News Archives: May, 2025
Recent "Minutes of the Meeting of the Treasury Borrowing Advisory Committee April 29, 2025" comment on stablecoins and money market funds," saying, "With the growth of the cryptocurrency and digital asset economy has come the expansion of the 'stablecoin' market in the United States and abroad. As this asset class continues to grow, the distinctions between money funds and payment stablecoins has continued to converge. Some stablecoins are moving towards paying interest, money market funds are exploring tokenization, and Congress is considering explicitly defining what constitutes a collateralized dollar-backed payment stablecoin. Please articulate the terminal effects of interest-bearing stablecoins from a perspective of Treasury demand, USD hegemony, the expansion of dollar-backed payment stablecoins, and potential effects for insured depository institutions. Further, do tokenized money funds present a risk should they be allowed to compete with other payment or settlement instruments?"
A press release titled, "Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee <i:https://home.treasury.gov/news/press-releases/sb0121>," tells us, "`The second charge focused on stablecoins and their intersection with the US Treasury market. The current market cap of stablecoins is around $234bn, with roughly half of that currently reported as invested in T-bills, with another $90bn in money market funds. The Committee noted that evolving market dynamics and proposed legislation have caused some estimates of the growth trajectory of stablecoins to reach ~$2tn in market cap by 2028."
It says, "The Committee discussed the potential impact to US Treasury demand. Legislation design is likely to determine both scale of growth in the industry and sources of inflows (e.g., unbanked users, reallocations from money market funds, or reallocations from bank deposits). Growth in stablecoins from unbanked market segments would be positive for T-bill demand, while growth at the expense of money market funds would likely be neutral. Committee members worry that growth at the expense of bank deposits could impact credit creation and the existing demand profile for US Treasury securities from the banking sector."
Treasury adds, "Additionally, the question of interest-bearing stablecoins warrants careful consideration. Current draft legislation precludes stablecoins from paying interest. The Committee expressed concerns about interest-bearing stablecoins and felt that further study was warranted, as was further regulatory environment design."
In other news, Federated Hermes Deborah Cunningham says, "Let Powell drive the bus" in her latest commentary. She comments, "No one likes backseat drivers, but if they lunge for the steering wheel, you can't ignore them. That's the position that President Trump has repeatedly put Federal Reserve Chair Jerome Powell in when he attacks him for refusing to cut interest rates. Presidents occasionally chirp about Fed policy, but Trump's tweets go well beyond that."
Cunningham writes, "Perhaps because cash managers deal in securities that don't know the meaning of VIX, we do our best to ignore Trump. And maybe everyone should. But the problem is not that administration lawyers might find a legal loophole to remove Powell, usurp Fed independence with a 'shadow chair' or do something more drastic. Those alternatives would take the sort of energy, expertise and political equity the administration might not have for something most voters don't prioritize. It's that Powell's term as chair is set to expire in May 2026, which means he will essentially be a lame duck in a few quarters, and Trump's assault could accelerate that timeline when we need strong leadership."
She continues, "And though Trump might want to hand-pick his successor, the nominee must come from the group of standing Fed governors. That could mean the new chair might not hold wildly different opinions, as Powell has shown a commanding influence on the Fed board and FOMC over the years. He's been challenged more in the last few quarters, with some dissention, but it seems they largely support his view of economics."
The piece states, "So, cue the debate that likely will ensue at the FOMC meeting next week. It would not be surprising if Powell and most of the voting members push back against the fed funds futures call for as many as four quarter-point cuts over the rest of 2025. A cut is extremely unlikely, but expect guidance about how the tariffs could exacerbate the stickiness of inflation and more clarity on the hard/soft data dichotomy. Can policymakers continue to dismiss the nosedive in consumer sentiment? Will they downplay GDP's first-quarter contraction?"
It adds, "The bond market also seems to be in favor of that 100 basis points of easing, teaming up with traders and Trump to bully Powell. But then again, might bond vigilantes instead focus on the potentially inflationary tariffs? Isn't that the reason for the 90-day delay? All the uncertainty is the main reason we are of the opinion that three rate cuts in the second half of this year are in order."
