JPMorgan: Liftoffs Slowed by Waivers
J.P. Morgan "Mid-Week US Short Duration Update" features a brief entitled, "Net MMF yields: slow to rise," which discusses how fast money fund yields might follow the Fed funds rate higher in coming months. They write, "In a few weeks, the Fed is likely going to lift rates off of the zero bound -- a level that has been maintained since March 2020. In a couple months, the Fed is also likely going to begin reducing its reinvestments in Treasuries and mortgages. We have discussed previously that the interaction of these policies means that reserves will be much more sensitive to normalization of the Fed's balance sheet than RRP. As leverage continues to remain a binding constraint for the banking system, and as rising interest rates are likely going to push yields at MMFs higher versus deposits, we would expect MMF balances to remain elevated, thereby increasing demand for RRP." JPM continues, "To that end, the recent debate about whether the Fed will raise rates by 25bp or 50bp at liftoff has prompted some to consider the pace at which cash might shift from deposits to MMFs. In other words, could we see a faster drain in reserves, and correspondingly a further rise in RRP? At the heart of this is the assumption that the correlation between the fed funds rate and net yields of MMFs are very high. While this is generally the case, the relationship between market rates and MMF net yields is much weaker when rates are near the zero lower bound. This is because of MMF fee waivers. As a result, the rise in interest rates do not necessarily get passed on to the end shareholder until further along in the tightening cycle." The update adds, "[D]uring the 2015-2018 tightening cycle, the first rate hike almost entirely went to expanding the expense ratios of government and prime funds as MMFs sought to recapture fee waivers. It was not until the fourth rate hike when expense ratios began to stabilize, implying a resumption of the relationship between market rates and MMF net yields. Based on current market expectations, this would suggest that if cash were on the move to economically take advantage of MMF yields versus deposits, it's probably going to be more of a 2H event."
