BNY on Money Funds, T-bill Issuance
BNY's John Velis asks in "More on money funds, T-bill issuance and funding markets," "Who is (and who will) buy the bills?" He explains, "Last week we discussed how slowing money market fund (MMF) growth could weigh on T-bill demand going into Q4. We argued that this could weigh on funding markets, given the importance of MMF participation in the T-bill market. This year, MMF T-bill holdings have fallen slightly, down by around $32bn through September, despite an increase of $570bn in bill supply. With T-bill issuance set to grow this coming quarter -- a back-of-the-envelope estimate is close to $500bn in new supply -- MMFs' continued reluctance to add bills to their asset allocation could indeed be a problem." The piece says, "Between 2023 and 2025, MMF AUM rose by an average of $1.03tn per year, closing 2025 with a then-record $8.1tn in total AUM. Between the end of 2025 and the end of this past September, MMF assets grew to $8.2tn, adding a mere $108bn in AUM. If we were to extrapolate the 2026 monthly average increase through the end of 2026 (approximately $12bn per month), we'd end the year with around $8.5tn in total assets, marking the slowest annual accumulation of cash in MMFs since 2022." The BNY update continues, "In early 2022, the Federal Reserve embarked upon what would be a 525bp rate hiking cycle, and MMF assets that year actually fell slightly -- and along with that, their T-bill purchases.... This behavior is typical during hiking cycles, and we can see in the chart that bank deposits initially increased as the tightening cycle commenced. With deposit rates generally moving in the same direction as policy rates, and money funds less willing to own longer-duration T-bills (meaning their own yields don't rise as fast as deposit rates), savers opted for deposits over MMF as a place for cash. This looks like it will be playing out again now, as we stare down the barrel of another hiking cycle." The article adds, "The question remains: who's been absorbing bill issuance this year, if not MMFs, and what happens as we head deeper into Q4 with auction sizes already starting to increase and Treasury likely to keep issuing ever more short-dated paper? Dealers have taken some of it. The 2025 monthly average saw primary dealers holding about $60bn in bills, while so far this year, the monthly average is pushing $81bn. Asset managers and other real money investors have increased their demand for bills, although foreign participants have been sporadic in their own take up of short-dated government paper."
