The money market mutual fund industry has a new champion, Somerset County (Pa.) Treasurer Anthony DeLuca. The Tribune Democrat of Johnstown, Pa, writes, "Somerset County considering money market to boost interest revenue." The piece explains, "With the county's general fund inflated to more than $31 million -- in part due to temporary American Rescue Plan money -- Somerset County Treasurer Anthony DeLuca sees a unique opportunity to grow that total. Advising the Somerset County commissioners that money market interest rates will grow to 2.25% on Sept. 1, he urged the board Tuesday to transfer those dollars into a market fund through an area bank. 'That's $35,130 per month the county could be gaining,' DeLuca said, adding that the total interest would add up to $427,433 a year."
The article continues, "Somerset County commissioners said the idea has their attention, but they pumped the brakes on DeLuca's call to act 'immediately.' `While moving the funds from a savings account that yields 0.55% to a market find that currently pays 1.75% might seem like a no-brainer, Commissioner Colleen Dawson said the board has a fiduciary responsibility to thoroughly explore whether a money market option, which has a monthly transaction limit, would be a fit."
The Tribune Democrat explains, "Monitoring investment opportunities is part of DeLuca's role as treasurer. He first pitched the idea in a committee meeting earlier this month. DeLuca obtained money market quotes from the bank the county currently deals with -- First National Bank, a Pittsburgh-based institution with a heavy presence in the region. While DeLuca said he'd reach out to other banks for proposals, he said the county is losing money each day -- and said he didn't understand why the county didn't act immediately to invest."
The paper adds, "President Commissioner Gerald Walker said the county has an obligation to act carefully and research the idea, given that taxpayers' money is involved. In the days since DeLuca first brought up the idea, the county spoke with officials from the Pennsylvania Local Government Investment Trust about directing general fund dollars into a money market, he said. The municipal government-created entity serves as a financial services resource for counties, townships and schools. The next step involves collecting quotes from banks and determining what percentage of its fund dollars the county could deposit in the fund, Walker said."
In other news, the Federal Reserve Bank of New York sent out a "Replay" version of an earlier Liberty Street Economics blog post, entitled, "The Fed's Balance Sheet Runoff and the ON RRP Facility." (We mentioned earlier in our April 13 Link of the Day, "The Fed's Balance Sheet and ON RRP," but briefly quoted.) They write, "A 2017 Liberty Street Economics post described the balance sheet effects of the Federal Open Market Committee's decision to cease reinvestments of maturing securities -- that is, the mechanics of the Federal Reserve's balance sheet 'runoff.' At the time, the overnight reverse repo (ON RRP) facility was fairly small (less than $200 billion for most of July 2017) and was not mentioned in the post for the sake of simplicity. Today, by contrast, take-up at the ON RRP facility is much larger (over $1.5 trillion for most of 2022). In this post, we update the earlier analysis and describe how the presence of the ON RRP facility affects the mechanics of the balance sheet runoff."
The blog explains, "In the exhibit below, we describe simplified balance sheets for the Fed, the Treasury, banks, and money market funds (MMFs). We only show the balance sheet items that are essential for understanding the mechanics related to the Fed's actions.... On MMFs' balance sheet, the asset side contains Treasury securities, deposits at banks, and investments in the ON RRP facility; on the liability side, there are MMF shares held by households. In contrast to banks and the Treasury, MMFs cannot hold balances in a Fed account; however, MMFs have access to the ON RRP facility (MMFs with ON RRP access accounted for approximately 80 percent of MMF assets under management at the end of 2021)."
It tells us, "We next consider what happens when newly issued Treasury securities are purchased by MMFs. MMFs can fund their purchases by withdrawing deposits at banks, reducing their investments in the ON RRP facility, or a combination of the two. The next exhibit shows what happens if MMFs use both deposits and ON RRP investments to purchase Treasury securities. Several transactions occur simultaneously: MMFs buy new securities from the Treasury, which holds the proceeds at the Fed, returning the TGA balance to its level before the Treasury securities held by the Fed matured. MMFs' deposits at banks decrease as MMFs use them to purchase a portion of the Treasury securities. Banks facilitate the purchase, transferring reserve balances to the TGA while debiting the accounts that MMFs have at the banks."
The blog says, "MMFs reduce their investments in the ON RRP facility to fund the purchase of the remainder of the Treasury securities. ON RRP balances decline and the TGA balance increases by an equal amount. Banks' balance sheet shrinks, with lower deposits on the liability side, and lower reserves on the asset side. The size of MMFs' balance sheet is unchanged, but its composition on the asset side has changed: the increase in Treasury securities holdings is offset by a decrease in deposits held at banks and investments in the ON RRP facility."
It states, "Since MMFs can only buy newly issued Treasury securities if they are Treasury bills or floating rate notes, only when these securities are issued in large amounts will MMFs be able to absorb a large fraction of the Fed's balance sheet reduction. Moreover, the extent to which MMFs are willing to buy Treasury securities depends on how the rates on these securities compare to the rates paid on alternative assets such as bank deposits and ON RRP investments. Finally, since a large fraction of the MMF industry -- namely government funds -- cannot invest in bank deposits, it is likely that a large proportion of purchases of Treasury securities by MMFs would be financed through reduced investments in the ON RRP facility."
Finally, they write, "In this post, we updated an earlier post illustrating the balance sheet mechanics of a runoff in the Fed's holdings of Treasury securities to illustrate the effect of the ON RRP facility. In all cases, the Fed's balance sheet decreases as the Fed doesn't reinvest the proceeds of its maturing Treasury securities. On the liability side of the Fed's balance sheet, the decrease may stem from either a reduction of reserves held by banks or a reduction in ON RRP take-up or a combination of both. Similar mechanics occur when agency mortgage-backed securities mature and banks purchase the newly issued securities, as was noted in this Liberty Street Economics post. As the exhibits in this post show, the runoff of the Fed's security holdings has potential implications for the balance sheets of a range of financial market participants."
