Yesterday, the Financial Times published the article, "Nearly $90bn pours into US money market funds ahead of expected rate cuts," which, contrary to popular belief, describes how money market fund assets should jump once the Federal Reserve cuts interest rates. It says, "Almost $90bn poured into US money market funds in the first half of August as investors sought to lock in attractive yields that could outlast an expected interest rate cut by the Federal Reserve next month. Money market funds, which hold cash and short-dated assets including government debt, pulled in net inflows of $88.2bn between August 1 and August 15, according to flow tracker EPFR -- the highest figures for the first half of a month since November last year." (Note: Register ASAP for our European Money Fund Symposium, which will be held Sept. 19-20, 2024 in London, England. Registration is $1,000.)
The FT piece explains, "Most of the inflows originated with institutional investors -- large entities investing on behalf of others -- rather than retail investors, the data shows. Industry participants said the rush of money reflected institutional investors positioning for a fall in interest rates from the current level of 5.25 to 5.5 percent as soon as next month. Yields on Treasury bills typically decline ahead of an expected interest rate cut, and drop further immediately after rates go down, they added, but money market funds can offer higher rates for longer because they have more diversified holdings."
They quote Shelly Antoniewicz, deputy chief economist at the Investment Company Institute, "The institutional increase that we've seen has really only just been the last couple of weeks.... The reason for that is it's pretty clear now that there is a much greater chance that the Fed will ease in September." The FT adds, "Money markets funds had a blowout 2023 as rates rose to a 23-year high to combat inflation. Net inflows reached a record $1.2tn last year, according to EPFR data, helped by significant demand from retail investors. Industry participants say institutional investors are following suit."
The article then quotes Deborah Cunningham, CIO of Liquidity at Federated Hermes, "This is something that happens quite regularly when interest rates start to go down. As those direct securities' yields have ratcheted down with expectations of further Fed rate cuts, [investors] would rather keep the yield of a money-market fund for a longer period of time." It states, "US money market funds are allowed a so-called weighted average maturity of up to 60 days, meaning they can hold a diverse range of securities -- from debt maturing in three or six months' time to much shorter-dated assets."
The piece tells readers, "The average US money market fund currently yields 5.1 percent, according to Crane Data. By comparison, a one-month T-bill yields a slightly higher 5.3 percent and a three-month bill 5.2 percent. So far, the overnight lending rate is 5.32 per cent."
The FT also says, "John Tobin, CIO at Dreyfus, noted that 'every rate cut in recent history has been a function of lowering rates to get to zero because there's been a financial crisis.' By contrast, he said, 'here, assuming that's not the case, we're now talking about terminal rates with at least a 3 [percent] handle.' That implied that money market funds could continue to attract assets long after the Fed cuts rates. This time, 'money funds are better positioned,' he said."
They comment, "Cunningham described rates above 3 percent as 'the magic hurdle.' 'If you start dipping below 3 percent, that's when people start getting a bit itchy about it and going into other products.'"
In other money market news, Bloomberg writes that, "Bond-Market Pros Are Unimpressed With Baby Whales From Crypto," which looks at stablecoins and the largest holders of Treasury bills. They explain, "They are turning into the strangest of bedfellows in the financial world: The famously safe securities issued by the US Treasury and the notoriously not-so-safe world of cryptocurrencies. Issuers of crypto stablecoins meant to track the dollar one-for-one have become noticeable players in the Treasury market as they seek the safest and most-liquid assets to back the value of their tokens."
Bloomberg states, "[R]oughly $81 billion in Treasury bills [is] directly owned by Tether.... At the moment, stablecoins are far from major whales in US debt markets, accounting for only about 1% of all Treasury bill purchases. The $6.19 trillion money-market mutual fund industry remains the largest buyer of bills. At the end of June, those funds held about $2.4 trillion of government debt, according to Crane Data. And demand from them is likely to grow as new regulatory requirements that take effect in October impose mandatory liquidity fees on some funds during times of financial stress."
They continue, "There are also corporate whales in traditional finance that dwarf the Tethers of the world: Warren Buffett's Berkshire Hathaway Inc. increased its holdings of T-bills to $234 billion in the second quarter, almost triple Tether's holdings and accounting for about 4% of T-bill purchases. The entire market cap for stablecoins is currently about $167 billion, of which Tether accounts for about $117 billion, according to data tracker CoinGecko. Whether stablecoin issuers do develop into major whales capable of influencing the T-bill market depends largely on how fast the crypto market itself continues to grow, and if the US Congress ever passes legislation regarding them."
Bloomberg's piece says, "Tether Chief Executive Officer Paolo Ardoino, for his part, is confident his firm will become an even more important player in Treasury securities. He believes the growth of the stablecoin market will be strong enough to make Tether, which is known as USDT, the biggest owner of three-month T-bills in the next few years, and perhaps the largest owner of all T-bills within a decade. Eventually, he expects Tether to be 100% backed by US T-bills, and only its excess reserves will be invested in other asset classes."
Finally, they tell us, "Meanwhile, lingering high interest rates have made Tether's pivot to T-bills a lucrative move that helped earn the company a record $5.2 billion in net profit in the first half of this year, according to its latest attestation report. And the relationship with Cantor Fitzgerald, which also allows Tether access to liquidity through the overnight reverse repo market, has helped erase some of the skepticism toward the stablecoin."
