The Capital Markets

CHAPTER 8Money Markets

Randy Harrison and Paul Mandel

Much of the U.S. economy relies on the scale and efficiency of the money markets. This is one of the most important financial markets that keeps our U.S. government, our local governments, and agencies, corporations, banks, other financial institutions, and broker‐dealers functioning smoothly for the benefit of its stakeholders and clients. The U.S. money markets include capital markets debt instruments with maturities of one year and less. Enormous cash flows are transacted daily in money market products that are readily accepted by investors due to the money market's liquidity, short duration, and strong credit quality. The Federal Reserve Bank is a significant strategic participant in the U.S. money markets and through its actions implements interest rate policies that impact the broader capital markets, including the bond and stock markets as well as the foreign exchange market. The principal purpose of the money markets from an issuer's perspective is to enable the federal government and domestic corporations to fund their short‐term cash needs, principally working capital. Investors who seek short‐term investment securities known for high credit quality that typically can be quickly converted to cash look to the money markets. This chapter will focus on the most significant instruments that comprise the U.S. money markets: fed funds, repurchase agreements, Treasury bills, agency securities, commercial paper, certificates ...