Morningstar published the article, "Where's the Best Place to Park Your Cash?" Author Christine Benz explains, "Not so long ago, one cash investment seemed virtually indistinguishable from the next. With the Fed funds rate barely positive as recently as late 2016, most investors considered their low-yielding CDs and money market funds dead money -- a necessary parking place for near-term expenditures, or a place to hunker down if they were feeling fearful. Nothing more." We review their latest overview of cash options, and we also cover the latest on money market fund asset flows, below.
The piece says, "Yet thanks to the Federal Reserve's efforts to normalize interest rates, cash yields have been steadily rising. It would be a stretch to suggest that cash is going to be a return engine any time soon, as you're lucky to earn more than 2% on any sort of cash instrument today. But as yields have risen, we're starting to see greater yield differentiation among various cash vehicles."
Morningstar continues, "Just a few years ago, FDIC-insured online savings accounts were in many cases yielding more than non-FDIC-insured money market mutual funds, providing an arbitrage opportunity for opportunistic investors. Now, however, a more traditional relationship between risk and yield prevails; you're going to earn the highest yields by being willing to put up with some liquidity constraints and/or venturing into non-FDIC-insured investment types."
They tell us, "If you would like an ironclad guarantee against loss, it's wise to focus on those that are backed by the Federal Deposit Insurance Corporation. Such accounts provide the assurance that you'll be made whole if your account has a loss; FDIC insurance covers up to $250,000 per depositor per institution. On the short list of FDIC-insured investments include checking and savings accounts, CDs, money market accounts (not to be confused with money market mutual funds), and online savings accounts. Brokerage sweep accounts, which often offer paltry yields in exchange for the convenience of having your dough readily accessible for investing in your mutual fund or brokerage account, may also be FDIC-insured, depending on whether your money is being swept into a bank account or a money market mutual fund."
The piece adds, "Not on the list: money market mutual funds, or any mutual funds, for that matter. While money market fund yields have edged above FDIC-insured investments in many cases, these products are not FDIC-insured. That said, regulations that went into effect in 2016 tightened up the rules for money market mutual fund management, making a repeat of the Reserve Primary fund debacle unlikely. The new regulations also carry caveats for investors: As of 2016, prime and municipal money market funds--both retail and institutional--are required to impose redemption fees and install "gates" when liquidity has dropped below certain levels, in an effort to stem high redemptions in periods of market duress."
Benz writes, "Government-focused money market funds for both institutional and retail investors are not required to impose fees or install redemption gates, but they can do so at the discretion of their boards. Government-focused money market funds are the safest money market mutual funds, as they invest virtually all of their assets in government-issued securities--from a practical standpoint, they're very safe, even if they're not FDIC-insured. The trade-off is that their yields are typically lower than nongovernment money market mutual funds."
Finally, she says, "If you're seeking the safety of FDIC protection and need regular access to your funds, CDs won't cut it; you'll be on the hook for a penalty if you need to gain access to the money in a CD prior to the CD maturing. Instead, you have a few key options: a savings account or a money market account offered through a bank (bricks and mortar or online) or a credit union. You might also consider a money market mutual fund; just bear in mind the lack of FDIC protections, as discussed above."
In other news, ICI's latest "Money Market Fund Assets" report shows money fund assets fell sharply for the second week in a row after rising for 6 weeks in a row. Money fund assets turned positive for the year-to-date for the first time in 2018 two weeks ago, but they fell back into the red this week due to oversized corporate tax payments. MMFs have decreased by $36 billion, or -1.3%, YTD, but they've increased by $185 billion, or 7.1%, over 52 weeks.
ICI writes, "Total money market fund assets decreased by $52.55 billion to $2.80 trillion for the week ended Wednesday, June 20, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $51.62 billion and prime funds increased by $620 million. Tax-exempt money market funds decreased by $1.55 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.194 trillion (78.2% of all money funds), while Total Prime MMFs stand at $475.5 billion (17.0%). Tax Exempt MMFs total $135.4 billion, or 4.8%.
They explain, "Assets of retail money market funds decreased by $581 million to $1.03 trillion. Among retail funds, government money market fund assets decreased by $1.47 billion to $630.63 billion, prime money market fund assets increased by $2.56 billion to $271.75 billion, and tax-exempt fund assets decreased by $1.67 billion to $127.33 billion." Retail assets account for over a third of total assets, or 36.7%, and Government Retail assets make up 61.2% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds decreased by $51.97 billion to $1.77 trillion. Among institutional funds, government money market fund assets decreased by $50.15 billion to $1.56 trillion, prime money market fund assets decreased by $1.94 billion to $203.71 billion, and tax-exempt fund assets increased by $117 million to $8.07 billion." Institutional assets account for 63.3% of all MMF assets, with Government Inst assets making up 88.1% of all Institutional MMFs.
