Money market fund inflows plunge to 158 billion, is the short-end liquidity of US Treasuries flashing a yellow light?

Notice that the flood of investor money flowing into money market funds has slowed significantly this year, pushing up US Treasury bill yields and potentially making the market vulnerable to short-term funding problems. Data from TD Securities shows that total money fund inflows in the first three quarters of this year were only $158 billion, below the $823 billion for all of 2025 and $840 billion in 2024. Analysts said the reduced money fund inflows have hit demand for Treasury bills, pushing up T-bill yields relative to comparable overnight index swaps (OIS) in recent trading sessions. OIS is a key money market benchmark reflecting Fed rate expectations embedded in the swaps market. Sam Earl, US rates strategist at Barclays, said, "If money funds aren't receiving these inflows, then they have to think about where to put the money." Still, money market funds remain net buyers of Treasury bills, though demand has clearly slowed. According to the latest data from the Investment Company Institute, as of the end of August, these holdings had risen about 4% from the end of 2025, compared with an 18% increase for all of 2025. Signs of investor concern This slowdown in demand is beginning to show up in the relative pricing of Treasury bills, with investors demanding a higher premium before they are willing to hold them. On Monday, the yield on 3-month US Treasury bills rose to nearly 10 basis points above 3-month OIS, after touching last week the widest spread since September 2024. For the 6-month tenor, the spread was 11.3 basis points on Monday, having briefly reached 12.5 basis points last week, the highest since April 2025. The spread measures the valuation of Treasury bills relative to the short-term Fed policy path implied by the market. If T-bill yields are higher, it indicates investors are demanding extra compensation before holding short-term US government debt assets normally sought after for their liquidity and near-risk-free status. Nafis Smith, principal and head of taxable money markets at Vanguard, said the strong performance of the US stock market this year has weakened investors' impulse to put money into cash, thereby restraining inflows into money funds. The S&P 500 is up 13% this year, while the Nasdaq is up 18%. Analysts said that beyond slower money fund purchases, rising T-bill yields also reflect expectations of a sharp increase in Treasury supply in the fourth quarter and further Fed rate hikes. Barclays estimates the Treasury will issue about $225 billion of Treasury bills in October and another $160 billion in November. As the Treasury floods the market with short-term securities, that should push yields higher. Long-end yields have also been rising, reflecting heavy corporate bond issuance to finance AI buildouts, deficit spending in the US and globally, and strong domestic economic growth. Gennadiy Goldberg, head of US rates strategy at TD Securities, said, "The Treasury is keen to concentrate more issuance in Treasury bills at the very front end of the curve, but the largest source of demand is slowing, which is concerning." If higher yields persist, they could change fund flows across the entire short-term funding market. If money funds pull money out of the overnight repo market and shift it into higher-yielding Treasury bills, while T-bill issuance increases, funding conditions could tighten, pushing up repo rates and raising funding costs for dealers and market participants. Still, analysts said it is too early to sound the alarm on this front. Money fund inflows usually accelerate in the fourth quarter as investors build up cash ahead of year-end liquidity needs, tax payments and portfolio rebalancing. Rate uncertainty dominates For now, higher T-bill yields further reflect growing uncertainty in the market about the direction of interest rates. LSEG estimates show US interest rate futures have priced in one 25 basis point hike this year and two more in 2027. Money fund managers tend to shorten portfolio duration when they expect rising rates. Shorter-dated debt matures faster, allowing managers to reinvest at higher yields when the Fed hikes. Vanguard's Smith said, "This kind of fluctuation around rate hike expectations for a money fund focused on capital preservation, this uncertainty naturally creates an incentive to stay short duration." TD Securities data shows the weighted average maturity (WAM) of money funds the average time until the securities held by the fund mature has fallen to 36 days from a peak of 42 days in May last month. That is still well above the low of just 15 days in 2022. For now, moves in T-bill rates do not yet appear to indicate stress in underlying funding. Analysts said the repo market usually where funding stress first appears remains orderly. Treasury officials have also repeatedly stressed that demand for Treasury bills from stablecoins and money funds remains strong even if slightly softer, but caution now seems to be prevailing. Vanguard's Smith said, "We are seeing volatility at the short end that I think the market has not been used to." "That gives money funds an incentive to stay short duration and try to demand a higher risk premium."