Money Market Instruments: T-Bills, Commercial Paper, Repos & More

Published: April 8, 2026

Article by Ryan O'Connell, CFA, FRM

Money market instruments are the foundation of short-term financing in the global financial system. These securities — with maturities of one year or less — provide corporations with working capital, give investors a safe place to park cash, and enable the Federal Reserve to implement monetary policy. Whether you’re a corporate treasurer managing liquidity, a portfolio manager building a cash allocation, or studying for the CFA exam, understanding money market instruments is essential. This guide covers every major instrument type, how they’re priced, and how to analyze their yields.

What Are Money Market Instruments?

Money market instruments are short-term debt securities with original maturities of one year or less. They represent the short end of the fixed income universe and are characterized by high liquidity, low credit risk (for most instruments), and yields that track short-term interest rates.

Money market instruments serve several critical functions in the financial system:

• Liquidity management — Corporations and financial institutions use money markets to invest excess cash or borrow for short-term needs
• Monetary policy transmission — The Federal Reserve uses money markets to influence short-term rates
• Benchmark rates — Money market yields like the federal funds rate and Treasury bill rates serve as reference points for pricing other securities
• Risk-free investing — Treasury bills and government money market funds provide safe returns for investors

The money market encompasses Treasury bills, commercial paper, negotiable certificates of deposit, bankers acceptances, repurchase agreements, federal funds, and Eurodollar deposits. Each instrument has distinct characteristics, but all share the common feature of short maturity and high liquidity.

Treasury Bills

Treasury bills (T-bills) are discount securities issued by the U.S. Treasury with maturities of 4, 8, 13, 17, 26, and 52 weeks. They are the benchmark short-term instrument globally, setting the floor for money market yields because they carry virtually zero credit risk.

Unlike coupon-bearing securities, T-bills are sold at a discount to face value and mature at par. The difference between the purchase price and face value represents the investor’s return. For example, a $10,000 T-bill purchased at $9,850 returns $150 at maturity.

T-bills are the most liquid money market instruments and serve as collateral in repurchase agreements. Their yields form the foundation of the risk-free rate used in asset pricing models like the CAPM. For detailed coverage of T-bills and other Treasury securities, see our guide on U.S. Treasury Securities.

Commercial Paper

Commercial paper (CP) is short-term unsecured debt issued by corporations to fund working capital and other short-term obligations. It is the largest segment of the money market, with outstanding volume exceeding that of Treasury bills at times.

CP issuers include large corporations (GE, Coca-Cola, Apple), financial institutions, and asset-backed conduits. Credit quality is essential — investors rely on ratings from agencies like Moody’s and S&P:

Commercial paper is distributed through two channels: direct paper (sold by the issuer to investors, common among large financial companies) and dealer paper (sold through securities dealers). To mitigate rollover risk — the risk that maturing CP cannot be refinanced — most issuers maintain backup credit facilities with banks.

Asset-backed commercial paper (ABCP) is issued by special purpose vehicles backed by receivables such as credit card balances, auto loans, or trade receivables. ABCP carries the credit quality of the underlying assets rather than a corporate issuer, providing an alternative funding channel for financial institutions.

Negotiable Certificates of Deposit

Negotiable certificates of deposit (CDs) are time deposits issued by banks that can be traded in the secondary market. Unlike retail CDs, negotiable CDs typically have denominations of $1 million or more and are issued to institutional investors.

The key feature distinguishing negotiable CDs from ordinary bank deposits is marketability — holders can sell them before maturity rather than incurring early withdrawal penalties. This liquidity makes them attractive to money market funds and corporate treasurers.

Eurodollar CDs — dollar-denominated CDs issued by banks outside the U.S., primarily in London — typically yield more than domestic CDs for three reasons: they are not covered by FDIC insurance, the issuing banks face no U.S. reserve requirements, and investors bear some sovereign risk. These higher yields make Eurodollar CDs popular with institutional investors willing to accept additional risk.

Bankers Acceptances

A bankers acceptance (BA) is a time draft guaranteed by a bank, primarily used to finance international trade. When an importer needs to pay a foreign exporter, a bank “accepts” a draft drawn on the importer, thereby guaranteeing payment at maturity. The accepted draft becomes a negotiable instrument that can be sold in the secondary market.

The mechanics work as follows: An importer arranges for their bank to issue a letter of credit. The exporter ships goods and presents shipping documents to the bank. The bank “accepts” a time draft, creating a BA that the exporter can hold to maturity or sell at a discount in the secondary market.

BAs were historically a major money market instrument, but their use has declined significantly in recent decades. The growth of commercial paper markets, improvements in trade credit, and disintermediation have reduced BA issuance. Today, BAs represent a small fraction of the money market compared to their prominence in earlier eras.

Repurchase Agreements

A repurchase agreement (repo) is a collateralized short-term loan structured as a sale of securities with an agreement to repurchase them at a higher price. Repos are the primary tool for short-term funding among dealers, banks, and the Federal Reserve.

From the borrower’s perspective, a repo provides cash by temporarily selling securities. From the lender’s perspective, a reverse repo is a secured investment with the securities as collateral. The difference between the sale price and repurchase price represents the interest (repo rate).

The repo rate depends on several factors: the quality of collateral (Treasury repos trade at lower rates than corporate bond repos), the term of the agreement, and overall market liquidity conditions. During the 2008 financial crisis and the September 2019 repo spike, repo rates surged as counterparty concerns and liquidity shortages disrupted normal trading.

For a comprehensive treatment of repo mechanics, haircuts, and tri-party arrangements, see our dedicated article on Repurchase Agreements.

Federal Funds

The federal funds market is where depository institutions lend reserves to each other, typically overnight, to meet reserve requirements or manage liquidity. The federal funds rate — the interest rate on these unsecured interbank loans — is the Federal Reserve’s primary policy rate and the most important short-term interest rate in the economy.

