J.​P. Morgan writes in its "Mid-​Week US Short Duration Update" that "Sharp equity market sell-​offs are MMFs' friend." The brief explains, "Concerns over the spread and impact of the COVID-​19 outbreak remain the primary driver of rates and spreads across the global markets. In the US, Treasury yields reached record lows while equities sold off over 6% the first two days of this week. Credit spreads have also widened, and the weak market backdrop has led to little to no issuance so far this week. Similarly, money markets have also been impacted during this time. Expectations of a Fed rate cut in response to the economic impact of COVID-​19 continue to mount. As of the time of writing [​Thursday a.​m.], `​OIS markets are pricing in over an 80% chance of a 25bp cut in April and more than a full cut in June. This has in turn led to declines in Libor yields across the curve, driven by further declines in OIS. The 1m1y Libor curve is now completely flat and has retraced all the steepness we saw in 4Q19." It adds, "Furthermore, large equity market sell-​offs have historically been associated with inflows into MMFs, especially retail MMFs. This makes sense as investors want to hold more cash and liquidity on hand while they wait for markets to stabilize, and that cash is often swept into a MMF.... [R]​etail government MMFs at Vanguard, Fidelity, and Schwab have often seen outsize inflows in weeks when the S&​P 500 sold off sharply. To this end, we have already seen flows into these large retail MMF managers so far this week: government retail MMFs across Vanguard, Fidelity and Schwab gained $​2.​8bn on Tuesday, their largest single-​day inflow YTD. To the degree the sell-​off persists, on the margin the demand for money market products, particularly rates product such as bills/​discos/​repo, could increase."

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