Evening Brief – 11.17.23
Dash to Cash
US money market funds have witnessed inflows for the fourth consecutive week after decreasing in October (mainly owing to companies withdrawing cash to meet delayed US income tax payments), the Investment Company Institute reported this week.
Money market funds increased by $21.9 billion in the week ending November 15 to a new high of $5.73 trillion.
Government funds, which invest largely in securities such as US Treasury bills, repurchase agreements, and agency debt, saw their assets climb by $18.9 billion to $4.68 trillion.
Prime funds, which invest in riskier assets such as commercial paper, saw their holdings rise by $5.6 billion to $932 billion. Flows into retail funds resumed their seven-month record, while institutional funds also witnessed inflows. Retail money market funds saw a $10.52 billion increase to $2.23 trillion, while institutional money market funds saw a $11.39 billion increase to $3.50 trillion.
Meanwhile, the amount of money investors are storing at the Federal Reserve’s reverse repurchase facility (the sale of securities with the promise to repurchase them at a higher price at a later date) has fallen below $1 trillion, reaching its lowest level since July 2021.
Inflows have fallen dramatically in recent months as the Fed has tightened policy aggressively since last year. Demand for the facility has been dwindling as the Treasury increased T-bill issuance, providing an option for short-term investors.
It represents a significant decrease from a record $2.554 trillion stashed on December 30, 2022, and some analysts are beginning to worry about the implications.
The Fed should stop reducing its bond holdings before the facility is totally depleted to ensure that banks’ cash buffers do not become too thin, putting pressure on short-term funding markets, according to Wrightson ICAP economist Lou Crandall in a note.
“We think banks should be encouraged to hold deep liquidity buffers, so our preference would be to adopt a generous definition of ‘ample,’” Crandall wrote. “Surplus cash sitting in the RRP (Reverse Repurchase Agreement) facility can be redeployed by money funds into the repo market in the event of a spike in financing needs.”
Overnight lending rates have risen in the past due to a lack of reserves, most notably in 2019, when the Treasury raised its borrowing and the Fed ceased buying as many Treasuries for its balance sheet.
Meanwhile, the Federal Reserve’s balance sheet shrank by $45.7 billion last week to $7.815 trillion, the lowest level since May 2021. The balance sheet has now shrunk by more than $1.1 trillion since its peak, but there is still quite a distance to go.
The Fed’s QT (Quantitative Tightening) program resumed last week, following a pause the previous week, with its securities-held falling $30.3 billion, the lowest since May 2021.
Most significantly, bank use of the Fed’s emergency funding facility surged to a new record high, up $7 billion to $113 billion, rekindling concerns about the viability of these institutions. Interestingly, regional banks are ignoring the fact that they are required to borrow from the Fed at high interest rates.