Fed Hike Fantastic News for MFs
Mutual fund news source ignites published "Fed Rate Hike Is 'Fantastic News' for Money Funds Friday, which explains, "The Federal Reserve's interest rate hike is expected to translate into greater money market fund revenue for firms. The Fed announced Wednesday that it would boost its target federal funds rate to between 0.25% and 0.50%. In addition, the 'dot plot' of individual Fed members' projections showed that their median expectation is for short-term rates to reach 1.9% by the end of this year and 2.8% in 2023, which would result in even more money fund revenue." They write, "This week's rate hike is 'fantastic news for money market fund managers' because it means that their revenue just increased substantially, said Pete Crane, chief executive of Crane Data. Additional rate hikes 'will be good news for money fund investors,' he said. Crane Data in late December forecast about $4 billion in industrywide annualized money fund revenue. The forecast rose to $5.8 billion as of Feb. 28, and with Wednesday's rate hike it will likely grow to $6 billion or even $7 billion by the end of this week, Crane said." The ignites piece continues, "The 25-bp rate increase and attendant bump up in yield will allow money fund shops to begin unwinding the fee waivers that most products instituted when the Fed slashed rates twice in March 2020, to near zero, due to the economic slowdown spurred by the pandemic. Money market fund shops waived about $8.4 billion in fees last year, a 171% increase compared to 2020, Investment Company Institute data shows. Average money fund assets last year were $4.5 trillion, up 4.7% from 2020, as reported. Last year marked the highest amount of fee waivers since 2014, when interest rates were similarly at near-zero levels and money funds waived about $6.3 billion in fees, according to ICI data. Some 97% of money fund share classes waived expenses last year, ICI data shows, up slightly from the prior year." The article adds, "BNY Mellon predicted in January that it could cut its fee waivers in half with a 25-bp rate hike.... 'From an industry perspective, even this modest action should go a long way to providing relief to fee waivers and returning to an environment in which investors in liquidity products can earn higher returns,' wrote Susan Hill, senior PM and head of Federated Hermes' government liquidity group.... Money funds typically charge 30 bps in expenses, Crane said, but as of January, they were charging about 9 bps. 'They're going to be charging 20 [bps] by next week and probably 30 [bps] in another month,' Crane said. 'They'll quickly get back to where they were.'"
