Money market funds have been moving into shorter-term securities as questions linger over the future course of Federal Reserve interest-rate policy, according to recent industry data.
Data tracking fund maturities shows a noticeable shortening in average durations. The weighted average maturity for the Crane Money Fund Average fell to 38 days for the week ending July 10, down from 42 days a month earlier. The Crane 100 Money Fund Index, which covers funds holding the bulk of industry assets, recorded a decline to 40 days this month from 44 days in June.
The pullback toward shorter maturities reflects an ambiguous outlook for Fed policy. The commentary points to Fed Chair Kevin Warsh, described as having dovish inclinations, who may encounter resistance from Federal Open Market Committee colleagues with more hawkish stances. At the same time, recent inflation readings that came in softer than expected have strengthened the case for either rate cuts or an extended pause in tightening.
Fund managers typically pare back portfolio durations when they anticipate higher interest rates. Shorter-dated securities mature sooner, giving managers the ability to reinvest proceeds at higher yields should the Fed increase rates. By contrast, owning three- or six-month Treasury bills ahead of a rate uptick can leave a fund locked into lower yields as market rates climb.
Assets in money market funds have surged amid these flows, reaching a record near $8 trillion in the first week of July, according to Investment Company Institute figures.
Portfolio managers are also shifting some inflows into instruments that adjust with market moves. Holdings of Treasury floating-rate notes increased by $32 billion at the end of June, reaching a record $523 billion. Floating-rate notes differ from fixed-rate debt because their payouts reset with market conditions, offering a quicker response to changes in interest-rate levels.
In sum, the combination of sizable inflows, elevated asset levels and an uncertain Fed outlook has prompted money market managers to shorten maturities and add floating-rate exposure as a way to manage reinvestment risk and respond to possible rate changes.
Key points
- Average maturities have shortened: Crane Money Fund Average at 38 days for week ending July 10, down from 42 days a month earlier.
- Major index shows similar move: Crane 100 Money Fund Index at 40 days this month versus 44 days in June.
- Record industry assets and rising allocations to Treasury floating-rate notes - assets near $8 trillion; Treasury FRN holdings rose by $32 billion to $523 billion.
Risks and uncertainties
- Uncertain Fed policy - differing views among Fed officials could lead to either cuts, an extended pause, or other policy shifts that affect short-term yields.
- Reinvestment risk - funds holding slightly longer bills may face lower yields if rates rise before maturities roll over, impacting returns for cash investors.
- Market reaction to inflows - large, rapid inflows into money markets and floating-rate instruments could influence liquidity and pricing in short-term Treasury markets.