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Money markets thrive in an atypical sweet spot



(Bloomberg) – In a global financial environment dominated by negative interest rates and central banks signaling more accommodative policies, the US money market industry is booming.

Typically used as a place to park cash in times of uncertainty: Taxable funds posted inflows of approximately $ 136 billion this year, even though US equity markets rallied and bonds yielded positive returns. This is based on data from the Investment Company Institute. The balance sheet has grown to more than $ 3 trillion, the highest level since the financial crisis.

Demand is supported in part by attractive short-term US yields relative to bank deposits, supported by the Federal Reserve's three-year interest rate hikes, an inverted yield curve and volatility on the financial markets. The total assets of the state's money funds is at a record high, and investment in first-rate funds are the highest since September 2016, before the economic reforms came into force.

The ghost of rate cuts is not perceived as an immediate threat, but it will be a topic among the participants in the Crane's Money Fund Symposium in Boston, which begins on Monday. Other issues that are likely to arise are the decline in yields and the narrowing of the spread between government and first-rate money market funds, and the growth of the repurchase market following the reform and the popularity of sponsored repurchase agreements.

"Money Market Returns Pia McCusker, the Boston-based global cash management director at State Street Global Advisors Trust Co., said it still appeals to investors today. If people are looking for a safe haven, cash is still a great place.

Two-year government bond yields fell nearly 74 basis points to 1.75% this year.

The Fed

Now that the Fed has abolished the use of "patient" in describing its approach to monetary policy changes. The futures markets are pricing in more than 25 basis points for easing at the next Federal Open Market Committee meeting in July. However, fund managers are baffled as money is still more attractive than bank deposits. Historically, money funds tend to tap outflows one to two years after the Fed cut interest rates, according to Alex Roever, head of US interest rate strategy at JPMorgan Chase & Co.

Investors in monetary funds pushed the Fed's interest rates down to zero which lowered money market yields and attracted investors' money in search of higher-yielding assets. "It was not the fact that they had to cut interest rates," said Roever. "It's true that the overall interest rate in this scenario has been so low."

Another problem could be whether the Fed decides to introduce an instrument to keep money market rates under control. Repurchase rates – a key component of short-term refinancing markets – have recently shown a tendency towards a month-end increase, which has helped to increase the Fed Funds Rate. Fed Chairman Jerome Powell said at his press conference following the meeting last month that the central bank will examine the idea of ​​a standing repo facility at a future meeting.

Lower Yields

Even if funds remain attractive investment vehicles, the yield decline will be a topic of discussion. After peaking at 30 to 35 basis points in December, the spread between prime funds – which mainly invest in commercial paper, certificates or deposits and term deposits – and sovereign wealth funds has fallen to around 20 basis points, according to State Street's McCusker

with the issue of commercial papers together and with the issues of financial institutions. So far this year, there were an average of 21 issues of AA-rated CPs that were longer than 81 days on a typical day, according to Fed data. This is a decline of an average of 28 issues over the same period of 2018. This supply shortage "has implications for Libor attitudes to be lower and overall for prime funds lower," Roever said.

Repo Growth

Given As sovereign wealth assets have grown following the entry into force of the 2016 reforms, the repo market has expanded to keep pace with increased demand. Money market fund dealer repo has risen to $ 1.2 trillion at the end of May, according to data from the Office of Financial Research. This is due to the growth of the sponsored repos. These are transactions in which traders sponsor non-dealer counterparties to the Cleared Repo Platform of the Fixed Income Clearing Corporation (FICC). Last month, the fund's cash raised in Cleared Repo rose to a record $ 154 billion, compared to $ 5 billion in June 2017, when the first funds were raised. Repo volume is set to grow, though "it's difficult predict how popular the program will become, "he wrote in a June 19 announcement. "How much commitment of a single counterparty to the FICC would like to have a monetary fund?" 25%, 50% or more?

(Adds a 2-year bond yield to the sixth chart.) An earlier version of this story was corrected due to a mislabeling in the chart legend.)

Contacting the Reporter About This Story: Alexandra Harris in New York under aharris48 @ bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Dave Liedtka, Mark Tannenbaum

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