Key facts
- Money market fund weighted average maturities decreased in July.
- Assets in money market funds reached a record nearly $8 trillion in the first week of July.
- Managers are increasing holdings in floating-rate notes and repurchase agreements.
- Treasury bill allocations were reduced by $96 billion in June.
- Interest rate futures suggest a high probability of a Fed rate hike in December 2026.
Money market funds are adopting a more defensive posture by shortening the maturity of their holdings, a strategy driven by uncertainty surrounding the U.S. Federal Reserve's future interest rate decisions. The weighted average maturity for money market funds has decreased, indicating a shift towards shorter-term securities.
This cautious approach comes as assets in money market funds have surged to a record nearly $8 trillion in early July. Fund managers are increasingly allocating these inflows into floating-rate notes (FRNs), whose interest payments adjust with market rates, and repurchase agreements (repos). Treasury FRN holdings reached a record $523 billion by the end of June, with a $32 billion increase.
However, the appeal of overnight repos has waned due to Federal Reserve actions injecting cash into funding markets, which has reduced available collateral and lowered repo yields. This presents a dilemma for fund managers: accept low overnight yields or extend maturities and risk being locked into lower returns if interest rates rise.
In June, money market funds reduced their Treasury bill allocations by $96 billion, though bills still constitute a significant portion of their holdings. This defensive positioning aims to mitigate risks in a potential rising rate environment. Current U.S. interest rate futures suggest an approximately 80% probability of one Federal Reserve rate hike in December 2026.