CNBC Pro Explains Money Funds' 'Lag'
CNBC Pro writes, "This is the cost of carrying too much cash, according to Wells Fargo." It tells us, "Americans' love affair with cash may be costing them in the long run, according to Wells Fargo. The bank believes 'the time may have come' to start pulling money out of cash vehicles like money markets, high-yield savings accounts and other short-term instruments. A record $6.42 trillion is sitting in money market funds, as of Wednesday, according to the Investment Company Institute." The article continues, "While it has been a great place to park cash and earn attractive yields, those rates are coming down now that the Federal Reserve has started cutting rates. The seven-day annualized yield on the Crane 100 list of the 100 largest taxable money funds is currently 4.75%. The last time funds yielded less than 5% was July 2023, according to Peter Crane, founder of Crane Data, a firm that tracks money markets. The yield was 5.2% in November, the highest since Crane started tracking yields in 2006, although they were over 6% for a period in 2000-2001 and in the high teens in the 1970s, he said." It adds, "The move in money market fund yields typically lag federal funds rate cuts. It usually takes about a month to fully digest Fed moves, Crane said. That delay is attractive for institutional investors. During Fed rate decreases, direct money market investments, like Treasury bills, will absorb the cuts quicker than money market funds. 'Of course, so much cash is coming in so fast that the rates will drop faster,' Crane noted. 'The new cash must be reinvested at the new lower levels, but T-bill, repo [repurchase agreement] and CD investors are flocking to MMFs while they still hold some of the older, higher yielding stuff.'"
