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The March issue of Crane Data's Money Fund Intelligence will be sent out to subscribers Friday morning. The latest edition of our flagship monthly newsletter features the articles: "Money on the Move? Keeping Up With Pending Changes," which estimates how much money will shift to various fund types and discusses other changes in the money fund world; "JP Morgan Sticks to Program; Announces Lineup Changes," about how JP Morgan is standing pat with its large Prime Institutional fund; and "Max 60-Day Maturity Funds: Federated Goes Its Own Way," a look at how Federated is changing its fund lineup with 60-Day maximum maturity funds. We also updated our Money Fund Wisdom database query system with Feb. 28, 2015, performance statistics, and will send out our MFI XLS spreadsheet shortly. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our March Money Fund Portfolio Holdings are scheduled to go out on Tuesday, March 10, and our March Bond Fund Intelligence is scheduled to ship next Friday, March 13.
The lead article in the latest issued of MFI is "Money on the Move? Keeping Up With Pending Changes." It says, "If the first couple of months of the year are any indication, 2015 will be filled with changes in the money fund world. As we have written about in MFI and on www.cranedata.com, money fund managers are not wasting any time getting ready for SEC reforms, which kick in October 2016. New funds are being announced, old funds are being converted, and that means money will be moving -- some in, some out, and some shuffling within. Let's take a look at the some of the recent changes and possibilities."
On the "Prime to Government Shift," the article comments, "Fidelity announced in late January that it was converting three Prime Retail MMFs to Government MMFs, including the largest money fund, the $112 billion Fidelity Cash Reserves. BlackRock, reports The Wall Street Journal, is also considering turning Prime Retail funds into Government funds. (See our table of the largest money fund managers along with their type of fund assets on p. 7.)"
In our middle column, we look at how JP Morgan Asset Management is responding to MMF reforms. It reads, "Since Fidelity Investments announced that it was revamping its money market fund lineup in response to SEC's reforms and investor demand in late January, two more major MMF managers have announced changes of their own, Federated Investors and J.P. Morgan Asset Management. The latter won't be making any changes to its largest MMF, the $64.9 billion J.P. Morgan Prime MMF, a prime institutional fund that will adopt a Floating NAV. But it did announce other changes."
The article continues, "J.P. Morgan, which is the second largest manager of money market funds globally with $384 billion, became the first money fund manager to designate which of its funds will be "Retail," "Institutional," or "Government," under the pending criteria established by the Securities & Exchange Commission in July 2014. The company also stated that it has no current intention of instituting liquidity fees or gates on any of the MMFs designated as Government MMFs."
The article on "Max 60-Day Maturity Funds: Federated says, "In a recent commentary, Garret Sloan, money market strategist with Wells Fargo Securities, said that he didn't expect a stampede of money managers to follow Fidelity's lead to move from prime to government funds. Rather, he said that money managers would choose to "go their own way." That's indeed been the case over these last few weeks. Case in point: Federated Investors, which is responding to SEC reforms by creating 60-day maximum maturity and under funds -- i.e. floating NAV funds that don't really float. However, the company also plans to have at least one longer duration Prime Institutional fund with a floating NAV."
It adds, "On Feb. 19, Federated Investors, the 4th largest money fund manager with $211 billion in assets, announced "phase one" of its post-MMF reform changes. The big change, which CEO Christopher Donahue has discussed in recent earnings calls, is to convert some of its Institutional Prime funds to 60-day maximum maturity funds, which are allowed to continue using amortized cost pricing, decreasing the likelihood that any floating NAV fund would actually float."
