BIS Bulletin
No 14
US dollar funding markets during the Covid-19
crisis – the money market fund turmoil
Egemen Eren, Andreas Schrimpf and Vladyslav Sushko
12 May 2020
BIS Bulletins are written by staff members of the Bank for International Settlements, and from time to time by other
economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in
character. The views expressed in them are those of their authors and not necessarily the views of the BIS. The
authors are grateful to Alan Villegas and Amanda Liu for excellent analysis and research assistance, and to Louisa
Wagner for administrative support.
This publication is available on the BIS website ().
© Bank for International Settlements 2020. All rights reserved. Brief excerpts may be reproduced or
translated provided the source is stated.
ISSN: 2708-0420 (online)
ISBN: 978-92-9197-381-0 (online)
Key takeaways
Short-term dollar funding markets experienced severe dislocations in mid-March 2020, with
funding diverted from unsecured funding markets as investors withdrew and switched to
secured funding markets and government MMFs.
Outflows from US prime MMFs led to a loss of funding for banks and a significant shortening of
funding maturities; this precipitated spikes in indicators of bank funding costs, such as the LIBOR-
OIS spread, despite banks not being at the epicentre of the liquidity squeeze.
The turmoil highlights broader lessons for MMF regulation, the role of non-banks for monetary
policy implementation, and the role of the central bank during stress.
Egemen Eren
@
Andreas Schrimpf
@
Vladyslav Sushko
@
US dollar funding markets during the Covid-19 crisis – the money
market fund turmoil
The Covid-19 crisis severely disrupted the functioning of short-term US dollar funding markets, in
particular the commercial paper and certificate of deposit segments. Commercial paper (CP) is a form of short-
term unsecured debt commonly issued by banks and non-financial corporations and primarily held by prime money
market funds (MMFs). Certificates of deposit (CDs) are unsecured debt instruments issued by banks and largely held
by non-bank investors, including prime MMFs. Both instruments are important sources of US dollar funding for
banks, especially for non-US headquartered banks.
The tensions lingered until end-April and spilled over to other international money market segments. Notably,
they were the main factor behind the widening of LIBOR-OIS spreads to levels second only to those last seen
during the Great Financial Crisis (GFC), and contributed to wide swings in offshore dollar funding costs. As such,
they hampered the transmission of the Federal Reserve’s rate cuts and other facilities aimed at providing
stimulus to the economy in the face of the shock. This Bulletin analyses strains in MMFs exacerbating the stress in
US dollar short-term funding during the Covid-19 crisis. The companion bulletin (Eren, Schrimpf and Sushko
(2020)) focuses on the US dollar funding stress for non-US banks in particular and how the disruptions to CP/CD
markets reverberated globally via FX swap markets.
Amid escalating market turmoil, market participants wanted to hold cash or something that resembles cash as
closely as possible. At the same time, financial intermediaries experienced difficulty accommodating
the surge in demand for safe and liquid assets. MMFs, in particular, were strained by this “dash for cash.” Prime
MMFs had to liquidate large parts of their portfolios, while government MMFs had to buy more assets to
accommodate surging inflows, all in a very short order. Even though, unlike the GFC, banks were not at the
epicentre of the crisis, dealers were unable or unwilling to expand their balance sheets sufficiently to intermediate
all the rebalancing taking place in money markets. The Federal Reserve’s intervention managed to restore market
functioning.
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Unsecured funding dries up and key money market rates diverge
Investor de-risking and scramble for cash at the onset of the Covid-19 crisis impacted US MMFs through two main
channels: (i) redemptions from prime MMFs that can invest in short-term bank and corporate paper; and (ii) a
flight to safety towards government and Treasury MMFs that invest in safe government instruments (Graph 1, first
panel). As a result, key money market rates diverged (second and third panels) and issuance of CP in primary
markets fell off sharply (fourth panel). Unsecured rates (eg CP/CD rates and LIBOR) initially edged down in
tandem with the Fed’s rate cuts, but then surged and remained elevated for some time, especially for term
borrowing. By contrast, rates on secured borrowing and on T-bills fell sharply – at times even falling below zero.
