JPM: MMFs Passing Along Hikes
J.P. Morgan Securities writes that "MMFs pass on over 70% of rate increases to shareholders," in a recent US Short Duration Update. They explain, "In one of the most aggressive tightening cycles in decades, the Fed has raised the fed funds target range by 225bp this year. As expected, MMFs have been quick to pass on the rate increases to end shareholders. As of July month-end, 7-day net yields of prime, government, and Treasury MMFs registered 1.86%, 1.56%, and 1.55%, respectively, an increase of 180bp, 154bp, and 154bp YTD." The piece tells us, "In other words, MMFs have passed on about 70-80% of the rate increases to shareholders, depending on the type of fund. Of course, this was not the case initially. The relationship between market rates and MMF net yields is much weaker when rates are near the zero lower bound due to MMF fee waivers. During the 2015-2018 tightening cycle, the first 25bp rate hike almost entirely went to expanding the expense ratios of government and prime funds as MMFs sought to recapture fee waivers. It was not until the fourth rate hike when expense ratios began to stabilize, implying a resumption of the relationship between market rates and MMF net yields." JPM comments, "Against this backdrop, the current tightening cycle has shown similarities to the last tightening cycle with respect to recouping fee waivers. Treasury and government MMFs have recouped a majority of their fee waivers imposed since the pandemic following the initial two rate hikes in March (+25bp) and May (+50bp). We estimate 82% and 96% of Treasury and government MMF fee waivers, respectively, were recouped by the time the fed funds target range was 0.75%-1.00%, while prime MMFs lagged and only recouped 46% during the same period." The update adds, "Furthermore, with expense ratios for government and Treasury MMFs now matching pre-pandemic levels, MMFs could pass along a majority of any further rate increases to shareholders, especially as we continue down this aggressive tightening path. Notably, there is a growing gap between where institutional and retail money funds are yielding. Based on 7-day yields, the spread between institutional and retail is currently around 10-20bp, versus 0-5bp at the start of this year.... This makes sense, as institutional MMFs make up over 70% of the taxable MMF universe, and MMFs are eager to attract institutional money less-loved by leverage-constrained banks.... Meanwhile, retail MMF AUMs tend to be sticky. And while online deposit rates have exhibited a much higher beta to the fed funds rate than those paid on institutional deposits and traditional retail deposits, they are still below the rates paid on retail MMFs, particularly in prime.... All told, for anyone looking to hold cash, MMFs remain an economically attractive vehicle, reform or not."
