Central-Planners Fail To Herd Money Market Funds Into Overpriced Stocks

Tyler Durden's picture

After years of deliberations and relentless scheming on how to make the multi-trillion money market funds less attractive, two weeks ago the SEC finally passed, with much industry pushback in a close 3 to 2 vote, regulation that among other things implemented gates on various money market funds, a move which both we and SEC commissioner Kara Stein explained would accelerate the exodus of funds out of MMFs and increase the risk of financial instability in a rickety, house of cards, system. Of course, forcing money flows out of MMFs and into risky assets was the goal of "regulators" and the Fed all along - after all someone has to come in and pick up the baton from a Fed which is no longer in the business of injecting nearly $100 billion in the stock market every month: what better replacement than a forced reallocation out of the $2.6 trillion money market industry.

“We’re definitely worried about breaking the buck,” Verett Mims, assistant treasurer at Chicago-based Boeing, said in a telephone interview on July 30. “That’s our biggest problem, the notion of principal preservation.”


The state of Maryland may also refrain from investing in prime money-market funds as a result of the floating-price rule, according to its treasurer, Nancy Kopp.


The changes “make these money market funds less usable, if not usable at all as investment vehicles,” she said in a July 22 conference call organized by the Chamber of Conference.

Sadly for the central planners, while they succeeded in the first part of their plan, namely getting investors to flee from money market funds, they failed in getting the money to flow into the desired asset class: stocks. Instead, money market funds are rushing at an unprecedented pace into that other most hated by the Fed, after precious metals of course, asset: Treasurys. Most hated because declining yields disprove all the propaganda about an improving economy as they do, or at least did, imply deflation down the road: hardly the stuff robust 3%+ recoveries are made of.

As Bloomberg reports, "one of the biggest winners in the push to make money-market funds safer for investors is turning out to be none other than the U.S. government." Actually, no, because the fate of the US government is now far more closely linked to the stock market ponzi than it is to the bond market, which after all the Fed can monetize directly. Allowing Yellen to legally buy stocks in the open market (as opposed to through Citadel) however, would require changing the Fed's charter.

Rules adopted by regulators last month will require money funds that invest in riskier assets to abandon their traditional $1 share-price floor and disclose daily changes in value. For companies that use the funds like bank accounts, the prospect of prices falling below $1 may prompt them to shift their cash into the shortest-term Treasuries, creating as much as $500 billion of demand in two years, according to Bank of America Corp.

Some examples include  Boeing and the state of Maryland who are already looking to make the switch to avoid the possibility of any potential losses. Bloomberg notes that "with the $1.39 trillion U.S. bill market accounting for the smallest share of Treasuries in six decades, the extra demand may help the world’s largest debtor nation contain its own funding costs as the Federal Reserve moves to raise interest rates." Well, yes: but that's not what the Fed wants - it would much prefer modestly rising rates if that means soaring stocks to keep the equity bubble inflated. After all pundit after pundit keeps pounding the table on the "bond bubble", which of course means that the real bubble is in stocks.

“Whether investors move into government institutional money-market funds or just buy securities themselves, there will be a large demand” for short-dated debt, Jim Lee, head of U.S. derivatives strategy at Royal Bank of Scotland Group Plc’s capital markets unit in Stamford, Connecticut, said in a telephone interview on July 28. “That will lower yields.”


He predicts investors may shift as much as $350 billion to money-market funds that invest only in government debt.

Bank of America, which also has hated Treasurys as an asset class since mid-2013, also chimes in:

Investors using prime funds to manage their idle cash may find floating prices an unnecessary risk when differences in fund rates are so minimal, said Brian Smedley, an interest-rate strategist at Bank of America in New York. He estimates about half the $964 billion held in institutional prime funds will flow into those that only invest in government debt and yield about 0.013 percentage point less, before the new rules become fully effective in 2016.

With demand set to surge, supply of high quality collateral, aka Treasurys, continues to decline:

As more companies opt for the safety of government debt, the supply of Treasury bills stands to decrease further. With the Obama administration projecting the deficit will narrow to a six-year low of $583 billion, the Treasury Department has pared its issuance of the short-term debt.


U.S. government securities due in four weeks to one year account for just 11.5 percent of the $12.1 trillion market for Treasuries, the smallest proportion in data compiled by Barclays Plc going back to 1952. As recently as 2008, bills accounted for more than third of the total.


This lack of supply, coupled with the money-market fund shift, mean short-term rates will remain low, Deborah Cunningham, the head of money-market funds at Pittsburgh-based Federated Investors Inc., which oversees $245 billion in short-term securities, said in a July 31 telephone interview.

