Bloomberg on MMFs' Shift to T-Bills
Bloomberg writes, "Money Markets Are Giving Fed Room to Keep Shedding Treasuries," which tells us, "Money markets are giving the Federal Reserve a green light to continue shedding Treasury securities from the massive pile accumulated as part of its pandemic response. By not rolling over all of its maturing holdings of US government debt, the Fed is forcing the Treasury to borrow more from the investing public. The risk is that the increased borrowing will drain reserves from the banking system to low levels that have caused problems in the past. So far, that's not happening. A surge in the quantity of Treasury bills being sold since US lawmakers agreed to suspend the debt limit in early June appears to be finding a home mainly with investors who have vast resources elsewhere." The article continues, "Money-market mutual funds that normally are big buyers of Treasury bills have been parking cash in the Fed's reverse repurchase agreement facility due to bill scarcity while the debt limit was in effect. A slump in usage of that daily operation suggests that money funds are scooping up most of the increased bill supply, limiting the impact on bank reserves. The total remains above $3 trillion. Wall Street strategists estimate — with low conviction -- that the banking system needs at least $2.5 trillion to function smoothly." It adds, "A key risk is that money-market funds appetite for Treasury bills is waning. Shifting assets from the Fed's RRP to bills affords higher returns, but also exposes funds to the risk of additional interest-rate increases by the central bank, which policy makers have signaled are likely. Morgan Stanley strategist Efrain Tejeda predicts reserves will fall by about $400 billion to $2.8 trillion by the end of the third quarter, with RRP balances dwindling to about $1.7 trillion. Bill supply is projected to increase by at least another $1 trillion this year. The final $300 billion could create problems, TD Securities' head of US rates strategy Gennadiy Goldberg told attendees at Crane’s Money Fund Symposium last week."
