Morningstar writes about "5 Ultra-Short-Term Bond Funds With High Yields," and tells us, "For the first time in years, investors have more choices when looking for a place to store cash that is both low-risk and paying high yields. One of those options: ultra-short-term bond funds. After eight interest-rate hikes from the Federal Reserve, short-term rates have risen to decadelong high levels. The average fund in the ultrashort Morningstar Category currently yields around 4.2%; a year ago, it yielded less than 1%. As investors experienced quite painfully in 2022, when interest rates rise, bond prices fall. But an ultra-short-term bond fund limits the sensitivity to changes in interest rates." (Note: For more on ultra-short bond funds, visit our upcoming Bond Fund Symposium, March 23-24, 2023, in Boston, Mass. Click here for the latest agenda.)
The article warns, "It's critical for investors to know up front that ultra-short-term bond funds can lose money and so are not an exact substitute for cash or investments such as money market funds and bank-issued certificates of deposit. Many ultra-short-term bond funds did suffer losses in 2022. The average ultra-short-term bond fund lost 0.1% in 2022, while other corners of the bond universe experienced double-digit declines. But as was the case last year, losses on ultrashort bond funds have historically been very small because of the nature of the investments."
Morningstar adds, "Among the ultra-short-term funds rated Bronze, Silver, or Gold ... the $9 billion `BBH Limited Duration BBBIX carried the highest yield, with a 4.8% SEC yield as of Jan. 31.... Putnam Ultra Short Duration Income (PSDQX) also carries a higher yield that most funds in the category but does so without investing in bank loans.... The $5.8 billion Fidelity Conservative Income Bond (FCNVX) takes a cautious approach in the ultrashort category.... Among Pimco's offerings is Pimco Short Term (PTSHX), where the managers have a broad range of securities to choose from.... For a less risky approach, there is $8.4 billion Pimco Enhanced Short Maturity Active ETF MINT, which is also yielding 4.62%."
In other news, The Wall Street Journal story, "Stablecoins Attract Scrutiny in SEC's Drive to Control Crypto," explains, "Washington's battle to rein in crypto has a new front: stablecoins. The Securities and Exchange Commission is investigating whether stablecoins, cryptocurrencies that maintain a price of $1, are among the products that were issued in violation of investor-protection laws. SEC enforcement lawyers have told Paxos Trust Co. that regulators plan to take enforcement action over its stablecoin, BUSD, although that decision isn't final."
They tell us, "An SEC lawsuit over BUSD, the third-largest stablecoin by market value, would be a significant jolt to an industry that has suffered a series of shocks in recent weeks. After the failure of crypto exchange FTX, the SEC has already cut off the ability of some crypto middlemen to offer lending services that give crypto investors a way to earn interest by lending out their tokens."
The Journal piece states, "Stablecoin issuers say they are backed 1-for-1 by cash or cash equivalents such as U.S. dollars and Treasury securities. Tether Holdings Ltd., the largest stablecoin issuer, discloses most of its portfolio holdings but not all. It has invested in riskier assets such as corporate debt and has made money by lending tethers to customers, a practice it is winding down."
They add, "Coinbase Global Inc. has disclosed the SEC is also investigating its stablecoin product. Coinbase maintains a partnership on the operation of USDC, the second-largest stablecoin, with Circle Internet Financial Ltd. Circle also has disclosed it faces an SEC investigation. A Circle spokesman declined to comment on the probe's focus or status. The SEC also could allege BUSD is a security through the application of another Supreme Court test that governs notes, or securities that promise the repayment of money, often with interest."
Finally, the WSJ states, "Stablecoins also don't look too much like money-market funds, a comparison that SEC Chair Gary Gensler has made, Mr. Grewal and others said. Money funds promise to maintain a $1-a-share value but, unlike stablecoins, pay interest. The SEC's money-fund rules haven't always made those products as safe as investors expect. U.S. authorities had to prop up money funds in 2008 and 2020, when panicked investors stampeded out of some, creating the possibility of losses for slower-moving users. 'Money-fund regulation is not really designed to support something that is supposed to be a payments instrument,' said Jonah Crane [no relation to Crane Data], a partner at Klaros Group, a financial-services advisory firm."
See also, the WSJ's "U.S. Regulators Warn Banks of Heightened Liquidity Risks in Crypto-Related Deposits," which says, "A trio of regulators including the Federal Reserve warned banks to be mindful of liquidity risks related to cryptocurrencies, the latest move by U.S. officials to limit the economy's vulnerability to the tumultuous market. The Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. said in a joint statement Thursday that banks should apply effective risk management when dealing with deposits linked to crypto entities. These include robust due diligence and monitoring of crypto entities that establish deposit accounts, as well as incorporating the potential volatility of those deposits into routine stress tests."
It comments, "The first are deposits placed by crypto firms for the benefit of their customers, who may react swiftly to market events, media reports and uncertainty. As a result, the stability of these deposits may not be driven solely by the firm, particularly in times of stress or market volatility, the regulators said. The second type of deposits flagged by regulators is related to stablecoins, a class of cryptocurrencies that seek to maintain a 1:1 parity with the dollar or other official currencies. Issuers of stablecoins typically ensure this parity by holding reserves in the form of bank deposits and highly liquid Treasury securities."
The second Journal piece adds, "For banks, however, the stability of these deposits shouldn't be taken for granted, the regulators warned. They said stablecoin reserves 'can be susceptible to large and rapid outflows' if stablecoin holders decide to redeem the assets for cash, if broader crypto markets encounter turmoil or if confidence wanes in the stablecoin issuer. Because stablecoin issuers often maintain razor-thin buffers against potential losses, regulators have long warned of stability risks. Large-scale redemptions could force issuers to offload reserves in a fire sale, potentially resulting not only in losses to stablecoin investors, but a drop in prices for Treasury securities."
