JPM Update on July Portfolio Holdings
Last week, J.P. Morgan wrote in its "JPM Mid-Week US Short Duration Update," that, "July was a muted month for MMFs, with inflows totaling just $15bn, the weakest July inflows since 2021.... However, beneath the surface, `MMFs absorbed a large share of the nearly $300bn increase in net T-bill supply to private investors in July. Indeed, MMFs increased their T-bill allocations by $264bn last month, absorbing nearly 88% of the issuance. Against this backdrop of muted inflows but heavy T-bill absorption, MMFs rotated out of repo, with total repo allocations declining by $124bn, bringing their allocation as a share of portfolio holdings down to 35%, the lowest since October of last year." They tell us, "Unsurprisingly, most of the decline in repo exposure came from the FICC-cleared repo, likely reflecting a reversal of June quarter-end balance sheet effects. At the same time, MMFs' dealer repo exposure surged, rising $101bn and bringing total dealer repo exposure to nearly $2.1tn.... Within dealer repo, exposure to U.S. banks increased by $75bn to $979bn, taking the year-to-date repo increase to $187bn. In contrast, exposure to Canadian dealers declined by $100bn in July, likely reflecting balance sheet adjustments around Canadian bank quarter-end. Outside of repo, government MMFs have also trimmed other exposures; allocations to Treasury coupons and FRNs declined by $89bn, consistent with a rotation into T-bills this month. Government MMFs' allocations to agencies rose, modestly, to $1.18tn, driven by FRNs.... Looking ahead, as we enter a period of negative T-bill supply in September, we expect funding markets to remain contained outside of modest pressures on the corporate tax date and quarter-end." The brief adds, "Meanwhile, MMFs appear to have maintained a defensive tone, with MMF WAMs continuing to shorten. Prime WAMs fell 1.7 days in July after declining 1.4 days in June.... This preference for liquidity is also evident in the holdings: prime funds increased repo exposure by $32bn. This defensive tone is prominent amid a time of elevated policy uncertainty as 1y1y OIS has moved in a wide 28bp range during July alone. At the same time, prime funds continued to add credit exposure by $16bn in July, taking total credit exposure up $72bn year to date.... Nearly half of this growth has been driven by both ABCP and non-financials, which is consistent with the surge in supply this year (ABCP outstandings $100bn YTD; non-financial outstandings $125bn YTD).... Looking ahead, we continue to believe that if the growth in ABCP supply continues, prime MMFs should be able to absorb the issuance on the margin, especially given the typical seasonal trend higher in MMF balances over the next four months. That said, issuer concentration remains a key risk and continues to be a potential constraint."