It also means that the latest self-fulfilling prophecy, namely that MMF cash will flow into bond funds, will be actualized, much to the chagrin of the Princeton economics department.

Those curious what recent MMF regulation change means for various asset classes are encouraged to skim the following table from JPM:

But before we declare victory over central planning, don't forget that the "regulators", the Fed and the SEC, are already contemplating the next step: recall that as we reported in June, "the Fed is preparing to impose "exit fee" gates on bond funds, in what, the official narrative goes, is an attempt to prevent a panicked rush for the exits. Of course, this is diametrically opposite of what the truth is."

Here one should clearly ignore here what the Fed itself said about the "logic" behind such an action, and how that too will ultimately backfire.

Our results have broader policy signi cance. Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs. Much of the wider policy signi cance of that risk is beyond the scope of this paper, since our model does not incorporate the large negative externalities associated with runs on financial institutions, including MMFs. But one notable concern, given the similarity of MMF portfolios, is that a preemptive run on one fund might cause investors in other funds to reassess whether risks in their funds are indeed vanishingly small.

And why worry about "backfiring" when the Fed already knows it is all in and any diversion from the herding path will merely result in the systemic reset arriving that much faster.

The bottom line is simple: the Fed will continue herding investors as long as it takes: first out of the money market funds, then out of bond funds, until the only possible investment product remains triple digit P/E stocks, and everyone is all the biggest market ponzi bubble of all time.

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IronShield's picture

Market goes up, make money.

Market goes down, make money.

What's the problem?

Thought Processor's picture



Because if they devalue the USD when everyone is in Money Market funds there will be revolution over night.


In order for the slight of hand to work the masses must be in something that has 'no' legal gaurantee of a return.  That would be stocks and stocks alone.



Pladizow's picture

These changes only apply to institutional investors, not retail - correct?

Leonardo Fibonacci2's picture

The tribe just moving the herd in the right direction so that the sheeple could be sheered.  Wool=Shekels. Besides its just goyims and Lloyd is doing God's work.

Manthong's picture

“our biggest problem, the notion of principal preservation”

That is about the most infuriating thing I have read in a long time.

I think that idiots biggest problem needs to turn to preserving his own ass - and soon.

IronShield's picture

I'm pretty sure I can still get my overpriced cup of joe using that 'money'; until I can't.  ;-)

Dr. Engali's picture

You've just unwittingly shown in your statement why the currency that you are using to buy that over priced cup of coffee with is not money.

IronShield's picture

Sea shells are so yesteryear; get with the times.  Perhaps bitcoins are more to your liking?  Gold?  Nah, that's for saving. Silver? Tulips?

LawsofPhysics's picture

"Its not really money ?"  -  bingo.  Let the hyperinflation begin.  Items required for survival are already leading the way...

LawsofPhysics's picture

Silver is not required for your survival, but yes, I do love a sale.


Not a very critical thinker are you?

IronShield's picture

So, silver will decline in price during a hyperinflation?  Not seeing the logic in your statements; likely because there is none.  And I'm not a very critical thinker???  Ho Lee Fuk.

LawsofPhysics's picture

If the dollar is temporarily stonger (more purchasing power), why wouldn't you think it might temporarily buy more silver?

Again, I think my statement holds.

IronShield's picture

What are you pricing silver in again?  Fiat, money, MOE; whatever you call it, you need it, until you don't. 

Silver is a funny thing; like to watch but made money on it long ago.  Now just a train wreck; and so are the purchasers.  Will it outpace (hyper)inflation?  Perhaps, but there are much better alternatives (as you should know).  ;-)

syntaxterror's picture

Don't cry for me Argentina!

curbyourrisk's picture

No...not Silver..



Bossman1967's picture

what and who do these people think they are? precious metals suck but in the end I have my assets and my ass. I feel sorry for the sheep. the wolf of wall street licking his chops.

Bossman1967's picture

what and who do these people think they are? precious metals suck but in the end I have my assets and my ass. I feel sorry for the sheep. the wolf of wall street licking his chops.

Bossman1967's picture

what and who do these people think they are? precious metals suck but in the end I have my assets and my ass. I feel sorry for the sheep. the wolf of wall street licking his chops.

ToNYC's picture

The fruit of the ignorant tree is found ripe only when it speaks or falls on the ground.

besnook's picture

why are so many italian americans named tony? immigrant parents tagged their children's clothes with "to ny" in case they got seperated.

Colonel Klink's picture

If they're rushing into PMs the price certainly doesn't show it.

pashley1411's picture

Not sure herding money into government treasuries isn't the plan.

Restrictions on withdraws - go into treasuries; stocks to moon-shot levels = treasuries, tax the hell out of income = treasuries.   

