Money fund yields rose over the past week, breaking the 5.0% level on average for the first time since August 2007. We expect them to keep rising in coming day and weeks following last Wednesday's 25 basis point hike by the Federal Reserve. Our Crane 100 Money Fund Index (7-Day Yield) was up 8 bps to 5.04% in the week ended Friday, 7/28, after increasing by just 1 bp the past week. Yields are up from 4.94% on June 30, 4.90% on May 31, 4.64% on April 30, 4.61% on March 31, 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. Almost three-quarters of money market fund assets now yield 5.0% or higher and one fund hit the 5.5% level on Friday. (It should get lots of company in coming days.) Assets of money market funds fell by $11.2 billion last week to $5.865 trillion according to Crane Data's Money Fund Intelligence Daily, but they rose by $18.9 billion for the month of July. Weighted average maturities inched up by one day last month to 24 days (Crane 100), after increasing by 3 days during June. (Note: Click here to see the replay of our recent Money Fund Wisdom Demo & Training, and register soon and make hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh.)
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 682), shows a 7-day yield of 4.93%, up 7 bps in the week through Friday. Prime Inst MFs were up 8 bps at 5.13% in the latest week. Government Inst MFs were up 8 bps at 5.00%. Treasury Inst MFs up 7 bps for the week at 4.99%. Treasury Retail MFs currently yield 4.77%, Government Retail MFs yield 4.69%, and Prime Retail MFs yield 4.95%, Tax-exempt MF 7-day yields were up 81 bps to 3.21%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (7/28), 36 money funds (out of 811 total) yield under 3.0% with just $16.6 billion in assets, or 0.3%; 95 funds yield between 3.00% and 3.99% ($98.9 billion, or 1.7%), 330 funds yield between 4.0% and 4.99% ($1.447 trillion, or 24.7%) and 348 funds now yield 5.0% or more ($4.302 trillion, or 73.4%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.59% after last rising 11 weeks ago.
The latest Brokerage Sweep Intelligence, with data as of July 28, shows that there was no changes over the past week. Three of the 11 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
In other news, The Wall Street Journal published an editorial entitled, "Gary Gensler's Money-Market Gamble." They comment, "Regulators rarely admit mistakes, but lo and behold, the Securities and Exchange Commission did this month when it scrapped two money-market rules. Alas, Chair Gary Gensler's rewrite could cause more strain on short-term funding markets when financial trouble arrives. The SEC is attempting for the third time since the 2008 financial panic to write regulations to prevent runs on prime money-market funds. These funds invest in high-quality commercial paper and short-term government securities. They are supposed to hold a stable value, and investors can redeem their shares at any time."
The piece continues, "Large companies and institutional investors use these funds to manage cash flow, and they typically offer higher yields than funds solely invested in government securities. They also provide a source of liquidity for big banks and businesses. But they are also vulnerable to runs when markets come under stress. The collapse of Lehman Brothers in 2008 triggered a run on the Reserve Primary Fund, which lost its $1 a share peg. Investors in other funds panicked, and short-term credit markets froze. Treasury and the Federal Reserve swooped in with a government guarantee."
It states, "The SEC in 2010 issued rules prescribing duration, credit quality and liquidity requirements for fund holdings. Four years later, the SEC required that prime funds with institutional investors report a floating net asset value rather than a stable $1 a share price, which had given investors a false sense of security. We supported this rule. However, the SEC at the same time adopted two other rules that allowed fund managers to suspend redemptions and impose withdrawal fees when their liquidity dropped below a certain threshold. The goal was to halt panics. But as we warned, the rules would give investors an incentive to withdraw their money at the first sign of market stress."
The Journal tells us, "And what do you know? That's what happened in March 2020. Amid the pandemic uncertainty, fund managers sought to maintain liquidity above the SEC threshold by selling longer-dated securities at a loss. These fire-sales caused short-term credit markets to seize up again and prompted another government intervention. The SEC is now scrapping its 2014 rules that allowed funds to suspend and impose fees on redemptions."
It adds, "Yet Mr. Gensler's mulligan could fuel more turmoil the next time financial markets come under stress. The new rule increases the minimum share of a fund's assets that managers must be able to liquidate in a business day to 25% from 10% and in a week to 50% from 30%. Managers of institutional prime funds would also be required to impose a fee on withdrawing investors when their daily redemptions exceed 5% of fund assets."
The editorial summarizes, "Altogether, the new rules 'may reduce the viability of prime money market funds as an asset class,' the SEC concedes. However, it says the reallocation of cash to insured bank products and government money-market funds 'may be efficient.' Driving more investors into government funds may help support the Treasury market during the Fed's quantitative tightening. But the rules could also make markets overall less resilient. 'Is one of our goals to kill prime funds?' GOP Commissioner Hester Peirce mused in a dissent." [Gensler said, "No," for the record.]
Finally, they write, "'Today's adoption contains the same flaw that tanked the 2014 money market fund rulemaking -- an insistence that our own judgment is superior to that of money market funds, their sponsors, their boards, and their shareholders,' she writes. 'A better approach would be to permit funds to choose approaches that work for them.' Such one-size-fits-all regulation often creates systemic financial vulnerabilities that become apparent only when markets are in distress. We may find out if Mr. Gensler is smarter than markets only when it's too late."
