SSGA's Q3 2023 Cash Outlook
State Street Global Advisors released its "Q3 2023 Cash Outlook" last week, which was titled "MMF Balances at 25-Year High." It tells us, "[C]ash strategies are buying T-Bills and extending durations. The breakeven has been working. The extreme caution taken by MMFs in 2022 -- letting durations (weighted average maturity, WAM) roll into the single digits -- has passed and MMF durations are now in the mid '20s WAM. It is not exactly a dramatic extension in duration, but funds are no longer in fear of the next 75 bp hike from Chair Jerome Powell." The piece explains, "MMFs have been taking money out of the Fed's Reverse Repurchase Program (RRP) and buying T-Bills. The RRP is down USD 700 bn from the high balances it held back in spring. The decline has been consistent with the Debt Ceiling resolution and the dramatic increase in T-Bill issuance. There has been some concern over this decline in RRP utilization. Ironically, there was concern over the increase in program utilization back in the spring of 2021 when the program's balance went from zero to over a billion in a matter of months. Ultimately, the Fed would like to see the RRP balance at zero. That would indicate a healthy balance of liquidity and functioning money markets. It is probably going to be a while and several billion more of QT before we get there." SSGA adds, "An additional effect of QT has been the increased funding needs of primary dealers. These dealers are required to bid on all of the US Treasury auctions. When they buy US Treasuries at auction, they do not necessarily have the money to pay for them; thus, they need financing. MMFs and other short-term cash investors can provide this financing through a repo transaction, where money is loaned and US Treasuries are received as collateral. Overall, total dealer repo balances as reported by the Fed have been trending higher for the past several months." Finally, they write, "Maybe, as QT continues, dealers will be asked to finance more of the debt rolling off the Fed's balance sheet. `This should put upward pressure on SOFR rates as that financing comes more in demand and reliance on the RRP decreases further. If liquidity continues to drain, we could see the opposite of what has existed for the past two years: upward funding pressure. But that dynamic appears to be some ways off. Investment Company Institute (ICI) reports MMF balances at historic highs. Current MMF AuM is over USD 5.6 trn. A year ago, balances were at USD 4.5 trn, and 5 years ago they were at USD 2.8 trn. Back in 2006 and 2007, we saw similar percentage increases in cash balances. Could this foreshadow a turn in the business cycle?"
