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Crescenzi: The 'Cliff' No One Is Talking About

Tony Crescenzi, Portfolio Manager/Strategist, PIMCO
Andrew Harrer | Bloomberg | Getty Images

A dramatic move in the money market is defined these days by a movement of a handful of basis points. By that definition, this week's decline in Treasury bill rates was dramatic, with bill rates falling up to five basis points or more to their lowest since January. Some T-bill rates maturing in January are actually trading at negative interest rates.

The decline in bill rates can be attributed primarily to this week to pass an extension of the program, which expires on December 31st. The TAG program expanded safeguards and provides unlimited insurance on deposits in non-interest bearing transaction accounts having balances greater than $250,000.

(Read More: When Will the Bond Bubble Burst?)

The potential expiration of the TAG program is the lesser known "cliff" and it will result in a further decrease in the universe of "safe" assets, as roughly $1.6 trillion of non-interest bearing transaction balances will suddenly become uninsured. This in theory will compel investors to shift assets from uninsured deposit accounts to money market instruments deemed safer, chiefly government and agency securities.

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Other factors affecting money market rates include the lack of discernible progress on the "fiscal cliff," and positioning for year-end.

Keep in mind that when Operation Twist ends at the end of December, the Federal Reserve's sales of shorter-term Treasuries will stop. This will alleviate some of the upward pressure on money market rates that has persisted for much of this year. This, along with the Fed printing $85 billion per month in new bank reserves, will keep rates under downward pressure.

(Read More: Is Corporate Behavior Too 'Bubblicious' in Bond Market?)

Anthony Crescenzi is a senior vice president, market strategist and portfolio manager at the PIMCO Newport Beach office. Prior to joining PIMCO in 2009, he was chief bond market strategist at Miller Tabak, where he worked for 23 years. He helped create that firm's asset management division and served as its chairman.

Crescenzi is an author of numerous books and he regularly appears on CNBC.