Columnist Allan Sloan demonstrates just how much higher rates in money funds are throwing off in interest income in a Barron's piece entitled, "The Fed Made Lots of 30,000% Winners. The Loser? The Fed." He writes, "The Federal Reserve's rate increases have raised the income from money-market funds 300 times, but its own losses are about to hit $100 billion.... Now that the Federal Reserve's 18 months of rate increases may finally be nearing an end, this is a good time to take a look at some of the biggest winners created by the Fed's interest-raising moves.... The winners, of course, are people who own money-market mutual funds, whose current income is running more than 30,000% -- or 300 times -- above what it was in February 2022, the month before the Fed began raising short-term interest rates to combat inflation.... [A]ll sorts of individual and institutional money-market fund investors have seen their income soar. But the Fed itself has been losing lots and lots of money."
He explains, "[L]et me show you the money fund math. Peter Crane of Crane Data told me that as of February 2022, the average interest earned by money-market fund holders was 0.02%. The funds' assets totaled $5.009 trillion, making their interest yield about $1 billion a year. But as of July 31 of this year, Crane told me, the funds' interest yield was 5.08%, and their assets were up to $5.903 trillion. By Crane's math, the funds' yields were running at the rate of $299.9 billion a year. But wait, there's more. As of Aug. 18, Crane said, the funds' average yields were up to 5.15%. If we assume that assets stayed the same, which is a very conservative assumption, the funds would be yielding more than $300 billion a year to their owners."
The article continues, "Crane cautions, however, that the $300 billion-plus is an 'annualized' rate -- you take the current situation and extrapolate it for an entire year. It isn't money that fund holders have actually collected. Money fund holders' income is rising because the funds buy short-term securities, and over the past 18 months, the Fed has raised its short-term federal-funds rate to 5.25%-5.50% from essentially zero. Money fund holders' income has risen along with the Fed’s rate increases."
It quotes Crane, "Five percent is the magic number. It holds psychological import, and money starts pouring into money funds at 5%. That's what happened in the late '90s and early 2000s, and that's what's happening now." It tells us, "But while money fund investors are making 30,000% more than they did before the Fed began raising rates in March of last year, the Fed itself -- ironically -- is running losses because of the rate increases.... In other words, money fund investors' gains are to some extent the Fed's -- and the Treasury's and U.S. taxpayers' -- losses."
Sloan adds, "I don't know what the future holds for money fund investors -- no one does. But for now, they are profiting substantially from the Fed's rate increases. And are likely to stay big winners for at least the immediate future. So if you have substantial money-market mutual fund accounts, it's time to be happy. Enjoy it while you can."
In related news, The Wall Street Journal discusses the benefits of higher rates in "Rates Are Up. We're Just Starting to Feel the Heat." After listing a lot of bad things about higher rates, the article states, "Still, one person's debt is another person's asset. As borrowers wince under the pressure of rising costs, many retirees and other will celebrate finally being able to earn a safe return above the rate of inflation."
It says, "Against this backdrop, companies will need to think differently about how they manage their cash. They will need not only to consider debt payments, but how they invest their cash and how much to keep liquid. New York-based Tradeweb CFO Sara Furber, for example, prioritized the online bond-trading company's cash positions more than a year ago. 'As we think about a higher-interest-rate environment, the first thing is to figure out where all the cash is and make sure it's not trapped,' said Furber, referring to strategies to free up investible cash."
The Journal also comments, "Retirees living on a fixed income have been squeezed by inflation. Higher rates provide some relief. Years of anemic returns in the bond market pushed many baby boomers to keep most of their portfolios in stocks. Now they have more options. Better returns on savings accounts, CDs, money markets and bonds give older Americans low-risk ways to stretch their nest eggs further.... June Dever feels like she's won the lottery.... 'The saver is finally rewarded,' she said."
The WSJ also wrote recently that, "Investors Are Finally Making Money on Bonds and CDs. Be Prepared to Pay Taxes." That article tells us, "Americans are taking advantage of higher returns on their Treasury bills and other fixed-income investments. That joy might be dampened when they see their tax bills. Over the past five weeks, investors have put a net $91.1 billion into money-market funds, according to Refinitiv Lipper data.... U.S. government bonds, high-yield bonds and bond funds, and a host of other fixed-income assets have been similarly popular."
It adds, "The driving force pushing Americans back into fixed income is returns. For over a decade, most of these assets gave investors next to nothing to hold them. Now, many are returning 4% or more a year. All that extra return comes with a catch. The same investment that left you with a tiny tax bill two years ago might now cost a lot of money at tax time. In nearly all cases, no tax is withheld, meaning many taxpayers will get a surprise tax bill next spring."
