a return in line with the money market rates. The Aaa-mf rating reflects Moody's view that the Fund will have a very strong ability to meet its objectives of providing liquidity and preserving capital. This view is supported by the portfolio's high credit quality and liquidity, strong asset profile, and low exposure to market risk." Moody's tells us, "The Fund invests primarily in a diversified portfolio of short-term money market instruments, which are predominantly denominated in USD and are of high credit quality at the time of purchase. The Fund also invests in currencies other than USD but these exposures are hedged against exchange risk. The Fund's weighted average maturity and weighted average life is below 60 days and 120 days respectively, which limits its exposure to market risks. The Fund, which follows the guidelines of the Asset Management Association Switzerland (AMAS) for short-term money market funds and is regulated by the Swiss Financial Market Supervisory Authority (FINMA), has to maintain at least 7.5% daily liquid assets but does not have a minimum requirement for weekly liquid assets. However, Moody's expects that the Fund will maintain a strong liquidity profile, supported by high levels of overnight and weekly liquidity." They add, "The Fund was launched in March 2010. It is managed by Lombard Odier Asset Management (Switzerland) SA, which is part of Lombard Odier Investment Managers, the asset management arm of Lombard Odier Group (Lombard Odier). Lombard Odier reported CHF 192 billion of total managed client assets as of 31 December 2022."
InvestmentNews: Finra Fines Vanguard
InvestmentNews published the article, "Finra fines Vanguard $800,000 for misleading information on money market accounts." They explain, "Finra ordered Vanguard to pay an $800,000 fine for issuing misleading account statements to money market customers and failing to respond to them when they indicated something was wrong. The Financial Industry Regulatory Authority Inc. found that from November 2019 to September 2020, Vanguard Marketing Corp. miscalculated the estimated annual yield and annual income for nine money market funds on approximately 8.5 million account statements, according to the Finra order posted [last] Thursday." The piece states, "The firm failed to update the yield data due to 'a technical issue where newer information received through an automated data feed did not overwrite certain existing data,' which led to the yield and income projections being overstated. After Finra began its investigation, Vanguard self-reported other problems on money market account statements that resulted in miscalculation of investment return. One occurred when customer contributions to an account were identified as an increase in market value instead of a cash deposit. This error affected approximately 23,000 statements from October 2019 to June 2021. Another misstep involved reflecting margin credits and debits as market appreciation or depreciation. That snafu affected 57,000 statements between October 2019 and June 2021." InvestmentNews adds, "Vanguard not only issued misleading customer statements but also failed to follow up on customer warnings that something was wrong, Finra found. From October 2019 to March 2021, the firm received communications from 100 customers who pointed out miscalculations and other errors on their statements. It failed to investigate promptly, Finra said, but did correct the statements after finally looking into the problems. Vanguard agreed to a censure and an $800,000. The firm did not admit or deny Finra's findings."
Crane 100 Index Grinds Up to 4.89%
Money fund yields inched higher again over the past week as they digest the remainder of the Federal Reserve's May 2nd 25 basis point rate increase. Our Crane 100 Money Fund Index (7-Day Yield) was up 4 bps to 4.89% in the week ended Friday, 5/26, after increasing by 1 bp the week prior. Yields are up from 4.64% on April 30, 4.61% on March 31, 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. They've increased from 3.59% on Nov. 30, from 2.88% on Oct. 31 and from 2.66% on Sept. 30. A number of the top-yielding money market funds now yield above the 5.0% level, and more should move above this level in coming days as they digest the remainder of the latest Fed hike. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 689), shows a 7-day yield of 4.77%, up 4 bps in the week through Friday. Prime Inst MFs were up 1 bp at 4.97% in the latest week. Government Inst MFs rose by 3 bps to 4.87%. Treasury Inst MFs up 8 bps for the week at 4.76%. Treasury Retail MFs currently yield 4.54%, Government Retail MFs yield 4.55%, and Prime Retail MFs yield 4.80%, Tax-exempt MF 7-day yields were up 24 bps at 2.84%. According to Tuesday's Money Fund Intelligence Daily, with data as of Friday (5/26), just one money fund (out of 819 total) yields under 2.0%; 84 funds yield between 2.00% and 2.99% with $48.5 billion, or 0.8%; 54 funds yield between 3.00% and 3.99% ($72.6 billion, or 1.3%), 526 funds yield between 4.0% and 4.99% ($3.387 trillion, or 58.5%) and 154 funds now yield 5.0% or more ($2.280 trillion, or 39.4%). Over the past week, 26 funds are yielding above the 5.0% mark (though many are private and not listed in our "Highest-Yielding Funds" table above) and we expect more to follow in coming days. Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.59% after rising 3 bps two weeks ago. The latest Brokerage Sweep Intelligence, with data as of May 26, shows that there were no changes over the past week. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
