Yields for taxable money market funds started moving up even before the Fed raised interest rates in December, but since then they have increased more rapidly. The average yield on the largest taxable money fund has risen from 0.05% to 0.22% over the past 3 months. Tax-Exempt MMF yields, on the other hand, remained anchored near zero ... until this week. But with a noticeable increase in the SIFMA Index rate, municipal money fund yields have begun to move. We examine the upward trajectory of MMF yields in recent months, reviewing a column in yesterday's Washington Post, entitled, "Comatose money market funds have finally begun to wake up." We also look at the Tax-Exempt sector, including commentary from Wells Fargo Securities Garret Sloan on rising SIFMA rates, and we recap recent T-E fund liquidations, including a new one from Deutsche.
According to our latest Money Fund Intelligence Daily, the Crane 100 MF Index, which tracks the largest 100 taxable money funds, averaged 0.22% (7-Day Yield) as of March 21, while the broader Crane Money Fund Average, which includes all taxable funds, averaged 0.11%. Before the Dec. 15 rate hike, on November 30, 2015, the MFA was at 0.03% while the Crane 100 was 0.07%. At the start of 2016, the 7-Day Yield for the MFA was 0.06% on Dec. 31, 2015, while the Crane 100 was 0.15%. (See our latest MFI Daily fore more.) Our Tax Exempt Index remains at 0.01%, but we expect this to rise very soon. The highest-yielding Tax Exempt MMFs have already started to move higher.
The Washington Post's "rising yields" story, written by Allan Sloan, says, "The recent rise in the stock market has attracted a lot of attention -- and it's easy to see why. From the market bottom on Feb. 11 through Monday, U.S. stocks, as measured by the definitive Wilshire 5000 index, rose a bit more than 13 percent, or about $2.8 trillion.... But there's another investment that has also turned positive -- but has attracted far less attention. I'm talking about taxable money market mutual funds. Yes, money funds. Sure, these funds aren't paying a whole lot, compared with what they paid before the Federal Reserve cut short-term U.S. interest rates to zero to fight the financial crisis. But they are paying a lot more than the 0.01 of 1 percent that "prime" money funds had paid for years, and the zero that Treasury and federal funds had paid."
It continues, "These days, largely unnoticed, many (but not all) prime funds, whose assets consist primarily of short-term obligations of banks and corporations, have begun to yield about 0.4 percent. [Crane Note: "many" is an overstatement; only the very highest-yielding funds are at 0.4% currently.] Many [a handful of] Treasury money funds are in the 0.25 to 0.3 percent range, as are federal money funds, which own Treasury securities and other obligations guaranteed by the federal government."
Sloan explains, "A few months ago, when pretty much every money fund was paying around 0.01 of one percent, there was nothing much for us average retail investors to pay attention to. Now, the difference between 0.4 percent on many big taxable funds and less than 0.1 percent on some other big taxable funds is worth looking at. And so is the difference between taxable funds and tax-exempt funds, most of which are still yielding 0.01 or 0.02 percent, a tiny proportion of what prime funds are earning. Usually, you would expect tax-exempt funds to be earning more than half of what prime funds earn."
Finally, he adds, "I asked Chris Allwine, head of Vanguard's municipal bond group, why Vanguard's prime money fund was yielding about 20 times as much as its tax-exempt funds, and its Treasury and federal funds were yielding about 15 times as much. Allwine attributed much of the disparity to technical factors, such as a shortage of appropriate securities for tax-exempt money funds to buy. He says things are beginning to change, and he expects to see tax-free yields rise."
Indeed, in yesterday's "Daily Short Stuff," Wells Fargo Securities' Garret Sloan discusses the long-overdue rebound in Tax-Exempt yields. He writes, "In the VRDN market, SIFMA has been climbing, and the seasonal move higher in the index has been early this year, with the current 7-day index touching 13 basis points. If seasonal effects were the only thing at play, we would not have expected SIFMA to climb until late March or early April. The fact that the index has reset so early and so much may be partially the result of recent transitions/outflows from tax-exempt funds."
Sloan tells us, "Since the beginning of January, tax-exempt funds have seen net outflows of more than $22 billion, which is approximately 9 percent of tax-exempt assets. The majority of these redemptions/conversions would be at the expense of the weekly VRDN market, which may be contributing, along with tax season, to the rising tide of the weekly VRDN market this year. The current weekly SIFMA rate of 13 basis points is the highest the index has been since May 2013, and while we still see the sector pricing well below most sectors, including the shortest-maturity T-bills, it is still the highest that weekly tax-exempt levels have been in almost three years."
We have seen Tax-Exempt assets drop sharply this year, no doubt in part due to pending liquidations. Currently, we show Tax-Exempt MMF assets at $230.9 billion (as of March 21), down 8.3% year-to-date, from $251.7 billion. Tax-Exempt MMF assets are down a huge 52.3% since Dec. 2008 when they totaled $483.8 billion. Furthermore, there's been a rash of Tax-Exempt fund liquidations since MMF reform was announced in July 2014. Our Crane Tax Exempt Money Fund Index currently tracks 331 funds vs. 397 on 7/31/14 (when reforms were announced) -- a drop of 66 funds or 16.6%, and dozens more are already in the pipeline.
As we mentioned, we suspect that part of the reason that SIFMA rates are rising is due to the large number of Muni MMFs liquidations. We covered this in our Feb. 24 News, "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche." Since then, there have been several more Muni fund liquidations. Putnam liquidated its $39 million Putnam Tax Exempt MMF (see our Feb. 25 News, "Hits Keep Coming to Prime, Tax-Ex: UBS Sweeps Filings, Putnam T-E Exit.") Also, PNC liquidated its $589 million PNC Tax-Exempt MMF. (See our March 1 News, "More Exits: PNC Liquidates, PIMCO Goes Govt; First American Update.")
We also learned from an SEC filing that Deutsche is liquidating its Tax-Exempt California Money Market Fund. This filing says, "Upon the recommendation of Deutsche Investment Management Americas Inc., the Board of Tax-Exempt California Money Market Fund has approved the liquidation and termination of the Fund, effective on or about April 8, 2016. The Fund will redeem all of its shares outstanding on the Liquidation Date."
Finally, in addition to funds shortening WAMs dramatically in preparation for liquidations, some Tax-Exempt MMFs are making their portfolios 100% weekly liquid assets (WLA). Morgan Stanley preceded JP Morgan's recent announcement (see our March 3 News "JPM Details Fund Updates, Cutoffs, Gates in Filing; Linton Comments"), changing the investment strategy on several of its Tax-Exempt funds.
Filings for the Morgan Stanley California Tax Free Daily Income Trust, Tax Free Daily Income Trust, Active Assets Tax-Free Trust, and New York Municipal Money Market Trust, all say, "As of September 11, 2015, the Board of Trustees of the Fund has approved an `amendment to the principal strategy stipulating that the Fund will invest all assets in high-quality, short-term securities that meet the definition of "weekly liquid assets" as defined by Rule 2a-7 under the Investment Company Act of 1940, as amended. We believe this change will likely serve the Fund well given market expectation for higher short-term interest rates in the coming months. The shorter duration and higher liquidity can help insulate the Fund from declining market values in a rising rate environment. We will proceed cautiously as we watch Fed monetary policy unfold and as we prepare for the implementation of the new rules governing money market funds later in 2016."
