Money market rates continued to decline to punishingly low levels in the latest week, pressured downward by a further increase in the monetary base, which is resulting from the Federal Reserve’s asset-purchase program. Banks, which hold about 20% of their assets in fixed-income securities, have since the Fed’s program began throttled back their steady accumulation of fixed-income securities, if only because the Fed is forcing their hand.
The liquefying of bank balance sheets is just one symptom of a systemic condition whereby financial liquidity is superfluous in magnitude substantial enough to encourage investors to do what the Fed ultimately intends them to do, which is to move out the concentric circle—to rebalance their portfolios and take added risk, buoying riskier assets. Combined with a continuing contraction in the supply of investable money market assets, the result is as it has been, which is an ever-lower level of money market rates. The nearing of quarter-end is adding to the downward pressure on rates.
No meaningful relief on the downward pressure on money market rates is expected until Washington approves an increase in the debt ceiling significant enough to restore the supplemental financing program and hence increase the supply of T-bills.