Divergence in money market fund flows and money market interest rates Graph 1
Cumulated daily flows into
MMFs
3-month CP term rates vs
OIS
3-month funding spreads2 Financial and non-financial
CP issuance3
USD bn Per cent Per cent USD bn
Feb 20 Apr 20 Feb 20 Apr 20 Feb 20 Apr 20 Feb 20 Apr 20
Government & Treasury 3m CP term rates: T-bill–OIS Financial: Top-tier (AA)
Prime Financial: Top-tier (AA)1 LIBOR–
OIS
Non-financial: Top-tier (AA)
Non-financial: Top-tier (AA)
Lower-tier (A2/P2)
3m OIS 3m T-bill
A1/P1 CP–T-bill Lower-tier (A2/P2)
The vertical line indicates 18 March 2020 (the establishment of the Fed Money Market Mutual Fund Liquidity Facility, MMLF).
1 Discontinued due to a lack of underlying market activity. 2 During the GFC, LIBOR-OIS reached 366 bp on 10 October 2008, while the T- bill-OIS
spread reached a minimum on 20 August 2007. 3 Weekly averages.
Sources: Board of Governors of the Federal Reserve System; Bloomberg; Crane Data; JPMorgan Chase; authors’ calculations.
Redemptions from prime funds strain unsecured funding markets
As part of the first channel, prime MMFs were hit by large-scale redemptions to the tune of $200 billion by end-
March, or around 20% of their assets under management (Graph 1, first panel). This was the largest volume of
outflows since the adjustments to the 2016 MMF reform, when their assets dropped by more than $850 billion
from April to October 2016. But unlike then, the redemptions during the Covid-19 rout were unanticipated and
rapid, thus putting significant strains on the industry and funding
The Covid-19 turmoil illustrates that prime MMFs were susceptible to rapid redemptions, even as the 2016
MMF reform alleviated many of the issues that were laid bare during the Prime MMFs offer
1 This period saw heavy portfolio rebalancing as key players sought to be as liquid as possible. See Huang and T áts (2020) on the role of
CCPs and Bank of England (2020) on how margin calls may have intensified redemptions from prime MMFs.
2 The MMF reform required prime funds to switch from a stable to a floating NAV calculation and introduced redemption gates and fees at
the fund’s discretion should its weekly liquid assets (a combination of government securities and other assets maturing within a week)
fall below 30%.
–300
0
300
600
900
–1
0
1
2
3
–
10
0
5
15
20
daily liquidity to their shareholders, allowing redemptions at their daily-close net asset value (NAV). But the
value of their assets can be quite sensitive to sizeable liquidations. Liquidating some of these assets to meet
redemptions, by offloading them to dealers, can be difficult at short notice and may need to occur at a discount.
This is especially so for CPs or CDs that are typically held to maturity. Hence, when many investors redeem their
shares simultaneously, this can adversely affect the value of the fund shares for the remaining investors. This “first-
mover advantage” creates incentives akin to depositors in bank runs: investors have an incentive to move
their money out before others do; and the higher the risk of redemptions, the more investors will try to exit
ahead of others.
Stress for prime funds and commercial paper on dealers’ balance sheets Graph 2
Minimum NAV for prime
institutional funds1
Minimum WLAs for prime
institutional funds2
Weighted average maturity of
portfolio holdings
Net positions of primary
dealers
USD Per cent Days USD bn
Feb 20 Apr 20 Feb 20 Apr 20 Feb 20 Apr 20 Feb 20 Apr 20
Institutional funds:
Government Prime
Commercial paper
The vertical line in the fourth panel indicates 18 March 2020 (the establishment of the Fed Money Market Mutual Fund Liquidity Facility, MMLF).
1 Minimum daily mark-to-market net asset value (NAV) of all prime institutional funds. Prime institutional funds trade on these values. 2
Minimum weekly liquid assets (WLAs) of all prime institutional funds.
Sources: Federal Reserve Bank of New York; Crane Data; authors’ calculations.
In mid-March, the risk of a run on prime funds intensified, exposing some of the fragilities. As funds faced
significant stress due to heavy redemptions, the NAVs of some prime funds deteriorated rapidly (Graph 2, first
panel).3 Some funds saw their weekly liquid assets (WLAs) falling below the 30% regulatory lower bound (second
panel). As their weekly liquidity positions deteriorated, the funds approached a point where the imposition of
redemption gates became a possibility. Faced with redemptions and a risk of further outflows, managers sought
to offload their holdings of CP and other illiquid short-term assets, rather setting a precedent of locking in
investors. And, to preserve the liquidity of their portfolios, they shed longer-maturity assets and rolled them over
into shorter maturities. This improved the liquidity and decreased the average maturity of their holdings (second and
third panels).