Cunningham asks, "Where does this put the money markets? Yields might decline faster than they might have absent the current proposed tariffs. But we expect they will remain relatively attractive. We also anticipate continued growth of assets under management. Stocks are acting like the worst is behind us, but the White House is sure to smack them again, potentially pushing investor assets to the relative safety of liquidity vehicles. Money market fund assets across the industry continue to hit record highs and value can be found, especially in the longer end of the liquidity yield curve. In a complex time like this, we'd like to think that investors also appreciate active management driving their portfolios."
As we wrote last Thursday, the Investment Company Institute recently published its "2025 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund industry. We reviewed much of the money fund content in our May 1 News, "ICI Publishes 2025 Fact Book, Reviews US, Worldwide Money Funds in '24." But below we focus on the numerous "Data Tables" involving "Money Market Mutual Funds." ICI lists annual statistics on shareholder accounts, the number of funds, net assets, net new cash flows, paid and reinvested dividends, composition of prime and government funds, and net assets of institutional investors by type of institution. (Note: Register soon for our Money Fund Symposium show, which will be held June 23-25, 2025 in Boston, Mass.!)
ICI's annual statistics show that there's been a steady decline in the number of money market mutual funds over the last 17 years. (See Table 35 in the Data Tables.) In 2024, according to the Fact Book, there were a total of 258 money funds, down from 275 in 2023, 291 in 2022, 305 in 2021, 340 in 2020, 364 in 2019, 802 in 2007, and down from 1,014 in 2001. The number of share classes stood at 955 in 2024 down from 1,009 in 2023, 1,044 in 2022, 1,060 in 2021, 1,108 in 2020, 1,126 in 2018 and 1,998 in 2008.
Table 36, "Money Market Funds: Total Net Assets by Type of Fund," shows that total net assets in taxable U.S. money market funds increased $933.1 billion to a record $6.852 trillion in 2024. At year-end 2024, $4.114 trillion (60.0%) was in institutional money market funds, while $2.738 trillion (40.0%) was in retail money market funds. Breaking the numbers down by fund type, $1.079 trillion (15.7%) was in prime funds, $5.638 trillion (82.3%) was in government money market funds, and $135.9 billion (2.0%) was in tax-exempt accounts.
Also, Table 37, "Money Market Funds: Net New Cash Flow by Type of Fund," shows that there was a 703.3 billion in net new cash flow into money market funds last year. A closer look at the data shows $417.1 billion in net cash inflows into institutional funds and a $286.2 billion cash inflow into retail funds. There were also $606.5 billion in net inflows from Government funds, versus $88.3 billion in net inflows from Prime funds.
Table 39, "Money Market Funds: Paid and Reinvested Dividends by Type of Fund," shows dividends paid by money funds were a new record, $297.2 billion, $216.7 billion of which was reinvested (72.9%). Dividends previous record was as high as $235.5 billion in 2023 (when rates were over 5%), and as low as $5.2 billion in 2011 (when rates were 0.05%). Reinvestment rates were 64.4% in 2007 and 62.3% in 2011, so they've remained relatively stable over the past decade.
ICI's Tables 40 and 41, "Taxable Government Money Market Funds: Asset Composition as a Percentage of Total Net Assets" and "Taxable Prime Money Market Funds: Asset Composition," show that of the $5.638 trillion in taxable government money market funds, 14.8% were in U.S. government agency issues, 35.4% were in Repurchase agreements, 41.1% were in U.S. Treasury bills, 9.1% were in Other Treasury securities, and -0.7% was in "Other" assets. The average maturity was 38 days, up 1 day from the end of 2023.
The second table shows that of the $1.079 trillion in Prime funds at year-end 2024, 23.8% was in Certificates of deposit, 25.7% was in Commercial paper, 43.4% was in Repurchase agreements, 0.0% was in US government agency issues, 0.4% was in Other Treasury securities, 0.8% was in Corporate notes, 0.2% percent was in Bank notes, 2.1% was in US Treasury bills, 0.3% was in Eurodollar CDs, and 3.2% was in Other assets (which includes Banker's acceptances, municipal securities and cash reserves).
Table 60, "Total Net Assets of Mutual Funds Held in Individual and Institutional Accounts," shows that there was $2.191 trillion of assets in money funds with Institutional investors, and $4.662 trillion in MMF assets in Individual accounts in 2024.
