U.S. Money Market Funds Shift to Defensive Mode as Assets Hit Record Near $8 Trillion
Claire Weston
US money-market fund assets climbed to a record near $8 trillion, yet managers are shortening portfolio duration to 38 days — bracing for a possible Fed hike while caught between soft overnight yields and duration risk.
Nearly $8 trillion pouring in — why are managers "going shorter"?
US money-market fund assets rose to a record near $8 trillion in the first week of July, according to the Investment Company Institute.
Yet the more cash arrives, the more cautious the positioning: the Crane Money Fund Average Index's weighted-average maturity (WAM — how many days, on average, until holdings mature) fell from 42 days to 38 days in one month.
This means → managers are lending shorter to hedge rate uncertainty. The shorter the loan, the smaller the loss if rates move suddenly.
Where is the money going? Floating-rate notes and repos
By end of June, holdings of US Treasury floating-rate notes (FRNs — short-term bonds whose interest resets with the market rate) rose by $32 billion to a record $523 billion.
Wells Fargo strategist Angelo Manolatos said the positioning "shows managers increasingly favour floating-rate exposure." In plain terms = if the Fed hikes, coupon payments reset upward automatically — no risk of being locked into a low return.
Repo balances (repurchase agreements — short-term trades that pledge bonds for cash) rose $68 billion to $3.06 trillion, or 37.2% of total holdings.
How much were T-bills cut?
Money-fund T-bill holdings fell by $96 billion to $3.3 trillion by end of June, but still accounted for 39.9% of total assets.
Funds have capped exposure to longer-dated T-bills while boosting repo allocations. Manolatos called it a "defensive positioning for a potential rate-hike environment."
This reflects a core judgment: better to sacrifice some yield now than to be caught wrong-footed if rates rise.
What is the "damned-if-you-do" dilemma facing managers?
TD Securities head of US rates strategy Gennadiy Goldberg described the situation as a "damned-if-you-do" problem: funds want to shorten WAM to hedge hike risk, but the shortest instruments — like overnight repo — still offer "soft" yields.
In plain terms = both options hurt. Accept abnormally low overnight returns, or extend duration and risk being locked into a low yield if T-bill rates climb.
Rate futures currently imply an ~80% probability the Fed hikes once in 2026, most likely at the December meeting. This means → the market is betting rates go higher, so the logic for defensive shortening holds for now.
Content is for reference only, not financial advice.