US Money Markets: Value in Extensions Given the Aggressive Fed Discount – ING Rates Strategy

Key Takeaways

• 1.Market discounting of further Federal Reserve rate hikes is overdone, making tenors of nine months to two years attractive for extension.
• 2.The carry spread between the Fed funds rate and the 3-year Treasury is out to 100bp, incorporating an excessive 70bp rate hike discount over the ~30bp neutral level.
• 3.The Fed's balance sheet reduction faces major hurdles; returning bond holdings to pre-GFC proportions (5.5% of GDP) would require offloading around $4.5tr in bonds and overhauling bank liquidity regulations.

Table of Contents

• The call on the Federal Reserve
• The Fed balance sheet narrative
• The Fed's bond and bills holdings
• Bank reserves at the Federal Reserve
• Fed funds rates versus the SOFR rate
• Money market funds remain on the rise
• Money market fund holdings
• Commercial paper alternatives

Report data

The Fed's bond and bills holdings