Finally, Table 62, "Taxable Money Market Funds: Total Net Assets of Institutional Investors by Type of Institution," shows of the total of $2.183 trillion in Total Institutional assets, $959.7 billion were held by business corporations (44.0%), $909.0 billion were held by financial institutions (41.6%), $215.6 billion were held by nonprofit organizations (9.9%), and $99.1 billion were held by Other (4.5%).
The U.S. Securities & Exchange Commission's Division of Economic and Risk Analysis (DERA) published a study titled, "Influences on Money Market Fund Price Variations During the March 2020 Market Dislocation," which states in its Abstract, "This white paper examines weekly fluctuations in money market fund ('MMF') market prices surrounding the March 2020 market dislocation, which resulted from the economic disruptions caused by the COVID 19 pandemic.... The analysis in this white paper identifies key factors influencing these price variations, including interest rates, redemptions, portfolio construction, and liquidity. This white paper aims to inform the Commission, investors, and other interested parties with insights into broader trends within the money market fund industry."
The paper explains, "There are three main categories of MMFs: i) government MMFs, which hold a mix of Treasury and government agency instruments (i.e., debt and repurchase agreements ('repos')); ii) prime MMFs, which mainly hold repos, Treasury debt, government agency debt, commercial paper ('CP') and certificates of deposit ('CDs'); and iii) tax-exempt MMFs, which primarily hold municipal debt. As of December 31, 2024, of $7.2 trillion in total MMF net assets, 82% was invested in government MMFs, 16% in prime MMFs, and 2% in tax-exempt MMFs."
It tells us, "By disrupting economic activity, the Covid-19 pandemic adversely affected U.S. funding markets, exacerbating financial stress that culminated in March 2020. MMFs, which previously acted as a conduit for contagion during the Great Recession in 2008, were similarly impacted during this period. Some MMFs experienced volatility in their net asset value per share ('NAV') and faced substantial redemptions as institutional investors shifted capital from institutional prime and institutional tax-exempt MMFs into government MMFs, despite regulatory reform in 2010 and 2014 aimed at enhancing their resiliency."
The SEC writes, "The 2010 reforms required funds to hold more liquid assets, shortened the weighted average maturity of their portfolios, and enhanced stress testing and disclosure requirements. The 2014 reforms, introduced floating NAV for institutional prime and institutional tax-exempt MMFs to mitigate first mover advantage and gave MMF boards for prime and tax-exempt MMFs the ability to implement fees and gates should MMF weekly liquid assets ('WLA') drop below 30%, with the goal of reducing the risk of investor runs. Another reason for the reforms was that market price volatilities for prime and tax-exempt MMFs were much larger than for government funds."
They comment, "Commission staff and other stakeholders studied the impact of the Covid-19 pandemic and the resulting March 2020 market dislocation. The President's Working Group on Financial Markets ('PWG'), for instance, published a report detailing key events -- such as large institutional prime MMF redemptions -- and outlined several policy reform options. The Commission then issued a request for comment ('RFC') on potential policy measures as described by the PWG report and any other topics relevant to any potential reforms. Several of the comment letters received as a result are referenced below. The Commission then adopted reforms in 2023, which included a modified liquidity fee framework, increased liquidity thresholds, and the removal of the gate provision established in the 2014 reforms."
The DERA study states, "The 2021 proposing release for the 2023 reforms described several empirical trends, including fluctuations in prime MMF market prices prior to and around March 2020. Analyses conducted by Commission staff and academics, as discussed in the 2021 proposing release, found no statistically significant correlation between institutional prime MMF redemptions and market prices amid the March 2020 market dislocation. This paper builds on the analyses presented in the 2021 proposing release to examine the key determinants of price variability during this period. Specifically, the report looks at the impact of the Covid-19 pandemic on market price fluctuations, identifying the factors that most significantly influenced market prices. These factors include interest rates, redemptions, portfolio construction, and liquidity."
It explains, "Currently, MMFs can be broadly categorized into those with stable NAVs and those with floating NAVs. Stable NAV MMFs, such as government and retail MMFs, have two distinct prices: the stable NAV (net amortized cost divided by the number of outstanding shares) and the market price (i.e., mark-to-market NAV or shadow price). If the market price remained within $0.0050 of $1, the MMF could price their portfolio using their stable NAV. In contrast, floating NAV MMFs -- typically institutional prime or institutional tax-free MMFs -- must value their shares to four decimal points, reflecting real-time market fluctuations in their underlying assets."
