Key facts
- Money fund inflows have slowed significantly this year, totaling $158 billion in the first three quarters.
- Reduced inflows have increased Treasury bill yields relative to overnight index swaps.
- The S&P 500 is up 13% and the Nasdaq is up 18% this year, potentially crimping money fund flows.
- Barclays estimates Treasury will issue $225 billion of bills in October and $160 billion in November.
- Money funds' weighted average maturity has fallen to 36 days from 42 days in May.
A significant slowdown in cash flowing into money-market funds this year has led to higher yields on short-term Treasury bills, potentially creating vulnerabilities in short-term funding markets. Inflows have totaled just $158 billion in the first three quarters, a sharp decrease from $823 billion in all of 2025 and $840 billion in 2024, according to TD Securities data.
This reduced demand from money funds has pushed up Treasury bill yields relative to comparable overnight index swaps (OIS), a key benchmark reflecting Federal Reserve rate expectations. Analysts note that if money funds are not receiving substantial inflows, they must reconsider where to allocate their capital.
Despite the slowdown, money market funds remain net buyers of Treasury bills, though their demand has markedly softened. By the end of August, their holdings had increased approximately 4% from the end of 2025, a contrast to the 18% rise seen over all of 2025, according to the Investment Company Institute.
The softer demand is reflected in the pricing of Treasury bills, with investors demanding a larger premium to hold them. US 3-month bill yields rose nearly 10 basis points above 3-month OIS on Monday, reaching the widest spread since September 2024. For six-month maturities, the spread touched 12.5 basis points last week, its highest since April 2025.
Nafis Smith, principal and head of taxable money markets at Vanguard, attributed the reduced money fund flows partly to the strength of the US equity market, with the S&P 500 up 13% and the Nasdaq up 18% this year, diminishing the incentive for investors to hold cash. Analysts also cited expectations of heavy Treasury supply in the fourth quarter and potential further interest rate hikes from the Federal Reserve.
Barclays estimates that the Treasury will issue approximately $225 billion of bills in October and another $160 billion in November. Gennadiy Goldberg, head of US rates strategy at TD Securities, expressed concern that the largest source of demand for bills is slowing while the Treasury aims to increase issuance at the front of the curve.
If persistent, higher bill yields could tighten funding conditions, potentially pushing up repo rates and financing costs for dealers and market participants, as money funds might shift cash from overnight repo markets into higher-yielding Treasury bills. However, analysts suggest it is too early to raise alarms, as money fund inflows typically increase in the fourth quarter ahead of year-end liquidity needs.
Growing uncertainty over future interest rates is also contributing to higher bill yields. US rate futures are pricing in one rate hike of 25 basis points this year and two more in 2027, according to LSEG estimates. Money fund managers tend to shorten portfolio maturities in anticipation of higher rates to reinvest at more favorable yields. Vanguard's Smith noted that this uncertainty creates an incentive for money funds, focused on capital preservation, to remain short-dated. The weighted average maturity of money funds has declined to 36 days from a peak of 42 days in May.
For now, the move in Treasury bill rates does not signal stress in underlying funding markets, which have remained orderly. Treasury officials have also noted continued strong demand for bills from stablecoins and money funds, even with the slight softening.