Growing number of investors urge Federal Reserve to act to prevent negative rates from taking hold in parts of US financial markets as a wall of liquidity lowers short-term debt yields and threatens to overwhelm the $ 4 billion money market fund industry. .
The Fed is expected to discuss intensifying pressure on U.S. money markets at its meeting this week, after record sums of money were parked in the central bank overnight at an interest rate no.
After more than a year of large-scale economic stimulus from the Fed and the US government, investors say too much money is looking to lodge in short-term Treasuries and other securities. In some cases, in recent weeks, this has pushed the yields on some debt into negative territory.
If the pressures persist, the situation could turn into a “question of how the monetary system works,” said Gennadiy Goldberg, rate strategist at TD Securities. “If you get enough money that just can’t find housing, the downward pressure on rates will intensify even more.”
The problem is particularly acute because negative rates would upset the economy of money market funds. These vehicles, which invest in short-term treasury bills and other debt, are used by businesses and individuals as an alternative to depositing money in a bank. Money market funds also play a crucial role in the repo market, providing short-term funding to a wide variety of other investors.
The assets of the so-called public money market funds, whose investments are limited to treasury bills, surpassed $ 4 billion for the first time last month, meaning more money than ever is running after the short-term debt as the US Treasury cuts its issuance of such bills.
“It’s kind of Dickensian right now: the best of times in terms of assets under management, the worst of times to try and invest that money,” said Thomas Callahan, head of global treasury management at BlackRock. “The Fed has the tools to take the pressure off.”
The dearth of suitable investments has forced money market funds to place more assets with an overnight Fed facility called the reverse repo program, which pays no interest. Use of the facility hit a record high of $ 584 billion on Monday, and JPMorgan strategists estimated it could soon reach $ 750 billion.
Some market participants want the central bank to raise short-term rates by agreeing to pay more than zero on the RRP. It could also increase the rate it pays banks on excess reserves they hold at the Fed.
“We believe that an adjustment might be wise to minimize the potential financial stability risks that could arise if money market funds [and banks] are no longer as willing to accept liquidity and ensure the RRP remains a solid floor for money market rates, ”JPMorgan strategists wrote in a recent memo.
Large asset managers with large money market fund deductibles were forced to defer fees because these would wipe out returns and make their funds unprofitable for clients. Some have also warned of potential closures pending relief from the Fed.
“The market expects the June meeting to result in a rate adjustment,” said Kevin Gaffney, director of money markets investments at Fidelity. The company manages $ 900 billion in money market assets and represents nearly a fifth of the US money market fund industry.
Others are not so sure the Fed will act immediately, although President Jay Powell acknowledges the pressures in his post-meeting press conference on Wednesday. The federal government’s debt ceiling, suspended for two years, is set to come into effect on August 1, meaning a congressional debt deal could be near, which would encourage the Treasury to issue more short-term bills. term.
The Fed’s main policy rate – the fed funds rate, which it has promised to keep in a zero to 0.25% range – has stabilized at 0.06%, after briefly dropping to 0.05 % earlier this year.
“The market is still working,” BlackRock’s Callahan said, “but this is helped by a half-trillion dollars sitting in the zero-interest RRP.”
