Money fund yields declined by 9 basis points to 4.48% on average during the week ended Friday, Nov. 15 (as measured by our Crane 100 Money Fund Index), after falling 7 bps the week prior. Yields are now reflecting the majority of the Federal Reserve's 25 basis point cut on November 7, but they should continue inching lower this week and next. They've declined by 58 bps since the Fed cut its Fed funds target rate by 50 bps percent on Sept. 18 and they've declined by 15 bps since the Fed cut rates by 1/4 point on 11/7. Yields were 4.65% on average on 10/31, 4.75% on 9/30, 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, and 5.20% on 12/31/23. (Note: Register soon for our "basic training" event, Money Fund University, which takes place Dec. 19-20 in Providence, RI.)
The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 672), shows a 7-day yield of 4.39%, down 9 bps in the week through Friday. Prime Inst money fund yields were down 10 bps at 4.59% in the latest week. Government Inst MFs were down 9 bps at 4.49%. Treasury Inst MFs were down 7 bps at 4.44%. Treasury Retail MFs currently yield 4.22%, Government Retail MFs yield 4.20%, and Prime Retail MFs yield 4.37%, Tax-exempt MF 7-day yields were up 40 bps to 2.84%.
Assets of money market funds rose by $12.9 billion last week to $6.982 trillion, they reached a new record high on Wednesday, November 13 of $7.010 trillion but assets declined slightly Thursday and Friday, according to Crane Data's Money Fund Intelligence Daily. For the month of November, MMF assets have increased by $119.2 billion, after increasing by $97.5 billion in October and $149.8 billion in September. Weighted average maturities were unchanged at 36 days for the Crane MFA and unchanged at 37 days for the Crane 100 Money Fund Index.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (11/15), 75 money funds (out of 786 total) yield under 3.0% with $60.3 billion in assets, or 0.9%; 92 funds yield between 3.00% and 3.99% ($118.3 billion, or 1.7%), 619 funds yield between 4.0% and 4.99% ($6.803 trillion, or 97.4%) and following the recent rate cut there is now zero funds yielding 5.0% or more.
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was down 2 bps at 0.46%, after dropping 3 basis points the week prior. The latest Brokerage Sweep Intelligence, with data as of Nov. 15, shows that there were three changes over the past week. Raymond James lowered rates to 0.20% for accounts of $100K to $249K, to 0.50% for accounts of $250K to $999K, to 1.75% for accounts of $1M to $9.9M and to 2.50% for accounts of $10 million or more. RW Baird also lowered rates to 1.52% for accounts of $1K to $999K, to 2.39% for accounts of $1M to $1.9M and to 3.11% for accounts of $5 million or greater. Merrill Lynch lowered rates once again for their advisory accounts, now at 4.53% (down 10 bps from the week prior). 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.
In other news, Roberto Perli, Manager of the System Open Market Account at the Federal Reserve Bank of New York recently spoke on "Facing Quarter-End Pressures: Understanding the Repo Market and Federal Reserve Tools." He explains, "The FOMC sets the stance of monetary policy to influence interest rates and overall financial conditions with the aim of promoting maximum employment and stable prices. The primary tool for doing so is raising or lowering the target range for the effective federal funds rate (EFFR). The EFFR represents the volume-weighted median rate on overnight unsecured transactions in the federal funds market. When the Committee decides to move rates up or down, it is my job to make sure that happens. Ensuring that the EFFR remains within the target range set by the FOMC is what we refer to as 'interest rate control.'"
Perli says, "Administered rates are rates that the Fed directly controls, and two of them are key for monetary policy implementation. One is the interest rate on reserve balances (IORB). The IORB represents the rate paid on reserve balances held at the Fed and is the Fed's main way of influencing the EFFR. The IORB is intended to provide a floor under EFFR, but participants in the federal funds market that do not earn IORB are willing to lend federal funds below that rate. To reinforce the floor the FOMC introduced the overnight reverse repo facility (ON RRP), which is available to a wide range of counterparties that are important in short-term funding markets, particularly Government-Sponsored Enterprises (GSEs), and money-market funds (MMFs). The ON RRP offering rate is the second key administered rate for monetary policy implementation."
He continues, "Of course, the federal funds market is just one money market, and it is certainly not the largest. But changes in administered rates typically influence other money markets, and that allows the Federal Reserve to achieve broad rate control. Still, persistent pressure in one money market segment can often be transferred to other segments. In that sense, rate control depends on the smooth functioning of all major segments of money markets."
Perli states, "As I noted in a recent speech, the market for repurchase agreements (or repos) is of particular interest. The repo market is large, of course, but it is also the market in which the Fed conducts temporary open market operations, including those under the ON RRP and the SRF.... I, like many market participants, have observed the greater levels of volatility in overnight repo around financial reporting dates like quarter-end. Since June 2022, when balance sheet runoff began, higher overnight repo rates on such dates have become more common, although the extent of the increases has varied."
He tells us, "Dealers are central players in the Treasury repo market, and, being dealers, they function mostly as intermediaries.... The first segment of the repo market that I want to discuss is the tri-party repo market, which is a client-to-dealer segment where dealers borrow from cash lenders against a generic basket of securities and settle transactions through a third-party. A portion of tri-party repo is centrally-cleared and netted through the Fixed Income Clearing Corporation (FICC), while the rest of the market trades bilaterally and is not centrally-cleared and netted. The SRF settles through this uncleared segment of the tri-party repo market. Much of the trading in this segment happens early in the morning but settles in the afternoon; maturities are largely overnight."
Perli explains, "The second segment is the interdealer segment, where dealers trade with each other. These trades are used to redistribute liquidity from dealers with an excess of funding to those with a need. This redistribution supports smooth market functioning by facilitating the movement of aggregate liquidity throughout the financial system. Importantly, these interdealer trades are predominantly cleared and netted via services offered by FICC. Most activity here takes place early in the morning, but, unlike the tri-party segment, it also settles in the morning as opposed to the afternoon."
He adds, "Finally, the third segment is the dealer-to-client repo market, where dealers provide financing to levered market participants, primarily hedge funds. This segment involves mainly bilateral transactions in which counterparties face each other directly. That said, the role of sponsored activity, in which a FICC member will sponsor or guarantee the performance of a client to have the trade cleared at FICC, has been growing significantly in recent years and may well continue to do so. Non-centrally cleared transactions are more likely to be longer maturities compared to the tri-party or interdealer markets. Like the interdealer segment, the bulk of dealer-to-customer activity occurs and settles in the morning."
The speech concludes, "To sum up, maintaining control over short-term interest rates is essential to enabling the FOMC to use monetary policy in furtherance of its dual mandate of maximum employment and price stability. That makes the smooth functioning of money markets more than an esoteric, acronym-riddled island populated by highly specialized market participants and the occasional central banker. It is at the heart of what the Fed does. Consistent with that imperative, the Federal Reserve System, and the New York Fed's Open Market Trading Desk, are constantly scrutinizing money markets for evidence of even minor stress."
