Schwab Money Funds Commentary
Charles Schwab Investment Management published a new Schwab Money Funds Commentary, which explains, "During the fourth quarter, Government, Prime and Municipal money market funds experienced industry wide outflows, as short-term rates remained at historic lows and equity markets set record highs. Uncertainty over the timing and size of additional fiscal stimulus in the U.S. led to a decline in Treasury bill supply, putting downward pressure on short-term government rates. Prime and Municipal money market fund managers were cautious around the presidential election, temporarily boosting liquidity levels. All of these factors led to a continued decline in money market fund yields during the quarter." They write, "According to Crane Data's Money Fund Intelligence reports, the money market fund industry finished the fourth quarter with moderately fewer assets under management, as domestic balances decreased by approximately $45 billion to $4.73 trillion. The Prime money market fund sector experienced the largest outflows during this quarter, followed by the Municipal money market fund sector, while the Government/Treasury money market fund sector saw slight inflows. Despite this overall decline in quarterly assets, demand remained strong for the year, with inflows of approximately $750B across all sectors, a 19% increase for 2020. Finally, Crane Data also noted that industry wide fee waivers for 2020 totaled more than $3 Billion. With no clear indication of a change in policy direction from the Federal Reserve, we expect fee waivers to continue in 2021." Schwab comments on its market outlook, "Although 2020 presented a different set of challenges from the last financial crisis, the weight of COVID-19 on the money fund industry led regulators to revisit liquidity facilities to maintain order and to regain investor confidence. As a result of these developments, regulators also indicated that money market fund rules may come under further examination in the near future. This notion has gained traction recently, as evidenced by the December release of the President's Working Group on Financial Markets (PWG) report titled 'Overview of Recent Events and Potential Reform Options for Money Market Funds and the Investment Company Institute's (ICI) November release of their own report titled, 'Experiences of US Money Market Funds During the COVID-19 Crisis.'" Schwab writes, "Yields are expected to remain at low levels for 2021 and the Federal Reserve has made no indication of changing course until material, sustained improvements to the economy are observed. Money market funds will likely continue to waive at least some portion of their operating expense ratios and show no immediate signs of reversing course. ICI data, for example, reflects that 94% of all money market fund share classes were waiving some portion of their fees at the end of Q4 2020, up from 68% in January of the same year." They add, "Additionally, we are closely monitoring policy developments out of Washington and how they could influence broader financial markets given the recent outcomes of the presidential election in November. And finally, continued diligence is merited regarding the ongoing effects of COVID-19 on investor behavior and how any potential stimulus could be funded."