The paper continues, "It was long assumed that the low-risk nature of institutional prime and institutional tax-free MMF assets would limit the potential to cause a deviation in market value from $1 and ultimately material dilution or other unfair results to investors. However, this assumption had not proven to be correct; for example, the market stress of 2008, which resulted in the Reserve Primary Fund 'breaking the buck' and significant numbers of institutional investors running from prime MMFs, triggered regulatory reform, resulting in institutional prime and institutional tax-free MMFs floating their NAV. In addition, it showed the importance of sponsor support in preventing significant deviations in MMF market prices."
It adds, "To reduce volatility in their market prices, MMFs invest in very short-term, high-credit-quality, well diversified debt securities following the guidelines set forth in rule 2a-7. Although these guidelines attempt to control risks a MMF may face, they do not eliminate those risks. Risks that remain may cause the fund's market price to deviate from $1. Changes in interest rates or a security's credit rating, for example, could put temporary downward pressure on an asset's price before it matures at par. In addition, if redemptions lead to fire sales or securities matured at less than the amortized cost, then the fund's market price could decrease below $1."
The SEC also says, "Various other factors (e.g., portfolio construction and liquidity) may also influence market price fluctuation of MMF shares. For example, MMFs may construct their portfolios with a small number of second-tier securities, to the extent the board can determine that those securities present minimal credit risk to the fund. During the March 2020 market dislocation, for instance, second-tier non-financial CP experienced a higher yield increase (higher price decrease) than first-tier securities. In response to the PWG's December 2020 report, one commenter noted that fund managers had difficulty selling their longer maturity assets, while some experienced losses when selling securities. Finally, an issuer may default on payments of principal or interest, generating losses for funds holding the issuer's securities. If the loss is big enough, a stable NAV fund could break the buck while a floating NAV fund could see a decline in its share price."
Finally, they add, "During the March 2020 market dislocation, MMFs faced the added complexity of liquidity constraints, as some managers had to contend with the possibility of implementing fees and gates when WLA amounts approached the 30% threshold following a wave of redemptions. The way MMF managers responded to redemption pressures -- whether by selling assets or strategically managing their liquidity -- had a direct impact on MMF market prices. This paper looks for patterns within this complex environment to better understand the factors driving MMF price movements. The rest of the paper is organized as follows: Section II. describes the data and methodology, Section III. examines the distribution and standard deviation of MMF prices, and Section IV. documents the empirical findings."
The Investment Company Institute released its "2025 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund space. Subtitled, "A Review of Trends and Activities in the Investment Company Industry," the latest edition tells us, "With stock markets rising across the globe in 2024 (24% in the United States and 10% in the Asia-Pacific region) worldwide total net assets of equity funds, which invest primarily in publicly traded stocks, increased by 12% to $35.7 trillion at year-end 2024. Bond funds -- which invest primarily in fixed-income securities -- saw their total net assets increase 7% over the same period, somewhat reflecting total returns (capital gains and interest income) on bonds in Europe and the Asia-Pacific region of 3% and 7%, respectively. Net assets of money market funds, which are regulated funds restricted to holding short-term, high-quality debt instruments, also increased substantially." We excerpt from the latest "Fact Book" below. (See too Tuesday's Link, "2025 Investment Company Fact Book," which quotes from ICI's press release.)
Discussing "Worldwide" mutual funds (page 18), ICI writes, "Worldwide net sales of money market funds remained robust in 2024, totaling $1.5 trillion, unchanged from 2023.... Investors across all geographical regions continued to demonstrate demand for money market funds, with the United States accounting for more than half of total net inflows. Investor demand for money market funds in the United States and Europe was $920 billion and $239 billion in 2024, respectively. Additionally, in the Asia-Pacific region, money market funds experienced net inflows of $336 billion in 2024."
They explain, "Investors use money market funds because they are professionally managed, tightly regulated vehicles with holdings limited to high-quality, short-term debt instruments. As such, they are highly liquid, attractive, cash-like alternatives to bank deposits. Generally, demand for money market funds is dependent upon their yields and interest rate risk exposure relative to other high-quality fixed-income securities."
