Money market funds that are among the largest holders of US Treasury bills say they are reluctant to sell them to the Federal Reserve, presenting an obstacle to the central bank as it seeks to increase the amount of cash in short-term lending markets.
The Fed announced last Friday that it would begin monthly purchases of roughly $60bn of Treasury bills, which have a maturity of less than 12 months, in an attempt to inject money into the financial system following a cash squeeze that sent overnight “repo” lending rates surging in September.
Many investors had expected the Fed to act but were surprised by the size of the planned purchases, with some questioning how the central bank would be able to buy the debt without pushing down yields in the $2.3tn market.
The problem facing managers of money market funds — which are permitted to buy assets with no more than 13 months to maturity — is that they would rather keep the Treasury bills now in their possession than sell them to the Fed and then go back into the market to buy debt with potentially lower yields.
“We are not going to sell them,” said Pia McCusker, global head of cash management at State Street Global Advisors, which holds more than $22bn of T-bills in its $350bn of money market funds. “It’s a short-term gain and then I would have to replace it with something else at a much lower rate.”
Money market funds are among the largest holders of Treasury bills, accounting for almost $550bn at the end of August, according to data from the Investment Company Institute.
The first round of purchases on Wednesday appeared to go smoothly, with the Fed buying $7.5bn of almost $33bn of Treasury bills submitted.
But several fund managers told the Financial Times that they have no incentive to sell without a steep increase in prices — and a corresponding fall in yields.
“It makes us question where are they going to find these bills,” said John Tobin, global head of liquidity portfolio management at JPMorgan Asset Management, which holds $70bn of T-bills across its $545bn money market funds. “When the Fed is going to be a large, indiscriminate buyer in the front end, that is going to put pressure on yields.”
Money market fund managers have already been dealing with falling yields on Treasury bills. The yield on a 12-month bill in April, for example, stood at 2.45 per cent. That same security now has just six months left until it matures, and six-month bills currently yield just 1.66 per cent.
Market yields are expected to head even lower by the end of the year. Futures markets are pricing in a 70 per cent probability for a cut in rates by the Fed when it meets at the end of this month.
One further complication is the lack of alternatives on offer for money market funds to buy, given that banks tend to step back from short-dated lending markets at the end of each quarter, in order to tidy up their balance sheets for reporting deadlines.
Data on the other large holders of Treasury bills are scant. Official foreign investors like central banks hold about $280bn, according to the US Treasury. Companies with big holdings of cash are also thought to be large investors. The group of banks responsible for ensuring the smooth auction of US government debt hold just $7bn.
Deborah Cunningham, chief investment officer of global liquidity markets at Federated Investors, said these investors may have different priorities from money market funds and could be more willing to sell to the Fed, easing potential pressure in the market.
“What the Fed will have to pay and who they will have to deal with to get to the amount of bills they want is not certain at the moment,” she said. “They could have to offer some pretty high premiums in order to entice people to sell.”
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