The US short-term treasury market has witnessed a new pattern
This year, the inflow of funds into US money market funds has largely slowed down. The demand for short-term treasury bonds has weakened, and the yield has risen. The uncertainty in the short-term financing market has increased.
The fundraising capacity of money market funds has sharply declined, and the demand for short-term bonds has weakened.
This year, the funds flowing into the US money market funds have ended the situation of significant net inflows in the previous two years. Statistical data shows that in the first three quarters of this year, the net inflow of money market funds was only $158 billion. In comparison, the net inflows in 2024 and 2025 were both over $800 billion, and the decline in the heat of funds this year was very significant. Analysts from Citibank stated that money market funds lack additional funds, and their overall investment allocation strategies will be more cautious, further suppressing short-term bond buying.
The weak inflow of funds directly impacts the short-term treasury bond market. Money market funds are the core purchasing force for US short-term treasury bonds. Insufficient funds mean that the new buying volume in the market has largely decreased. Although money market funds are still increasing their holdings of treasury bonds, the increase in holdings has shrunk. Data shows that as of August, the holdings of treasury bonds by money market funds only increased by 4% compared to the end of 2025, while the increase for the entire year of 2025 was as high as 18%. The trend of demand contraction is very clear.
The flow of funds has shifted.
The performance of the US stock market has diverted a large amount of conservative funds. This year, the S&P 500 index has risen by 13% and the Nasdaq index has increased by 18%. The considerable returns in the stock market have led investors who originally preferred to allocate funds to low-risk money funds to adjust their investment directions.
The preference of investors for money funds and treasury bonds lies in their zero-risk and high liquidity advantages. However, in the profitable stock market environment, funds no longer flock to safe-haven assets, and the demand base for short-term debt markets has been weakened. The change in the flow of funds has also made the pricing logic of short-term treasury bonds no longer simply follow the policies of the Federal Reserve.
The supply of government bonds has expanded, and the fund allocation strategy has become more conservative.
While the demand side remains weak, the supply side of US Treasuries has been largely increasing. The two-way pressure has further pushed up the yields of short-term bonds. The issuance scale of short-term US Treasuries in the fourth quarter has largely increased. In October, the single-month issuance amount reached $225 billion, and $160 billion will be issued again in November. The already weak market demand is unable to absorb a large amount of supply. Industry institutions are concerned about this, and the Treasury Department is currently focusing on the issuance of short-term bills, but the largest demand in the market, money funds, is cooling down.
Markets are less certain about what the Federal Reserve will do with interest rates. Interest rate futures data show that the market predicts that the Federal Reserve will raise interest rates by 25 basis points this year and will have two more rate hikes in 2027. The expectation of high interest rates continuing is constantly strengthening. Under the environment of repeated fluctuations in the interest rate expectation, the allocation thinking of fund managers is generally becoming more conservative. Short-term bonds have a short maturity cycle, and after the Federal Reserve raises interest rates, they can be quickly reinvested at a higher yield, effectively avoiding the loss from rising interest rates.
Year-end liquidity may see a recovery.
The short-term bond market has experienced increased volatility and rising yields, but currently, the overall financial market has not shown any systemic risks. As a barometer of market liquidity, the repo market is operating smoothly, and there is no phenomenon of tight funds. Analysts believe that there is no need to panic over the short-term market fluctuations.
From the regular patterns of previous years, the fourth quarter is often a window period for the return of money fund funds. At the end of the year, tax payments, rebalancing of investment portfolios, and the rising demand for liquidity reserves will drive investors to re-invest in cash assets, which is expected to alleviate the demand pressure in the short-term bond market.