Exhibit 1 - Treasury securities in money market funds (January 2023 to January 2024

Exhibit 1 - Treasury securities in money market funds (January 2023 to January 2024
Source: FRED

In Q1 2024, money market funds held about $2.6 trillion of Treasury securities, $2.1 trillion of which were T-Bills. Many of the largest money market funds are composed of about 30% U.S. Treasury bills.

T-Bill futures are specifically designed to track the performance of short-term U.S. Treasury bills. Since money market funds invest heavily in these government securities and use the 3-month T-bill as their benchmark, T-Bill futures provide a more direct hedge against interest rate fluctuations affecting these assets than other short-term interest rate futures from a basis perspective.

Although money market funds are associated with low volatility and risk, it is crucial to understand that they are not risk free. T-Bills are susceptible to interest rate risk, and their prices can change if the overall interest rate environment changes. With interest rate cuts on the horizon, currently issued T-Bills may trade higher. Money market investors should be mindful of how market conditions may impact their holdings.

T-Bill prices are inversely correlated with interest rates. When the Fed lowers rates, the yield on newly issued T-Bills will decrease since their returns are closely aligned with target rates. Existing T-bills, in comparison, will become more attractive due to their higher yields, potentially leading to an increase in their price. Money market funds holding T-Bills may see a decrease in the returns they can offer their investors. With a high proportion of T-Bills in money market funds, performance is closely tied to prevailing short-term interest rates.

Institutions with capital stored in money market funds can look to T-Bill futures to hedge their short-term interest rate risk. Consider the scenario where an investor is looking to lock in their short-term interest rate exposure to protect their money market fund investments. On August 23, 2024, the investor entered a long position in December 2024 T-Bill futures at 95.835, implying a 4.165% discount rate for the 13-week T-Bill auction on December 16, 2024

Exhibit 2 - T-Bill futures Settlement Prices (July 26, 2024, August 9, 2024, and August 23, 2024)

Exhibit 2 - T-Bill futures Settlement Prices (July 26, 2024, August 9, 2024, and August 23, 2024)
Source: CME Group

Assume a scenario where the Fed cuts rates aggressively and the target Federal Funds rate sits at 400 – 425 basis points by the time of the December 2024 TBF3 final settlement. Since T-Bill yields are closely aligned with interest rates, the discount rate for the 13-Week T-Bill auction in December will likely be in this range. Suppose that this discount rate for this auction is 4.125, implying a T-Bill futures price of 95.875 for the December 2024 contract.

The price of the futures contract went up four basis-points. With a dollar value of one basis-point change (DV01) of $25, the value of the position went up $100 per contract traded. The trader was effectively able to “lock in” a higher rate exposure, and protect themselves from the fall in short-term treasury yields.

As demonstrated, 13-Week U.S. Treasury Bill futures are an effective hedge for interest rate risk. With more favorable inflation reports and weakening job data, the market is primed for a pivot in monetary policy, favoring rate cuts. With the transparent and highly liquid marketplace at CME Group, standardized T-Bill futures contracts offer investors a value tool to mitigate their short-term interest rate risk.

Contract Specifications

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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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