It's been two months since the market collectively and suddenly decided rates were going lower and not higher. While the Federal Reserve has yet to officially cut interest rates, brokerage, bank and money market fund money market fund yields have all inched lower since April 30. Money market mutual fund yields, as measured by our Crane 100 Money Fund Index, have moved down from 2.25% to 2.18% over the past month and a half, and some of the highest-yielding bank deposit options cut rates last week. (See Monday's Link of the Day, "WSJ Says Marcus, Ally Cut Rates.") The latest move lower comes from Charles Schwab, who just lowered brokerage sweep rates. Schwab reduced rates for balances under $1 million from 0.30% to 0.26% in the latest week, according to our Brokerage Sweep Intelligence, and they trimmed rates for balances over $1 million to 0.65% from 0.67%.
All other rates tracked by our Brokerage Sweep Intelligence report were unchanged in the latest week. But as we mentioned in our May 23 News, "Brokerage Sweep Rates Inch Down, But Raymond James Raises," several brokerages, including UBS and E*Trade, reduced rates during May. Expect more trimming and tweaking in the coming weeks as pressure builds on brokerages to maintain net interest margins.
Our Crane Brokerage Sweep Index, an average of the 11 largest brokerage firms' "sweep" rates, is currently 0.24% for balances under $100K, 0.30% for balances under $250K, 0.39% for balances under $500K, 0.43% for balances under $1 million, 0.62% for balances under $5 million and 0.76% for balances over $5 million. Most tiers for the Crane Brokerage Sweep Indexes inched lower by one basis point over the past month, but they remain slightly higher than at the start of the year and substantially higher than a year ago. A year earlier, average sweep rates were 0.14% (under $100K), 0.18% (under $250K), 0.23% (under $500K), 0.25% (under $1M), 0.37% (under $5M), and 0.46% (under $5M).
Fidelity is offering by far the highest FDIC-insured sweep rates among the $100K balance tier, with a yield of 0.79% as of June 28. RW Baird occupies the No. 2 spot in the weekly survey, paying out 0.55% on its $100K tier. Raymond James ranks third with a rate of 0.40% at the $100K tier, followed by Schwab's 0.26% rate. Ameriprise, UBS and Wells Fargo are all yielding 0.25% on balances of $100K. E*Trade and Morgan Stanley offer just 0.15%, Merrill pays 0.14% and TD Ameritrade ranks last at just 0.10%.
For more on brokerage sweeps, see these Crane Data News articles: Brokerage Sweep Rates Flat; MS, E*Trade Earnings; TD Lowers Rates (4/23/19), BNY Keeps Dreyfus Name on Money Funds; Brokerage Sweep Rates Flat (3/5/19), Edward Jones Latest to Shift to FDIC Sweeps; ICI: MMFs Break $3T in '18 (1/31/19), Schwab, Brokerages Discuss Sweeps, Money Funds on Earnings Calls (1/25/19), SF Chronicle on Brokerage Sweeps; Bloomberg on Europe Rejecting RDM (11/28/18), TD Ameritrade, Morgan Stanley on Sweeps; Money Fund Assets Rebound (10/26/18) and Money Fund Yields, Sweep Rates Move Higher; WSJ on Savings, Deposits (10/18/18).
In other news, J.P. Morgan Securities writes on "Takeaways from Crane's Money Fund Symposium in its latest "Short-Term Market Outlook and Strategy." They comment, "The money markets convened [last] week for the annual Crane's Money Fund Symposium in record numbers. Over the years, this has become one of the largest industry events in the money markets. Discussion topics focused on a number of items, including monetary policy, deposits versus money funds, supply, repo, and credit. Below, we highlight some of our key takeaways."
JPM's piece continues, "In the face of a potentially lower interest rate environment, sentiment among cash investors was not particularly negative. From our conversations, we found that most investors viewed potential upcoming eases as more insurance eases than those that precede a recession. Of course, MMF investors don't really want lower rates given their sensitivity to their MMF yields. However, they have also learned to live with them over the past decade when rates were at the zero lower bound, and have found ways to deal with them."
It explains that, "MMFs are still relatively attractive. Even with lower yields, cash investors have continued to find MMFs attractive given their liquidity and safety. This is evident from the unexpected scale of flows that have entered MMFs this year, across both retail and institutional shareholders. Furthermore, in spite of the narrowing spread between prime and government yields, prime funds have also continued to see inflows. Relative to bank deposits, MMFs remain a competitive alternative. While these flows may slow in the near-term, they should also continue, which should keep money market assets well-bid."
JPMorgan also tells us, "One of the key themes throughout the conference was the growing role of repo for money market investors. The flood of Treasury supply and record-high dealer positions have supported a significant growth in dealer repo balances with MMFs, and, combined with the inverted yield curve, have made repo an increasingly attractive investment. FICC sponsored repo was the subject of considerable attention and enthusiasm -- many noted that because it is more balance-sheet efficient for dealers, FICC has created additional repo capacity, especially at quarter ends when balance sheet has historically been scarce."
They continue, "Speakers did identify a few issues with sponsored repo: in particular, because sponsored repo transactions all face FICC instead of the individual sponsoring banks, counterparty risk limits could put a cap on MMFs' participation. The CCLF, which requires sponsors to commit liquidity to FICC based on their peak daily activity, also imposes some additional costs compared to uncleared GC repo. Overall, though, there was a broad consensus that FICC repo will continue to grow in the coming months, with higher volumes, more investors, and more banks and dealers competing as sponsors."
The update discusses the "Widespread acceptance of SOFR," stating, "In general, there was broad acknowledgement of the need to transition away from Libor, and acceptance of SOFR as the replacement rate. Though there is still a long way to go, speakers were generally optimistic about the transition process and progress to date. Increasing issuance volumes and bringing more issuers onboard was seen as more important than getting some of the technical conventions (compounding vs. simple averages, day count conventions, etc.) perfect, at least at this early stage. Several noted that a Treasury FRN linked to SOFR would be a big help to adoption. The daily publication of forward-looking SOFR term rates and backward-looking averages was also viewed as an important step."
Finally, the piece adds, "Credit analysts and PMs alike showed no real signs of concerns with respect to the current credit environment. While some called attention to the amount of BBB issuers in the high grade corporate credit market, they also noted that most of their portfolios are invested with financial issuers, most of whom are extremely well capitalized and very liquid. And while they will continue to monitor the situation, credit risks have not been a major concern."
Note: Thanks again to those of you who attended our 11th annual Crane's Money Fund Symposium in Boston last week! We had a record 584 register.... Attendees and Crane Data subscribers can access the conference binder materials (including the recordings) via our "Money Fund Symposium 2019 Download Center." Watch for more coverage in the July issue of our Money Fund Intelligence newsletter, and mark your calendars for next year's show in Minneapolis (June 24-26, 2020).
