The money market has become an ever-worsening house of pain, owing to the Federal Reserve’s merciless effort to create an investment climate so punishing that it drives investors to seek refuge in other assets. This rebalancing effect is the essence of the Federal Reserve’s asset purchase programs—popularly dubbed QEI and QEII.
More of the same lies ahead, because the Federal Reserve will in the two months ahead put to bear further immense pressure on short-term rates by adding still-more financial liquidity to the current mountain that already exists. This will no doubt continue the exodus by investors from the money market realm, which will help other asset classes to flourish, just as the Fed hopes.
The pain inflicted on money market has in recent weeks been intense, as evidenced by the T-bill market, where yields have plummeted from an average of around 14 basis points in the six months ended in early March to about 6 basis points on Friday and just 4 basis points in today’s trading. The repo market—the biggest segment of the money market where investors swap their excess cash with cash hungry banks and primary dealers for Treasury securities (generally on an overnight basis), has also seen rates plummet, from an average of about 21 basis points in the six months ended in early March to as low as 3 basis points in today’s trading.