Before the introduction of a series of new rulesDiadelmariachimegawaysThe fund began to transfer them to 6 trillion dollars.DiadelmariachimegawaysFunds in the US money market. The new rules are likely to boost demand for government securities at the expense of riskier assets.
As of mid-April, about five of these funds, including the two largest, had announced plans to own only government shares or shut down altogether to avoid measures taken by the Securities and Exchange Commission (Securities and Exchange Commission) later this year. Starting in October, these changes mean that the cost of withdrawing money from some funds will become higher in times of financial stress.
The change in holdings means an increase in demand for government support tools, from treasury bills and discounted institutional notes to repurchase agreements, while less demand for commercial paper and certificates of deposit.
Investor interest in government bonds is likely to push down short-term interest rates, making an important overnight financing vehicle of the Federal Reserve (Fed) more attractive again as money flows around the financial system looking for places to invest.
"when this restructuring takes place depends on two factors: the timing of the planned shift and how long institutional investors are willing to stay in the fund to be converted," Joseph Abate, a strategist at Barclays Plc, wrote in a note to clients on Tuesday. "so far, there are only a few signs of a shift from credit to government assets or capital outflows."
Barclays estimates that there are about $650 billion in agency-level funds, of which about $605 billion is concentrated in 20 entities. The eight so-called internal funds (open only to other money markets and mutual funds in the complex) account for 60 per cent of the balance.
Barclays estimates that by October, the balance of institutional quality funds will fall by about 63-75 per cent, the total remaining assets will be between $150 billion and $250 billion, and the balance of government-specific funds will increase by $400 billion to $500 billion.
For government-specific funds, demand will be roughly distributed between government bonds, agency bonds and repo bonds, enough to absorb expected net issuance in the second half of the year, Abate said. Inflows into the Fed's reverse repo facility (RRP) may be as little as $50 billion, but demand could rise sharply if quality funds for the public choose to increase their cash holdings on the day ahead of possible redemptions.
Overall, the impact of rule changes is expected to be more moderate than the previous series of reforms in 2016. Before the deadline, about $1 trillion went to the government. Such a significant cash transfer widened the spread between three-month commercial paper and overnight index swaps by 32 basis points.
This time, however, institutional quality funds account for only 45 per cent of premium money market space, up from more than 70 per cent in 2016. Strategists at JPMorgan Chase & Co., led by Teresa Ho, believe this should "significantly reduce" the impact of this round of reforms.
The buyer base for commercial paper is now more diversified, with money funds accounting for about 24 per cent by the end of 2023, while other institutions such as companies, state and local governments will play a bigger role.
"the impact of the reform will be far less than that of 2016," he wrote in a report. But this is not to say that there is no risk of widening spreads in the coming months, but we believe that widening spreads will be driven by other factors. "
