US Rates Watch: Fed funds drop: looking less temporary

Research evidence excerpt

US Rates Watch: Fed funds drop: looking less temporary

FHLB DN < FF => FHLBs lend in FF

The slowness in FHLB debt paydowns and low demand for advances means more cash

can be allocated to FHLB investments. The $20b increase in FF volumes can likely be

attributed to FHLBs having excess cash to lend and taking advantage of the EFFR- O/N

DN spread (currently ~11.5bp). This spread implies FHLBs can likely sustain elevated FF

lending longer-term and even allow for FF to decline further as long as the spread is

attractive (i.e. >5+bp). FHLB liquidity portfolios are likely lending more in FF & less in

repo due to the widening gap between these money market rates.

Front-end inflows => cash / collateral imbalance

Contributing to the softness in funding has been (1) low TGA balances (2) significant

inflows into the front-end, esp from money funds.

TGA: TGA has declined $280b from its April peak. TGA outflows are likely to continue

until the mid-June tax date based on typical post April seasonality (Exhibit 5).

MMFs: MMF have seen >$130b in inflows MTD following net outflows in April. As seen

in Exhibit 6, post tax-date inflows are more significant than prior years. We attribute this

to some catch up following a weak start to ‘26, macro uncertainty, and the rapid rise of

rates further out the UST curve (i.e. investors avoiding fixed income losses further out

the curve). Cash migrating to the front end is also seen across broader fixed income

flows (see: Flows & positioning report).

It will likely take several weeks for TGA to rebuild (post tax date) & for MMF inflows to

cool, given ongoing elevated macro uncertainty & bond fund losses from the rate move.

Excess cash likely to stay near-term

This excess of cash is likely to drain naturally when the GSE float period ends early next