Money market funds and the pricing of near-money assets

Sebastian Doerr, Egemen Eren and Semyon Malamud

No 1096, BIS Working Papers from Bank for International Settlements

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.

Keywords: T-bills; repo; money market funds; near-money assets; liquidity (search for similar items in EconPapers)
JEL-codes: E44 G11 G12 G23 (search for similar items in EconPapers)
Date: 2023-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-des, nep-fmk and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Money Market Funds and the Pricing of Near-Money Assets (2024)
Working Paper: Money Market Funds and the Pricing of Near-Money Assets (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1096

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