Cunningham on Rise in Money Markets
In her latest monthly update, Federated Hermes' Deborah Cunningham writes, "What's behind the substantial rise in assets of money market vehicles?" She explains, "While liquidity products such as money market funds and pools invest in banks, it is not a symbiotic relationship. We often compete for clients. Not that we root for them to fail. Their health is critical to the financial system -- a fact not lost on the Federal Reserve, U.S. Treasury and FDIC. The latter announced today it briefly seized and then sold troubled First Republic Bank to JP Morgan. While the deposits are secured, and at this time we don't see further contagion in the banking system, it's been a stressful time for customers there and at any regional bank. That's why I've always felt cash management should be about more than financial gain. We want people and institutions to thrive, and seeking the best return on their cash, with the least amount of anxiety, can be a large part of that, especially those in or close to retirement." Cunningham continues, "Indeed, the Fed's extraordinarily low rates of the last two decades have been particularly hard on savers, so every bit helps. Along with seeking stability of principal, we think part of the appeal of money funds, state pools and similar alternatives is their potential to deliver more 'bits' in the form of attractive yields. Interest rates on deposit products, such as a savings account or a money market deposit account (MMDA), generally have not kept up with the rate hikes of this Fed cycle, while money funds across the industry have. Why? Because banks chose to provide administered interest rates based on business calculations. In contrast, liquidity products operate in the marketplace, in which yields on most securities tend to track the rise in Fed rates." She adds, "We believe this is at the heart of the recent outflows from bank deposits and inflows to money market vehicles. Institutions have been actively moving around money since the first hike, but individuals and retail clients typically are slower to act. The bank stress initiated by the collapse of Silicon Valley Bank likely caused them to take a closer look at the interest rates on their accounts, especially those greater than the FDIC-insured $250,000. [T]he trend began about six months ago. But in any case, we think the relative yield advantage should remain for sometime. The Fed likely will raise rates another 0.25% this week, and hold them higher for longer. Liquidity products likely will stay elevated, too."
