OFR Monitor Shows U.S. Money Market Funds Remain a Popular Parking Option for Investor Cash

Views and opinions expressed are those of the authors and do not necessarily represent official positions or policy of the OFR or Treasury.

Short-term funding vehicles, like U.S. money market funds (MMFs), have been attractive investments because of high interest rates. Continued cash inflows pushed MMF assets to $6.6 trillion on July 31, 2024, according to the OFR U.S. Money Market Fund Monitor (MMFM) data. MMFs hold short-term investments that allow for quick portfolio rebalancing and, absent a market or liquidity event, benefit from returns on high-yield holdings in the near-term.

The OFR U.S. MMFM relies on data collected by the Securities and Exchange Commission (SEC) on Form N-MFP. S EC amendments to Form N-MFP that required more frequent data points and altered some fund categories became effective at the end of Q2 2024. OFR extended the MMFM’s release to accommodate the new data requirements and submission changes. As a result, this quarter’s MMFM overview includes the July data release.

Assets Continue to Grow but at a Slower Pace

MMF assets increased $106 billion or 1.6% over the four months ending July 31. This was a slower pace compared to the same period a year earlier, when regional bank stress weighed on depositor confidence and investors moved cash into MMFs (see Figure 1).

Retail funds continued to experience relatively steady flows totaling $74 billion for the period (see Figure 2). Institutional investor inflows, in contrast, were uneven. Seasonal factors, the direct purchase of short-term investments, and fund liquidations contributed to these fluctuations.

Figure 1. Cumulative U.S. Money Market Fund Flows by Fund Types ($ trillions)

Note: Data as of August 19, 2024.

Source: Securities and Exchange Commission Form N-MFP, Analyst’s analysis.

Figure 2. Cumulative U.S. Money Market Fund Flows by Investor Type ($ trillions)

Note: Data as of August 19, 2024.

Source: Crane Data, Analyst’s analysis.

Most of the inflows into institutional funds involved investors rebalancing portfolios toward government funds and away from institutional prime funds. This was partly from some sponsors converting their institutional prime funds to government funds ahead of new SEC rules on MMFs set to take effect in October¹. The new rules require that institutional prime funds impose mandatory redemption fees in certain circumstances.

Approximately one-third of the $626 billion in prime institutional assets at the start of the year have been converted through July. Internal funds that function as liquidity pools for a mutual fund complex account for much of the shift.

MMF Holdings of Repo Increased

MMFs continued to increase their investment in repurchase agreements (repos) with banks and dealers, as their participation in the Federal Reserve’s Overnight Reverse Repo Facility (ON RRP) overall decreased (see Figure 3). MMFs’ lending to these institutions through centrally cleared sponsored repos rose to $646 billion or 29% of total private repos, up from 27% in March and 24% a year earlier. At the individual fund level, there is significant dispersion across these exposures: Some funds do very little in sponsored repo, while others have as much as 45% of their portfolio in sponsored repo. The increased utilization of sponsored repo reduces MMFs’ exposure to any particular counterparty; however, it does concentrate their exposure to the central counterparty.

MMFs continued to accept a broad range of securities as repo collateral. As of July, U.S. Treasury and government agency securities collateralized about 69% and 28% of MMF repo transactions, respectively. MMFs’ remaining repos were collateralized by corporate bonds, equities, and private label structured investments.

Most U.S. Treasury repo collateral securities have maturities exceeding either one year or five years. If not for repos, MMFs would not be able to directly hold much of this collateral because SEC rules require that MMF assets have a remaining maturity of 397 days or less. However, U.S. Treasury repos are generally overcollateralized, meaning they are backed by collateral with a value that is typically 102% of the cash the MMF lends. Thus, MMFs should be protected if a repo counterparty defaults, provided the collateral value is marked-to-market daily and adjusted accordingly.

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