Money market fund yields appear to have bottomed out last week, as our flagship Crane 100 inched down by just one basis point to 0.15%. The Crane 100 Money Fund Index fell below the 1.0% level in mid-March and below the 0.5% level in late March, and is down from 1.46% at the start of the year and down from 2.23% at the beginning of 2019. Almost half of all money funds and over one quarter of MMF assets have already hit the zero floor, though many continue to show some yield. According to our Money Fund Intelligence Daily, as of Friday, 5/29, 410 funds (out of 852 total) yield 0.00% or 0.01% with assets of $1.335 trillion, or 26.1% of the total. There are 171 funds yielding between 0.02% and 0.10%, totaling $1.071 trillion, or 20.9% of assets; 152 funds yielded between 0.11% and 0.25% with $1.801 trillion, or 35.2% of assets; 102 funds yielded between 0.26% and 0.50% with $679.1 billion in assets, or 13.3%; and just 12 funds yield between 0.51% and 0.99% with $236.8 billion in assets or 4.6% (no funds yield over 1.00%).
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 674), shows a 7-day yield of 0.11%, down a basis point in the week through Friday, 5/29. The Crane Money Fund Average is down 36 bps from 0.47% at the beginning of April. Prime Inst MFs were down 3 bps to 0.27% in the latest week and Government Inst MFs fell by 1 basis point to 0.08%. Treasury Inst MFs dropped by 1 basis point to 0.06%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.03% (flat in the last week), and Prime Retail MFs yield 0.19% (down 3 bps for the week), Tax-exempt MF 7-day yields dropped by 1 basis point to 0.06%. (Let us know if you'd like to see our latest MFI Daily.)
The largest funds tracked by Crane Data yielding 0.00% or 0.01% include: Fidelity Govt Cash Reserves ($201.2B), Fidelity Government Money Market ($189.5B), Federated Government Obl Cap ($155.9B), Fidelity Treasury Fund ($29.7B), Edward Jones Money Mkt Inv ($22.4B), Invesco Treasury Cash Mgmt ($21.8B) and Schwab US Treasury MF Investor ($20.4B). Funds yielding 0.00% or 0.01% are the most likely to be waiving partial fees in order to avoid negative yields.
Our Crane Brokerage Sweep Index, which hit the zero floor two months ago, remains at 0.01%. The latest Brokerage Sweep Intelligence, with data as of May 29, shows no changes in the last week. All of the major brokerages now offer rates of 0.01% for balances of $100K. No brokerage sweep rates or money fund yields have gone negative to date, but this could become a distinct possibility in coming weeks or months. Crane's Brokerage Sweep Index has been flat for the last eight weeks at 0.01% (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).
Monday's MFI Daily, with data as of May 29, shows money fund assets seeing modest inflows. Last week money fund assets experienced the first outflows since the coronavirus crisis started in mid-March, with a decrease of $19.2 billion. Prime assets continue their rebound with $4.2 billion of inflows increasing their asset total to $1.105 trillion in the latest week. Following inflows of $790 billion in March and $362 billion April, Government assets again experienced inflows in the latest week, increasing by $2.2B to $3.879 trillion. Tax-Exempt MMFs decreased $1.5 billion. Month-to-date money fund assets have risen $81.5 billion. Prime assets are up $87.3 billion MTD, while Government assets are down by $5.5 billion. Tax-Exempt MMFs decreased by $364 million.
In other news, PIMCO posted, "Reassessing Short Term Strategies Amid Market Recalibration: Liquidity, Libor, and the Fed," in mid-May. They write, "Short-term fixed income assets sold off in March as investors sought to de-risk and indiscriminately raise liquidity in response to fallout from the global health crisis. Jerome Schneider, PIMCO's head of short-term portfolio management, discusses the outlook for short-term assets give recent Fed announcements of support, how a possible resurgence of COVID-19 could affect liquidity markets, and the future of Libor (the London Interbank Offered Rate) as a benchmark for trillions of dollars of financial instruments."
The piece explains, "Short-term markets got hit hard in the first quarter, along with market segments. Could we see that again, such as if we see a resurgence of Covid-19, or have the Federal Reserve's actions bolstered liquidity enough? Concerns about risk markets at the beginning of the global economic shutdown in mid-March prompted investors to de-risk and maintain higher levels of liquidity. Unlike the global financial crisis (GFC), this recent period of stress was founded upon concerns about liquidity rather than systemic solvency, which put money-market and short-duration assets at the vortex of the volatility."
