U.S. Money Market Funds Accelerate Duration Shortening, Floating-Rate Note Holdings Hit Record
N.R. Finch
U.S. money-market funds managing over $8 trillion are piling into overnight repos and floating-rate notes, compressing their weighted-average maturity from 45 to 40 days — This means → the industry is keeping its powder dry for a possible rate hike.
What are they actually doing?
Money funds are moving cash out of T-bills — short-term IOUs from the U.S. government — and into two even shorter instruments: overnight repos and floating-rate bonds.
This means → funds don't want money locked at a fixed rate. If rates rise, a fixed-rate position loses value. Floating-rate bonds reset with the market; overnight repos mature the next day. Both let the money "re-deploy on demand."
In plain terms = imagine you think home prices might keep climbing, so you park your cash in a savings account instead of buying — you wait until the picture clears.
Why move now?
Signals are clashing: rising oil prices and hawkish remarks from Fed Chair Kevin Warsh briefly led markets to price in a hike this month. Then two tame inflation prints last week scrambled expectations again.
This means → nobody can call the next step — hike or hold — and the murkier the policy path, the less duration risk funds will accept.
The 2022 lesson lingers: some funds held longer-duration assets just before one of the Fed's fastest tightening cycles in decades, suffering significant portfolio losses. This reflects a "once bitten, twice shy" mindset — managers would rather earn less than repeat that mistake.
Where did the money go, and how much?
Repo allocations rose roughly $36 billion in June, bringing the total to about $1.89 trillion.
Floating-rate Treasury holdings climbed to a record $523 billion. The Federal Home Loan Banks added about $180 billion in outstanding debt this year, of which roughly $140 billion was floating-rate issuance.
The flip side: despite the Treasury steadily expanding T-bill supply, money-fund T-bill holdings fell by nearly $105 billion last month. In plain terms = supply is rising, but funds are actively handing the bills back.
What are the insiders saying?
Deborah Cunningham, CIO of global liquidity at Federated Hermes, said investors want enough "dry powder" to seize better opportunities ahead, so they are deliberately shortening WAM (weighted-average maturity). She expects WAM to compress further as the Fed prioritizes bringing inflation back to target.
Geoff Gibbs, managing director at DWS, disclosed that for most of this year the firm has kept roughly half its portfolio in repos — and sees no reason to change course.
Wells Fargo strategist Angelo Manolatos noted that a September hike remains possible. Unless there is a compelling reason otherwise, new cash will keep flowing into repos and floaters rather than taking on extra duration risk.
What to watch next?
The key marker: whether WAM bottoms out before a rate-hike expectation actually materializes. This means → if WAM stops falling — or bounces — it signals the market believes the worst-case scenario is fully priced in.
In plain terms = WAM is acting like a "fear gauge." The shorter it gets, the more nervous funds are. The moment it stops shrinking is the moment the market says "enough — the worst is already in the price."
Content is for reference only, not financial advice.