J.P. Morgan Securities' most recent "Short-Term Market Outlook and Strategy" features, "An update on short-term bond funds and money market spreads. The "Short-duration bond fund update" comments, "YTD, short-duration bond fund AUMs have declined by an estimated $32bn (or 4%), led by short-term credit and short-term multi-asset bond funds.... This isn't surprising, as these funds tend to maintain a longer average effective duration than ultra-short funds and MMFs. Indeed, 6-month short-term fund returns averaged between 0.47% and 0.99%, while 6-month ultra-short fund returns ranged from 2.33-2.39% and `money funds from 2.25-2.34% as of July-end." (Note: Please join us next month for our European Money Fund Symposium, which takes place Sept. 25-26, 2024 in Edinburgh!)
They explain, "In fact, average government MMF yields have surpassed short-duration bond fund yields since early this year, with the spread between these funds registering 66bp as of July-end. Needless to say, since the Fed began raising interest rates, flows seem to have gravitated towards MMF AUMs at the expense of short-duration AUMs. Since February-end 2022, taxable MMF balances have increased by $940bn, while short-duration fund AUMs have declined by an estimated $162bn."
JPM also writes, "In light of the annual Jackson Hole Economic Symposium, we thought it might be worth revisiting how money market spreads have performed so far this year. While monetary policy often plays a key role in setting rates, so too do technicals. To be sure, total money market supply (excluding Fed RRP) has grown substantially this year (+$1.5tn), thanks to a surge in net T-bill issuance (+$1.3tn). At present, we estimate total money market supply (excluding Fed RRP) stands at ~$15tn, surpassing the peak we saw in mid-2020 when Treasury issued about $2.5tn of T-bills to fund the CARES package.... Meanwhile, the demand for money market supply (as proxied by AUMs of taxable MMFs and GSE liquidity portfolios) has continued to grow, albeit to a smaller extent (+$800bn)."
The piece continues, "Still, even with the growth in supply relative to demand, it's been notable that this has had minimal impact on money market spreads, underscoring the notion that there is still an abundance of cash in the front end, most of which is sitting at the ON RRP. Indeed, in the overnight space, the SOFR/EFFR spread has remained relatively steady, trading mostly in a narrow range between -2bp and -3bp. The same is true of the TGCR/RRP spread."
It states, "Farther out the money markets rates curve, T-bill valuations remain rich, thanks to a mix of RRP and non-RRP investors actively deploying liquidity into this asset class. Combining that with investors' desire to extend duration, longer-dated T-bills (i.e., 3m and 6m) are now trading below their 3m averages on a spread-to-OIS basis, while shorter-dated T-bills have remained rangebound.... Meanwhile, Agency discos continue to trade rich to T-bills as diversification remains a focus among liquidity investors."
JPM adds, "In money market credit, bank CP/CD yields have also not been impacted by the increased T-bill supply so far this year. In fact, since early June, 3m and 6m fixed-rate bank CP/CD spreads to OIS have tightened by 12bp and 10bp, respectively, and 6m SOFR FRNs have also narrowed by 5-10bp.... The same is true of Tier 1 and Tier 2 non-financial CP, though we have seen some recent widening in Tier 1 non-financial CP given additional supply in recent weeks."
Finally, they tell us, "We are not at the end of the rise in total money market supply balances. In particular, our Treasury strategists forecast an additional ~$540bn of net T-bill issuance between now and the end of the year. All else equal, this would bring the year-over-year change in total money market supply balances to +$2.1tn, the second-highest year-over-year increase we've seen in the past decade and only slightly behind the year-over-year increase of $2.2tn in 2020. And yet, given what we have seen so far this year, we suspect the additional supply will continue to be easily digested, limiting its impact on money market spreads."
In other news, money fund yields inched higher over the past week to 5.16% on average, their highest levels since 1999. They broke the 5.0% level for the first time since August 2007 five weeks ago <b:>`_. The Crane 100 Money Fund Index (7-Day Yield) rose by 1 basis point to 5.16% in the week ended Friday, 8/25, after increasing by 1 bp the previous week. We expect yields to inch higher in coming days as they finish digesting the Fed's July 26th 25 basis point hike.
Yields are up from 4.94% on June 30, 4.61% on March 31 and 4.05% on 12/31/22. Three-quarters of money market fund assets now yield 5.0% or higher. (They should get more company in coming days.) Assets of money market funds rose by $24.5 billion last week to $5.955 trillion according to Crane Data's Money Fund Intelligence Daily, and they have risen by $73.9 billion in the month of August (after rising $34.7 billion in July). Weighted average maturities were unchanged last week, and were mostly unchanged in July (at 24 days), after increasing by 3 days during June.
The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 681), shows a 7-day yield of 5.04%, unchanged in the week through Friday. Prime Inst MFs were up 1 bp at 5.26% in the latest week. Government Inst MFs were up 1 bp at 5.11%. Treasury Inst MFs up 1 bps for the week at 5.09%. Treasury Retail MFs currently yield 4.87%, Government Retail MFs yield 4.81%, and Prime Retail MFs yield 5.07%, Tax-exempt MF 7-day yields were up 68 bps to 3.52%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (8/25), 10 money funds (out of 810 total) yield under 3.0% with $2.9 billion in assets, or 0.0%; 115 funds yield between 3.00% and 3.99% ($107.5 billion, or 1.8%), 244 funds yield between 4.0% and 4.99% ($1.284 trillion, or 21.6%) and 441 funds now yield 5.0% or more ($4.560 trillion, or 76.6%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.62% after rising 1 bp two weeks prior. The latest Brokerage Sweep Intelligence, with data as of Aug 25, 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.