Crane Data's February MFI XLS, with Feb. 28, 2015, data shows total assets decreasing in February, the second month in a row, down $1.6 billion to $2.598 trillion, after falling $44.6 billion in January. Prior to January, assets had gone up each of the last 5 months of 2014. Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield remained at 0.02%, while our Crane 100 Money Fund Index (the 100 largest taxable funds) stayed at 0.03% (7-day and 30-day). On a Gross Yield Basis (before expenses were taken out), funds averaged 0.14% (Crane MFA, same as last month) and 0.17% (Crane 100, unchanged) on an annualized basis for both the 7-day and 30-day yield averages. Charged Expenses averaged 0.13% (up from 0.12%) and 0.14% (same as last month) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 41 and 44 days, respectively. The Crane MFA WAM was the same as last month while the Crane 100 WAM is down 1 day from the prior month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The February issue of Crane Data's new publication, Bond Fund Intelligence, which tracks the bond fund marketplace with a focus on the ultra-short and most conservative segments, interviews Leonard Aplet, Senior Portfolio Manager at `Columbia Management and a portfolio manager on Columbia's institutional CMG Ultra Short-Term Bond Fund, one of the largest and oldest conservative ultra-short bond funds. Aplet is responsible for Columbia's short duration strategies, a major segment of the manager's $20.7 billion in bond fund assets. We reprint the article below. (Watch for our profile of J.P. Morgan's Dave Martucci in the upcoming March issue of BFI. Contact us to subscribe or for a sample issue.)
BFI: How long have you been involved in the space? Aplet: I started at Columbia in 1987 and have managed money market funds and short term bond products ever since. The inception date of the Ultra Short Term Bond Fund is March 8, 2004, and the inception date for the Short Term Bond Fund is October 2, 1992. While each of the funds have named portfolio managers on them, there are research analysts, traders, and other portfolio managers that are all part of the team.... My group is a multi-sector group; we manage funds and separate accounts that typically invest in more than one investment grade sector. Columbia also has other fixed income teams that manage shorter duration assets that specialize in a single sector.
BFI: Why was the Ultra Short Term Bond Fund launched? Aplet: At the time Columbia launched the Ultra Short Term Bond Fund, we saw a gap in the market between money market funds and short duration. Our short duration bond fund has as a benchmark the Barclays 1-3 Government Credit Index, so we wanted something between zero duration and 1.5-1.75 years. It was a space that was filled with the Ultra Short Term Bond Fund. The current benchmark for that fund is the Barclays Short Term Government Corporate Index and it's basically anything that falls below the Barclays 1-3 year Government Credit Index. It's an institutional fund and one of the things we've been looking at in this marketplace is the need for a retail offering in the ultra-short term area.
BFI: What is the investment strategy? Aplet: As you know, money market funds are very restrictive and our money market funds are very plain vanilla. They're prime funds and we don't stray from the safe and stable. But with the Ultra Short Term Bond Fund, the difference is it can invest in securities that are longer, even though the overall duration of the Ultra Short Term Bond Fund is not that much longer than a money market fund. It has a duration of around 0.6 years and the benchmark is 0.55 years. The Fund can be as long as a year so it can be quite a bit longer than money market funds. In terms of the individual securities, we will typically go out as far as three years on an individual security basis. So the Fund can employ strategies like barbells when the yield curve is steeper. That's something that a money market fund cannot do. We also can invest in the full range of investment grade securities, down to triple-B. Typically, a money market fund that buys prime securities only buys A1-P1 securities. So we can go down a little bit lower in credit quality but still stay within the investment grade universe. We can also buy tranches of asset-backed securities that are beyond the 2a-7 limitations. Overall, we can be a little bit longer with individual securities; we can invest in some asset classes that are not 2a7 eligible; and we can go down to the full extent of investment grade credit.
BFI: What is the outlook for supply? Aplet: In general, there are not enough bonds to go around. That's not going to get any better going forward, as the population ages, the preference for bonds grows, and a large percentage of US Treasuries are owned by foreign governments, as well as by the Fed itself. So all of that has taken supply out of the market, not necessarily just at the short end of the curve, but it has taken general supply out of the marketplace. There has been good supply of corporate bonds over the past couple of years, but that supply has been met with even higher demand. So when new securities come to the marketplace, they are generally over-subscribed and you can't purchase as much as you want. That has, I think, contributed to less liquidity in the market today. We want to make sure that the NAV price of the fund doesn't fluctuate very much, that we have securities that maintain their investment grade credit rating, and that we provide the necessary liquidity so clients can withdraw their funds when they need them.
