JPM on State of Prime MMFs

Jan 13 21

J.P. Morgan's latest weekly "`Short-Term Fixed Income" briefly discusses, "The state of prime MMFs." They write, "Prime MMFs are starting off the year with plenty of liquidity, and consequently plenty of cash to be put to work. Concerns around outflows in the run up to the November elections and year-end failed to materialize, and as a result, prime MMFs are starting the year with 50-60% in weekly liquidity, depending on the type of fund.... Based on Crane Data, aggregate AUMs have settled in the range of about $920bn ($640bn institutional, $280bn retail), so there is still plenty of demand for credit products. Not surprisingly, WAMs and WALs have increased this past week after a shortening late last year though it's unclear how much more room there is to go." The piece tells us, "Anecdotally, we've seen more and more investors prefer longer-dated fixed rate paper this past week. However, the extreme flatness of the credit curve in the money markets does bring into question whether extending out the curve makes sense. Indeed, the 1m/1y Libor curve is currently trading at around 20bp, significantly flatter than what we saw during the prior ZIRP period. During that time, the lowest spread between 1m and 1y Libor was 38bp, nearly double what it is currently." JPM adds, "That said, as noted earlier, given the tepid supply backdrop and a continued rise in reserves, we would argue that staying invested is likely going to be more of an issue than trying to find relative value in the current environment."

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