J.P. Morgan Securities' latest "Short-Term Fixed Income" weekly features a "Low duration bond fund update," which briefly discusses developments and cash flows in the ultra-short bond fund marketplace. JPM writes, "In a volatile environment, bond funds focused on the front end of the curve have continued to attract cash. We estimate total AUM across short-term and ultrashort mutual funds and ETFs registered $680bn as of 1/31/19, up $49bn since the end of September and $99bn year over year." We quote from their latest, and we also excerpt from a WSJ article on "fin-tech" cash offerings below.
They explain, "Both ultrashort funds (those with a portfolio duration between 0.5 and 1.5 years), and short-term funds (with a longer duration of 1.5 to 3.5 years) have seen growth lately, with balances rising by about $25bn each over the last 4 months. This represents something of a revitalization for short-term funds, which had been relatively flat for months as investors flocked to ultrashorts."
The weekly continues, "With their longer duration, short-term funds have outperformed ultrashorts in the recent rally, but they underperformed (and often lost value) in the first quarter of 2018 as rates rose. These effects have largely offset, and funds across all styles have on average had remarkably similar cumulative total returns over the past year. The yield gap between short and ultrashort funds has narrowed as the curve has flattened, but short-term funds have a more volatile NAV, so they outperform in a rally but are more exposed when rates rise."
It adds, "With the yield curve flat, ultrashort funds remain attractive, and we expect demand for them to persist. And with the Fed's hikes on a pause for now, short-term funds may also see more inflows relative to ultrashorts if investors are less worried about negative returns from rising rates."
Crane Data's Bond Fund Intelligence publication shows overall bond fund assets rising by just $18.4 billion, or 0.7%, over the past year through Jan. 31, 2019, to $2.475 trillion, while our combined Conservative Ultra-Short Bond Fund and Ultra-Short Bond Fund categories grew by $33.2 billion, or 29.9%, to $149.9 billion. (Crane Data segments ultra-shorts into two segments to produce a tighter peer group for those funds just beyond money market funds.) Conservative Ultra-Short Bond Funds rose by $21.4 billion, or 43.6%, to $68.8 billion, while Ultra-Short BFs rose by $11.8 billion, or 19.0%, to $73.1 billion. Our Short-Term Bond Fund category increased by just $4.3 billion, or 1.6%, to $269.6 billion. (As a reminder too, Crane Data is hosting its 3rd annual Bond Fund Symposium March 25-26 in Philadelphia, where ultra-short bond funds will be discussed in detail. Registrations are still being accepted.)
In other news, this weekend's Wall Street Journal featured the piece, "Robo Advisers Aim to Take Bank Deposits." It tells us, "Automated financial advisers are expanding into the cash-management market with high rates, the latest move by these so-called robo advisers to capture clients from traditional banks and brokerages."
The article states, "Wealthfront's new cash-management account, essentially a brokerage account meant for cash, is offering a 2.24% annual interest rate, and Betterment LLC's account, launched in August, offers 2.23% after fees. That compares with a national average of 0.10% U.S. banks are paying savers, according to Bankrate.com. For a saver with a $25,000 account, the difference is roughly $500 over the course of a year."
The Journal comments, "These better deals for savers could hit higher-cost banks and brokerages: Cash deposits have long generated a significant chunk of revenue, and they became even more lucrative after the Federal Reserve raised rates last year. Savers looking to earn more on cash can opt to buy higher-yielding products such as money-market funds, analysts say. And some banks and brokerages have been offering competitive rates. Online brokerage E*Trade Financial Corp. , through its bank, pays clients 2.1% interest on savings, while Goldman Sachs Group Inc. pays 2.25% through its Marcus arm."
They write, "But many banks have held off raising their deposit rates much, even though the Federal Reserve raised short-term interest rates four times last year. With the Fed signaling that further increases are on pause, big banks aren’t likely to offer depositors more soon."
Finally, the WSJ says, "To offer the higher rate, Wealthfront is sweeping the money to partner banks, where up to $1 million is insured through the Federal Deposit Insurance Corp. Betterment is investing the cash in higher-yielding bonds. At Betterment, up to $250,000 in cash is insured by the Securities Investor Protection Corp. M1 Finance LLC, maker of another automated investing app, has also introduced a cash-management account with relatively high rates for savers." (See our Jan. 2 News, "Barron's Hits FinTech Money Markets; MarketWatch Slaps Wall of Cash," our Dec. 21, 2018 News, "Robinhood Withdraws 3 Percent Offer; MF Assets Stay Over $3 Trillion," and our Feb. 20 Link of the Day, "Wealthfront Cash Targets Deposits.")
Note: The average money market fund is currently paying 2.25% (our Crane 100 Money Fund Index, an average of the 100 largest taxable money funds as of 2/28/19), while the average Conservative Ultra-Short Bond Fund is yielding 2.63% (as of 1/31/19) according to our Bond Fund Intelligence publication. For comparison's sake, the top-yielding money market funds are currently paying annualized rates of 2.5-2.6%, while the top-yielding ultra-short bond funds have yields of around 3.0-3.25%.