BFI: What are the key challenges? Aplet: The recent rally has affected the longer end of the yield curve more than the shorter end, so it hasn't really impacted our yields as much. The very short-term yields have actually gone up a little bit over the past several months, but yields are still low. That's something that is hard to accept for some investors so they go out searching for yield -- sometimes in the right places, but sometimes in the wrong places. Or it could be the right place today, but the wrong place as the market changes. One of the challenges that we see is that besides the fact that yields are low, investors' preferences for yield is growing, so investors are maybe taking more risk today than they would have been comfortable taking a few years ago. We think that has caused more demand for products that are lower quality, especially in the ultra-short term space. Despite that thirst for yield, however, we have stuck with our strategy to provide the investment grade products that our clients signed up for and I think that's going to keep us in good stead as we go through this cycle.
BFI: How are regulations impacting this space? Aplet: Money market reform regulations are going to have a major impact. We also have money market funds, so we're in the process of making decisions on institutional vs. retail; prime vs. government, etc. So far I don't think these changes have caused a tremendous amount of fund flows. You have seen a few mutual fund complexes announce changes to their funds, but in general, people haven't really made those announcements. We're trying to assess what clients find most important -- Is it the floating NAV? Is it the potential for a fee or gate? There's still some time before investors make decisions, so we are evaluating our lineup as we constantly do. Our product development team is looking at the different options to make sure we are giving clients a full range of offerings. We're not yet at the point of offering anything new, but it's something we're definitely considering.
BFI: Has the space been attracting assets? Aplet: The ultra-short term bond space saw most of the asset gains about one to two years ago as investors sought out yield and safety of principle. Much of the money in ultra-short funds came from money market funds or cash-type investments. It's not that big a leap in terms of risk, but I think a lot of that movement has already occurred. So that movement into ultra short funds probably peaked a year ago. However the flows may pick up again if investors decide to move more funds from either lower yielding money funds or longer duration bond funds.
BFI: What is your outlook for rates? Aplet: Our economists see the Fed potentially acting in the second half of the year. The Fed has allowed the unemployment rate to fall below the level that they originally were looking for to raise rates, but they did that because they knew the participation rate was low and the underemployment rate was still pretty high. Now that the adjusted unemployment rate is coming in at about the level in which they previously said they would start raising interest rates, I think they are a little bit more anxious to act. Our view is it's a second half 2015 phenomenon, but instead of June, it might be closer to the end of 2015 before the Fed acts.
BFI: And rising rates might not be a bad thing, right? Aplet: I think people lose track of the fact that rising interest rates are not the worst thing in the world for ultra-short term and short duration products. It's going to drive better returns, especially if you look at returns on a total return basis. The NAV can fall somewhat, but in the case of our products, they are short enough that they won't fall very much, yet the increase in yield is going to more than make up for that. So, our investors are going to be better off if interest rates rise, even if it may not seem like it at the time. When the Fed does start raising rates, the good thing is that ultra-short and short duration funds are probably going to be as much or more rate responsive than money market funds, because there's so much subsidy in the expense ratio for many of the money market funds, more than the longer duration funds. Some of that interest rate increase needs to be absorbed by a reduction in that subsidy. So if rates go up 25 basis points, will the net yield on money market funds go up 25 basis points? I doubt that will happen.
Crane's 5th Annual Money Fund University, a two-day crash course in money market mutual funds, attracted nearly 100 attendees to the Stamford Marriott in Stamford, Conn., late last week. Our Day 1 recap features coverage of the History of Money Funds, the Federal Reserve, Interest Rates and Money Fund Math, and Fund Ratings, as well as sessions explaining the various Instruments of the Money Markets (including Repurchase Agreements, Commercial Paper, CDs, Tax-Exempt/VRDNs, CDs, Treasurys, and Time Deposits). Day 2, which we will report on in coming days (and in our February MFI), focused exclusively on Money Fund Regulations. "A day and a half is really not enough time to learn about a space as big as the money fund sector, but we're going to give you a crash course and try," said Peter Crane, President, Crane Data, as well as host and MC for the event. He opened the conference leading a session called "History and Current State of Money Funds. (Note: Crane Data's next conference will be our flagship Money Fund Symposium, June 24-26 in Minneapolis. The next European Money Fund Symposium will be Sept. 17-18 in Dublin and our next MF University will be Jan. 21-22, 2016, in Boston.)