ICI continues, "In the United States, net sales of money market funds remained positive because of sustained demand from both retail and institutional investors. In 2023, money market fund yields reached their highest level in more than 15 years, and yields continued to remain high in 2024 despite three cuts to the federal funds rate in the second half of the year. Both retail and institutional investors were attracted to the high market yields and low interest-rate risk offered by money market funds."
The Worldwide section adds, "Demand for money market funds in the Asia-Pacific region is dominated by Chinese money market funds, which hold the bulk of money market fund total net assets in the region. In the second half of 2024, the People's Bank of China lowered interest rates, decreasing the official one-year loan prime rate to 3.1 percent. The reduction in the short-term interest rate was part of a set of policy measures intended to address sluggish economic performance. Regardless, net inflows into money market funds in the Asia-Pacific region remained positive for the year."
Under the section "Role of Investment Companies in Financial Markets," they say, "Investment companies held 24% of bonds issued by US corporations and foreign bonds held by US residents at year-end 2024 and 17% of the US Treasury and government agency securities outstanding. Investment companies also have been important investors in the US municipal securities market, holding 28% of the securities outstanding at year-end 2024. Finally, mutual funds (primarily prime money market funds) held 24% of the US commercial paper market -- a critical source of short-term funding for many major corporations around the world."
ICI writes in Chapter 3, "Overview of Mutual Fund Trends," "The US mutual fund industry remained the largest in the world, with $28.5 trillion in total net assets at year-end 2024. The majority of US mutual fund net assets were in long-term mutual funds, with equity funds alone making up 53% of US mutual fund net assets. Money market funds were the second-largest category, with 24% of net assets. Bond funds (18%) and hybrid funds (6%) held the remainder."
They state, "A variety of factors influence investor demand for mutual funds. For example, US households rely on equity, bond, and hybrid mutual funds to meet long-term personal financial objectives, such as preparing for retirement, saving for emergencies, or saving for education. US households, as well as businesses and other institutional investors, use money market funds as cash management tools because they provide a high degree of liquidity and access to short-term market yields."
ICI adds, "Investor demand for mutual funds remained robust in 2024, as inflows into money market funds and bond funds more than offset outflows from equity funds and hybrid funds. Money market funds experienced strong demand as investors were attracted to high short-term yields. Bond mutual funds saw modest demand, with bond market returns and portfolio rebalancing likely playing key roles. By contrast, equity mutual funds experienced outflows in 2024 (despite strong stock market returns), primarily reflecting an ongoing shift to other products and portfolio rebalancing."
Discussing, "Investors in US Mutual Funds," they comment, "Demand for mutual funds is, in part, related to the types of investors who hold mutual fund shares. Retail investors (i.e., households) held the vast majority (88%) of the $28.5 trillion in US mutual fund total net assets at year-end 2024.... When looking at only long-term mutual funds, the share of net assets held by retail investors was even higher (94%). Retail investors also held substantial money market fund net assets ($4.7 trillion), but this was a relatively small share (19%) of their total mutual fund net assets ($25.0 trillion)."
The Fact Book continues, "By contrast, institutional investors such as nonfinancial businesses, financial institutions, and nonprofit organizations held a relatively small portion of mutual fund net assets. At year-end 2024, institutions held $3.6 trillion or 12% of mutual fund net assets.... The majority (61%) of which was held in money market funds. One of the primary reasons institutions use money market funds is to help manage their cash balances."
The section on "Money Market Funds" (page 57), explains, "In 2024, money market funds saw substantial inflows of $703 billion … as short-term interest rates remained elevated. Demand was positive for all categories of money market funds in 2024, with government money market funds experiencing the bulk of inflows ($606 billion). Prime money market funds and tax-exempt money market funds saw inflows of $88 billion and $9 billion, respectively."
Finally, ICI writes, "In July 2023, the Securities and Exchange Commission (SEC) adopted in its money market funds reforms a mandatory liquidity fee requirement for institutional prime money market funds. This new rule requires institutional prime funds to charge investors a liquidity fee under certain conditions, which is complex and costly for some money market fund sponsors to calculate. These concerns led 16 institutional prime funds to either liquidate or convert to government money market funds before the rule’s implementation on October 2, 2024.... These funds had about $60 billion in net assets at the time of their liquidation or conversion."
