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Money market funds and the pricing of near-money assets

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  • Sebastian Doerr
  • Sebastian Egemen Eren
  • Semyon Malamud

Abstract

US money market funds (MMFs) play an important role in short-term markets as large investors of Treasury bills (T-bills) and repurchase agreements (repos). We build a theoretical model in which MMFs strategically interact with banks and each other. These interactions generate interdependencies between repo and T-bill markets, affecting the pricing of these near-money assets. Consistent with the model's predictions, we empirically show that when MMFs allocate more cash to the T-bill market, T-bill rates fall, and the liquidity premium on T-bills rises. To establish causality, we devise instrumental variables guided by our theory. Using a granular holding-level dataset to examine the channels, we show that MMFs internalize their price impact in the T-bill market when they set repo rates and tilt their portfolios towards repos with the Federal Reserve when Treasury market liquidity is low. Our results have implications for the transmission of monetary policy, benchmark rates, and government debt issuance.

Suggested Citation

  • Sebastian Doerr & Sebastian Egemen Eren & Semyon Malamud, 2023. "Money market funds and the pricing of near-money assets," BIS Working Papers 1096, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1096
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    References listed on IDEAS

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    Cited by:

    1. Iñaki Aldasoro & Sebastian Doerr, 2023. "Who borrows from money market funds?," BIS Quarterly Review, Bank for International Settlements, December.

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    More about this item

    Keywords

    T-bills; repo; money market funds; near-money assets; liquidity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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