"In 1994, when I started writing about money funds and when the Community Bankers Fund 'broke the buck,' the space was only about $500 billion. Money market funds were not this behemoth that they were when the Reserve Fund broke the buck in 2008 and almost took down the world economy with it. Money funds peaked at $3.9 trillion in January 2009 after Reserve broke the buck; money was still pouring in because money funds lagged the money markets." Since that time, money fund assets declined precipitously over the next few years, dropping by about 15% per year in 2010 and 2011, he explained. But then the last 3 years in a row, money fund assets have clawed higher despite a near zero interest rate environment. "The fact that money fund assets have gone up fractionally the last 3 years in a row is just mind boggling," he said, testament to the safety and stability of the funds, which were made even safer by recent reforms.
On the other hand, there is the question of how recent reforms will impact money funds going forward, particularly Prime Institutional, which will be subject to a floating NAV in October 2016. "Institutional investors say they are going to leave, but as Churchill said about America, institutional investors will do the right thing, and stay in prime institutional money funds, after they've exhausted every other possibility," quipped Crane. He believes that any outflows we do see from Prime Institutional MMFs will be "dwarfed by inflows from bank deposits and perhaps from bond funds as well."
In the session that followed, two of the leading strategists in the space discussed "The Federal Reserve and US Money Markets." Brian Smedley, US Rates Strategist at BofA Merrill Lynch Global Research, shared his thoughts on when interest rates will rise. "Our expectation is that the Fed will start to shift up the Fed Funds target range starting in September of this year and from there we see hikes proceeding every other meeting, so half as fast as what they pursued last time." He expects it will go up to the 0.25-0.50% range in September, then to 0.50-0.75% in December 2015. By December 2016, rates will reach the 1.50-1.75% range, he said.
"There's an old proverb that says, "May you live in interesting times," and I think that's a fairly accurate description of financial market conditions, certainly in money markets at the moment," said Joseph Abate, Senior Vice President, Liquid Market Research at Barclays Capital. He focused on 4 topics; 1) the ongoing shortage of government safe assets in the financial sector and how that effects behavior in money markets, 2) how the repo market is changing largely because of dynamics related to the Fed and regulation, 3) the Federal Reserves arsenal of tools, namely reverse repo and term deposits, and 4) market liquidity, especially in prime assets. Going forward, he said, "The next battle, if you will, is not going to show up on this front, it's going to come from somewhere else, and I think it's going to be liquidity."
In her overview of the "Instruments of the Money Markets," J.P. Morgan Securities' Teresa Ho, Vice President, Short Duration Strategy, talked about challenges related to supply. "At its peak (in 2007) total money market supply was around $11.5 trillion. If you exclude Treasurys, the peak was about $9.5 trillion" she said. "Fast forward to today, and that has fallen to $5.5 trillion (excluding Treasurys) so we've seen a drop of about $4 trillion in the sector. As you might expect, a lot of it was driven by banks.
Case in point, the commercial paper market peaked at about $2 trillion at the end of 2006; half of that was in ABCP, or asset-backed commercial paper. This was a very popular way back in the day for banks to fund on a short-term basis on behalf of their clients. This particular product has really fallen by the wayside. The economics for banks to participate in this market has really waned. So right now the ABCP market is at its all-time low, at $230 billion, and it is our expectation that this sector will continue to decline going forward because of other regulatory headwinds." Another sector that has declined is the repo sector. "This is a market that has also suffered from the liquidity crisis. It has shrunk almost by half since 2007 and will continue to shrink if you look at all the regulations out there.
On the other hand, investors still see money market funds as a good way to invest their cash on a short-term basis, so demand is strong. "When you think about what has happened with supply over the last couple of years and factor that in to what's happened with demand -- you have a situation where there's too much cash chasing too few assets. There's a huge gap between supply and demand, and it's the reason why we see the competition for assets right now.... [It's] so intense that's its driving rates very, very low in the front end market. There's a real concern that a lot of money will move out of bank deposits into money market funds because of regulations.... If indeed that is the case and cash moves from bank deposits to money market funds, then this supply/demand imbalance becomes even more acute in the absence of additional supply."
