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Money Market Funds and the Pricing of Near-Money Assets

Author

Listed:
  • Sebastian Doerr

    (Bank for International Settlements)

  • Egemen Eren

    (Bank for International Settlements)

  • Semyon Malamud

    (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

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) with banks and the Federal Reserve, some of the world’s safest and most liquid assets. We build a theoretical model in which MMFs’ strategic interactions generate a trade-off between their market power in the repo market and their price impact in the T-bill market. Empirically, we show that MMFs’ portfolio allocation decisions between repos and T-bills have an economically significant impact on T-bill rates and market liquidity, and the liquidity premium on T-bills. Guided by our model, we devise instrumental variables to establish a causal effect. Using a granular holding-level dataset we confirm the model’s prediction that MMFs internalize their price impact in the T-bill market when they set repo rates. Moreover, when Treasury market liquidity is low, MMFs tilt their portfolios away from T-bills towards repos with the Federal Reserve. Our results have broad implications.

Suggested Citation

  • Sebastian Doerr & Egemen Eren & Semyon Malamud, 2023. "Money Market Funds and the Pricing of Near-Money Assets," Swiss Finance Institute Research Paper Series 23-04, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2304
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    Cited by:

    1. Fabienne Schneider, 2024. "On-the-run Premia, Settlement Fails, and Central Bank Access," Working Papers 24.05, Swiss National Bank, Study Center Gerzensee.
    2. Ferrari Minesso, Massimo & Siena, Daniele, 2026. "Private money and public debt. U.S. Stablecoins and the global safe asset channel," Working Paper Series 3174, European Central Bank.
    3. Iñaki Aldasoro & Sebastian Doerr, 2023. "Who borrows from money market funds?," BIS Quarterly Review, Bank for International Settlements, December.
    4. Fabienne Schneider, 2025. "On-the-run Premia, Settlement Fails, and Central Bank Access," Staff Working Papers 25-19, Bank of Canada.
    5. Eisenschmidt, Jens & Ma, Yiming & Zhang, Anthony Lee, 2024. "Monetary policy transmission in segmented markets," Journal of Financial Economics, Elsevier, vol. 151(C).
    6. Rashad Ahmed & Iñaki Aldasoro, 2025. "Stablecoins and safe asset prices," BIS Working Papers 1270, Bank for International Settlements.

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    Keywords

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    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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