Funds’ demand for liquidity is typically met by dealers. However, dealers faced difficulty absorbing the
assets shed by prime funds, as they were reaching limits to further balance sheet expansion, not least due to large
amounts of other securities they had been taking into their inventories (Schrimpf, Shin and Sushko (2020)). This
led to severely impaired market functioning in mid-March, as dealers were less willing to warehouse risk outside of
matched trades. This, in turn, exacerbated the stresses in funding markets that depend on prime MMFs as
marginal lenders. Activity in CP and CD markets came close to a halt,
3 By 24 March, the minimum NAV dropped to cents on the dollar – a notable deterioration, but less dramatic than the 97 cents on
the dollar on 16 September 2008, when the Reserve Primary Fund broke the buck.
24
27
30
33
36
0
6
12
18
24
24
27
30
33
36
primary issuance dwindled, and corporate and financial issuers struggled to roll over funding. Unsecured funding
costs for banks and corporates rose substantially, even for the most creditworthy borrowers.
Dealers began to expand their CP inventories only after the announcement of the Fed’s Money Market Mutual
Fund Liquidity Facility (MMLF) on 18 March (Graph 2, fourth panel). This facility is intended as a way for the
Fed to extend loans to dealers to purchase eligible assets from By mid-April, following successive measures
by the Fed to improve funding conditions in core money markets, prime funds again began to see modest inflows.
In this context, they also started to increase the maturity of their holdings, in an effort to balance demand for
liquidity with maintaining yields on their portfolio.
Risk-free interest rates tumble as government MMFs face massive inflows
The other side of the coin of the scramble for liquidity were heavy inflows into government MMFs. These inflows
reflected not only a reallocation away from prime funds, but a widespread “dash for cash”, driven by divestments
from other less liquid asset classes. The desire to be more liquid arose from the heightened uncertainty key economic
agents faced regarding their cash flows, cash management needs, as well as margin calls. By end-March,
government and Treasury MMFs saw inflows in excess of $800 billion, or about 30% of their assets under
management. The ensuing investment needs of fund managers pushed T-bill rates towards zero. Similarly, repo
rates for the safest collateral tumbled towards zero, with a fair amount of overnight transactions even occurring at
negative rates. Some government MMFs stopped accepting inflows during this period (eg several Treasury MMFs
closed to new investors on 31 March). The situation normalised somewhat around end-March, on the back of
aforementioned measures by the Federal Reserve and the increased supply of assets sought by government MMFs
due to heavy T-bill issuance.
Shifts in money market funds’ portfolio holdings
According to granular MMF portfolio data, government MMFs sought to purchase the safest assets. They expanded
their holdings of T-bills and agency debt (Graph 3, left-hand panel). And, in repo investments, they mostly
expanded their Treasury reverse repos (lending cash against Treasuries as collateral) in the cleared repo segment
(via the Fixed Income Clearing Corporation (FICC)), by more than $50 billion. At the same time, they curtailed
their reverse repo positions with dealers by more than is usual at quarter-ends (times when dealers typically cut
back their exposures for regulatory reporting reasons). This was another indication of dealers’ balance sheet
constraints during this period: the cleared segment is more attractive for dealers because it is less capital-intensive
due to netting, which in turn may explain the substitution towards the FICC and away from bilateral reverse repos
in this episode.
The Fed’s overnight reverse repo (RRP) facility also proved to be an important release valve for rapidly rising
MMF cash balances amid the surge in demand for safe investment In normal conditions,
MMFs prefer to place funds in the market, not least to preserve their relationships with dealers. The Fed’s facility, on
the other hand, typically only serves as an outside option, in particular at quarter- and year-ends when dealers
tend to pull back. But, given the stressed conditions and lack of attractive investments in the market, the take-up
of the Fed’s facility moved up to $285 billion by end-March, up from $64 billion in the previous quarter-end and
the highest since year-end 2017. By turning to the Fed’s RRP facility, which at the time was paying zero interest,
government MMFs were essentially accepting 0% returns, while also waiving management fees, all in an effort to
avoid negative rates of return. Absent the facility, increased demand for safety may well have pushed risk-free rates
deeper into negative territory.
4 On 14 April, another programme, the Commercial Paper Funding Facility (CPFF), under which the Fed directly purchases three- month CP
from issuers, went operational. The pricing is OIS +110 bp for A1-rated CP and OIS + 200 bp for A2-rated CP.
