The Securities & Exchange Commission's Division of Investment Management Analytics Office published, "Money Market Funds in the Treasury Market," which reviews Government money market fund investments in Treasuries and repos over the past decade. Authors Viktoria Baklanova, Isaac Kuznits and Trevor Tatum write, "This study analyzes portfolio holdings data filed by money market funds (MMFs) on Form N-MFP to gain insights about these funds' activity in the Treasury market. Since March 2020 the MMF industry, including both government and prime MMFs, increased investments in Treasury securities and Treasury repurchase agreements supporting Treasury auctions and repo market functioning. MMFs are also the main investors in the Federal Reserve's reverse repo facility supporting monetary policy implementation."
They explain, "MMF investments in the Treasury market have increased substantially in recent years. One reason for this development is the growth of assets under management in government MMFs, which are required to invest at least 99.5% of their total assets in cash, U.S. government securities, or fully collateralized repurchase agreements (repos). Assets in government MMFs more than doubled in 2016 following implementation of the 2014 MMF reforms and increased considerably once again in the first half of 2020, when demand for government assets surged amidst the COVID-19 pandemic."
The paper continues, "In addition, prime MMFs, which can invest in a broad range of short-term, high quality assets, have increased their holdings of U.S. government securities, mostly Treasuries. As of June 30, 2022, the MMF industry allocated $3,783 billion, or 75% of total investments to Treasury securities and Treasury repos. This includes prime MMFs that sharply increased their allocations to Treasury securities and Treasury repos since the onset of the pandemic in March 2020."
It tells us, "MMFs participate in the Treasury market alongside other types of entities. The statistics about Treasury securities issuance and holdings collected by the Federal Reserve show that as of March 31, 2022, foreign and international investors, including hedge funds, were the largest holders of Treasury securities accounting for approximately 30% of $25.5 trillion in Treasury securities outstanding.... The second largest holder of Treasury securities was the Federal Reserve with around 23% of the total. The Federal Reserve's share grew markedly in 2020 when the central bank increased its holdings of Treasury securities to support the flow of credit to households and businesses during the pandemic, among other measures."
The SEC staffers say, "Investment companies (including MMFs) were the third largest investor in the Treasury market holding just under $3.6 trillion of Treasury securities and accounting for 14% of the total. MMFs account for around 7% of outstanding Treasury securities.... MMFs investments are limited to securities that have residual maturities of 397 days or less or government adjustable rate securities resetting within 397 days. Because of these limitations, MMFs mainly invest in Treasury bills.... MMFs have also become dominant investors in Treasury floating rate notes (FRN) since the FRN program was established in January 2014. As of June 30, 2022, MMFs held 60% of outstanding Treasury FRN and accounted for over 30% of outstanding Treasury bills."
They write, "MMFs' share of total Treasury securities outstanding increased markedly at the onset of the pandemic. Government MMFs, which received inflows of $838 billion in March 2020 and $347 billion in April 2020, increased their market share in Treasury bills. MMF Treasury bill holdings, which were 24% of the total outstanding in February 2020, increased to 32% of total outstanding in March 2020 and further increased to 43% of total outstanding in April 2020, supporting government debt issuance during the time of crisis."
The piece states, "Typically, MMFs purchase Treasury securities at auctions and hold to maturity. Portfolio holdings data filed by MMFs on Form N-MFP offer month-end snapshots, but doesn't provide complete visibility into asset turn-over. For example, if an MMF disposes of portfolio holdings intra month, the currently available data would not reflect this activity and could potentially underestimate the amount of asset liquidation. Given this limitation, estimates based on monthly filings of Form N-MFP suggest that, on average, MMFs hold around 70% of Treasury securities to the next month, while around 6% of such holdings are liquidated before maturity.... Around 23% of Treasury holdings mature during the month. Prime MMFs show even less Treasury securities turnover. Estimates based on monthly filings of Form N-MFP suggest that prime MMFs, on average, liquidate only 4% of their Treasury holdings before maturity."
It also says, "Holdings of Treasury securities enhance the liquidity parameters of MMF portfolios. These assets are considered daily liquid assets by MMF regulation. In the first half of 2020, at the onset of the pandemic, MMFs sharply increased their holdings of Treasury bills, providing additional demand at the Treasury auctions and supporting market liquidity. For example, in April 2020, MMFs absorbed around 64% of the additional $1.3 trillion in Treasury bill issuance."
The paper adds, "MMFs are also important investors in the Treasury repo market. As of June 30, 2022, MMF investments in Treasury repos were close to $2,317 billion, of which $2,063 billion were allocated to the Federal Reserve's reverse repo (RRP) facility. MMF investments accounted for over 70% of the Treasury repos settled on the triparty platform. At present, MMFs conduct most of their Treasury repos with the Federal Reserve, which has replaced securities dealers as the main MMF repo counterparty since mid-2021.... Before that, securities dealers had been the largest MMF repo counterparty. Dealer access to MMFs in the repo market facilitates settlement of the Treasury auctions and a range of dealers' market making strategies, indirectly connecting MMFs to a broader set of activity in the financial system."
The paper also says, "Since introduction, RRP has been actively utilized by MMFs. As of June 30, 2022, total RRP investments by all counterparties reached an all-time high of $2,330 billion with MMFs accounting for approximately 89% of the total. For MMFs, RRP investments represented close to 41% of industry investment assets. This was in contrast to 2020, when MMFs only sparsely used RRP amid the increased issuance of Treasury bills, which provided a yield advantage over the RRP offering rate of 0.0% at that time."
Finally, on the "Fixed Income Clearing Corporation," they comment, "Some MMF investments in repos are centrally cleared, netted and novated by the Fixed Income Clearing Corporation (FICC). FICC allows some clearing members to sponsor their eligible clients such as registered investment companies, including MMFs. Netting of trades between FICC members reduces dealer exposures and can make trading less expensive, potentially providing cost benefits to MMFs as sponsored members. As of June 30, 2022, MMFs had close to $63 billion in centrally cleared Treasury repos, or 3% of their total Treasury repo volume. Most of these MMF sponsored repos were settled outside the triparty platform, although FICC has recently developed a triparty sponsored repo service."
