SSGA on Trends Moving Cash Markets
State Street Global Advisors published a brief entitled, "Eight Trends Moving Cash Markets Now." Author Will Goldthwait writes, "The money market landscape continues to evolve in January 2024, with a few notable trends and concerns. Some of these are the substantial growth in money market fund (MMF) assets under management (AuM) over the past year, the shifting dynamics of retail cash flows, and the ongoing discussions regarding the unwinding of quantitative tightening (QT) by the US Federal Reserve (Fed). We also see signs of strain on primary dealer balance sheets and changes in the Treasury Bill (T-Bill) and commercial paper (CP) markets. Lastly, MMFs have been extending durations amid uncertainty over the future path of interest rates. Here is a closer look at all of these developments." The piece states, "MMF AuM have experienced remarkable growth, increasing by over 23% in the past year and more than 60% since 2019. The most significant surge was observed in retail cash, with prime MMFs witnessing gains of over 60% and government MMFs experiencing a nearly 30% increase in 2023. While this growth is notable, it raises questions about the sustainability of these cash inflows, especially given historical declines in MMF AuM during recessions as observed in 2001 and 2008.... The decline in commercial bank deposit balances appears to have slowed, with indications that these balances are moving into MMFs. This reallocation of funds could be a response to changing market conditions and monetary policy." SSGA also says, "Weekly T-Bill auctions experienced significant growth in H2 2023 but have now stabilized. Most of the new supply appears to have been absorbed by cash that was previously invested in the Fed's RRP. Overall, outstanding T-Bill debt has reached historically high levels, surpassing $5 trillion and representing over 22% of the US Treasury's total debt. This situation could have implications for market dynamics and investor strategies.... CP issuance has seen only slight growth over the past decade, hovering around $1.2 trillion. While bank balance sheets have expanded, their reliance on short-term funding like CP has not increased significantly. CP yields relative to T-Bills are tight compared to their historical range. However, we advise caution, particularly regarding longer-dated CP. Shorter-dated CP may appear relatively cheaper." Finally, State Street tells us, "MMFs have been extending their duration, with typical weighted average maturities now reaching around 50 days. This represents a substantial change from 2022 when durations were closer to 10 days. In the face of an inverted yield curve in both rates and credit, maintaining current yields will be challenging for MMFs in the coming months.... The money market landscape is undergoing significant changes, driven by growth in AuM, shifts in cash balances, debates about the Fed's QT strategy, and the evolving market dynamics. As we move forward in 2024, market participants will need to adapt to these shifting conditions and carefully monitor the factors influencing the money market’s performance."
