The Independent Adviser for Vanguard Investors writes about "Money Market or Cash in the Bank" in its May 2022 newsletter. They ask, "Did your invite to Vanguard's new Cash Deposit option get lost in the mail along with mine? Don't worry. This isn't a party you need to show up early for. In the middle of April, Vanguard quietly rolled out a new settlement fund option for your cash (or at least, for some investors' cash). Settlement (also called sweep) accounts are the place where cash goes to rest in your brokerage account unless you actively choose to put it somewhere else. For most Vanguard investors, your sweep account is Federal Money Market. The new, invitation-only option is called Vanguard Cash Deposit. And as I said, Vanguard is keeping it under wraps. No marketing campaign, no press release, no hoopla as far as I can tell. I only heard about the program through an updated SEC form that Vanguard was required to send me." (Note: Please join us for our Money Fund Symposium conference, June 20-22 in Minneapolis, Minn.)

The brief continues, "Vanguard Cash Deposit is currently available by invitation only.... So, what is this new Cash Deposit? And should we all seek an invitation to change our settlement funds from Federal Money Market? Short answer: No. Cash Deposit is a way for the cash in your settlement fund to earn interest in an FDIC-insured bank account. Vanguard has partnered with Valley National Bank and NexBank, their 'Program Banks,' to participate in the initiative. For the chosen invitees, Vanguard automatically sweeps your cash into an account at one or both of those banks. So, you still access your money through your Vanguard account but in effect it's like having the cash in a bank account rather than a money market fund. One reason you might prefer Cash Deposit over Federal Money Market would be for that FDIC insurance. But given that Federal Money Market holds U.S. government debt, I'm not sure how much of an upgrade it is to get FDIC insurance. Plus, while there is no limit on how much cash you can hold in Cash Deposit, there is a limit to how much will be insured by the FDIC."

It says, "As for the interest rate you'll earn on Cash Deposit ... the most recent rate for the program that I can find on Vanguard's website is 0.25% dating to March 22. At the time, that was nearly two times the 0.13% yield on Federal Money Market. Since then, the money fund's yield has risen to 0.25%. I have no idea if the rate on Cash Deposit has changed over the past month or not and Vanguard isn't saying. My initial conclusion was that over time the two settlement options would offer a similar yield. Vanguard only goes so far as to say the program will offer 'a different rate of return.' But, after more digging, I think it may pay to wait and see how things play out as the Fed continues hiking interest rates.... It appears the banks may have been boosting profits over boosting yields. We can only hope that Vanguard has negotiated a better deal with its Program Banks to avoid this scenario. If not, Federal Money Market will remain the easy choice."

The newsletter adds, "Maybe this is why Vanguard's not promoting Cash Deposit -- they want to work out the inevitable kinks on a small client base before rolling it out to a wider audience? So, what's in it for Vanguard? They aren't offering this service for free. Vanguard keeps a small slice of the interest you earn on the cash held in those bank accounts. Maybe Vanguard is tired of waiving fees on its money market funds every time the Fed cuts rates to zero. With Cash Deposit they'll keep earning a 'fee' as long as those Program Banks keep their interest rates above zero. If Vanguard gets this right, I suppose you could switch between the two options and chase the higher yield. But in most instances, I believe we’ll be talking basis points—not the stuff that's going to make or break your ability to achieve investment success."

Fund news source ignites writes about the news in "Vanguard Pilots Bank Sweep Option for Brokerage Clients." They explain, "Vanguard is offering a new bank sweep option for certain brokerage clients, marketing materials show. Vanguard Cash Deposit, which automatically transfers the uninvested portion of a brokerage account into an account at a participating bank, is available by invitation only, the program literature states. However, it is not open to mutual fund, college savings or other accounts. There is no minimum balance requirement. The pilot program began late last year, a Vanguard spokesperson said. The Independent Adviser for Vanguard Investors first reported on the pilot in its May newsletter."

They tell us, "The Securities and Exchange Commission recently floated a requirement that it says would help money market funds prepare for potential negative interest rates. The agency would require that government and retail money funds certify that their intermediaries, including brokerages, can process purchases and redemptions if the products' net asset values were to fluctuate. Those funds currently operate with $1.00-per-share stable net asset values. The bank sweep program could be a 'hedge' against this potential regulation's coming to pass, said Peter Crane, chief executive of Crane Data. Vanguard's spokesperson declined to comment on whether the SEC's proposed regulation has any bearing on its new bank sweep option."

The article says, "Fidelity, the largest money market fund sponsor, warned the SEC in April that the proposed requirement could drive assets out of government money market funds, which 'could negatively impact both the Treasury Department's exercise of fiscal policy (with government funds holding close to 30% of outstanding Treasury debt) and the Federal Reserve's conduct of monetary policy.' Fidelity had $937 billion in money fund assets as of March 31, Crane Data reported.... The two most-popular Fidelity funds offered as sweep options together hold more than $450 billion in sweep assets."

It adds, "The average yield across bank sweep accounts was 1 bp as of April 29, according to Crane Data. Schwab and other brokerages have shifted sweep options to bank accounts in recent years because they are more lucrative for those institutions than money market funds. 'Brokerages have found that they can earn a higher return on the sweeps,' Crane said. 'That's why everybody is doing it. They're not doing it because customers like FDIC insurance.'"

Finally, ignites writes, "The higher yields that money funds can offer brokerage clients when interest rates are not at rock bottom has in the past been a point of competition. Fidelity, for example, in 2019 touted its higher sweep returns for brokerage clients, noting that customers would get 47 times more with the firm than if they put their money with TD Ameritrade, 10 times more than with Schwab and 27 times more than with E*Trade."

In other news, the Federal Reserve Board hiked short-term interest rates by 50 basis points to a range of 0.75-1.00%. The FOMC statement says, "Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures."

It explains, "The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks."

The statement tells us, "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in conjunction with this statement."

They add, "In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."

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