Bloomberg writes that, "Money Funds Keep Cash Closer as Fed Leaves Markets Guessing." The article, written by Alex Harris, tells us, "Money market funds are shifting toward ultra short-term holdings and away from assets with even modest interest-rate risk as uncertainty grows over the Federal Reserve's policy path and the near-term outlook for rates. The weighted average maturity of fund holdings has fallen to 40 days from 45 days in mid-May, according to Crane Data LLC. Managers have directed more cash into overnight repurchase agreements and short-dated securities, while increasing allocations to floating-rate agency and Treasury debt. Exposure to T-bills has edged lower even as the government ramps up issuance."
It continues, "A surge in oil prices and a more hawkish tone from the Fed under Chairman Kevin Warsh had traders pricing in a rate increase as soon as this month. But a pair of benign inflation reports last week further clouded the policy outlook, prompting markets to reassess those expectations. Against that unsettled backdrop, money funds overseeing more than $8 trillion are favoring securities that mature, roll over or reset within weeks, preserving the flexibility to reinvest at higher yields should rates rise again."
The piece quotes Deborah Cunningham, Federated Hermes' CIO for Global Liquidity, "You want to keep some powder dry for better opportunities down the road so you want those WAMs to come in a bit."
Bloomberg says, "Managers are trying to avoid a repeat of early 2022, when some were caught with relatively long-dated holdings ahead of what became one of the Fed's fastest tightening cycles in decades. The experience has left them more reluctant to take interest-rate risk when the policy path is unclear."
They also quote "Geoff Gibbs, a managing director at DWS Group, said at the Crane's Money Fund Symposium last month that they've kept roughly half the portfolio in repo for most of the year and don't expect that to change, especially now that rate hikes are being folded into the outlook."
The piece adds, "Money market funds' allocations to repo increased by about $36 billion in June to roughly $1.89 trillion, Crane Data show. Federated's Cunningham said she expects weighted average maturities to shorten further as the Fed prioritizes bringing inflation back toward its target."
They quote Wells Fargo's [Angelo] Manolatos, "With September still on the table and plenty of hawkish Fed speak about potential hikes, money market funds will want to gradually shorten WAMs from here. It's a fairly high bar for money managers to want to do anything other than deploying excess cash in repo or floaters if they can avoid it."
In other news, State Street recently published, "Fund Connect Quarterly: A Hawkish Lead Into the Second Half," which states, "Multiple market-based measures point to at least one Fed hike in the second half of 2026, followed by another in early 2027. Since June 21, September Fed funds futures have fluctuated between 17 and 25bps of tightening priced, while December contracts imply roughly 37bps, suggesting that one hike this year is fully priced and a second remains a meaningful possibility. Options markets tell a similar story: SOFR options imply nearly a 70% probability of at least one hike by year-end, while the likelihood of no change has fallen below 20%. Looking further ahead, SOFR options assign greater than a 50% probability to two cumulative hikes by March 2027."
They tell us, "Cash managers at the largest money market funds have taken notice. Weighted average maturities (WAMs) have declined from a Q1 peak of 46 days in April to 37 days currently, reflecting a preference to retain flexibility and reinvest at potentially higher yields.... That said, a 37-day WAM does not signal expectations for an aggressive tightening cycle. During Fed's 2022–23 hiking campaign, WAMs fell below 10 days. Rather, current positioning suggests money market managers anticipate a gradual rise in short-term rates and want the ability to redeploy assets at more attractive yields over the coming quarters."
The brief adds, "In the second half of Q2, real-money demand for bills increased alongside a rise in money market fund assets.... While several factors contributed to the increase in cash across the system, including elevated Treasury bill and corporate debt issuance, the resulting excess liquidity helped drive funding rates meaningfully lower through the quarter. Although funding rates have since normalized, they do not currently signal liquidity pressures, as overall market liquidity remains ample. More recently, inflows into bills have slowed, and cash allocations remain relatively limited as multi-asset investors continue to take a glass-half-full approach to asset allocation."
