Money market fund yields, which fell below the 1.0% level four weeks ago and below the 0.5% level two weeks ago, continued their march downwards towards zero in the latest week. Our flagship Crane 100 Money Fund Index fell 8 basis points over the past week (through Friday, 4/10) to 0.34%, according to Money Fund Intelligence Daily. The Crane 100 is down from 1.46% at the start of the year and down 1.89% from the beginning of 2019 (2.23%). Our Crane Brokerage Sweep Index has already hit the floor, at 0.01% (for balances of $100K), after falling a basis point last week. It's down 27 bps from the end of 2018 (0.28%). The latest Brokerage Sweep Intelligence, with data as of April 10, shows no rate cuts this past week, but two out of 11 major brokerages cut rates in the prior week. All of major brokerages now offer rates of 0.01% for balances of $100K.
While some funds have already hit the zero floor, most money funds maintain a yield advantage over sweeps and bank deposits, though perhaps not for much longer. As of Friday, 155 funds (out of 852 total) yielded 0.00% or 0.01% with total assets of $217.3 billion, or 4.6% of total assets. There were 75 funds yielding between 0.02% and 0.10% (totaling $692.5B, or 14.6% of assets); 142 funds yielded between 0.11% and 0.25% (with $1.048 trillion, or 22.1% of assets); 185 funds yielded between 0.26% and 0.50% ($1.491 trillion, or 31.5%); 222 funds yielded between 0.51% and 0.99% ($992.2B or 20.9%); and, 67 funds yielded over 1.00% ($295.9B or, 6.2% of total assets).
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 674), shows a 7-day yield of 0.29%, down 13 basis points in the week through Friday, April 10. Prime Inst MFs were down 12 bps to 0.58% in the latest week, while Government Inst MFs fell by 15 bps to 0.27% and Treasury Inst MFs dropped by 9 bps to 0.19%. Treasury Retail MFs currently yield 0.04%, (down 2 bps), Government Retail MFs yield 0.11% (down 17 bps), and Prime Retail MFs yield 0.53% (down 22 bps), Tax-exempt MF 7-day yields dropped by 1.73% to 0.80%.
Yesterday's Brokerage Sweep Intelligence shows rates unchanged, but the prior week's BSI shows that Fidelity lowered rates across the board last week, while Ameriprise dropped rates on their higher tiers. Fidelity cut rates on all balances by 6 bps, the $100K balance rate was dropped to 0.01%. Fidelity had been the last major brokerage firm paying more than 0.01% on $100K balances. Ameriprise cut rates on balances of $1M and over by 1 basis point. Rates on $100K balances remained at 0.01%. No brokerage sweep rates or money fund yields have dropped to zero or gone negative to date, but this could become a distinct possibility in coming weeks or months.
Crane's Brokerage Sweep Index was flat last week, after falling to 0.01% the previous week (for balances of $100K). Ameriprise, E*Trade, Fidelity, Merrill Lynch, Morgan Stanley, Raymond James, RW Baird, Schwab, TD Ameritrade, UBS and Wells Fargo all currently have rates of 0.01% for balances at the $100K tier level (and almost every other tier too).
In other news, Wells Fargo Money Market Funds latest "Portfolio Manager Commentary" explains, "The MMLF has proven particularly effective in providing liquidity support for money market funds, as the banks participating in this facility are exempt from risk-based capital and leverage requirements. This exemption allows banks to intermediate the flow of credit and support market prices and liquidity. As a result, prices in money market securities stabilized and have rebounded and market liquidity has improved. With the introduction of the MMLF, much of the pressure from shareholder redemptions -- as well as the pace of those redemptions -- has subsided.... We anticipate maintaining higher-than-normal liquidity levels in the near future until we can determine that conditions in the markets have begun to normalize."
On the "Municipal sector," Wells' James Randazzo writes, "As pandemic concerns roiled the global markets, the short end of the municipal market was not immune to the liquidity pressures experienced in other markets. During the second week of the month, a sudden and dramatic burst of redemptions from municipal bond funds resulted in heavy selling of variable-rate demand notes (VRDNs) and tender option bonds (TOBs) as well as short-term notes as managers sought to raise liquidity to meet outflows. By mid-month, redemptions began to spread to municipal money market funds as well, adding further pressure on supply. The rapid rise in VRDN inventories reflected the need for managers to raise liquidity quickly rather than concerns about the creditworthiness of the municipal issuers and third-party letter-of-credit providers on the securities."
He continues, "The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index rapidly spiked to 5.20%, a level last seen in 2008, up from 1.15% at the end of February. Further out on the curve, levels on one-year high-grade paper, which had fallen to a low yield of 0.68% at mid-month, quickly gapped to as high as 2.50% as selling pressure moved from variable-rate paper to the fixed-rate space."
Wells' piece continues, "Shortly after it introduced the MMLF to backstop prime money market funds, the Fed expanded the list of securities eligible for the MMLF to include municipal money market funds and their holdings of certain municipal securities, which provided additional support to the municipal markets and led to a surge in demand for VRDNs. Rates on overnight paper, which had spiked to as high as 7.50% on average during the middle of the month, rapidly fell to as low as 0.75% at month-end. The SIFMA Index, which resets weekly, fell to 4.71% on March 25, just two days after the MMLF program was implemented. With weekly inventories rapidly falling over the last few days of the month, we expect the SIFMA Index will fall back into the 1.00%–1.50% range in early April. The short-term notes market recovered as well, with one-year paper falling to 1.34% after reaching a mid-month high of 2.14%."
They tell us, "During the month, we continued to focus our purchases primarily in VRDNs and TOBs with daily and weekly puts. By structuring our funds with an overweight in the short end of the municipal curve, we were well positioned to withstand market volatility and actually benefited from the rapid spike in the SIFMA Index. Looking ahead, we expect the municipal money market space to continue to normalize as we enter a new phase of the zero interest rate policy. In this environment, we expect to maintain our steadfast commitment to maintaining high degrees of liquidity while focusing on principal preservation."
When comparing the coronavirus meltdown to 2008, Wells comments, "In spite of those similarities, the key difference between the two is the credit environment -- specifically the health of the financials sector. In 2008, there were real questions about which financial institutions would survive, and at times it seemed some parts of the system were on the verge of collapse. This time around, we do not view current market volatility as a credit event, primarily due to the fact that the conditions of financial institutions' balance sheets are much more sound than they were 12 years ago, thanks to some of the post-crisis regulations. In our view, current volatility in pricing is due to market participants' uncertainty over current events and that this is not a 'new normal' but rather a temporary situation."
Finally, they add, "We believe this will be resolved through the efforts of the Fed and global central banks to support smooth market functioning as well as evolving clarity over the coronavirus and its effects on the economy. Due to the programs put in place to support the markets, we have seen a moderation in industry flows as well as a stabilization and slight improvement in pricing. We anticipate these improvements will continue as capital markets stabilize and as more clarity around the effects of the current pandemic becomes known. Similar to 2008, though, we are not able to put a time frame around the normalization of current conditions, but we will keep a vigilant eye out for evidence that the risk environment is stabilizing."