The objective is to turn all instruments of society into mere supporting props of the imperium (what was the "f" word again?).  

Seems like things are proceeding right on track.

Tyler Durden's picture

It isn't the plan, at least not yet: "Fed Prepares to Gate Bond Funds"

The Fed is hoping it can push the 10Y to 3.5% to "validate" a growth narrative, without spooking stocks too much.

ekm1's picture

Fed can make 10y yield at 3.5%  and Dow at 50k in 4 weeks if they are told to.

Just mark up the numbers on computer gradually.

No trading needed.


The fact is nobody cares about the Fed. 

All what insolvent oligarchs care about is $1.4 quadrillion swaps and trying to expropriate energy and commodity assets from solvent oligarchs around the world

LawsofPhysics's picture

Sorry tylers, but I think this is the real issue.  The Fed, the U.S. government, and the NYSE seem to be fighting for their very credibility at this point.  The very relevance and sphere of influence (although still great) seems to be decreasing at an exponential rate.

The only thing I know well is my profession, farming.  We are are actually selling more to foreign  markets right now.  That's right, I am exporting more soybeans, sorghum, nuts, and now fruits (apples and pears) then I am selling in the states.  Good luck to all those SNAP babies in the cities, our cities will soon be just like all the other cities around the planet.  These fuckers in the states don't know how good they have it.

I never in my lifetime thought that I would be holding foreign reserves, but here the fuck I am, and today I am buying more physical silver with them today.

ekm1's picture

If you are in farming, you know everything.

We should ask you for feedback, advises and opinions


By the way, I'm buying only US and Canadian food here in Toronto.

LawsofPhysics's picture

"poor" people in America need to be sent to south america so they can see what "poor" really means.

IronShield's picture

That's why we're exceptional.

Redneck Hippy's picture

Poor people is South America need to be sent to Africa so they can see what "poor" really means.

besnook's picture

why travel so far when both can see the working definition of poverty in haiti.....and it is warm in the winter.

LawsofPhysics's picture

The "poor" in Africa are quickly becoming the poor and dead.  Big difference.

oudinot's picture

Most American produce is GMO: I would strongly advise you not to eat the crap.

LawsofPhysics's picture

"Most of the earth's produce consumed by humans is GMO" - fixed it for you.  Everyone (all 7+ billion) are certainly free to try and grow 100% of the food they consumed, but the math and biological cycles required to do that are what they are...

Please, wake the fuck up, humanity isn't just another unsustainable ponzi, it's the unsustainable ponzi.

NoDebt's picture

I'm not sure this change will affect the 10-year much.  That's too long if you're looking for the next closest thing to a Money Market fund.  1 year Treasuries or less, exactly like is already starting to happen seems like where most/all of the effect would be concentrated.

So, I think the Fed can still play different games to get the 10-year to their 3+% target while this is happening on the short end.

And then Larry Kudlow can make a return appearance on CNBC and gush about the virtues of an "upward sloping yield curve" and how great all this is.

Thought Processor's picture


It isn't the plan, at least not yet: "Fed Prepares to Gate Bond Funds"

The Fed is hoping it can push the 10Y to 3.5% to "validate" a growth narrative, without spooking stocks too much.



Though my guess is that they herd everyone in stocks and then after that drop the hammer on the USD (via some event perhaps).  Then a 'solution' will be offered up to make it all better whereby they will allow a swap into treasuries at some pretermined 'valuation' of former equity holdings.  Market operations would have to be suspended for this to work though (reason for said event above).   It would be a defacto USD devaluation, market re-valuation, and treasury bail in all in one fell swoop.  It would be the Trifecta of resets.

Call it my conspiracy theory for events that have not happened yet (pre-conspiracy theory?!).


Potential 'events' are lining up though, just take your pick- war, ebola hitting the financial centers, and we can't forget the ever present 'terrist' threat / event.  

Something will be used to kick it all off.  And they are getting near the end of their rope.

CheapBastard's picture

So everything is Bullish, right?

dbTX's picture

Stack them high, silver is on sale today.

Dr. Engali's picture

"With demand set to surge, supply of high quality collateral, aka Treasurys, continues to declin:


The solution is simple..... bigger deficits.

GFORCE's picture

Money funds will buy the dips. So yes, the CBs will win.

mastersnark's picture

The Fed just needs to start printing S&P 500 stock. No one cares if the stock was actually issued by the company; that's as outdated as "fundamentals."

Sudden Debt's picture

yep... we've finally reached PEAK STUPIDITY!

Grande Tetons's picture

Are you suggesting that intelligence is on the horizon? 

Bill of Rights's picture
Thomas Piketty Cut to Shreds By a Direct Student of Ludwig von Mises