Federal Reserve Bank of Dallas President Lorie Logan hosted a panel on "The Increasing Role of Nonbank Institutions in the Treasury and Money Markets" at the Federal Reserve Bank of Atlanta 2025 Financial Markets Conference. The panel featured Lou Crandall of Wrightson ICAP, Deirdre Dunn of Citigroup Global Markets and chair of the Treasury Borrowing Advisory Committee, and Nate Wuerffel of BNY. In Logan's "Opening remarks," she comments, "Our topic this afternoon is a timely one: the role of nonbank financial institutions (NBFIs) in Treasury and money markets.... The Treasury market and money markets sit at the very core of the financial system. The Treasury market finances the U.S. government, provides a safe and liquid asset relied on by investors worldwide, and creates a benchmark for broader long-term interest rates. Money markets establish overnight risk-free interest rates that are building blocks for all other asset prices, they keep credit flowing through the economy by financing a wide range of assets, and they are where the Fed implements the stance of monetary policy. And these markets are tightly linked because one of the main money markets is the repo market, where Treasury securities are financed."
Logan explains, "These markets are extraordinarily strong, deep and liquid, as befits their systemic role. But they are not invulnerable. Observers have cited potential fault lines including limited intermediation capacity, buildups of leverage and uneven risk management. When economic shocks occur, market participants often seek to transfer large amounts of risk and raise large amounts of liquidity in Treasury and money markets.... [But] there is the potential -- as we saw, for example, at the onset of the COVID-19 pandemic -- for the demand for intermediation to overwhelm the supply of intermediation and create market dysfunction."
She says, "In principle, approaches to enhancing the resilience of intermediation capacity could address both banks and nonbanks. I'm sure our panelists and I could fill an entire session with ideas on bank intermediation. But our focus today is going to be the rest of the market: the nonbanks. I'm looking forward to a robust discussion of the state of Treasury intermediation by NBFIs and what can be done to strengthen it."
Logan comments, "Excessive leverage can amplify challenges from insufficiently elastic intermediation in stress episodes. Perhaps precisely because repo markets ordinarily function so well and Treasury securities are so safe and liquid, it is possible for NBFIs to obtain large amounts of leverage against them. Yet levered positions can be prone to unwind rapidly, adding to intermediation demands. Buildups of NBFI leverage in trades such as the cash-futures basis can, therefore, be cause for concern if the risks are not managed appropriately. Some observers had voiced worries about such a buildup earlier this year, so it was reassuring to see that the basis trade did not materially amplify the market volatility we experienced in early April."
She states, "Strong risk management mitigates vulnerabilities from leverage, and the Securities and Exchange Commission mandate for broader central clearing marks an important step to strengthen risk management in the Treasury cash and repo markets. Data collected by the Office of Financial Research shows that a large fraction of noncentrally cleared bilateral repos are conducted with no haircut. In some circumstances, other components of a cash borrower's portfolio may effectively provide the margin on these trades. But that is not always the case. And repos that are margined on a portfolio basis could be more difficult to move to different counterparties in times of stress. Broader central clearing will ensure risk management is stronger, more uniform and therefore more resilient."
Logan adds, "Lastly, as my Fed colleague Roberto Perli, manager of the System Open Market Account, noted in a recent speech, resilient funding liquidity makes the market as a whole more resilient. A strong Federal Reserve monetary policy implementation framework forms an important part of that resilience by ensuring ample liquidity will remain available across money markets at rates within or near the target range for the fed funds rate. In my view, rate control is not just about keeping the fed funds rate in the target range. The fed funds market is small. And the FOMC's desired stance of monetary policy must transmit smoothly into larger and broader markets -- especially the repo market."
In other news, money fund yields (7-day, annualized, simple, net) were unchanged at 4.11% on average during the week ended Friday, May 16 (as measured by our Crane 100 Money Fund Index), after falling 3 bps and rising 2 bps the previous two weeks. Fund yields should remain relatively flat until the Fed moves rates again. They've declined by 95 bps since the Fed first cut its Fed funds target rate by 50 bps on Sept. 18, 2024, and they've declined by 52 bps since the Fed cut rates by 1/4 point on 11/7. Yields were 4.14% on 3/31/25, 4.16% on 2/28/25, 4.19% on 1/31/25, 4.28% on average on 12/31/24, 4.45% on 11/30/24, 4.65% on 10/31, 4.75% on 9/30, 5.10% on 8/31, 5.13% on 7/31 and 6/28, 5.14% on 3/31 and 5.20% on 12/31/23.
The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 682), shows a 7-day yield of 4.01%, unchanged in the week through Friday. Prime Inst money fund yields were unchanged at 4.25% in the latest week. Government Inst MFs were down 1 bp to 4.11%. Treasury Inst MFs were up 1 bp at 4.07%. Treasury Retail MFs currently yield 3.83%, Government Retail MFs yield 3.82%, and Prime Retail MFs yield 4.01%, Tax-exempt MF 7-day yields were up 39 bps to 2.37%.
Assets of money market funds rose by $15.6 billion last week to $7.325 trillion, according to Crane Data's Money Fund Intelligence Daily. For the month of May (MTD), MMF assets have increased by $25.5 billion, after decreasing $24.4 billion in April, increasing by $2.8 billion in March, $94.2 billion in February, $52.8 billion in January, $110.9 billion in December, $200.5 billion in November, $97.5 billion in October and $149.8 billion in September. Weighted average maturities were at 37 days for the Crane MFA and 38 days the Crane 100 Money Fund Index.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (5/16), 116 money funds (out of 794 total) yield under 3.0% with $145.7 billion in assets, or 2.0%; 255 funds yield between 3.00% and 3.99% ($1.312 trillion, or 17.9%), 423 funds yield between 4.0% and 4.99% ($5.867 trillion, or 80.1%) and following the recent rate cut there continue to be zero funds yielding 5.0% or more.
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was down 1 bp at 0.40%. The latest Brokerage Sweep Intelligence, with data as of May 16, shows one change over the past week. RW Baird lowered rates to 1.40% for accounts of $1 to $999K, to 2.20% for accounts of $1M to $1.9M, and to 2.86% for accounts of $5 million or greater. Three of the 10 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
Finally, Barron's writes "Stablecoin Bill Set to Pass Senate. What It Means for Crypto." They tell us, "The crypto industry appears poised to grab its first major legislative victory as Congress moves closer to passing a bill to regulate stablecoins.... As soon as Monday, the Senate plans to hold a key procedural vote on the so-called GENIUS Act. Among other provisions, the bill would require stablecoins, whose value is typically pegged to the dollar, to hold reserves of liquid, safe assets like Treasury bills. Issuers would also have to follow anti-money-laundering and terrorism finance rules and to give holders of coins priority to recoup their money in a bankruptcy."
The article explains, "Stablecoins underpin most of the $3.3 trillion market for Bitcoin and other crypto tokens. Rather than pay cash for a token, traders typically use stablecoins, which together have a market value of about $250 billion. The largest such token, called USDT, is issued by Tether Holdings. U.S.-based Circle Internet Financial issues USDC, the second-largest token, which was founded in partnership with crypto trading platform Coinbase Global."
