Money Market Funds See Modest Growth Amid Tax Season Winding Down
Following the significant outflows from money market funds the prior week, there was a modest increase of $9.1 billion in total assets last week, though they still stand below the $6 trillion mark at $5.97 trillion as tax season winds down.
The influx into money market funds up to April 24 was primarily driven by institutional investors, who contributed $8.9 billion to these funds after leading the decline the previous week due to tax-related reasons.
Breaking down the figures for the week ending April 24, government funds, which primarily invest in assets like Treasury bills and agency debt, saw their assets climb to $4.84 trillion, marking a $3.97 billion increase. On the other hand, prime funds, which typically invest in higher-risk assets like commercial paper, saw their assets rise to $1.02 trillion, a $3.15 billion increase.
Cash is anticipated to continue flowing into money market funds as long as the Federal Reserve maintains its current interest rate stance, although expectations of rate cuts have diminished further this week.
The Federal Reserve's balance sheet continued to decrease, dropping by $32.8 billion to its lowest level since January 2021.
As discussions about tapering quantitative tightening (QT) by the Fed begin, the utilization of the Fed's bank bailout facility, which has now expired but included 12-month term loans, continued to decline, albeit by a small $638 million. This decline effectively offsets the inflows driven by arbitrage in the later period, leaving a significant $126 billion gap in bank balance sheets that is still being filled by this facility.
This implies that the actual crisis funds that banks relied on to stabilize themselves have yet to fully unwind from the bailout fund, especially considering that current interest rates are higher than they were a year ago when the balance sheet holes were being filled with artificial Fed paper, resulting in greater losses.
Additionally, bank reserves at the Fed decreased last week, and although the US equity market capitalization has seen a slight increase in the past two days, there's a concern that the downward trend (and a painful reconnection) still poses a threat.
While there may not be any rate cuts in the near future, the question remains whether the Fed will taper quantitative tightening in a significant enough manner to prevent this reconnection.