Federal Reserve Board research links prime money market fund flows to higher commercial paper issuance yields

The Federal Reserve Board published a FEDS Note analysing whether investor-flow-driven fragility in prime money market funds (MMFs) affects pricing and issuance in the primary commercial paper (CP) market. Using a flow-based funding fragility measure, the note finds that CP issuers face higher borrowing costs when their MMF counterparties experience greater redemption pressure, even outside crisis periods. The analysis combines confidential transaction-level primary-market CP data from The Depository Trust & Clearing Corporation with security-level prime MMF holdings from SEC Form N-MFP filings, covering December 2014 to March 2024 while excluding March to April 2020. In issuer-day regressions with controls and day fixed effects, a one-percentage-point increase in lagged funding fragility is associated with roughly a 0.3 basis point increase in CP issuance yields; splitting flows shows redemptions raise yields while inflows lower them. Issuer-month results indicate no statistically significant effects on issuance volumes, and maturity effects are not robust once issuer fixed effects are included. Pricing effects are stronger for issuers characterised as having weaker bargaining power, with additional yield increases of about 0.3 to 0.5 basis points under redemption pressure for longer-tenor, more dealer-dependent, or foreign-domiciled issuers.