Moody's Ratings recently published a report titled, "Money market fund sector faces wave of tech-driven innovation," which tells us, "A new generation of technology-driven products looks set to shake up the conservative money market fund (MMF) sector. Exchange traded and tokenized MMFs, most of which have entered the market since late 2024, offer greater flexibility, transparency and lower costs than traditional MMFs. They will increase competitive pressure on incumbents, but may also attract significant numbers of new investors to the asset class. Traditional MMFs are low-risk funds that issue redeemable shares to investors, and invest in short term, high quality assets. Their key advantages are that they typically offer stable net asset value (NAV) per share and are highly liquid, allowing investors to redeem their money at short notice. This feature also allows them to serve as a cash management tool for large companies."
It continues, "Traditional MMFs are currently in strong demand, with the sector's combined assets under management (AUM) rising to a record $7.2 trillion in the US and EU2 trillion in Europe in 2024, up respectively by 13.6% and 16.7% compared with the previous year. The improvement reflected a broadly supportive economic environment and still attractive MMF yields. US traditional MMFs are currently far larger than their tokenized and ETF equivalents."
Moody's writes, "The new MMF products share the same basic characteristics as traditional funds, but typically offer greater flexibility and transparency. A key advantage of the ETF product, for example, is that it allows investors to exit or enter positions immediately, whereas traditional MMF trades are executed with a lag. ETF MMFs are also subject to strict market regulation, ensuring the same high standards of investor protection as tradition-al funds, and may also offer lower management fees."
They explain, "Tokenized MMFs - which use digital tokens to represent MMF shares - offer almost instantaneous settlement and high liquidity. Tokenization is a promising technology for the MMF sector as it will allow investors to post collateral without selling underlying assets, which reduces flow volatility. It improves transparency by allowing investors to verify transactions and check their holdings in real time using distributed ledger technology (DLT). Tokenization will also over time lower transaction costs as it increases in scale. MMFs also face some competition from stablecoins, which also offer stable NAV and high liquidity, although they mostly lack regulation and income generation."
The ratings agency says, "Money market ETFs may initially grow at a faster pace than tokenized MMFs because they use well-established regulatory and operational frameworks that will be familiar to a broad range of market investors. In contrast, tokenized MMFs are part of the decentralized finance (DeFi) ecosystem, which aims to enhance capital efficiency through the use of block-chains and smart contracts. They will at first primarily attract more specialized investors with an understanding of the risks arising from their technological infrastructure."
They add, "However, tokenized MMFs could outpace money market ETFs in the long run as they scale up and deliver promised reductions in transaction costs. Their integration with other products - tokenized MMFs are already used as backing assets for stablecoins, for example - could also drive growth."
For more, see the Investment Executive piece, "Boring money market funds face innovation: Moody's," which states, "Innovation may be coming to a staid sector of the global investment industry - money market funds - according to a report from Moody's Ratings.... Earlier this year, BlackRock and Charles Schwab launched money market ETFs, it noted, while BlackRock also launched a tokenized MMF last year and the report said that Fidelity is planning to launch one this year too."
In other news, J.P. Morgan's latest "JPM Mid-Week US Short Duration Update" includes a "March holdings update: MMFs lean on ON RRP." It says, "Last month, MMFs navigated through an environment where demand exceeded supply, with flows into MMFs totaling $41bn and net T-bill issuance falling by over $200bn in response to Treasury hitting the debt ceiling. As a result, both government and prime funds reduced their T-bill holdings by $155bn collectively, bringing total allocations to approximately $2.2tn, and redirected the cash primarily to the Fed's ON RRP. Combining that with the typical quarter-end technical factors amid counterparty constraints between dealers and MMFs, balances at the ON RRP among MMFs increased by $147bn month-over-month to $347bn. MMFs continue to be the largest participant at the ON RRP facility, comprising 87% of usage."
They continue, "In terms of non-Fed repo, when looking at the breakdown by dealer cohort, repo supply, excluding Fed, continues to be predominantly concentrated among the top five dealers.... This concentration persisted despite a $104bn reduction in MMF repo exposure to dealers in March. However, MMFs sought alternative channels for non-Fed repo, notably increasing their allocations to FICC-sponsored repo by $49bn, marking a 6% month-over-month rise to $896bn by the end of March.... Despite the decline in dealer repo and MMFs shifting cash to the RRP, the funding markets remained mostly contained around the quarter-end."
JPM writes, "Additionally, government MMFs have slightly increased their exposure to Treasury FRNs by $33bn and Treasury coupons with maturities falling within the money market range by $30bn.... Regarding Agency debt, government MMFs reduced their allocation to discount notes by $21bn, while increasing allocations to Agency coupons by $28bn and, to a lesser extent, Agency FRNs by $6bn during March. Meanwhile, prime funds modestly increased their allocations towards credit exposure, particularly with Yankee banks."
They add, "Looking ahead, MMFs have shed approximately $100bn in AUMs over the three days leading up to and including April 15, coinciding with the tax deadline. With this reduction along with coupon settlements totaling $41bn, SOFR and TGCR levels were 3bp and 2bp above EFFR as of the close on April 15. As we approach the GSE P&I period in the coming days, along with continued T-bill paydowns, we anticipate that repo levels will remain subdued, along with the fact that liquidity market participants are probably inclined to shore up liquidity. Month-end technical factors are likely to exert upward pressure on repo levels, but SOFR and TGCR are expected to remain in the low 4.30% range. We think current valuations for SOFR/FF for April as fair at around -1/-2bp."