PIMCO's Schneider writes, "For U.S. dollar investors in short-term markets, this sparked unprecedented flows into U.S. government money market funds and out of prime funds, which can take credit risk and were subsequently forced to sell assets in order to maintain their required liquidity buffers. The resulting lack of appetite for new issue credit (bank and financial) holdings and the forced selling of short-term assets, including financial commercial paper (CP) and certificates of deposit (CDs), propelled credit spreads and absolute yields to rise relative to risk-free benchmarks such as the fed funds rate, the overnight index swap rate (OIS), and the Secured Overnight Financing Rate (SOFR). Libor the benchmark proxy for many credit-indexed instruments, also widened relative to OIS and SOFR, reflecting underlying stress in money markets. The spread of Libor versus OIS reached a peak of 138 basis points (bps) on 31 March, indicated sharply reduced risk appetite and elevated demands for liquidity."
He continues, "Financial institutions' efforts to raise funding during this period of stress were challenged. Even though banks offered CP at historically wide spreads of up to 100 bps above Libor in an attempt to lure investors, the lack of demand at any premium simply caused new issuance to plummet. Secondary market liquidity was even worse, with high quality CDs trading at distressed levels as dealers hoarded liquidity. It wasn’t until the Federal Reserve Board of New York stepped in to support money markets via the Money Market Mutual Fund Liquidity Facility (MMLF) and the Tier 1 commercial paper market via the Commercial Paper Funding Facility (CPFF) that credit conditions began to stabilize and then ease."
PIMCO comments, "Since 23 March, the array of announced Fed-sponsored programs has helped provide stability by injecting liquidity directly into affected segments of the money markets, as well as by outlining additional support to front-end credit markets. While surprising given regulators' reluctance to support a backstop to prime funds after the GFC, the MMLF has provided specific relief as an outlet for prime money funds to sell their credit holdings, thereby raising much-needed liquidity and easing concerns that prime fund investors might be gated (i.e., face a temporary suspension of redemption privileges) due to eroding liquidity buffers."
They state, "The Federal Reserve's broad-based support for liquidity and credit markets via their announced loan programs has helped to quell the dire sentiments observed in March and set us on a path toward normalcy. Further, the central bank has demonstrated a profound commitment to support the economy throughout the medium-term recovery associated with the COVID-19 crisis, as Fed officials remain visibly supportive of these emergency measures.... While the Fed is clearly on call to help put out any rekindled fires, savers and investors should not be complacent in this evolving economic environment. Rather, they should actively evaluate the pros and cons of risk allocations as well as costs of de-risking entirely to money funds."
The posting adds, "Short-term markets have begun to stabilize. Nevertheless, market liquidity remains thin and credit spreads remain elevated and sensitive to not only the trajectory of the virus' economic impact, but to the challenges presented by everyday market function, which are a consideration for liquidity as many dealers and banks continue to operate with less-efficient work-from-home structures. Moreover, there is potential for further credit weakness spurred by deteriorating corporate earnings or possible bankruptcies of high-yield credit issuers. Furthermore, concerns over corporate credit will remain for the cyclical horizon despite prime fund outflows stabilizing.... We believe an important takeaway is that many nonfinancial issuers in highly cyclical industries most affected by the crisis have been left with no source of short-term funding ... and those mostly Tier 2 nonfinancial issuers that will continue to be forced to pay a premium to issue short-term debt and commercial paper."
Finally, the article tells us, "As concerns about the trajectory of the economy continue to percolate, investors from all avenues have become increasingly defensive and continue to allocate more assets to cash strategies. A return to the zero lower bound has us thinking about emerging structural opportunities for short-term investments, as unfortunately the Fed's monetary policy benchmark hovering at 0% does little to reward the broadening corral of investors looking for safety and income while maintaining a defensive posture. Similar to the previous episode of ZIRP (Zero Interest Rate Policy) in 2012, we believe the best solution will be active evaluation of liquidity needs and tiering your cash capital between immediate and intermediate liquidity needs. Front-end investors who remain flush with cash due to a defensive orientation may benefit from high quality, short-dated, floating-rate assets and strategies that can take advantage of this structural tailwind of elevated liquidity premiums versus the near-0% benchmark rates offered by traditional government money market funds."
