Skip to main content
Monthly Cash Review January 2024 (USD)

Eight Trends Moving Cash Markets Now

We identify the key points of interest to cash markets now. It is important to be patient, and not chase the market.

Portfolio Strategist

The money market landscape continues to evolve in January 2024, with a few notable trends and concerns.

Some of these are the substantial growth in money market fund (MMF) assets under management (AuM) over the past year, the shifting dynamics of retail cash flows, and the ongoing discussions regarding the unwinding of quantitative tightening (QT) by the US Federal Reserve (Fed).

We also see signs of strain on primary dealer balance sheets and changes in the Treasury Bill (T-Bill) and commercial paper (CP) markets.

Lastly, MMFs have been extending durations amid uncertainty over the future path of interest rates.

Here is a closer look at all of these developments.

1. MMF Assets Under Management Growth

MMF AuM have experienced remarkable growth, increasing by over 23% in the past year and more than 60% since 2019. The most significant surge was observed in retail cash, with prime MMFs witnessing gains of over 60% and government MMFs experiencing a nearly 30% increase in 2023.

While this growth is notable, it raises questions about the sustainability of these cash inflows, especially given historical declines in MMF AuM during recessions as observed in 2001 and 2008.

2. Shifting Balances From Commercial Banks to MMFs

The decline in commercial bank deposit balances appears to have slowed, with indications that these balances are moving into MMFs. This reallocation of funds could be a response to changing market conditions and monetary policy.

3. Quantitative Tightening (QT) Debate

There is an ongoing debate about when and how the Fed will unwind QT. Currently, the Fed is allowing approximately $18 billion, on average, to roll off its balance sheet per week.

Notably, there is still around $600 billion of excess liquidity in the Reverse Repurchase Agreement (RRP) market (granted that balance is down dramatically from a year ago) and bank reserves held at the Fed have not decreased over the past year.

The expectation is that the Fed will begin tapering QT this year, and the timing of this decision could impact the pattern of policy easing. Delaying the tapering process might necessitate more rapid easing later on.

4. Strain on Primary Dealer Balance Sheets

Primary dealer balance sheets are starting to feel the strain from the Fed’s balance sheet reductions. As they are tasked with carrying the extra supply, market repo rates (Secured Overnight Financing Rate [SOFR]) are beginning to widen relative to the Fed’s set RRP rate. This scenario mirrors the situation during the previous QT period in 2017–2019, suggesting that volatility in SOFR rates may increase.

5. T-Bill Market Dynamics

Weekly T-Bill auctions experienced significant growth in H2 2023 but have now stabilized. Most of the new supply appears to have been absorbed by cash that was previously invested in the Fed’s RRP.

Overall, outstanding T-Bill debt has reached historically high levels, surpassing $5 trillion and representing over 22% of the US Treasury’s total debt. This situation could have implications for market dynamics and investor strategies

6. Commercial Paper (CP) Market

CP issuance has seen only slight growth over the past decade, hovering around $1.2 trillion. While bank balance sheets have expanded, their reliance on short-term funding like CP has not increased significantly. CP yields relative to T-Bills are tight compared to their historical range. However, we advise caution, particularly regarding longer-dated CP. Shorter-dated CP may appear relatively cheaper.

7. MMF Duration Extension

MMFs have been extending their duration, with typical weighted average maturities now reaching around 50 days. This represents a substantial change from 2022 when durations were closer to 10 days. In the face of an inverted yield curve in both rates and credit, maintaining current yields will be challenging for MMFs in the coming months

8. Federal Fund Futures Market Expectations

The Federal Fund Futures Market is pricing in rate cuts beginning early in 2024. In general, market pricing behavior can be erratic and mislead the investor on what path the Fed will take. As we move through this period of transition (policy hikes to policy eases), it is important to be patient and not chase the market.

In Conclusion

The money market landscape is undergoing significant changes, driven by growth in AuM, shifts in cash balances, debates about the Fed’s QT strategy, and the evolving market dynamics. As we move forward in 2024, market participants will need to adapt to these shifting conditions and carefully monitor the factors influencing the money market’s performance.

More on Cash