There are some bright spots, however. One is Collateralized CP, which is a small but growing sector of the market at about $30-$35 billion. "Investors have been very attracted to this product." (Rob Crowe, Director, Institutional Clients Group, and Jean Luc Sinniger, Director, Money Markets, both of Citi Global Markets, took a deeper dive into CP in their session later in the day on "Instruments: Commercial Paper and ABCP.") Another glimmer of hope is in the Treasury Bill market.
Ho commented, "We have heard from the U.S. Department of the Treasury that they intend to increase their operating cash balances. Right now they run an average of about $60 billion; the expectation is that that they want to raise it to $500 billion. I suspect if they do that, a lot of it would be funded in the bill [market]. If that is the case, we'll see about $400-$450B in T-Bill supply." She said in closing, "Regulations are going to alter and fundamentally change the landscape, but the markets will adapt and they will evolve and meet whatever needs are out there."
Finally, Day 1 ended with a session led by Adam Ackerman, Vice President and Portfolio Manager at J.P. Morgan Asset Management on "Portfolio Management & Credit Analysis." Ackerman said, "My presentation is about taking everything you've seen today and bringing it all together to give you some insight into how portfolio managers think -- how we assess risk and model a portfolio for our fundamental goal, which is to provide liquidity." He said his primary goal is the preservation of capital. After that, his goals are to provide adequate liquidity and competitive yield, in that order. "Yield is important but it doesn't drive our decision making as portfolio managers, primarily."
He added, "We are in the business of providing liquidity; cash right now. We need to provide any type of liquidity that's demanded, whether it's billions or millions. We need to manage well enough so that we can manage any type of flow risk at any time." In terms of credit analysis, "Generally, the way we think about it is, the higher the credit rating, the higher the liquidity. The better the credit quality, the more concentration I'm comfortable with. Conversely, with lower credit quality, you want to lower your risk through lower concentrations." J.P. Morgan employs a rigorous credit selection process that includes their own internal analysis, he explained. Finally, he said, the ultimate measure of success is how well you meet investors' demands of preservation of capital, liquidity, managing risk, and yield. Do that well, and the assets will come.... Stay tuned for coverage of Day 2 in coming days.
Crane Data published its latest Money Fund Intelligence Family & Global Rankings earlier this week, which rank the asset totals and market share of managers of money market mutual funds in the U.S. and globally. The January edition, with data as of Dec. 31, 2014, shows asset increases for a majority of money fund complexes in the latest month, with the largest players leading the way. Gains have also been solid over the past three months. Assets jumped by $86.2 billon, or 3.3%, in December; over the last 3 months, assets are up $115.4 billion, or 4.6%. For 2014, total assets inched up $25.7 billion, or 1.0%. Below, we review the latest market share changes and figures. These "Family" rankings are available to our Money Fund Wisdom subscribers. (Note: We also wanted to give readers a final reminder about next week's Crane's Money Fund University, which will take place Jan. 22-23 in Stamford, Conn. Registrations are still being accepted for our "basic training" event (see the agenda here), and we hope to see some of you in Stamford next week!)
Goldman Sachs, BlackRock, JP Morgan, Federated, and Fidelity, were the biggest gainers in December, rising by $14.7 billion, $12.9 billion, $11.3 billion, $10.9 billion, and $8.5 billion, respectively. BlackRock, JP Morgan, Goldman Sachs, Wells Fargo, and Federated led the increases over the 3 months through Dec. 31, 2014, rising by $30.5B, $21.4B, $17.1B, $10.1B, and $9.5B billion, respectively. The only complexes among the 25 largest seeing declines in December were: Invesco, RBC, T. Rowe Price, Reich & Tang, and BofA (according to our Money Fund Intelligence XLS).
Our latest domestic U.S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $413.9 billion, or 15.7% of all assets (up $8.5 billion in December, up $9.1B over 3 mos. and down $14.4B over 12 months), followed by JPMorgan's $259.5 billion, or 9.8% (up $11.3B, up $21.4B, and up $7.7B for the past 1-month, 3-months and 12-months, respectively). BlackRock remained in third with $221.9 billion, or 8.4% of assets (up $12.9B, up $30.5B, and up $13.7B). Federated Investors was fourth with $215.9 billion, or 8.2% of assets (up $10.9B, up $9.5B, and down $13.1B), and Vanguard ranks fifth with $173.7 billion, or 6.6% (up $1.3B, up $1.4B, and down $2.0B).
