JPM Update on Supply, MFS, Regs
J. P. Morgan's latest "Mid-Week US Short Duration Update" gives a shout-out to our recent Money Fund Symposium conference in Atlanta. They write, "The continuing trend of deposit-to-MMF migration, the Fed's ongoing balance sheet runoff, and the possible slew of demand for T-bills from non-RRP investors could pressure reserves lower. That said, in our base case, we still assume the Fed will continue their QT efforts this year, and we do not believe EFFR will drift higher in the target range, as liquidity remains ample and RRP balances remain elevated. Furthermore, we look for SOFR to continue trading flat to RRP. We also expect T-bill valuations to richen in coming weeks with debt ceiling concerns behind us. Meanwhile, given our economists' expectation of one more 25bp Fed hike this year in July, we see EFFR and SOFR (1m trailing average) ending 2023 at 5.35% and 5.30%, respectively. During 1H23, total money market net supply (ex-Fed) increased by about $1186bn, driven primarily by increased T-bill and Agencies supply. Meanwhile, short-term credit net supply saw a modest decline. We estimate total money market net supply (ex-Fed) will increase by another $1436bn in 2H23, driven largely by the upcoming T-bill issuance. Further, we look for financial CP/CD net supply to increase by about $175bn in 2H23." The brief states, "Apart from our outlook, the Crane Data Money Fund Symposium took place in Atlanta last week, where we heard perspectives from an array of money fund managers, strategists, and other money market investors on the current state of money funds and the issues they face. Generally, money funds are still finding floaters relatively attractive given prevailing uncertainty surrounding how much higher the Fed will go. For the same reason, funds could be somewhat more cautious in extending duration further. Since the debt ceiling was pushed back to 2025, some MMFs have somewhat dialed down their balances at the ON RRP. Some expressed that they care to have relative diversity in their portfolios' repo counterparties, noting the value of FICC sponsored repo, for example. However, with so much cash in the front end and without a significant value add in diversifying repo investments, many funds remain focused on tri-party repo and Fed RRP for overnight cash management. Meanwhile, Treasury/repo money funds continued to shorten portfolios for some time after government funds began extending, but since May, the gap in WAMs between the two fund types has mostly closed, particularly as the debt ceiling has been resolved." JPM adds, "Separately, the SEC appears to have MMF reforms on its short-term priority list. As the SEC takes into consideration the very large (and growing) comment file on the proposed reforms, and with a vast majority of commentators opposed to swing pricing, it is possible that swing pricing alternatives could be discussed. Nevertheless, we think swing pricing for institutional prime MMFs will likely be imposed, and we foresee the SEC giving MMFs a 2-year implementation time period."
