Money‑market fund inflows have slowed dramatically in 2026, according to data from TD Securities. The funds attracted just $158 billion in the first three quarters, far below the $823 billion recorded for the full year of 2025 and the $840 billion seen in 2024.

Reduced inflows have lowered demand for Treasury bills, causing yields to rise relative to comparable overnight index swaps (OIS), a benchmark that reflects market expectations for Federal Reserve rate moves. “If money funds are not getting those inflows, then they have to think about where they want to put their money,” said Sam Earl, U.S. rates strategist at Barclays.

Impact on Treasury Bill Pricing

Even though money‑market funds remain net buyers of Treasury bills, the pace of buying has slowed. By the end of August, fund holdings of bills were up roughly 4 % from the end of 2025, compared with an 18 % rise over the entire 2025 year, according to the Investment Company Institute.

The softer demand is reflected in wider spreads between bill yields and OIS rates. On Monday, the 3‑month bill yield was nearly 10 basis points above the 3‑month OIS, the widest spread since September 2024. The 6‑month spread reached 11.3 basis points, after touching 12.5 basis points last week – the highest level since April 2025.

Market Drivers

Vanguard’s Nafis Smith, head of taxable money markets, noted that a strong equity market this year has reduced the impulse for investors to park cash in money‑market funds. The S&P 500 is up 13 % and the Nasdaq is up 18 % so far in 2026.

Analysts also point to expectations of heavy Treasury supply in the fourth quarter and the prospect of additional Federal Reserve rate hikes. Barclays projects the Treasury will issue about $225 billion of bills in October and another $160 billion in November, a volume that could further lift yields.

Potential Funding Implications

If higher yields persist, money‑fund managers may shift cash from overnight repo markets into higher‑yielding Treasury bills, which could tighten short‑term funding conditions and push repo rates higher. However, analysts caution that it is too early to sound an alarm. Historically, money‑fund inflows tend to accelerate in the fourth quarter as investors prepare for year‑end liquidity needs, tax payments, and portfolio rebalancing.

Rate Outlook

U.S. rate futures currently price in one 25‑basis‑point hike for the remainder of 2026 and two more hikes in 2027, according to LSEG estimates. Money‑fund managers typically shorten portfolio maturities when they anticipate higher rates, a strategy that helps preserve capital while allowing reinvestment at higher yields.

Vanguard’s Smith said, “We have this ebb and flow around rate‑hike expectations, and for a money fund focused on capital preservation, that uncertainty creates a natural incentive to remain short.” The weighted average maturity of money‑fund portfolios fell to 36 days last month, down from a peak of 42 days in May, though it remains well above the 2022 low of 15 days.

Market Stability

Despite the yield movement, repo markets have stayed orderly, and Treasury officials continue to highlight strong demand for bills from stablecoins and money funds, even if that demand has softened slightly. “We’re seeing volatility on the short end that I don’t think the market has been accustomed to,” Smith added, noting that this could encourage funds to seek higher risk premiums.

Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.