For the first year since 2001, investors moved back into money market mutual funds in 2005, with net sales of $127 billion. (See: Federal Reserve flow of funds account F206.)

The largest flows into money market funds came from U.S. households ($47.7 billion) and funding corporations ($58.4 billion).

The return of investors to money market funds was clearly the result of the Federal Reserve policy of increasing short-term interest rates, combined with the flattening of the yield curve due to buying pressure on longer-term fixed income securities resulting from the trade deficit.

Investment by funding corporations picked up in the last quarter of 2005 to an annual rate of $168.6 billion. Much of the money of funding corporations is connected to cash collateral held on short-sales of securities.

Presumably, collateral put up by speculators against long-bonds (gambling that long-bond prices would fall) was being channeled through funding corporations into money market funds, thereby helping to keep short-term rates down.

(See: “Just What Are Funding Corporations?“)


The Federal Reserve Flow of Funds Table F211 for Municipal Securities and Loans, shows that state and local government are issuing long-term bonds at record levels.

The main purchasers of municipal bonds are domestic individual investors that benefit from tax exemptions on municipal bond interest. The largest institutional purchasers are property-casualty insurance companies and money market funds.

The graph shows that total liabilities have increased since 1995 with much of new municipal debt being financed by the household sector.

Individuals Hold Government Debt
Individuals Hold Government Debt

The rate of increase in borrowing by State and Local Governments has more than tripled since 2000.

Foreign investors are not significant players in this market.


From the article, “Funding Corporations Are Major Buyers of Open Market Paper: Q3 2005“, the reader might infer that everybody understands what ‘Funding Corporations’ are, and for that I apologize.

If you never heard of ‘funding corporations’, don’t feel embarrassed. I worked for forty years in international capital markets, and I never heard of them either.

It turns out that the term ‘funding corporations’ is Federal Reserve Geek Speak: a term invented to cover a mixed bag of sources of funds that appear in Flow of Funds Accounts Table F131.

There is no color-coded version of Table F131 on this site, but the data can be found online at the Federal Reserve: Table F131 and Table L131.

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