Bloomberg published the article, "The Higher-for-Longer Interest-Rate Bonanza," which is subtitled, "With yields passing 5%, money-market funds rake in cash while banks fail to keep pace." They tell us, "With the US Federal Reserve keeping interest rates pinned around zero for most of the past 15 years, depositors grew resigned to earning virtually nothing on their cash, whether it was sitting in a bank or a money-market fund. A turning point came in the spring. Thanks to the Fed's inflation-fighting interest-rate hikes, people started to see they could earn 4% or more on their money. The regional bank crisis that began with the collapse of Silicon Valley Bank in March served as another wake-up call. 'If you maintain idle balances at a bank, that's an unsecured risk that you're not getting compensated for,' says Barclays Plc strategist Joseph Abate. 'People became more aware in March after SVB, which is when the deposit awakening kicked off.'"
The piece continues, "In the wake of the Fed's July rate hike, yields on money-market funds climbed above 5% for the first time since before the 2008 financial crisis, giving savers even more reason to act. To enjoy those higher yields, savers can't stand pat. The average yield on a savings account is about 0.45% as of Sept. 18, which compares with the 5.16% on the Crane 100 Money Fund Index, an average yield of the 100 largest taxable funds, as of August. That spread 'is so wide you can drive a truck through it,' says Peter Crane, president of money-market information provider Crane Data LLC."
It says, "Since the Fed began raising rates 18 months ago, total money-market fund assets have climbed by more than $1 trillion, Investment Company Institute data show, pushing total assets to an all-time high $5.64 trillion. About $900 billion of that has poured in this year. The retail money-fund sector now accounts for 38% of total industry assets, up from about 30% at the end of 2021. Michael Bird is a senior fund manager at Allspring Global Investments, which has seen assets rise about 26% across its money-fund complex this year, with assets in its retail money funds more than doubling. 'A 5% money-market-fund yield versus what your bank is paying you -- it's a no-brainer,' Bird says."
Bloomberg' Alex Harris writes, "Banks were unfazed as cash began leaving for money-market funds at the onset of the hiking cycle. That's because having too much in deposits can be a handicap for some banks. Deposits are considered liabilities, and larger liabilities can force banks to increase capital and subject them to increased regulation. As a result, the banks have felt no urgency to pass along the central bank's aggressive interest-rate hikes."
She comments, "Money funds don't have such worries. To make sure they can respond quickly to rising rates, money-fund managers have been keeping assets in ultrashort investments, such as in the central bank's overnight reverse repurchase agreement facility. So if the Fed announces an increase on a Wednesday, money funds can pass along that hike to investors as early as Thursday."
Bloomberg adds, "Since March, banks have lost almost $700 billion in deposits. And there are signs the outflows are beginning to hurt. After declines in June and July, the largest US banks increased their borrowing in August by 9%, or $70 billion, Federal Reserve data show. Concurrently, the Federal Home Loan Bank System, a general liquidity provider for banks, saw total debt outstanding rise to $1.249 trillion from $1.245 trillion in July. The increase in borrowing by large banks indicates that they're 'not comfortable letting reserves fall much further from current levels,' Citibank strategists Shuo Li and Jason Williams wrote in a report issued on Sept. 15."
Finally, they state, "With Fed officials indicating that they'll be holding interest rates at elevated levels for an extended period, the cash exodus from banks is likely to increase, putting them in a bind. 'Banks have a terrible choice -- crush profitability or lose deposits,' Crane says. 'In this case they're doing both.'"
In related news, the Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets dropping, likely due to Sept. 15 quarterly tax payments, after hitting record levels for 8 out of the previous 9 weeks. ICI's weekly asset series fell to $5.636 trillion, but MMFs remain up a massive $1.05 trillion, or 23.0%, over the past 52 weeks. Assets are up by $901 billion, or 19.0%, year-to-date in 2023, with Institutional MMFs up $455 billion, or 14.9% and Retail MMFs up $445 billion, or 26.5%. (Totals are up $815.6 billion, or 16.9%, since 2/22/23.) Over the past 52 weeks, money funds have risen $1.052 billion, or 23.0%, with Retail MMFs rising by $604 billion (39.8%) and Inst MMFs rising by $447 billion (14.6%).
Their weekly release says, "Total money market fund assets decreased by $7.04 billion to $5.64 trillion for the week ended Wednesday, September 20, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $10.12 billion and prime funds increased by $5.20 billion. Tax-exempt money market funds decreased by $2.11 billion." ICI's stats show Institutional MMFs falling $14.4 billion and Retail MMFs rising $7.3 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.627 trillion (82.1% of all money funds), while Total Prime MMFs were $893.9 billion (15.9%). Tax Exempt MMFs totaled $114.6 billion (2.0%).
ICI explains, "Assets of retail money market funds increased by $7.31 billion to $2.12 trillion. Among retail funds, government money market fund assets increased by $3.12 billion to $1.40 trillion, prime money market fund assets increased by $6.15 billion to $624.45 billion, and tax-exempt fund assets decreased by $1.96 billion to $103.83 billion." Retail assets account for over a third of total assets, or 37.7%, and Government Retail assets make up 65.7% of all Retail MMFs.
They add, "Assets of institutional money market funds decreased by $14.35 billion to $3.51 trillion. Among institutional funds, government money market fund assets decreased by $13.24 billion to $3.23 trillion, prime money market fund assets decreased by $956 million to $269.48 billion, and tax-exempt fund assets decreased by $154 million to $10.73 billion." Institutional assets accounted for 62.3% of all MMF assets, with Government Institutional assets making up 92.0% of all Institutional MMF totals.
According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets broke the $6.0 trillion level on Sept. 1 and hit a record $6.046 trillion on Sept. 12, before easing back to $6.033 trillion Wednesday (9/20). Assets have risen by $53.8 billion in September through 9/20 after rising by $98.3 billion in August and $34.7 billion in July. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.
