December 14, 2018 / 10:13 PM / a year ago

MONEY MARKETS-Surge of cash eases U.S. dollar lending strain

* U.S. money funds take in record inflows in week -Lipper

* Some dollar funding costs fall due to cash spike (Adds background, quote)

By Richard Leong

NEW YORK, Dec 14 (Reuters) - A flood of cash swamped the U.S. money markets this week, reducing tension in the sector that had been constrained by the growing supply of Treasury bills and the Federal Reserve’s paring its bond holdings.

Investors poured a record $81 billion into U.S. money market funds this week as they withdrew a near-record $13 billion from bond funds and more than $46 billion from U.S. stock funds, the most ever, research service data firm Lipper said late on Thursday.

The stampede into money funds signaled investors’ nervousness as a result of the wild swings in global stock markets and evidence of slowing economic growth, analysts said.

“People are looking to lock in their returns or to preserve their capital for the year,” said Deborah Cunningham, chief investment officer of money markets at Federated Investment Management Co in Pittsburgh. “They don’t like anymore exposure in stocks and longer-dated bonds. They want to go into the safety of cash.”

The yields on money market funds, which are seen almost as safe as bank accounts, have increased in step with the Federal Reserve’s increasing key short-term rates since December 2015.

The seven-day average yield on taxable money funds rose to 1.90 percent in the week ended Dec. 11, up from 1.88 percent the week before, according to iMoneynet.

This compared favorably to U.S. stocks and bonds in 2018.

Year-to-date, the S&P 500 index has recorded a total loss of 0.9 percent, while a gauge on the U.S. bond market compiled by Bloomberg and Barclays has fallen 1.0 percent.

This week’s massive shift into cash provided some relief for Wall Street, which borrows heavily in money markets to fund loans and trades, and for banks to meet their reserve requirements.

A barometer on what banks pay each other to borrow excess reserves fell below what the Fed pays banks on excess reserves, or IOER, this week due partly on the surge in cash. The “effective,” or average, rate in the federal funds market was 2.19 percent on Thursday, while the IOER is currently 2.20 percent.

In the repurchase agreement market where Wall Street relies for overnight cash, overnight interest rates slipped to 2.30 percent. Last week, the overnight repo rate hit about 2.85 percent, the highest level since the height of the global credit crisis 10 years ago.

This week’s swell of cash may ebb as money funds typically experience outflows beginning in the middle of the month, Federated’s Cunningham said.

Reporting by Richard Leong; editing by Chizu Nomiyama and Leslie Adler

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