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Use of a Federal Reserve facility for storing cash has halved from its peak as money market funds plough their excess funds into US government debt instead.
Investors on Friday put $1.28tn into the Fed’s overnight reverse repo facility (RRP), where cash is stored risk-free for a short period for a generous return. The total was close to the lowest level in two years, half of its $2.6tn peak and a drop of more than 40 per cent since May.
Until this year, the record daily inflows of more than $2tn into the RRP were considered a sign of market uncertainty, implying that US money market funds that invest in government debt preferred the safety of the Fed over the volatility of bonds.
The facility was established permanently in 2014 and is designed to absorb excess cash in the financial system.
However, the incentives for investors have flipped in recent months due to data indicating a resilient US economy. This has prompted traders to reconsider their views on how long the Fed will maintain elevated interest rates to control inflation.
As a result, last week’s decline in bond prices pushed yields on benchmark 10-year Treasuries to a 16-year high of nearly 5 per cent.
Higher yields have increased the appeal of money market mutual funds to investors, especially as rates from competing products like bank deposits have failed to keep up with interest rate moves.
A record $5.7tn is currently held in US money market funds, with the majority, valued at $64bn, flowing into government funds based on weekly data released on Thursday.
Since June, the Treasury has also flooded the market with new paper, encouraging funds to shift out of the RRP as the government works to replenish its coffers after Congress agreed to raise the US debt ceiling.
While the movement was less significant for shorter-dated notes that serve as an alternative to the RRP, yields on six-month bills rose to 5.59 per cent, their highest level in over two decades and nearly a full percentage point above their levels at the beginning of the year.
Short-term paper typically reflects current borrowing costs, while yields on longer-term notes indicate investor expectations for future levels.
The use of the RRP can become volatile towards the end of the quarter as users reallocate funds to improve their performance.
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