Money fund yields moved lower following the Federal Reserve's Sept. 18 50 basis point rate cut, while money market mutual fund assets jumped to all-time records last week (though they eased off Friday). Money fund yields slid 18 basis points to 4.75% on average in the week ended Sept. 27 (as measured by our Crane 100 Money Fund Index, an average of 7-day yields for the 100 largest taxable money funds), after falling 12 bps the week prior. Yields were 5.10% on 8/31, 5.13% on 7/31 and 6/28, 5.14% on 5/31, 5.13% on 4/30, 5.14% on 3/31 and 2/29/24, 5.17% on 1/31/24, 5.20% on 12/31/23, 4.94% on 6/30/23, 4.61% on 3/31/23 and 4.05% on 12/31/22. Yields should continue to inch lower as they digest the final remnants of the Fed cut, then they should stabilize until the next cut.
The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 655), shows a 7-day yield of 4.66%, down 18 bps in the week through Friday. (Three weeks prior was the first time our Crane MFA fell below 5.0% since July 2023.) Prime Inst money fund yields were down 20 bps at 4.83% in the latest week. Government Inst MFs were down 20 bps at 4.75%. Treasury Inst MFs were down 14 bps at 4.74%. Treasury Retail MFs currently yield 4.51%, Government Retail MFs yield 4.46%, and Prime Retail MFs yield 4.62%, Tax-exempt MF 7-day yields were down 30 bps to 2.96%.
Assets of money market funds rose by $73.9 billion last week to $6.791 trillion according to Crane Data's Money Fund Intelligence Daily. Assets reached its record high Thursday Sept. 26 at $6.799 trillion. For the month of September, MMF assets increased by $175.8 billion, after increasing by $109.7 billion in August. Weighted average maturities were unchanged at 32 days for the Crane MFA and down 1 day at 31 days for the Crane 100 Money Fund Index.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (9/27), 55 money funds (out of 774 total) yield under 3.0% with $23.9 billion in assets, or 0.4%; 84 funds yield between 3.00% and 3.99% ($119.7 billion, or 1.8%), 614 funds yield between 4.0% and 4.99% ($6.126 trillion, or 90.2%) and just 21 funds now yield 5.0% or more ($521.1 billion, or 7.7%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was down (3 bps) at 0.54%. The latest Brokerage Sweep Intelligence, with data as of Sept. 27, shows that there was two changes over the past week. Merrill Lynch lowered rates to 0.05% for accounts between $1 million and $9.9 million, and lowered rates to 0.15% for accounts of $10 million and greater. Merrill Lynch also lowered rates to 4.82% for all advisory accounts. RW Baird lowered rates to 1.66% for all accounts up to $999K and lowered rates to 2.62% for accounts between $1 million and $1.9 million, they also lowered rates to 3.40% for accounts of $5 million and greater. Three of the 10 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley. (Note: This past week we added advisory rates to Brokerage Sweep Intelligence for Merrill Lynch and Morgan Stanley.)
Federated Hermes Deborah Cunningham's latest monthly commentary is titled, "Sky high." She explains, "The Chicken Little predictions that the Federal Reserve easing cycle would lead to an exodus of assets from liquidity products have been proven wrong. Money market funds across the industry alone have experienced inflows of around $150 billion since the Fed cut rates by 50 basis points in mid-September to a range of 4.75-5%."
Cunningham continues, "It's another case of the disconnect between some media pundits and investors. The former want their opinions heard, and bad news gets more attention. The latter simply want the highest possible return across their portfolio, whether they invest in liquidity products to offset riskier holdings or for future deployment to other investment opportunities."
She says, "Historically, in a falling-rate environment, yields of cash management products lag the direct security market. Why? Because some of their holdings have locked in higher rates, and most of those won't mature until later, at some point in the next 12 months -- referred to as a laddered strategy. In contrast, some securities in the direct market -- especially overnight securities and those with floating rates -- trace Fed moves immediately, as does the Reverse Repurchase Facility, which now sits at 4.80%. History is only a guide, of course, but we think this will be the case as the easing continues."
Cunningham tells us, "Some cynics channeling Henny Penny -- the original name of that apocalyptic-minded chicken in the European folk tale -- characterize the magnitude of the half-point reduction as a mortal blow. We think that actually helps cash-like vehicles because the decline in their yields traditionally has been proportional to the cut. Had the Fed trimmed the target range by a quarter-point, liquidity yields likely would have a spread of around 12 basis points initially. As it stands, that difference is closer to 25 basis points due to the oversized cut, and gets more attractive out the inverted yield curve. No wonder the inflows."
Finally, she adds, "The implementation of the SEC's money fund rules is finally upon us. On Oct. 2, we get the last phase, which imposes mandatory liquidity fees on institutional prime and institutional municipal money market funds. A fee would only be charged only if net redemptions exceed 5% of a fund's net assets and the cost of liquidity (including, transaction costs and market impact costs) exceeds 0.01% of the value of the total shares redeemed on that day. Despite our lasting opinion that the 'reforms' were not necessary, it is good to finally close the chapter. The liquidity industry has risen to the occasion despite the operational challenges, and we believe the inflows this year show that the efficacy of these products remains intact."
