Jeff Snider would argue a premium is being paid for scarce collateral and UST’s etc are simply balance sheet tools these days. I recommend Jeff’s work as he looks at money matters more from the collateral side rather than the cash side. His writing can explain far better than I can. See Old work at Alhambra Investments. Now at Macro Plus Insider and has written for years at Real Clear markets. Thanks again Daniel for your work.

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Very nice post, Daniel. I’ve been looking into this too, and have a few thoughts:

- The market participants who could possibly benefit from the arbitrage are probably balance-sheet constrained (banks and dealers). We can see this by banks shedding deposits to MMFs and dealers’ constraint via (deteriorating) market liquidity.

- With this, the rate “gap” between funding markets and ON RRP take longer to close following a hike. Can see this in 1-month bill/ON RRP spread which the past three hikes have taken roughly 20 days to recover; MMFs (and other cash investors) rebalance their portfolio from Bills to ON RRP over this time. This is the main mechanism right now w/ bloated balance sheets per above.

- Participants without Fed access (asset managers, pensions), are a bit more agnostic between bills and MMFs given the fees/expenses of MMFs, but I think the recent growth of ON RRP speak to more rotation out of bills and into MMFs as well (which then deposit in ON RRP).

Still thinking through impacts of QT...more to come...

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Is there something preventing money-market mutual funds from expanding their balance sheets to do the arbitrage?

Is there a reason why depositors wouldn't trust their money with MMMFs right now? That would prevent the MMMFs from doing the arbitrage.

How much interest are MMMFs, in particular, paying to borrow overnight? Is it higher than the market rates? Is it higher than the ON RRP rate?

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