With the U.S. Department of the Treasury significantly increasing the issuance of short-term Treasury bonds over the past year, Wall Street is concerned about market demand in the prospect of a Fed rate cut.
According to media reports on Friday, since the beginning of 2023, the U.S. Treasury has issued $22.3 trillion in short-term U.S. bonds. Currently, the market seems to have easily absorbed this supply, and the pricing between short-term government bonds and risk-free rates such as overnight index swaps remains relatively stable.
However, some analysts are worried that with the Fed potentially starting rate cuts and balance sheet reduction, there may be pressure on market funds. Torsten Slok, Chief Economist at Apollo Global Management, warned:
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Once the Fed starts cutting rates in September, the demand for short-term Treasury bonds from households and money market funds may decrease, thereby pushing up short-term rates.
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Not all Wall Street experts share this view, though. Some analysts believe that in order to lock in the high returns from Fed rate hikes, investors have poured a large amount of money into money markets. As of the latest data, total assets of money market funds have reached $6.14 trillion, nearing a historical high, and they believe that these funds will remain ample.
As the Fed approaches a rate cut, money market funds are starting to extend the duration of their assets, purchasing longer-term short-term Treasury bonds to lock in higher yields. This means that companies directly purchasing short-term Treasury bonds will instead invest cash in funds, further increasing the demand for short-term Treasury bonds in the money market.
Mike Bird, Senior Portfolio Manager at Allspring Global Investments, stated:
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The view that demand for short-term Treasury bonds will decline during a Fed rate cut cycle is somewhat exaggerated, especially for money market funds. We will continue to maintain our buying demand.
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Teresa Ho, Head of U.S. Short-Term Rates at JPMorgan, believes:
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In the past three rate cut cycles, funds only started flowing out of money market funds in the latter half of the Fed rate cut process. Currently, a yield of 4% to 5% is still quite high.
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Furthermore, on the supply side, due to the debt ceiling being reinstated on January 1st next year, the issuance of short-term Treasury bonds may decrease

In the past three interest rate cut cycles, it was not until the Fed's interest rate cut process entered the second half that funds began to flow out of money market funds. Currently, a yield of 4% to 5% is still quite attractive

Will the Federal Reserve cut interest rates? Can US money market funds still be purchased?