Money Markets are markets for short-term loans (overnight - 1yr) and serve as the “plumbing of the financial system”. When they break down, financial crises tend to precipitate1.

  • Money markets are interconnected, changes in interest rate in one country affect other countries via arbitrage1
  • Money market reform in 2016 allowed for the freezing of prime money market fund withdrawals, which caused investors to shift from the prime funds into government funds which do not have this redemption gate1.

Secured Money markets

There are two major secured money markets: the Repo Market and the FX-swap market.

Unsecured money markets

Loans are based on credit worthiness, and therefore rely on ratings agencies to determine that worthiness1.

  • Certificates of Deposits: bank deposits that cannot be withdrawn until a maturity date
    • CD investors are rate sensitive and tend to diversify using CD funds
  • Commercial paper is debt issued by any party (not exclusively banks)
  • Federal funds market is an inter-commercial bank market for reserves on an overnight basis. This market has shrunk considerably post financial crisis do to regulation and investor wariness
    • Commercial banks also have less of reason to borrow reserves with the increased supply of reserves

1. Wang, J. J. Central Banking 101. (Joseph, 2021).