US money funds cut maturities to 38 days on Fed uncertainty
US money market fund managers are shortening portfolio maturities to navigate a difficult trade-off between weakening repo yields and the risk of future Federal Reserve rate hikes.
US money market funds have significantly shortened the maturity of their holdings as managers brace for an uncertain Federal Reserve policy path. The weighted average maturity of the Crane Money Fund Average fell to 38 days in the week ended July 10, down from 42 days a month prior. The broader Crane 100 index dropped to 40 days from 44 days over the same period.
This defensive shift allows managers to reinvest cash more quickly if borrowing costs rise, preventing them from being locked into lower-yielding, longer-dated securities. The positioning reflects a market grappling with conflicting signals: softer-than-expected inflation has boosted expectations for rate cuts or an extended pause, yet rate futures indicate an 80% probability of a hike by December 2026.
Managers are adjusting their allocations accordingly. Treasury bill holdings dropped by $96 billion at the end of June to $3.3 trillion, though they still account for roughly 40% of total assets. "Managers have trimmed exposure to longer-dated Treasury bills while increasing allocations to repos as part of a broader defensive strategy for a potentially higher-rate environment," said Angelo Manolatos, a macro strategist at Wells Fargo.
Repo holdings rose by $68 billion in June to $3.06 trillion, representing 37.2% of total money fund assets. However, this pivot introduces a new challenge. Federal Reserve reserve management purchases have injected liquidity and reduced the supply of available collateral, putting downward pressure on overnight repo yields.
Funds now face a difficult balance. Remaining in overnight instruments limits returns due to softer repo yields, while extending maturities exposes portfolios to losses if rates eventually climb. The manoeuvring is occurring against a backdrop of immense investor demand, with total assets under management climbing to a record nearly $8 trillion in the first week of July, according to the Investment Company Institute. Manolatos noted managers are favouring floating-rate exposure to capture elevated three-month Treasury bill yields while avoiding the duration risk inherent in fixed-rate securities.
