Money fund yields inched higher last week after jumping earlier in the month after the Fed's 25 basis point hike on Feb. 1. Our Crane 100 Money Fund Index (7-Day Yield) rose 2 basis points to 4.37% in the week ended Friday, 2/17. Yields rose by 12 basis points the previous week and they're up from 4.15% on Jan. 31, 2023. Money fund yields have risen from 4.05% on 12/31/22, and they're up from 3.59% on Nov. 30, 2.88% on Oct. 31 and 2.66% on Sept. 30. Yields should inch higher in coming days as they digest the last bits of the Fed's latest hike. The top-yielding money market funds have broken above 4.70% and should move towards 5.0% in coming weeks. (See our "Highest-Yielding Money Funds" table above).
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 681), shows a 7-day yield of 4.25%, up 3 bps in the week through Friday. Prime Inst MFs were up 2 bps at 4.49% in the latest week. Government Inst MFs rose by 3 bps to 4.30%. Treasury Inst MFs up 4 bps for the week at 4.27%. Treasury Retail MFs currently yield 4.05%, Government Retail MFs yield 4.02%, and Prime Retail MFs yield 4.32%, Tax-exempt MF 7-day yields were up at 3.29%.
According to Tuesday's Money Fund Intelligence Daily, with data as of Friday (2/17), No money funds (out of 816 total) are now yielding below the 2.00% mark this past week, as many continue to rise over 4.0%; 27 funds yield between 2.00% and 2.99% with $10.1 billion, or 0.2%; 230 funds yield between 3.00% and 3.99% ($201.2 billion, or 3.9%), and 559 funds yield 4.0% or more ($4.978 trillion, or 95.9%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, increased last week to 0.55% from 0.52%. The latest Brokerage Sweep Intelligence, with data as of Feb. 17, shows that there were two changes over the past week. Fidelity raised rates to 2.32% (from 2.19%) for all balances between $1K and over $5 million. RW Baird also raised rates to 1.72% (from 1.58%) for balances between $1K and $999K, to 2.62% for balances between $1 million and $1.99 million, and to 3.36% for balances of $5 million or greater. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
We also noticed that Interactive Brokers recently began advertising on The Wall Street Journal's WSJ.com, with a banner stating that they offer 4.08% on uninvested cash. The ad states, "IBKR pays 4.08% interest annualized daily on uninvested cash in your brokerage account. If the total market value of your account is less than $100,000 -- the interest payment will be proportionally less. There will be no interest paid on the first $10,000 of cash."
On their website," they explain under the title, "Earn Market Rate Interest on Your Uninvested Cash Balances," "Client accounts may receive credit interest on long settled cash balances in their securities accounts. Accounts with a Net Asset Value (NAV) of USD 100,000 (or equivalent) or more are paid interest at the full rate for which they are eligible. Accounts with NAV of less than USD 100,000 (or equivalent) receive interest at rates proportional to the size of the account."
Interactive Brokers' disclaimer continues, "For example, an account with a NAV of USD 50,000 earns credit interest at a rate equal to one-half the rate paid by IBKR to accounts with a NAV of USD 100,000 or more. Interest accrues daily. IBKR posts the interest payments on a monthly basis on the third business day of the following month. IBKR uses a blended rate based on the tiers outlined in the table below. The tiers on which interest rates are based are subject to change without prior notification."
It adds, "For balances held in CHF, JPY, or RUB, IBKR may apply an effective negative rate to long balances held. The negative rate applied to accounts holding these currencies is the same regardless of account size. For other currencies in which the effective rate is less than zero, the interest paid is 0%. Please note that credit interest is not paid on long-settled cash balances held in the commodities segment of a securities account." They list 26 different currencies all with the rates paid, and there is also a big rate difference between 'IBKR PRO' and 'IBKR LITE.'
Earlier this month, Federated Hermes' Deborah Cunningham wrote, "Yield curveball: The market is dismissing the Fed's determination to defeat inflation." She tells us, "Count us among those who question the assumption that inflation will continue to decline quickly. The robust labor market and resilient consumer suggests CPI could hover around 4% for a while. That will test the resolve of policymakers bent on avoiding a repeat of the '70s. It's important to remember they did not technically start tightening until July, when the target rate rose above 2%. Prior to that, they were simply normalizing monetary policy, pulling rates up from the ultra-accommodative zero bound."
Cunningham continues, "We think they will stay higher for longer, maintaining a 5-5.25% range into 2024, a scenario Powell laid out as his base case. In a 'read my lips' moment, he said it likely will not be appropriate to cut rates this year. Whether or not investors take him at his word, we are wary of longer-dated securities currently yielding less than what we think they should. The market has the choice to pay attention or whiff on a pitch the Fed said it would throw."
She tells us, "The situation portends continued support for the dash for cash. Investments into liquidity products historically garner inflows when rates stabilize after rising. That was the case in the tightening cycle of 2015-18, when industry money funds saw growth of around 11% (Investment Company Institute). After the Fed lowered rates in 2018, assets grew even more, showing a 14% increase. Past performance is no guarantee, of course, but if this trajectory is repeating, industry assets have grown ahead of schedule. Crane Data reports total money market fund assets hit an all-time high last month, rising $235 billion over the past 13 weeks to reach $4.82 trillion on Jan. 28."
Finally, Federated adds, "Another financial showdown is taking place in Washington. The battle over raising the federal debt limit will be messy and embarrassing, but the 'adults in the room,' as my colleague Susan Hill characterized them, will prevail over the politics of petulance to ensure the U.S. won't default. While financial institutions and investors are better prepared for this than in 2011, we don't think it will come down to the wire. Expect drama, not danger. We continue to position our portfolios with short Weighted Average Maturities to take advantage of the hikes and keep ample liquidity. Our prime money funds target a 15-25 day range, with our government and municipal products at 25-35 days."
