Investor inflows into US money market funds have slowed considerably this year, with total inflows reaching only $158 billion in the first nine months, according to data from TD Securities. This marks a significant decline from the $823 billion recorded in 2025 and $840 billion in 2024. The slowdown has led to a decrease in demand for Treasury bills, causing yields to rise.
The reduced inflows into money market funds have resulted in higher yields on Treasury bills compared to overnight index swap contracts, a key indicator of market expectations for the US interest rate path. The yield on three-month Treasury bills rose around 10 basis points above the yield on similar OIS contracts, while the spread between six-month Treasury yields and OIS contracts reached 11.3 basis points.
Analysts attribute the slowdown in money market fund inflows to the strong performance of the US stock market, which has reduced investors' appetite for cash. The S&P 500 index has risen around 13% this year, while the Nasdaq index has gained 18%, encouraging investors to allocate more funds to equities. Despite the slowdown, money market funds remain a net buyer of Treasury bills, with their holdings increasing around 4% by the end of August.
The decline in demand for Treasury bills coincides with expectations of a significant increase in short-term debt issuance by the US Treasury in the final quarter. Barclays estimates that the Treasury will issue around $225 billion in bills in October and $160 billion in November, totaling $385 billion over the two months. This could keep yields elevated as more short-term securities enter the market.
Yields are also influenced by expectations of potential US interest rate hikes, as well as increased corporate debt issuance to finance infrastructure expansion for artificial intelligence and spending related to fiscal deficits. Continued rises in Treasury bill yields could alter liquidity flows in short-term funding markets, potentially leading to tighter financial conditions.
However, analysts believe it is still too early to discuss significant pressures, as money market fund inflows typically accelerate in the final quarter amid investor preparations for year-end liquidity needs, tax payments, and portfolio rebalancing. The movement in Treasury yields also reflects uncertainty about the interest rate path, with futures contracts currently pricing in one 25-basis-point rate hike this year and two additional hikes in 2027.
The average maturity of money market fund assets has decreased to 36 days, down from a peak of 42 days in May but still significantly higher than the 2022 low of 15 days. Despite increased volatility in the short-term Treasury market, repo markets have remained relatively stable, with no clear signs of fundamental funding pressures.
Key points
- Reduced investor inflows into US money market funds have driven up yields on short-term Treasury bills.
- Expectations of increased Treasury bill issuance in the final quarter could keep yields elevated.
- The slowdown in money market fund inflows may lead to tighter financial conditions in short-term funding markets.