FT on Record Money Market Assets
The Financial Times writes, "Yield-hungry investors push US money market assets to record $5.4tn." The piece explains, "US money market fund assets have swelled to a record high this week, as the best yields available in years and the early May collapse of First Republic Bank kept investors piling into the low-risk vehicles. Total net assets in money market funds, which invest in high-quality, short-dated debt, reached almost $5.4tn as of Wednesday, according to data from the Investment Company Institute. The figure is up from less than $5.3tn in late April and $4.8tn at the start of the year. Investors have rushed into money market funds this year due to the increasingly high yields on offer, particularly in government vehicles, fueled by the Federal Reserve's most aggressive campaign of interest rate rises in decades." It tells us, "In March, money market funds received a massive $370bn as the regional Silicon Valley Bank and Signature Bank collapsed, raising questions about the health of the wider sector. For Shelly Antoniewicz, senior economist at the ICI, rapid inflows into money market funds early this month were likely related to the demise of California-based First Republic, which had $93.5bn of deposits before it was shut down and largely sold to JPMorgan Chase at the beginning of May." The FT adds, "The flood of cash into money market funds has continued even as pressure on the banking system has eased and attention has turned to the prospects of a US government default if lawmakers in Washington fail to reach a deal to raise the country's debt ceiling. The prices of bills maturing around the time that the US is expected to run out of cash have plummeted, sending yields above 7 percent. The starring role of money market funds in markets this year may continue even after any deal to raise the federal borrowing limit. After a potential resolution, the Treasury department is expected to have to borrow vast amounts of cash in order to replenish its coffers -- roughly $750bn in Treasury bills in the four months after a deal, according to JPMorgan estimates."
ICI: MMF Assets Up 5th Straight Week
The Investment Company Institute's most recent "Money Market Fund Assets" report shows MMFs hitting a record for the fifth week in a row and for the 10th week out of the past 11. Assets have risen by $568.0 billion, or 11.8%, over the past 13 weeks! ICI shows assets up by $653 billion, or 13.8%, year-to-date in 2023, with Institutional MMFs up $372 billion, or 12.2% and Retail MMFs up $281 billion, or 16.8%. Over the past 52 weeks, money fund assets have risen $860 billion, or 19.0%, with Retail MMFs rising by $538 billion (37.9%) and Inst MMFs rising by $322 billion (10.3%). (According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets broke above $5.8 trillion for the first time ever and hit a record $5.817 trillion on Tuesday, 5/23, then dipped $10.9 billion on Thursday. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.) The weekly release says, "Total money market fund assets increased by $46.67 billion to $5.39 trillion for the week ended Wednesday, May 24, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $41.25 billion and prime funds increased by $6.48 billion. Tax-exempt money market funds decreased by $1.07 billion." ICI's stats show Institutional MMFs jumping $39.4 billion and Retail MMFs rising $7.3 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.481 trillion (83.2% of all money funds), while Total Prime MMFs were $795.8 billion (14.8%). Tax Exempt MMFs totaled $111.7 billion (2.1%). ICI explains, "Assets of retail money market funds increased by $7.26 billion to $1.96 trillion. Among retail funds, government money market fund assets increased by $3.22 billion to $1.32 trillion, prime money market fund assets increased by $4.91 billion to $536.95 billion, and tax-exempt fund assets decreased by $870 million to $101.22 billion." Retail assets account for over a third of total assets, or 36.4%, and Government Retail assets make up 67.4% of all Retail MMFs. They add, "Assets of institutional money market funds increased by $39.41 billion to $3.43 trillion. Among institutional funds, government money market fund assets increased by $38.03 billion to $3.16 trillion, prime money market fund assets increased by $1.58 billion to $258.85 billion, and tax-exempt fund assets decreased by $196 million to $10.45 billion." Institutional assets accounted for 63.6% of all MMF assets, with Government Institutional assets making up 92.1% of all Institutional MMF totals.
JPM: MMFs Won't Liquidate Treasuries
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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