Bloomberg on T-Bills and MMFs
Bloomberg wrote, "Fed Proves Irrelevant in $2.6 Trillion Slice of U.S. Debt Market," which says, "The blowout U.S. jobs report for October means the Federal Reserve may be weeks away from raising interest rates. For U.S. savers earning next to nothing on $2.6 trillion of money-market mutual funds, the move will barely register. The reason is that there's an unprecedented shortfall in the safest assets, especially Treasury bills -- a mainstay of those funds and traditionally the government obligations that are most sensitive to changes in Fed policy. The shortage means some key money-market rates will probably remain near historic lows even if the central bank increases its benchmark from near zero next month. As a share of U.S. government debt, the amount of bills is the lowest since at least 1996, at about 10 percent, and the Treasury is just beginning to ramp up issuance of the securities after slashing it amid the debt-ceiling impasse. Meanwhile, regulators' efforts to curb risk after the financial crisis are stoking increased demand: Money-market industry rules set to take effect in October 2016 may lead investors and fund companies to shift as much as $650 billion into short-maturity government obligations, according to JPMorgan Chase & Co. "The demand for high-quality short-term government debt securities is insatiable and there is just not enough supply," said [PIMCO's] Jerome Schneider. "Even given the increased bill sales coming as the debt-limit issue has passed, it won't keep up with rising demand from regulatory forces. This will keep rates low." While the U.S. government stands to benefit as the imbalance holds down borrowing costs, it's proving the bane of savers. Average yields for the biggest money-market funds, which buy a sizable chunk of the $1.3 trillion Treasury bills market, haven't topped 0.1 percent since 2010, according to Crane Data LLC. In 2007, they were above 5 percent before the Fed started slashing rates to support the economy." It continues, "BlackRock Inc., Federated Investors Inc. and Fidelity Investments are among asset managers changing money-fund offerings in response to the shifting rules. They're converting prime funds to choices focused on government securities, including bills and agency offerings. Those funds will retain the stable $1 share value that's been a bedrock assumption of money markets. Adding to the supply-demand imbalance in bills, higher capital requirements have led some banks to place fees on deposits, pushing savers into short-term government securities. "There has been tens of billions that has flowed into the government money-market sector, but it's about to turn into hundreds of billions," said Peter Crane, president of Crane Data.... That pressure will "keep government and Treasury rates nailed to zero." It adds, "How big the RRP program gets will have a big impact on where bill rates go in the Fed liftoff," said Alex Roever, head of U.S. interest-rate strategy at JPMorgan. "That will matter to the bill market because the Fed RRP's are going to be a substitute, and likely a higher-yielding one, for short-term Treasury bills."
