Treasury Seeks Dealer Input on Money Fund Rule

The Department of the Treasury on Friday issued a questionnaire to primary dealers asking them how the SEC’s new money market fund rules, which take effect on May 5, could impact demand for Treasuries and the broader Treasury repo and cash market functioning. Treasury is seeking the information ahead of a meeting with the dealers on April 30.

Money market funds have invested in Treasury bonds at unseen levels ever since the Reserve Primary Fund broke the buck in September 2008, said Connie Bugbee, managing editor of iMoneyNet.

“I can’t imagine the demand being any greater than it has been since Reserve and the flight to safety. Prior to September 2008, an average of one Treasury wouldn’t have appeared [in a money fund portfolio] because the yield is too low,” Bugbee said. “Maybe repos or government agency bonds, but not Treasuries.”

The challenge money fund managers expect to face is meeting the shortened liquidity requirements. “Most all of the money fund managers are saying there could be a lack of securities,” Bugbee said.

However, a newly released TABB Group report on the size of the Treasury market, predicts it will continue to grow substantially in size. "With interest in the U.S. Treasuries picking up - the U.S. Treasury issued more than $2 trillion in treasury securities in 2009, more than double that of 2008 and nearly three times more than 2007 - the market is headed toward a rapid growth in trading volume," said TABB Research Director Adam Sussman.

Treasury is also asking primary dealers if increasing the frequency of TIPS auctions through a second reopening of 10-year TIPS offerings would be a concern.