The sixth through tenth largest U.S. managers include: Dreyfus ($169.9B, or 6.4%), Schwab ($166.3B, 6.3%), Goldman Sachs ($160.4B, or 6.1%), Wells Fargo ($119.7B, or 4.5%), and Morgan Stanley ($107.3B, or 4.1%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSgA ($82.0B, or 3.1%), Northern ($80.5B, or 3.1%), Invesco ($59.9B, or 2.3%), BofA ($50.6B, or 1.9%), Western Asset ($46.6B, or 1.8%), First American ($42.4B, or 1.6%), UBS ($37.7B, or 1.4%), Deutsche ($34.5B, or 1.3%), Franklin ($21.5B, or 0.8%), and RBC ($17.1B, or 0.6%). Crane Data currently tracks 72 managers, the same number as last month.
Over the past year, calendar year 2014, Goldman Sachs showed the largest asset increase (up $18.7B, or 13.2%; followed by BlackRock (up $13.7B, or 6.6%), Morgan Stanley (up $10.3B, or 10.6%), JP Morgan (up $7.7B, or 3.1%), and Northern (up $5.5B, or 6.8%) <b:>`_. Other asset gainers in 2014 include: Western (up $4.6B, or 10.9%), First American (up $4.4B, or 11.6%), American Funds (up $2.8B, or 20.7%), Franklin (up $2.7B, or 14.3%), and SSgA (up $2.2B, or 2.8%). The biggest decliners over 12 months include: Fidelity (down $14.4B, or -3.4%), Federated (down $13.1B, or -5.7%), UBS (down $6.9B, or -15.5%), Invesco (down $6.9B, or -5.5%), and Wells Fargo (down $3.6B, or -2.9%). (Note that money fund assets are very volatile month to month.)
When European and "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for Goldman moving up to No. 4, and Western Asset appearing on the list at No. 9. (displacing Wells Fargo from the Top 10). Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families are: Fidelity ($420.2 billion), JPMorgan ($388.8 billion), BlackRock ($343.7 billion), Goldman Sachs ($244.6 billion), and Federated ($225.4 billion). Dreyfus ($196.7B), Vanguard ($173.7B), Schwab ($166.3B), Western ($137.5B), and Morgan Stanley ($125.7B) round out the top 10. These totals include offshore US Dollar funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
Also, our January 2015 Money Fund Intelligence and MFI XLS show that yields continue to inch up for the second straight month in December. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 838), remained at 0.02% for the 7-Day Yield, but moved up a tick to 0.02% for the 30-Day Yield (annualized, net) Average. (The Gross 7-Day Yield was unchanged at 0.13%.) Our Crane 100 Money Fund Index shows an average 7-Day Yield of 0.03%, same as last month, but the 30-Day Yield went up to 0.03% from 0.02% last month. (The Gross 7- and 30-Day Yields for the Crane 100 also inched up to 0.17%, from 0.16%.) For the 12 month return through 12/31/14, our Crane MF Average returned a record low of 0.01% and our Crane 100 returned 0.02%.
Our Prime Institutional MF Index yielded 0.03% (7-day), while the Crane Govt Inst Index moved back down to 0.01% (from 0.02%). The Crane Treasury Inst, Treasury Retail, Govt Retail and Prime Retail Indexes all yielded 0.01%. The Crane Tax Exempt MF Index also yielded 0.01%. (The Gross Yields for these indexes were: Prime 0.20% (up from 0.19%), Govt 0.10% (up from 0.09%), Treasury 0.06%, and Tax Exempt 0.11% in December.) The Crane 100 MF Index returned on average 0.00% for 1-month, 0.00% for 3-month, 0.02% for YTD, 0.02% for 1-year, 0.04% for 3-years (annualized), 0.05% for 5-year, and 1.56% for 10-years.