Money Market
The money market is the wholesale market for short-term debt with maturity of one year or less. It supplies liquidity and funding for governments, banks, and large corporations. Core instruments are Treasury bills, bank-accepted bills, negotiable certificates of deposit, commercial paper, repurchase agreements, and the units of money market funds. Rates pivot off the central bank's policy rate, the cash rate in Australia and the federal funds rate in the United States.
Why it matters
Think of the money market as the cash-management layer of the financial system. A super fund with A$200 million arriving on Friday that must be paid out on Monday will not buy a 10-year bond. It will roll cash into a 7-day bank bill or a negotiable CD that returns face value plus a small yield. The same plumbing lets a bank fund tomorrow's loan book and a corporate treasurer park surplus cash overnight. The shorter the maturity, the closer the yield sits to the central bank's policy rate.
Formulas
Worked examples
A corporate treasurer has A$50 million of surplus cash to deploy for 30 days. The treasurer buys a portfolio of 30-day bank-accepted bills issued by the four major Australian banks at a yield of per annum.
Settlement price per A$1 of face value . Total outlay \approx \text{A\}49{,}832{,}000$ for A$50 million face. Interest earned at maturity \approx \text{A\}168{,}000$, well above an at-call bank account, with negligible default risk because the bills are bank-accepted.
Westpac needs to fund a A$200 million corporate loan that draws down next week. The bank issues A$200 million of 180-day negotiable CDs at .
Issue price per A$1 . Westpac raises about A$195.8 million today and repays A$200 million in 180 days. The CD trades on the secondary market, so the original buyer can sell before maturity if cash is needed.
Common mistakes
- ✗Money market instruments are risk-free. They carry very low credit risk but not zero risk. The 2008 collapse of Lehman Brothers triggered the Reserve Primary Fund to break the buck, and the RBA had to expand its repo eligibility list during COVID-19 to keep Australian money markets functioning.
- ✗Money market and capital market are the same thing. The dividing line is maturity. Money market is one year or less, capital market is longer than one year. The same issuer (e.g. Commonwealth of Australia) appears in both, with Treasury Notes in the money market and Treasury Bonds in the capital market.
- ✗Yields are quoted on the same basis everywhere. Conventions differ. Australian bank bills use simple interest on a 365-day year, US T-bills use a discount basis on a 360-day year, and euro money markets use ACT/360. Mixing conventions produces real errors when comparing yields.
Revision bullets
- •Short-term debt with maturity of one year or less
- •Core instruments are T-bills, bank bills, CDs, CP, MMFs
- •High liquidity, low credit risk, low return
- •AUD convention is simple interest ACT/365
- •USD T-bill convention is discount ACT/360
- •Yields anchor on the central bank policy rate
Quick check
Money market instruments by definition have an original maturity of
Why are Australian bank bill yields and US T-bill yields not directly comparable without adjustment?
Connected topics
In learning paths
Sources
- Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.Chapter 4 introduces money market instruments, day-count conventions, and the distinction between discount and add-on yield quotation.
- Reserve Bank of Australia. The Domestic Market for Short-term Debt Securities. RBA Bulletin, September 2011.Survey of the Australian money market structure covering bank bills, NCDs, Treasury Notes, and commercial paper issuance patterns.
- Reserve Bank of Australia. Bank Funding in 2024. RBA Bulletin, April 2025.Recent overview of Australian bank short-term wholesale funding via certificates of deposit, bank bills, and offshore commercial paper.
- Australian Office of Financial Management. Treasury Notes. AOFM, accessed 2026.Official description of AGS short-term discount securities, including the competitive tender process and typical 3 to 12-month tenors.
- Fabozzi (2021)Fabozzi, Frank J. Bond Markets, Analysis, and Strategies. 10th ed. MIT Press, 2021. ISBN 978-0-262-04627-3.Standard fixed-income textbook with detailed treatment of money market instruments, yield conventions, and short-term funding mechanics.