Market News

By Alexandra Harris

(Bloomberg) -- Money market funds are hesitant to buy longer-term Treasury bills even though the Federal Reserve cut interest rates by a half percentage point last week.

Fund managers tend to buy further out the T-bill curve when the Fed embarks on a rate-cutting cycle to lock in higher yields that they can pass on to investors. But the money-market yield curves remain inverted, meaning owning shorter-term bills command higher yields than those of longer maturities. And that is inhibiting funds from moving money into the latter.

It’s been a difficult environment for money markets, which has been expecting the Fed to slash rates, though not as rapidly as now being priced across broad markets. There remains “the lack of clarity on how the easing cycle will unfold and the inverted yield curves,” JPMorgan Chase & Co. strategists led by Teresa Ho wrote in a note to clients published on Friday. 

The gap between one-month and one-year T-bills is negative by about 82 basis points, while the spread between three-month bills and two-year notes is negative by 106 basis points. These inversions have resulted in a shortening of the weighted average maturity of funds’ assets. 

“These curves remain deeply inverted, challenging liquidity investor’s willingness to add duration,” Ho said. 

Government funds, the primary buyer of T-bills, increased their holdings of bills maturing within the 31 to 60-day range by $226 billion in August, while reducing exposure to those maturing in more than 60 days by $53 billion, according to JPMorgan. 

Meanwhile, prime funds, which tend to invest in riskier assets such as commercial paper, boosted their allocation to floating-rate notes to 20% at the end of last month from 15% at the beginning of the year. That’s because floaters tend to have better protection in the current rate environment while ensuring those higher yields, Ho wrote. 

“Short-term paper looks unattractive so it’s harder to keep weighted average maturities longer,” Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes, said during a media roundtable in London on Sept. 17. “It’s about closing your eyes and picking the one you dislike the least.” 

The uncertainty over the size of rate cuts is making it harder for money market funds to jump into longer-dated T-bills. Projections on the path for rates released alongside the Fed’s monetary decision last week show a wide range of views among policymakers on where rates should be at the end of 2025. Fed-dated swaps are currently pricing in around 73 basis points of cuts for the rest of this year. 

Despite the doubts, both Cunningham and Ho see money funds’ assets under management climbing this year. For one, institutions and corporate treasurers tend to outsource cash management during such periods to capture yield, rather than grapple with it themselves. The other factor is that these instruments still deliver more return than bank deposits. 

“Given the still inverted front-end yield curve and the yield advantage MMFs have over other cash alternatives, we expect MMF AUMs will continue to rise into year-end,” Ho said.