The Wall Street Journal tells us, "Why You May Want to Cheer for Money-Market Funds." Subtitled, "Money funds remain an attractive place for excess cash and can help keep a lid on short-term borrowing costs," the article says, "Cash might be a trash asset to some risk-loving traders. But it's a pretty good thing to have sloshing around the economy. U.S. money-market fund assets have so far through mid-December grown by over $800 billion in 2024, bringing the nearly two-year gain since the end of 2022 to roughly $2 trillion, according to Investment Company Institute data. This continuing flow may be a surprise to some. At points in 2024, it often seemed that Federal Reserve interest-rate cuts, plus a bullish tilt to equity markets, would push more investors out of cash. Or, at the very least, lead them to begin to lock in some duration by moving from very short-term money markets to somewhat longer-term bond funds." (Note: Thanks again to those who attended and supported our Money Fund University last week in Providence! Attendees and Crane Data Subscribers may access the MFU Conference Materials here. Merry Christmas and Happy Holidays!)
The Journal comments, "But for one, thinking of investment flows as a zero-sum game is often not quite right, since every buyer of an asset is sending cash to the seller. In fact, even with U.S. money-market fund assets at nosebleed levels, north of $6.7 trillion, according to ICI's latest weekly figure, investors are quite aggressively positioned: The cash allocation level in Bank of America's Global Fund Manager Survey was recently at its lowest since the survey began in 2001. Instead, what is going on may be more about a shift in where cash lives."
They quote our Peter Crane, president of Crane Data, "Money funds are gaining market share from bank deposits, that is the big driver." The Journal piece tells us, "He further notes that a growing economy and government spending also play a role. Money-market funds offer an appealing return, at a 4.39% 7-day annualized net yield as of Dec. 19 in Crane Data's index of 100 money funds. That will likely come down with the latest Fed rate cut. But by contrast the national average annual yield for a bank savings account is close to half a percentage point, according to a survey by Bankrate -- though some banks may offer much more competitive rates."
The WSJ explains, "In general, many investors and savers have woken up to the possibility of higher rates on their cash. Plus, there is now a lot of attention being paid to the interest available on so-called sweep deposits at wealth managers and brokerages.... Consider this as well: Money funds' demand for government debt is one thing helping keep short-term yields in check. While the outstanding supply of Treasury bills has risen $2.5 trillion since March 2022, according to the recent note from Barclays strategists, government-only money-fund balances have risen by $1.7 trillion."
In other news, the Office of Financial Research (OFR) published an article titled, "OFR Monitor Shows U.S. Money Market Fund Asset Growth and Increased Exposure to Centrally Cleared Repo." They state, "U.S. money market funds (MMFs) experienced cash inflows in Q3 2024, pushing their assets to $6.9 trillion by quarter-end, according to the OFR U.S. Money Market Fund Monitor data. Attractive yields on money market instruments spurred these inflows. The average yield on MMFs was about 270% higher than the average national rate on a three-month bank certificate of deposit and 30% higher than the return on a short-term U.S. Treasury bond."
OFR continues, "MMF assets increased by $367 billion, or 5.6%, through the Q3 quarter-end. Government funds attracted more than 80% of the new cash, while retail prime funds saw outflows of $36 billion or 3%. Institutional investors were responsible for about three-quarters of the inflows into government funds, and about one-third of these flows were attributable to liquidations or conversions of mostly institutional prime fund assets to government-only holdings ahead of new Securities and Exchange Commission (SEC) rules that took effect in October. The rules require that institutional prime funds impose mandatory redemption fees in certain circumstances."
They explain, "The large inflows into government MMFs supported MMFs' demand for short-term Treasuries, government agencies, and repurchase agreements (repos) collateralized by these securities. MMFs eligible to participate in the Federal Reserve Overnight Reverse Repurchase Agreement Program (ON RRP) redirected some investments to U.S. Treasury bills. This increased the funds' total holdings of U.S. Treasuries to $2.7 trillion, 38% of total MMF assets. It also modestly extended their portfolio duration and locked in prevailing interest rates ahead of any potential additional Federal Reserve rate cuts."
The piece says, "MMFs continued to allocate cash to private repos, raising their exposure to private repo by 13% to almost $2.3 trillion at the end of Q3. Nearly all of this change was attributable to centrally cleared repos with the Fixed Income Clearing Corporation (FICC). With this growth, more than a third of MMFs' repo exposure is to FICC."
OFR's Dagmar Chiella writes, "Although most MMFs held a small share of assets in FICC-sponsored repo, the average fund's exposure was 16%, and a few funds held as much as 40% of their assets in such repos. SEC rules permit MMFs to look through to the underlying collateral for diversification purposes if the repo transaction meets certain conditions. MMFs may, however, still be subject to credit-rating agency limits on counterparty exposures. Many of the funds with more than 25% allocated to FICC are not subject to guidelines from a rating agency review."
The article adds, "The increased use of FICC-sponsored repos instead of other private repos reduces an MMF's direct exposure to any particular counterparty because FICC replaces the original dealer as counterparty to the MMF. However, the MMF retains indirect exposure to its sponsoring dealer, as it guarantees the performance of its sponsored members and generally contributes margin and clearing fund requirements to FICC on behalf of sponsored members. FICC uses those contributions to meet its funding needs in the event of a member default."
