Money fund yields moved higher again in the latest week, as they began to digest the Federal Reserve's latest short-term interest rate hike. The Federal funds target rate was raised 1/4-point to a range of 2.00-2.25% on Sept. 28, the Fed's 8th 1/4-point hike since Dec. 2015 and 3rd hike of 2018. Our Crane 100 Money Fund Index is now at 1.95%, up 7 basis points from a week ago (and from 9/30) and up from 1.12% at the start of 2018 and from 0.43% at the start of 2017. Brokerage sweep rates and bank deposit rates also continue to inch higher. We review recent yields below, and also quote from a pair of Wall Street Journal articles on savings and bank deposits. (Note: We apologize, but we're missing some funds in our Form N-MFP data files that haven't yet been updated on the SEC's website. They should be updated and revised soon though, and our 9/30 Money Fund Portfolio Holdings reports will be sent out on Wednesday.)
Our broad Crane Money Fund Average, a simple average of 779 taxable money market mutual funds, currently yields 1.77%, up from 1.69% on 9/30/18, and up from 0.92% on Dec. 31, 2017 and up from 0.26% on Dec. 31, 2016. Prime Institutional MFs yield 1.95% on average, while Government Inst MFs yield 1.87%, a spread of a mere 8 basis points. (Treasury Inst MFs yield 1.83% as of Oct. 8.) Prime Retail MFs yield 1.82% vs. 1.52% for Govt Retail MFs (a much more generous spread of 30 bps). Tax Exempt MFs average a 7-day yield of 1.08% currently. (See our Money Fund Intelligence Daily for the latest yields and averages.)
The top-yielding money funds currently are paying annualized rates of 2.25% and higher. Internal (not available to outside investors) funds Fidelity Money Market Central Fund (FID03) and BlackRock Cash Inst MMF SL (BRC01) are yielding 2.37 and 2.33%, respectively, while DWS ESG Liquidity Cap (ESIXX) yields 2.30%, Morgan Stanley Inst Liq Prime Inst (MPFXX) yields 2.26%, and (the internal) Vanguard Market Liquidity Fund (VAN01) yields 2.26%. Goldman Sachs FS MM Inst (FSMXX) is yielding 2.26%, Dreyfus Cash Mgmt Institutional (DICXX) yields 2.25%, Federated Inst MM Mgmt IS (MMPXX) yields 2.25% and Wells Fargo Cash Inv Select (WFQXX) yields 2.25%. Yields should continue higher in coming days as the rest of the Fed's recent move gets passed through.
As we've mentioned in recent weeks and months, brokerage sweep rates continue to inch higher too. Our latest Brokerage Sweep Intelligence shows that rates among the $1 trillion in FDIC-insured cash held at brokerages moved higher in the latest week, rising to 0.25% (for accounts of $100K-$249K) from 0.24% the week prior, up from 0.11% at the start of the year, and up from 0.07% a year ago. Several brokerages, including Ameriprise, Raymond James, and TD Ameritrade, increased rates on selected sweep tiers in the latest week. (Let us know if you'd like to see a copy of our most recent Brokerage Sweep Intelligence report.)
In related news, this weekend's Wall Street Journal featured an article entitled, "How to Find Decent Yields on Savings." They write, "If you haven't checked in a while, yields on savings accounts at the big money-center banks have barely budged since the financial crisis -- still generally below 0.2%. But many investors may wrongly assume there are no better yields to be had in safe and liquid fixed-income products. There are."
The piece explains, "There are three ways to realize higher yields on liquid accounts that one should always maintain to pay bills, meet unexpected expenses and store profits swept out of the market. One is to set up savings accounts at smaller local banks; a second is funding online savings accounts at solid financial institutions; and the third is allocating cash into money-market mutual funds."
Oddly, the piece adds, "Before the financial crisis, money-market mutual funds typically paid more than savings accounts. But with the adoption of stricter rules on money markets, including repricing of shares below their par value (typically $1) if the prices of underlying investments decline, such money-markets products have become less visible. But they still exist."
Finally, the Journal also wrote "Banks Brace for the Downside of Higher Rates," which tells us, "Banks have enjoyed a profit boost from rising interest rates over the past couple of years. But now those higher rates could turn into a drag. Higher rates enable banks to charge more on loans. But they also can hit the banks' mortgage businesses, since the higher interest payments could make some consumers think twice about buying a home or refinancing. What's more, rising rates are forcing banks to start paying some depositors more."
This article comments, "As rates keep rising, banks are also finding they may need to start ramping up what they pay savers. Banks tend to try to keep deposit rates low for as long as customers will tolerate it, and so far many customers have been accommodating. The average rate on a money-market deposit account, a widespread type of savings account, was 0.10% right before the Fed started raising rates, according to Bankrate.com. The average rate is now at 0.20%, even though the Fed has raised rates 2 percentage points since December 2015."
It adds, "But smaller banks and online-only institutions have been raising their rates, a move that some analysts believe may put even more pressure on larger banks to pay up. And banks have been more willing to raise deposit rates for customers with large accounts or who are more likely to take their business elsewhere, such as business clients or wealth-management customers."
