Western Asset tells us in a "July 2024 Liquidity" update, "In the money markets, the front-end yield curve flattened significantly in July, while longer dated yields fell sharply with rate cuts drawing closer. Three-month Treasury bill yields fell by around 0.10% to 5.28% while three-month commercial paper yields fell by 0.10%-0.15% to a range between 5.30% and 5.35%. Usage of the Fed's Reverse Repurchase Program (RRP) ended July at $413 billion, with market expectations of a continued gradual decline in RRP balances as ongoing issuance in Treasury bills presents an attractively yielding source of supply for money market investors." (Note: There's still time to register for European Money Fund Symposium, which will be held Sept. 19-20, 2024 in London, England! We hope to see you there!)
They write, "Over the month of July, weighted average maturities (of Western Asset Treasury Liquidity portfolios gradually increased from the mid 40-day range to around 50 days, while also increasing weighted average life (days) to a little under 90 days. Net yields remained steady over the month, reflecting general stability in the money markets with the FOMC continuing to hold the overnight target range at 5.25% to 5.50%."
The update continues, "Western Asset's Government Liquidity portfolios moderately increased their WAMs over the month to the mid 30 days level, while WALs also held at slightly higher levels than the previous month, ending July at around 100 days. With economic data in July showing continued progress in disinflation and a softening labor market, the WAM and WAL positioning reflected the market's firmer expectations that the Fed would cut rates as soon as September."
It says, "Western Asset's Prime Liquidity portfolios moderately shortened their WAMs to the mid 30 days level, with WAL levels also decreasing from around the 70 to mid 80-day level to the mid 60-day level. Money market yields, including commercial paper, fell as July ended, while the yield advantage of Prime Liquidity portfolios over government portfolios continued to hold at around the 0.08% to 0.10% levels. Financial and banking sectors remained stable, and liquidity in commercial paper, certificates of deposit and other instruments used in the portfolios remained sufficient."
The piece adds, "In July, municipal money market fund yields ended the month at slightly higher levels than the prior month. The average 7-day tax free SIFMA rate decreased to 3.51% at July month end, down from 3.88% at June month end. Higher broker/dealer inventories and quarter end technical factors contributed to the higher yields and underperformance versus SOFR. Western Asset maintained an up in quality bias amid the volatility, and still deems the front end of the yield curve as attractive versus intermediate maturities."
In other news, Citi's Jason Williams writes on "Estimating where repo needs are going" in his latest "Short-End Notes." He says, "Repo financing needs have grown materially over the past two years on the back of increased Treasury supply and larger dealer holdings. We estimate where repo financing needs may be going into 2025 based on our supply projections and what it may mean for repo.... Repo rates had a light respite the past few days, but we still see stress in the future as eventually banks become the marginal lender. We do not think increasing MMF AUM, which again hit highs this week, will keep repo rates pinned."
The update tells us, "Money market fund (MMF) AUM climbed higher the past few weeks on the back of the recent risk-off. We've previously expected balances to grow into 2025 as commercial deposit rates remain significantly below MMF yields.... Does this mean repo must remain pinned to RRP, making MMF AUM a better proxy for front-end 'demand' than bank reserves (which we discussed above)? We don't think so, since increases in MMF AUM are not 'new' money introduced to the financial system but rather money moved from one pot to another. For instance, if MMF AUM rises due to a decline in bank deposits, the bank portfolio needs to choose between 1) moving a reserve, 2) reducing an asset (perhaps repo or UST holdings), or 3) increasing a liability (e.g., issue CP/CD). As a simple toy example, if a bank portfolio pulls money from repo to fund the MMF transfer, and then the MMF invests in repo, that is a net wash."
It continues, "The QT period from 2018 to 2019 is a great example of this, with reserve scarcity occurring in September 2019 despite MMF AUM still moving higher. In our view, bank deposits (and assets) rose from banks increasing their securities holdings, making reserves more important for banks, as their only true source of liquidity.... In other words, MMF inflows from 2018 to 2019 effectively moved money from one pot to another pot. Meanwhile, in today's landscape, the decline in RRP usage does add new cash to the banking system. This is one reason repo rates should not move too non-linearly (for now), barring intermediation challenges."
Citi's note states, "Bank portfolios eventually become the end game as the marginal cash lender in repo markets. The timing is a function of when RRP cash empties out, or intermediation challenges stop RRP from being utilized in the repo market (although presumably MMFs will eventually spend their RRP cash on T-bills as the supply grows over time). At some point, when RRP is unable to move lower due to heightened intermediation challenges (perhaps December), expect bank portfolios to step in and become the marginal lender into repo. Last December, cash lenders were able to utilize cleared bilateral repo, presumably funded by RRP cash, to help alleviate repo stress. This time around, due to the intermediation constraints, we do not think that channel can be utilized.... Large domestic banks did step in in December 2023 and around the last quarter-end as repo moved above IORB."
Finally, The Wall Street Journal writes, "Charles Schwab Wants to Fix Its Struggling Bank. Investors Are Skeptical." They comment, "Charles Schwab's biggest moneymaker is its bank. It is also a sore spot the company is trying to fix. Schwab's playbook of making easy money on customer deposits was upended when interest rates rose rapidly and people moved their cash to chase higher yields. Now, Schwab is looking to change how it uses customer deposits, and make more money from lucrative services including loans and financial advice."
The piece tells us, "Banks make money off customer deposits in a variety of ways. At Schwab, the focus has largely been on investing the cash in such assets as Treasurys and mortgage-backed securities, and less so on making loans directly to consumers and businesses. That strategy was squeezed when rates rose. The value of the longer-term bonds in Schwab's investment portfolio declined, just as many customers moved their deposits into higher-yielding alternatives such as money-market funds. To avoid taking losses on its longer-term investments, Schwab had to turn to pricier short-term funding sources, such as borrowing from the Federal Home Loan Bank system."
It adds, "Schwab is now looking to make its bank more nimble. On the company's earnings call last month, Walt Bettinger, chief executive officer and co-chairman, said Schwab plans to put more of its investment portfolio into shorter-term assets. It might also offload more of its deposits to third-party banks."
