J.P. Morgan published "Short-Term Fixed Income 2025 Outlook" last week, which explains, "Cash continued to flood into MMFs as investors sought refuge in this asset class while earning 5% yields. More importantly, an inverted yield curve and low bank deposit yields made MMFs a very attractive liquidity investment. The inflows continued even as the Fed cut rates, pushing AUMs to a record $7tn, underscoring the abundance of liquidity in the system, most of which seemed to be sitting in the front end. To that end, money market spreads traded largely in a narrow range, even in the face of MMF reform." (Note: We're still taking registrations for our "basic training" event, Money Fund University, which will be held Dec. 19-20, 2024 in Providence, R.I. Please join us too for Crane Data's Holiday Party on Thursday, Dec. 19 at the Renaissance Providence from 5-7pm!)
JPM tells us, "In 2025, yields are heading lower, though we remain constructive on the money markets. Fed cuts are not going to shake off the attractive appeal of MMFs given the shallower easing cycle and uncertainty with respect to how the economy will unfold under the new US administration. We believe MMF AUMs will remain elevated at around $7tn, continuing to provide steady demand for money market instruments. In contrast to prior years, supply in the money markets in 2025 will not be driven by T-bills. Instead, it will be driven by collateral, as continued growth in net Treasury supply and demand for levered equity exposure translate into more Treasury repo, equity repo, and ABCP supply."
They write, "All told, we see total money market supply increasing by $775bn to $17.9tn in 2025. While demand for money market investors should persist, prices might need to adjust to incentivize continued absorption of that supply, particularly as RRP liquidity has fallen to low levels and hit a floor."
A section titled, "MMFs: Lower rates, no problem," states, "If we're right about our Fed interest rate forecast, a 3.75% terminal rate by 3Q25 is hardly a low yield. Cash will remain an attractive asset class even as the Fed cuts rates. This was certainly evident in the demand for MMFs this year, refuting the notion that lower rates would prompt imminent outflows. Through 11/21, total taxable money fund balances grew by $691bn (+11%) YTD and now register nearly $6.9tn. Even accounting for seasonality, this year's inflows were substantially higher than those of prior years, including 2020 but excluding 2023 when the COVID crisis and the regional banking crisis respectively drove cash into MMFs."
The outlook continues, "In the face of an inverted yield curve and volatile markets, MMFs provided a safe haven for investors seeking stability and yields -- and at extremely attractive yields at that for an overnight asset. So it was not surprising then that flows were widespread this year, with notable gains across different types of taxable MMFs with the exception of prime institutional funds as they underwent structural reforms."
JPM says, "We expect MMF AUMs to remain elevated next year. While the degree to which cash moves into MMFs may abate, we certainly do not foresee any outsized flows out of MMFs. Indeed, a look at MMF flows going back three decades, spanning over four easing cycles (1995, 2001, 2007, 2019), shows that MMFs continue to see inflows even as the Fed begins to cut rates.... In fact, in 1995, which we think is most reflective of the shallow cycle we are about to embark on and is also more comparable on an absolute yield basis, MMFs continued to see inflows throughout the entire cycle."
They add, "Fundamentally, the relative attractiveness between bank deposits and MMFs should also continue to favor the latter asset class.... [T]he spread between bank deposits and MMFs remains wide, with MMFs yielding 60bp above online bank savings accounts and 425bp above national bank deposit accounts. With a Fed that is expected to bring rates back down to neutral, we suspect banks are not going to be increasing their deposit yields anytime soon, particularly on non-operational deposits which banks still do not necessarily want. And while cuts will push MMF yields incrementally lower, the spread over deposits will remain large enough for MMFs to continue to attract incremental cash."
Finally, the piece summarizes, "All told, combination of a flat front-end yield curve and low deposit rates should keep taxable MMF balances relatively elevated. AUMs around $7tn are here to stay, which means steady demand for money market instruments."
In other news, a press release titled, "Archax Provides Access to abrdn Money Market Fund on the XRP Ledger in Collaboration With Ripple," tells us, "Archax, the first FCA regulated digital asset exchange, broker and custodian, has provided access to a money market fund from UK asset manager abrdn in tokenized form on the XRP Ledger (XRPL), a decentralized blockchain. The fund comprises part of abrdn's £3.8 billion US dollar Liquidity Fund (Lux) and represents the first tokenized money market fund on the XRPL, further establishing it as one of the leading blockchains for real-world asset (RWA) tokenization and institutional decentralized finance (DeFi)."
The release continues, "This milestone is the result of an ongoing collaboration between Archax and Ripple, the leader in enterprise blockchain and crypto solutions. It marks an important step towards unlocking operational cost savings and settlement efficiencies by deploying capital markets infrastructure on the XRPL. According to McKinsey, tokenized money market funds already exceed USD$1 billion in assets under management, and some projections estimate the value of tokenized assets could reach $16 trillion by 2030.... Ripple will allocate USD$5 million into tokens on abrdn's Lux fund."
Markus Infanger, Senior Vice President of RippleX, comments, "The arrival of abrdn's money market fund on XRPL demonstrates how real-world assets are being tokenized to enhance operational efficiencies, while further reinforcing the XRPL as one of the leading blockchains for real-world asset tokenization. There is no question that the on-chain economy is gaining traction. By working with companies like Archax, we are excited to help financial institutions like abrdn to seize the incredible opportunity represented by blockchain and digital assets technology to deliver utility at scale."
Graham Rodford, CEO of Archax, adds, "Financial institutions are understanding the value of adopting digital assets for real world use cases. There is now real momentum building for tokenized real-world assets, and Archax is at the forefront of tokenizing assets such as equities, debt instruments and money market funds. In collaboration with Ripple, we are excited to help our clients such as abrdn, which manages over half a trillion pounds in assets (as at Q2 2024), to bring them to the XRPL using Archax's tokenization engine. Institutional buyers can now purchase abrdn's Lux fund directly from Archax in token form."
