Dan Wiener, Editor of The Independent Advisor for Vanguard Investors newsletter, published a news brief entitled "In the Land of One (Basis point, that is)," which discusses the zero-yield era for money market mutual funds. He writes, "[T]here are ... anniversaries that you'd rather forget -- forever. Here's one: Feb. 18, 2010. I'd love to forget that day but there are some important lessons Vanguard investors can learn from at least acknowledging the 10-year anniversary just a few weeks ago. On Feb. 18, 2010, all three of Vanguard's taxable money market funds' yields hit 0.01%. That's one one-hundredth of one percent."
Wiener explains, "How low is that? So low that Vanguard was forced to waive expenses to keep yields in the black. These fee waivers totaled more than $122 million for all of Vanguard's taxable and tax-exempt money funds and were in effect for about four to five years depending on the fund.... In 2014, not a single one of Vanguard's taxable money market funds reported a yield over 0.01% for even a day. That year all three funds returns, even with compounding, totaled just 0.01%."
He continues, "Fortunately, yields didn't stay at 0.01% for the entire 10 years after they first hit that ignominious milestone. Unfortunately, they were low for a long time, remain very low by historical standards and returns over the last decade were abysmal. Prime Money Market, generally the highest-yielding Vanguard money fund, generated a 6.2% total return over the last 10 years. That's not an annualized number but an absolute number. Annualized it comes out to about 0.6% compounded. Ugh!"
Wiener tells us, "This raises the important question of just how much 'super-safe' money you have squirrelled away in a money market fund. Yes, we should all have some money set aside for near-term expenses and to cover emergency costs, but beyond a certain point of safe reserves (and that point will vary from person to person) it might be better to step slightly up the risk ladder for a better return on your money." He shows a chart comparing 10-year returns for Vanguard's three taxable money funds vs. "my favorite short-term fund, Short-Term Investment-Grade, as well as Short-Term Treasury. The differences are astounding."
He states, "Where the money market funds returned between 5% and 6% in total (about 4% for the tax-exempt money funds), the two short-term bond funds grew 13% and 29%. That means Short-Term Investment-Grade grew your money six times as much as a money fund.... [But] there were only a few speed bumps along the way. The fund's worst drop, a 1.3% decline in mid-2013, took four months to recover from. In my book, the greater return more than covers the additional risk."
Wiener also comments, "But if that's too rich for your blood, in February 2015 Ultra-Short-Term Bond was introduced. What Jeff and I refer to as a money-market fund on steroids has returned 8.6% since its inception compared to Prime Money Market's 6.1% return and Short-Term Investment-Grade's 13.3% gain over the same period. Investors looking for tax-free income have had Short-Term Tax-Exempt to call home for their cash since 1977. It too is like a money market on steroids with a much shorter duration (a measure of risk) than the taxable short-term funds. Since Ultra-Short-Term Bond's introduction the tax-exempt fund returned 6.1% and it's up 11.8% over the past decade."
Finally, he adds, "Money market yields have fallen from their recent highs and without a dose of inflation that might force the Federal Reserve to begin hiking short-term interest rates, it's a good bet yields are going to remain low and returns will be paltry. We all have a need for liquid, safe, never-loses-a-dime cash for those immediate emergencies that simply can't wait. But on this anniversary as you count the blessings of the long bull market in bonds and stocks, you might also contemplate the size of your money market balances. It might make sense to take some of your excess reserves, if you have them, and take a bit more risk for a better return in a short or ultra-short bond fund."
In other news, J.P. Morgan writes in its latest "Taxable money market fund holdings update," "For the first time since April 2019, MMFs saw month over month net outflows, totaling $17bn in January.... Outflows of this magnitude have not occurred since June 2018. The outflows were confined to government funds which lost $34bn. Meanwhile, prime funds actually saw inflows of $17bn.... That said, these sort of outflows are actually quite normal for January. In fact, taxable MMF outflows in January have averaged $27bn since 2012 (excluding 2016 because of MMF reform). For the rest of 2020, while we don't anticipate a repeat of 2019's performance, we think the combination of a flat front-end yield curve and low deposit rates should keep MMF balances relatively elevated this year."
They continue, "MMF's exposure to FICC sponsored repo declined by $44bn to $232bn in January.... Despite the decline, this level is still $92bn higher than at the end of November and is the second-highest level on record. This indicates that sponsored repo is not just a year-end alleviator, but is turning into something of a constant force in the repo markets, as more sponsoring and sponsored members are added to the platform.... Usage of the Fed's RRP dropped off, down $43bn to just $5bn as MMFs found better yields beyond RRP's 1.50%."
The update explains, "Dealers' use of repo came roaring back in January, with their total repo borrowing increasing $127bn. Up until January, primary dealers had been successively paring down their borrowing in each of the previous four months as the Fed's open market operations reduced their borrowing needs from MMFs and as they prepared for year-end constraints."
It adds, "Consistent with the decline in government MMFs' WAMs and WAL, government MMF holdings of Treasuries and Agencies decreased while exposure to repo increased.... With the Fed's bill purchases crowding out money funds, total holdings of T-bills decreased $50bn last month.... Presumably, the shift toward repo can also be explained by the attractive yield pickup repo offered relative to bills and coupons, especially at month end, and the lack of a yield pickup from going out the Treasury curve."
JPM's piece states, "In December, prime funds turned toward Banks, shifting allocations away from Treasuries and Repo.... Bank CP/CD/TD exposures increased by $66bn. While bank CP/CD/TD exposure to Eurozone and UK banks increased, US and Canada bank exposures decreased.... At the individual issuer level, changes were largely idiosyncratic."
Finally, they write, "Month over month, the weighted average maturity of bank CP/CD held by prime MMFs decreased 4 days to 41 days, while the weighted average life fell 14 days to 92 days.... Canadian banks had the longest WAL at 137 days, followed by Australian banks at 130 days.... Month over month, overall prime MMF WAMs decreased by 1 day to 29 days and WALs increased 2 days to 70 days. Treasury MMF WAMs decreased 6 days to 32 days and WALs decreased 2 days to 93 days, while Government and Agency WAMs decreased by 3 day to 29 days and WALs decreased 2 days to 87 days."