5 The Fed’s overnight RRP facility was introduced in 2013 as a tool to provide a firm floor for key money market rates in an
environment of excess liquidity, thereby helping policy rates lift off from the lower bound. The set of eligible counterparties is significantly
broader than that in conventional central bank repo operations and also includes MMFs.
Prime MMFs, in turn, made three key portfolio adjustments in this period. First, to accommodate
outflows, they curtailed their repo lending, both with dealers and in the cleared repo segment (Graph 3, centre
panel). Second, to prepare for the risk of future redemptions, they shed less liquid and riskier longer-dated
instruments, such as term CP and CDs, in favour of T-bills, agency debt and reverse repos (both via cleared repo
and the Fed’s RRP facility). Third, they significantly shortened the maturity of their holdings of unsecured debt,
such that the share of overnight unsecured investments rose by around 7 percentage points (Graph 3, right-
hand panel). The drop in portfolio duration mostly came at the expense of term instruments issued by banks,
which represent the largest part of their holdings. Holdings of non-financial CP by prime MMFs exhibited different
dynamics, with a rise of both overnight and longer- dated instruments (possibly as funds sought to balance liquidity
and yield considerations).
Money market fund portfolio holdings and maturity distribution
March vs February 2020 Graph 3
Government and Treasury fund
holdings
Prime fund holdings Change in maturities across types1
USD bn USD bn Percentage points
Feb 20
Treasury
Mar 20
Overnight RRP
Feb 20
Financial unsec
Mar 20 Financial
rev
repo
Financial
unsec
Non-
financial
unsec
Agency FICC
Financial rev repo
Non-financial unsec
Other Overnight
2–7 days
8–30 days
>30 days
FICC = Fixed Income Clearing Corporation; financial rev repo = reverse repos with financial institutions other than the New York Fed (overnight RRP) and
the FICC; financial unsec = unsecured instruments issued by financial institutions (CP, CD, time deposits etc); non-financial unsec =
unsecured instruments issued by non-financial institutions (mostly commercial paper).
1 Difference in the share of holdings by government, Treasury and prime MMFs within each maturity bucket: March versus in February 2020. Sources:
Crane Data; authors’ calculations.
Implications for bank funding costs
The withdrawals of MMFs from providing term funding to banks and corporates and the freeze of CP/CD markets
translated into a persistent widening of US dollar LIBOR-OIS spreads. By mid-March, the latter widened to
levels second only to those during the GFC (Graph 1, third panel), despite the fact that, unlike the GFC, the banking
system was not the main source of distress (also see Aldasoro et al (2020)).6
A key reason is that CP/CD rates have come to play an important role in the determination of LIBOR. Post-
GFC, interbank deposits, the traditional underpinning of interbank offered rates (IBORs), such as
6 Corporates rushing to draw on their contingent credit lines with banks ($230 billion between 5 March and 13 April, according to market
estimates) also created pressure on banks. On the other hand, while metrics of bank credit risk, such as CDS spreads, temporarily widened in
mid-March, they narrowed quickly thereafter and so do not appear to have constituted the primary drivers of persistently wide LIBOR-
OIS spreads.
3,200
2,400
1,600
800
0
1,000
750
500
250
0 –8
–4
0
4
8
ak
LIBOR, no longer serve as the major marginal source of term funding for banks. Instead, unsecured
instruments like CP/CD, held by non-bank institutional investors such as MMFs, constitute the most important
unsecured wholesale funding source for banks. The health of CP/CD markets is therefore an important barometer
of bank funding conditions. Moreover, reflecting the lack of interbank transactions, banks’ submissions to IBOR-
style benchmark interest rates nowadays mostly rely on funding costs from CP/CD and other related markets as
inputs (via the so-called waterfall methodology).
The widening of the LIBOR-OIS spread signalled tightening of financial conditions exactly when the Fed
aimed to provide stimulus via cuts in interest rates and lending programmes. With dealers’ intermediation
capacity to step in as buyers of illiquid paper impaired, the Fed took over this function via its MMLF facility.
Priced at 100 bp over the Fed’s discount window rate (25 bp) for lending against CP collateral, the MMLF
provided an implicit rate ceiling on CP. Aided by the Fed’s actions, markets started to heal gradually, with flows
into prime MMFs recovering slightly in late April, a week after the Fed began to directly purchase three-month CP
from issuers via its Commercial Paper Funding Facility (CPFF). By the first week of May, LIBOR-OIS spreads
compressed below 50 bp.
