The Federal Reserve's interest rate cut is "ineffective", as money market funds continue to avoid long-term U.S. Treasury bonds.

Despite the Federal Reserve opening a rate-cutting cycle last week with a 50 basis point reduction, money market funds are still reluctant to purchase longer-term US treasuries. When the Federal Reserve initiates a rate-cutting cycle, fund managers often further buy short-term US bonds to lock in higher yields. However, the US bond yield curve is still inverted, meaning that the yield on short-term bonds is higher than that on long-term bonds, which suppresses the flow of funds into long-term bonds. This presents a challenging environment for money market funds. The money market has been expecting the Fed to cut rates, but not as quickly as it is currently being reflected in the wider market. Morgan Stanley strategist Teresa Ho stated in a client report, "The unfolding of the easing cycle and the yield curve inversion remain uncertain." Data shows that the spread between one-month and one-year Treasury bills is negative by about 82 basis points, while the spread between three-month and two-year Treasury bills is negative by 106 basis points. These inversions have led to a shortening of the weighted average maturity of fund assets. Teresa Ho said, "These curves are still severely inverted, challenging the willingness of liquidity investors to extend their duration." According to Morgan Stanley's data, government funds, which are major buyers of Treasury bills, increased their holdings of 31-60 day Treasury bills by $226 billion in August, while decreasing their holdings of Treasury bills with maturities over 60 days by $53 billion. Meanwhile, high-quality funds inclined towards investing in riskier assets such as commercial paper have increased their allocation to floating-rate notes from 15% at the beginning of the year to 20% at the end of last month. This is because in the current interest rate environment, floating bonds often provide better protection and ensure higher yields. Deborah Cunningham, Chief Investment Officer for Global Liquidity Markets at Federated Hermes, said, "Short-term notes do not appear attractive, making it more difficult to extend the weighted average maturity." "Just close your eyes and pick the one you like the least." The uncertainty in the extent of rate cuts has increased the difficulty for money market funds to buy longer-term US treasuries. The rate path forecasts released alongside the Fed's monetary policy decision last week showed policymakers expect a total reduction of 50 basis points by the end of this year. However, the money market currently anticipates a total rate cut of around 73 basis points for the remaining time this year. Furthermore, both Teresa Ho and Deborah Cunningham believe that the assets under management of money market funds will continue to increase this year. On one hand, during such times, institutional and corporate treasurers tend to outsource their cash management to gain returns rather than deal with it themselves. On the other hand, the returns on these investment tools are still higher than bank deposits. Teresa Ho said, "Given the continuing inversion of the front-end yield curve and the yield advantage of money market funds relative to other cash alternatives, we expect assets under management for money market funds to continue to rise by the end of the year."