Federated Investors' Deborah Cunningham writes that "The liquidity space should continue to grow in popularity in 2020" in her latest update, entitled, "2020 Outlook: Optimism and opportunities." She says, "The stereotype of trading in the liquidity markets is that it's a ho-hum job. No battling for deals like those in a stock exchange; just grab whatever offer that comes along. Well, not only is that unconditionally wrong, 2020 might force traders for money markets and the like to be as fierce as those in any sector."
Cunningham continues, "With the Federal Reserve on hold, the yield curve relatively flat and the economy on a low-growth path, liquidity-market firms will contest for every basis point they can get. Relative outperformance will go to those best at identifying situations that can lead to an advantage. There will be periods when the yield curve offers a little more value, giving portfolio managers, analysts and traders opportunity to set them apart. I don't get to talk about our traders often enough. With an average of 16 years of experience and a variety of expertise, I have the utmost confidence in them."
She explains, "Key to this is how much money flows into the sector. Perhaps it won't rise to the level of the tremendous growth of 2019, especially in the prime space, but liquidity products should experience solid inflows. We anticipate growth in the low double digits. There are plenty of people who are uncomfortable about the ebullience of the equity market right now or foresee volatility stemming from the presidential election. If they want to take some of their winnings off the table, the liquidity markets can provide a good home for them. In the current environment, they can offer a competitive return. In this regard, 2020 should see liquidity products taking their traditional role of being an asset class that works in tandem with the equity and fixed-income portions of an investor's portfolio."
Cunningham also tells us, "The Fed was able to ward off volatility in the repo market in the days spanning year-end. Some market participants were concerned rates might spike as they did in September. But through overnight and term operations, the Fed made almost $500 billion available to primary dealers on Dec. 31. This move proved successful -- dealers took down roughly half of it -- and repo rates traded well within the federal funds target range. But policymakers have much more work to do."
Finally, Federated's Outlook adds, "Obviously the [Fed's actions in 2020] will have enormous consequences for cash managers, especially on the level of supply. But we are optimistic about 2020, and frankly can't wait to do our best work for clients. We extended that to our purchasing strategy for December, which focused on asset-back securities, bank instruments, government securities, commercial paper, Treasuries and more. The target weighted average maturity (WAM) of our funds remained in a range of 35-45 days for government and 40-50 days for prime and municipal."
In other news, rates on money market funds and brokerage sweep accounts remained flat again in the first week of January. Our Money Fund Intelligence Daily shows that the flagship Crane 100 MF Index held at 1.46% over the past week. The Crane 100 is down from 1.81% on Sept. 30 and down from 2.18% on June 30. The Crane 100 is down 77 bps from the beginning of 2019 (2.23%), but up from its near low of 0.06% ten years ago (12/31/09). The Crane Brokerage Sweep Index, which is currently 0.11%, is up 6 bps from ten years ago (0.05%) and down 17 bps from the end of 2018 (0.28%). Our latest Brokerage Sweep Intelligence, with data as of Friday, Jan. 3, shows every major brokerage keeping rates steady in the past week.
Our broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data, shows a 7-day yield of 1.34%, unchanged in the week through Friday, Jan. 3. Treasury Inst MFs were down by 1 bps to 1.34%. Government Inst MMFs and Prime Inst MMFs were up 1 bps, finishing the week at at 1.41% and 1.57%, respectively. Treasury Retail MFs currently yield 1.08%, (down 0.01%), Government Retail MFs yield 1.10% (unchanged) and Prime Retail MFs yield 1.40% (up 0.01%). Tax-exempt MF 7-day yields increased 0.03% to 0.86%.
Crane's Brokerage Sweep Index remained flat at 0.14% in the week ended January 3 (for balances of $100K). No firms changed rates. E*Trade and TD Ameritrade currently have the lowest rate for balances at the $100K level (0.01%). Meanwhile, Fidelity continues to have the highest sweep rate (0.82%). (Fidelity also have a higher-yielding money fund option for new accounts.) Morgan Stanley is paying 0.03%. UBS, Merrill and Wells Fargo are all paying 0.05%, and Schwab is paying 0.06%. Raymond James and Ameriprise are paying 0.08%. RW Baird is paying 0.33% for balances of $100K.
Crane Data has also started tracking some of the other brokerages beyond the largest ones in our Brokerage Sweep Intelligence, just for internal purposes. Securities America currently has the lowest rate for balances at the $100K level (0.05%). Meanwhile, Robinhood has the highest sweep rate (1.80%). LPL and SSN Securities are paying 0.10% and 0.12%, respectively. Edward Jones offers rates of 0.15% on 100K balances and Folio Institutional offers rates of 0.14%. JPMS Brokerage is paying 0.20%, while Commonwealth is paying 0.25%. TIAA is paying 0.30%, Cetera is paying 0.32%, Pershing and Ally Bank are paying 0.75%, Pershing Dreyfus is paying 0.79% (down 1 bps from last week; the only firm to shift rates in the 100K level). And, JPMS Advisory is paying 1.55% for balances of $100K.
In related news, Barron's mentioned sweeps in its piece, "How Brokers Like LPL Use Commissions, Fees, and Other Practices to Profit." They write, "LPL also makes it clear that cash-sweep accounts (which investors use for liquidity) and money-market funds on its platform are more of a profit center for the company than its clients. LPL's client disclosures state that it receives fees of up to 0.35% from money-market fund sponsors for cash sweep purposes (such as settling trades). That is cash compensation that LPL doesn't share with advisors and that ultimately comes out of clients' pockets. For non-sweep money markets (which clients can still buy), LPL says that 'in many cases' it selects share classes with higher fees than the identical funds available outside its platform. Depending on market rates, investors may see 'negative overall investment returns' on cash reserves as a result, the firm says."
The article adds, "These practices aren't unusual. Most brokers no longer offer money-market funds for cash sweep accounts. LPL eliminated money-market funds for sweeps last spring, putting client cash in lower-yielding bank deposits (for which it receives fees from banks). It's hardly unique: E*Trade Financial, Charles Schwab, TD Ameritrade Holding, and Merrill Edge (the discount brokerage arm of Bank of America) have eliminated money markets for sweeps, leaving Vanguard and Fidelity as the two major holdouts."
