J.P. Morgan Securities' latest "Short-Term Market Outlook & Strategy discusses "RRP's ups and downs" and gives an update on "Low-duration bond funds." Authors Teresa Ho, Pankaj Vohra and Molly Herckis write, "Turning to the money markets, the ON RRP facility has fluctuated over the past couple of weeks, with balances dropping below $100bn on two occasions -- $94bn on January 16 and $96bn on January 21 -- but balances have rebounded somewhat from this years' lows. This volatility at the facility could partly be attributed to the increase in T-bill supply observed recently. Notably, total T-bill supply has risen by nearly $140bn since year-end, with the largest settlement occurring on January 23, amounting to $87bn."
They explain, "In light of this, SOFR ticked higher by 6bp to 4.35% this week on the back of Thursday's settlement. Interestingly, despite this week's large settlements, cash at the RRP, which mainly comes from MMFs, only declined by $13bn to $105bn since last Friday. It's possible that the influx of cash into MMFs might have cushioned the facility slightly. In fact, total AUMs have increased by $55bn to approximately $7.1tn year-to-date, with $46bn added just this past week. Also, as is typical during this time of the month, the money markets have been flush with cash, as GSEs enter the front-end, which can typically lift ON RRP balances slightly."
JPM's piece continues, "In the near term, balances at the ON RRP facility may slightly decline further as GSE cash continue to exit the repo markets and an additional $47bn of T-bill supply is scheduled to settle next week. However, in the medium term, we expect the facility to increase, along with reserves, as the TGA runs down due to the debt limit. For now, we continue to anticipate QT concluding by the end of 1Q25 but acknowledge the risks that this could be delayed."
A segment titled, "Low-duration bond funds experienced a positive year of inflows," tells us, "In 2024, short-duration bond funds experienced a positive year of inflows, with AUMs higher by $37bn to surpass $825bn, marking a 5% year-over-year rise. This was the first year of net inflows since 2021. Among the bond funds we track, growth was primarily driven by short-term multi-asset funds, which added $15.5bn; ultra-short credit funds, which gained $12.1bn; short-term credit funds, which increased by $8.8bn; and ultra-short multi-asset funds which grew by $7.0bn. In contrast, ultra-short government funds remained flat, and short-term government funds saw a decrease of $6.0bn."
It states, "Last year's inflows into short-duration funds closely mirrored bond performance, which partly reflected investors' expectations regarding Fed rate policy. In fact, nearly 90% of the inflows occurred between May and September, a period when monthly returns were at its peak for the year and the front-end curve was at its narrowest levels as 2y Treasury yields declined. Conversely, during months with negative returns -- specifically February, April, and October -- outflows were also observed."
JPM adds, "That said, short-term bond funds still experienced a relatively strong year in terms of performance, with ultra-short funds standing out in particular. Indeed, ultra-short bond funds outperformed prime MMFs by up to 78bp on a 1-year total return basis. In a similar vein, ultrashort credit funds and multi-asset funds surpassed their short-term counterparts over 1- month, 3-month, and 1-year periods."
Finally, they comment, "Looking ahead, markets are anticipating a shallower easing cycle this year, with OIS forwards pricing in just 38bp of reductions to the target range. Despite this, front-end Treasury yields should still trend slightly lower in 2025, which might encourage some investors to extend into longer duration. As a result, we could see some inflows into the short-duration bond space this year, potentially leading to a modest increase in AUMs. That said, we continue to expect MMF AUMs to remain elevated even if there is a slight rotation from MMFs to low-duration bond funds this year."
As a reminder, Crane Data will host its Bond Fund Symposium in 2 months, March 27-28, 2025 at the Hyatt Regency in Newport Beach, Calif. Crane's Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent networking venue, for bond fund and fixed-income professionals. Registrations are still being accepted ($1,000) and sponsorship opportunities are still available. See the latest agenda here and details below.
Portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of bond funds and fixed-income investing will benefit from our comprehensive program. A block of rooms has been reserved at the Hyatt Regency. We'd like to thank our sponsors and exhibitors -- Northern Trust, Fitch Ratings, Morgan Stanley, Dreyfus, J.P. Morgan Asset Management, Bloomberg Intelligence, Payden & Rygel, GLMX, UBS, PIMCO and Dechert -- for their support. (We'd also love to get some new ones!) E-mail us for more details.
We're also now making plans for our next "big show," Money Fund Symposium, which will be held June 23-25, 2025, at The Renaissance Boston Seaport in Boston. (Let us know if you'd like details on speaking or sponsoring.) Finally, mark your calendars for our next European Money Fund Symposium, which will be held Sept. 25-26, 2025 in Dublin, Ireland. Watch for details on these shows in coming weeks and months.
