Money market fund inflows plummet to 158 billion—Is short-term US Treasury liquidity flashing a warning sign?

English Trading News APP has noted that the inflow of investor funds into money market funds has slowed significantly this year, pushing up the yields on U.S. Treasury bills and potentially making the market more vulnerable to short-term funding issues.

According to data from TD Securities, total inflows into money market funds reached only $158 billion in the first three quarters of this year, much lower than the $823 billion for all of 2025 and $840 billion in 2024.

Analysts said the reduced inflows into money market funds have dampened demand for Treasury bills, driving up T-bill yields relative to the comparable Overnight Index Swap (OIS) in recent trading sessions. The OIS is a key money market benchmark reflecting market expectations for Federal Reserve rate hikes embedded in the swap market.

Sam Earl, U.S. Rates Strategist at Barclays, stated, “If money funds are not receiving these inflows, then they have to consider where to deploy their cash.”

However, money market funds remain net buyers of Treasury bills, though demand has clearly slowed. According to the latest data from the Investment Company Institute, as of the end of August, these holdings were up about 4% from the end of 2025, compared to an 18% increase for all of 2025.

Signs of Investor Concern

This slowdown in demand is beginning to show up in the relative pricing of Treasury bills, with investors demanding higher premiums to hold them.

On Monday, the yield on three-month U.S. Treasury bills rose to nearly 10 basis points above the three-month OIS, after touching the widest spread since September 2024 last week. For the six-month bill, the spread was 11.3 basis points on Monday, after reaching as high as 12.5 basis points last week—the highest since April 2025.

This spread measures the valuation of T-bills relative to the short-term Fed policy path implied by the market. Higher T-bill yields suggest that investors are demanding extra compensation to hold short-term Treasuries—instruments usually sought after for their liquidity and near risk-free status.

Nafis Smith, principal and Taxable Money Markets Head at Vanguard, said that this year’s strong U.S. equity market performance has weakened the incentive for investors to park money in cash, thus dampening fund flows into money market funds. The S&P 500 is up 13% this year, and the Nasdaq is up 18%.

Analysts say that apart from the slowdown in money fund buying, rising Treasury bill yields also reflect expectations of a surge in government debt supply in Q4 and expectations for further Fed rate hikes.

Barclays estimates that the Treasury will issue about $225 billion in bills in October and another $160 billion in November. With the Treasury flooding the market with short-term securities, this is expected to push yields higher. Long-end yields have also been rising, reflecting heavy corporate bond issuance to finance AI development, deficit spending in the U.S. and globally, and robust domestic economic growth.

Gennadiy Goldberg, Head of U.S. Rates Strategy at TD Securities, said, “The Treasury is very keen to concentrate more issuance at the front end of the curve with T-bills, but the biggest source of demand is slowing, which is concerning.”

If higher yields persist, it could shift capital flows across the entire short-term funding market. Should money funds withdraw capital from the overnight repo market to invest in higher-yielding T-bills as bill issuance ramps up, funding conditions could tighten, potentially pushing up repo rates and raising financing costs for dealers and market participants.

However, analysts say it is still too early to sound the alarm here. Money fund inflows typically accelerate in Q4, as investors accumulate cash ahead of year-end liquidity needs, tax payments, and portfolio rebalancing.

Interest Rate Uncertainty Dominates

Currently, higher Treasury bill yields further reflect increased market uncertainty over the direction of interest rates. LSEG estimates show U.S. rate futures have priced in one rate hike this year (25 basis points), and two more in 2027.

Money market fund managers often shorten portfolio duration when rates are expected to rise. Shorter-maturity debt matures faster, allowing managers to reinvest at higher yields as the Fed hikes rates.

Vanguard’s Smith stated, “All the ups and downs around rate hike expectations naturally create a motivation for a capital-preservation-focused money fund to keep a short duration amidst such uncertainty.”

According to TD Securities data, the weighted average maturity (WAM) of money market funds—the average time to maturity of the underlying securities—has fallen from a peak of 42 days in May to 36 days. This remains well above the low of just 15 days in 2022.

For now, movements in T-bill rates do not seem to indicate underlying funding stress.

Analysts noted that the repo market—usually the first place to show funding pressures—remains orderly. Treasury officials have repeatedly emphasized that even with a slight weakening, stablecoins and money market funds maintain strong demand for T-bills, but caution currently prevails.

Vanguard’s Smith said, “We’re seeing volatility at the front end that I think the market is not used to. This gives money funds a reason to keep durations short and seek higher risk premia.”