The Fed influences the fed funds rate by adjusting the supply of reserves in the banking system. When the Fed wants to lower rates, it adds reserves; when it wants to raise rates, it drains reserves. The fed funds rate then transmits throughout the economy, affecting borrowing costs for consumers and businesses.

While most fed funds transactions are overnight, term fed funds (1 week to 1 year) also exist. The fed funds market is distinct from the repo market: fed funds are unsecured, while repos are collateralized. This means fed funds rates typically exceed repo rates, reflecting the additional credit risk.

Eurodollar Deposits

Eurodollar deposits are U.S. dollar-denominated deposits held in banks outside the United States. Despite the name, Eurodollars are not limited to Europe — the term refers to any offshore dollar deposit, whether in London, Tokyo, or the Cayman Islands.

The Eurodollar market emerged in the 1950s and 1960s as foreign banks and corporations sought to hold dollar deposits outside U.S. regulatory jurisdiction. Today, it is one of the largest money markets globally, with trillions of dollars in deposits.

LIBOR (London Interbank Offered Rate) was historically the benchmark rate for Eurodollar deposits and served as the reference rate for trillions of dollars in loans, derivatives, and other contracts. Following manipulation scandals and declining transaction volumes, regulators mandated a transition away from LIBOR.

The Secured Overnight Financing Rate (SOFR) has replaced LIBOR as the primary U.S. dollar benchmark. SOFR is based on actual overnight repo transactions backed by Treasury securities, making it more robust and less susceptible to manipulation than LIBOR. Most new contracts now reference SOFR rather than LIBOR.

Money Market Mutual Funds

Money market mutual funds are investment vehicles that pool investor capital to purchase a diversified portfolio of money market instruments. They offer individual and institutional investors access to money market returns with daily liquidity and professional management.

Money market funds are regulated under SEC Rule 2a-7, which imposes strict requirements on credit quality, maturity, and diversification. Rule 2a-7 funds must maintain a weighted average maturity (WAM) of 60 days or less and a weighted average life (WAL) of 120 days or less.

Government money market funds, which invest exclusively in Treasury and agency securities, remain the safest option for investors seeking stability. Prime funds typically offer higher yields but carry modest credit risk and, for institutional share classes, NAV variability.

How to Analyze Money Market Yields

Money market instruments use several yield conventions that differ from standard bond yields. Understanding these conventions is essential for comparing instruments and making investment decisions.

The bank discount yield is the traditional quoting convention for T-bills and some commercial paper. It understates the true return because it divides the discount by face value (not the purchase price) and uses a 360-day year. For this reason, other yield measures are often more useful for comparison.

The bond equivalent yield converts money market yields to a basis comparable with coupon bonds. It uses a 365-day year and is based on the purchase price rather than face value, providing a more accurate measure of investor return.

Day count conventions vary across money markets:

• Actual/360 — Most U.S. money market instruments (T-bills, CP, repos, fed funds)
• Actual/365 — UK commercial paper and some international markets
• 30/360 — Federal Farm Credit System securities (exception to the norm)

Capital Market vs Money Market Instruments

The distinction between money markets and capital markets is fundamental to understanding fixed income investing. While both involve debt securities, they serve different purposes and attract different investors.

Money market instruments are priced primarily on credit quality and short-term rate expectations. Capital market instruments are more sensitive to long-term interest rate movements and require analysis of duration and convexity. For more on bond pricing and capital market analysis, see our guide on Bond Pricing and Yield to Maturity.

Limitations

While money market instruments are generally low-risk, they have important limitations investors should understand:

1. Credit Risk Exists — While T-bills are risk-free, commercial paper, negotiable CDs, and prime money market funds carry credit risk. The collapse of Lehman Brothers demonstrated that even top-rated issuers can default.

2. Yield Calculation Complexity — Different instruments use different conventions (discount yield, BEY, Actual/360, etc.), making direct comparisons difficult without conversion.

3. Low Real Returns — Money market yields often barely exceed inflation, meaning real returns can be negative. Investors seeking wealth accumulation need capital market exposure.

4. Rollover Risk — Short maturities mean constant reinvestment. If rates fall, investors must reinvest at lower yields. Issuers face the opposite risk — they may not be able to refinance maturing paper.

5. Liquidity Can Evaporate — Secondary markets for commercial paper and bankers acceptances are thin. During stress periods, bid-ask spreads widen dramatically or markets freeze entirely.

Common Mistakes

Investors and practitioners often make these errors when dealing with money market instruments:

1. Confusing Money Market Funds with Bank Accounts — Money market mutual funds are not FDIC-insured. Government funds are very safe but not guaranteed; prime funds carry credit risk and can lose value.

2. Ignoring Credit Quality in Prime Funds — Higher-yielding prime funds hold commercial paper and negotiable CDs. In normal times, the yield pickup seems attractive. In a crisis, these funds can experience losses.

3. Misunderstanding Discount vs. Add-On Yields — Bank discount yield understates true returns. Investors comparing T-bill discount yields directly to bond yields or CD add-on yields will make incorrect decisions.

4. Assuming All Money Market Rates Move Together — While short-term rates are correlated, spreads between instruments (e.g., CP vs. T-bills, fed funds vs. repo) vary based on credit conditions, liquidity, and regulatory factors.

5. Overlooking Day Count Conventions — A 5.00% rate using Actual/360 is not the same as 5.00% using Actual/365. Ignoring conventions leads to incorrect yield comparisons and pricing errors.

6. Underestimating Systemic Risk — Money markets are interconnected. Stress in one segment (repo markets, commercial paper) can quickly spread to others, as seen in 2008 and briefly in March 2020.