Some policy considerations
A surge in demand for liquidity by the non-bank sector precipitated strains in short-term dollar funding markets
during the Covid-19 crisis. The MMF sector became strained, which diverted funding away from core unsecured
funding markets. The Fed’s swift response to backstop the MMF industry for a second time in the past 12 years
stabilised funding markets, thereby helping to avert a full-blown run on the fund sector. The episode was also a
reminder that disruptions to short-term unsecured funding markets can quickly spill over to other financial
market segments and to the real economy through their effects on widely used interest rate benchmarks.
Nevertheless, broader policy questions remain. First, the events in March showed that the 2016 reforms
did not extinguish completely the MMF redemption channel in exacerbating money market stresses. Hence, it
will be important to review the lessons from the episode and assess the resilience of the MMF sector going forward.
Second, in the light of the growing importance of non-bank financial investors for conditions in money markets in
general, the extent to which they may participate in central bank facilities, as well as the modalities of that
access, remain open questions. Third, the central bank balance sheet (once again) acted as an important buffer,
accommodating demand for safety coming from the non- bank sector in the Covid-19 crisis. This raises broader
questions about the systemic benefits and costs of facilitating access to safe central bank liabilities for a wider set of
players.
References
Aldasoro I, Fender I, Hardy B and N Tarashev (2020): “Effects of Covid-19 on the banking sector: the
market’s assessment”, BIS Bulletin, no 12, May.
Bank of England (2020): Interim Financial Stability Report, May.
Eren, E, A Schrimpf and V Sushko (2020): “US dollar funding markets during the Covid-19 crisis – the
international dimension”, BIS Bulletin, no 15, May.
Huang W and E T
Schrimpf A, H S Shin and V Sushko (2020): “Leverage and margin spirals in fixed income markets during the
Covid-19 crisis”, BIS Bulletin, no 2, April.
áts (2020): “The CCP-bank nexus in the time of Covid-19”, BIS Bulletin, no 13, May.
Previous issues in this series
No 13
11 May 2020
The CCP-bank nexus in the time of Covid-19 Wenqian Huang and Előd Takáts
No 12
7 May 2020
No 11
5 May 2020
Effects of Covid-19 on the banking sector: the
market’s assessment
Releasing bank buffers to cushion the crisis – a
quantitative assessment
Iñaki Aldasoro, Ingo Fender, Bryan
Hardy and Nikola Tarashev
Ulf Lewrick, Christian Schmieder,
Jhuvesh Sobrun and Előd Takáts
No 10
28 April 2020
Covid-19 and corporate sector liquidity Ryan Banerjee, Anamaria Illes,
Enisse Kharroubi and José-Maria
Serena
No 9
24 April 2020
No 8
21 April 2020
No 7
17 April 2020
No 6
14 April 2020
No 5
7 April 2020
No 4
6 April 2020
Buffering Covid-19 losses – the role of
prudential policy
Identifying regions at risk with Google Trends:
the impact of Covid-19 on US labour markets
Macroeconomic effects of Covid-19: an early
review
The recent distress in corporate bond
markets: cues from ETFs
Emerging market economy exchange rates and
local currency bond markets amid the Covid-
19 pandemic
The macroeconomic spillover effects of the
pandemic on the global economy
Mathias Drehmann, Marc Farag,
Nikola Tarashev and Kostas
Tsatsaronis
Sebastian Doerr and Leonardo
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Frederic Boissay and Phurichai
Rungcharoenkitkul
Sirio Aramonte and Fernando
Avalos
Boris Hofmann, Ilhyock Shim and
Hyun Song Shin
Emanuel Kohlscheen, Benoit Mojon
and Daniel Rees
No 3
3 April 2020
Covid-19, cash, and the future of payments Raphael Auer, Giulio Cornelli and
Jon Frost
No 2
2 April 2020
No 1
1 April 2020
Leverage and margin spirals in fixed income
markets during the Covid-19 crisis
Dollar funding costs during the Covid-19 crisis
through the lens of the FX swap market
Andreas Schrimpf, Hyun Song Shin
and Vladyslav Sushko
Stefan Avdjiev, Egemen Eren and
Patrick McGuire
All issues are available on our website .
