Climbing money market rates are beginning to work their magic by allowing money fund companies to unwind some of the most painful stages of their fee waivers, but those same higher overnight and short-term rates have been drawing investors out of funds and into Treasury bills and other direct instruments. Rate data released by the Treasury show 4-week, 13-week and 26-week Treasury bill rates last week at their highest levels since August 2009. Rates of 0.14%, 0.16%, and 0.24%, respectively, as of March 18 were more than double their level of a month prior, and a welcome relief following the near-zero periods of December 2009 and January 2010. (See recent CP rates from the Federal Reserve here.)
Though money fund yields have inched up ever so slightly -- our Crane 100 Money Fund Index of the 100 largest taxable money market mutual funds has risen a mere one basis point off its record lows, from 0.04% to 0.05%. But the underlying market shift towards the higher end of the Fed's zero-to-25 basis point target range could take many money funds off of a death-watch. Large funds could likely survive indefinitely with gross yields of 15-30 basis points; even their outlook was uncertain in a zero to 15 bps range. Money funds currently charge average expenses of 0.27% annualized as measured by our Crane 100. (This is down from 0.37% a year ago. Current expense ratios could be even lower as our numbers may not reflect the full impact of fee waivers.)
As an FT article "Beware, repo rates are on the rise" explained (citing a Barclays Capital report), "It's been less than a month since the Federal Reserve resumed its Supplementary Financing Program in a bid to begin draining liquidity, but the effects are already creeping into the rate market."
But FT quotes Barclays, "Instead, our economists expect the Fed to raise interest rates in September -- which may be a few months earlier than the consensus. With reverse repos unlikely to begin until late June at the earliest, our sense is that markets may be over-reading what to us seems to be a purely technical reaction to an overabundance of collateral in the repo market." Nonetheless, the slightly higher yields are a welcome development. Whether they last remains to be seen.
Money funds continued to see outflows on Monday, though the pace has slowed considerably. Our Money Fund Intelligence Daily shows assets declining by $2.5 billion on March 22 with a decline of $22.7 billion in the week ended Monday. The extremely heavy outflows of March 12 ($20.0 billion) and March 15 ($28.4 billion) were followed by much more moderate declines of $8.5 billion (3/16), $4.0 billion (3/17), $1.1 billion (3/18), and $6.5 billion (3/19). It appears that the quarterly tax payments, coupled with a surprise spike in repo rates, were the biggest factors in the sucking sound eminating from the money fund sector. (Today's MFI Daily shows that money funds actually inched higher Tuesday, March 23, rising $707 million.)
