A new publication called "Income Matters Today," written by former Barron's columnist Lawrence Strauss recently interviewed our Peter Crane in a piece entitled, "Juicy Yields: An industry expert weighs in on money market funds."It explains, "For many years, as interest rates were very depressed thanks in no small part to the Federal Reserve's quantitative easing program, money market mutual funds had puny yields. But that's reversed. To fight inflation, the Federal Open Market Committee has aggressively raised short-term rates since early last year, effectively boosting yields across the bond market. Money market funds have been a big beneficiary. Assets total about $6 trillion, an all-time record. For some perspective on these funds, which typically invest in shorter-term securities such as Treasury bills, Income Matters Today spoke with Peter Crane, a leading expert on these funds. This is an edited version of that conversation." (Note: Thanks to those who attended and supported our European Money Fund Symposium in Edinburgh this week! Watch for highlights of the show in coming days and in our next Money Fund Intelligence!)
The interview asks, "What's important for retail investors to be thinking about when it comes to money market mutual funds?" Crane comments, "Money markets and cash are just for money that you might need tomorrow -- the shortest-term and the safest investment bucket. Money market mutual funds, which aren't bank deposits and aren't insured by the FDIC [Federal Deposit Insurance Corporation], became popular because bank interest rates stunk in the past. They are not very good now, in most cases."
"Money funds got to be a $6 trillion vehicle because they give investors what the market gives them. That's an important point that has been lost. Often with investing, you have to know where the market is. If the market is paying 5.25% and you're getting 5%, you're good. If the market's paying 2% and you are getting 5%, you are taking a major risk -- and there's something wrong with that. So that market rate of return has been the key to the success of money market mutual funds. And, of course, they offer convenience -- notably liquidity and safety."
"Money market yields have been very attractive lately at around 5% on average, but that wasn't the case for many years with ultra-low interest rates. Prior to early last year when the Fed started hiking short-term rates, money market rates had been almost zero for 14 out of the last 17 years. So, we've come through an unusual period of zero yields. Historically, money funds have had a yield advantage over bank deposits. Bank deposits, though, had a safety advantage, owing to the FDIC protection, but that's sort of shifted. Of course, when there's no yield, all you care about is safety and liquidity. But now that money funds are almost entirely invested in government securities such as Treasuries, that safety differential has changed as well."
The newsletter says, "U.S money market fund assets have surged to $6 trillion. What's driving that?" Crane responds, "The assets keep hitting records every day. Money market fund inflows show no signs of stopping. The retail flows are being driven by money trying to get a competitive rate. That's brokerage money moving out of bank sweep [accounts] and into money funds. It's also high net-worth money and institutional money coming in. Those 5% yields are definitely bringing in a lot of cash. Retail assets have been growing at 40% over the last year; institutional at 15%."
Income Matters Todays writes, "Where are the money market flows coming from right now?" Crane tells them, "Most of the money in money markets isn't going into the stock market; it's being used for different personal finance business purposes and cash. Most of the money we've seen coming into money markets this year isn't coming out of the stock market; it's coming out of bank deposits. In general, everybody, because the markets have done so well over the past 20, 30 years, is overweight stocks and bonds and underweighted cash. But the world's still a dangerous place. If investors don't have that cash cushion -- and if they don't have that emergency buying power -- it's a great time to reconsider that. But it's bank deposits that have been the main driver of money market mutual fund flows these days, because bank deposit rates are so low generally."
They query, "What kind of yields are you seeing?" We respond, "The Crane 100 money fund index, which is an average of the largest funds, was 5.16% as of Sept. 14. It's sort of flatlined there over the last two, three weeks as the most recent Fed hike in late July gets digested."
The article also asks, "Have you seen any other factors contribute to the pick up in money market fund inflows?" Crane says, "They've gradually been building for the last year and a few months. In March, when you saw the Silicon Valley Bank tremor, and concerns about the health of regional banks you had a big shift of institutional assets. Until the government guarantees all bank deposits, that uninsured deposit slice remains vulnerable. It's still around $7 trillion out of the $18 trillion total."
The piece adds in an "Editor's note: The U.S. Securities And Exchange Commission recently approved amendments to some of its rules for these funds, partly owing to concerns about transparency and liquidity. SEC Chairperson Gary Gensler noted in a July statement outlining the proposals that there's 'a potential structural liquidity mismatch' for money market funds. 'Investors can redeem their money market fund holdings on a daily basis, even if those funds keep some of their holdings in securities with less liquidity,' he added."
The article tells us, "The new rules attempt to shore that up. There have been a few times -- during the financial crisis in 2008 and early in the pandemic in March of 2020 -- when liquidity surfaced as an issue. What's important to keep in mind here?" Crane comments, "The SEC has changed Rule 2a-7 of the Investment Company Act of 1940 a number of times since the birth of money funds a little over 50 years ago. This latest round increases the liquidity requirements so you're going to see even more government money funds -- that means more Treasury bill holdings and the like."
He adds, "During the last couple of rounds of rule changes, you saw a big shift away from credit [securities] and into government holdings to make them safter. Most of the technical changes relate primarily to the prime institutional funds, whose holdings can include commercial paper, and certificates of deposit, corporate notes. Retail investors as a whole, though, won't see that much change in money funds."
Finally, they ask, "What kinds of holdings are you seeing in government money market funds catering to retail investors?" We tell them, "The weighted average for how long it takes a money fund to turn over its portfolio is 25 days. So even a one-month Treasury bill is longer than that. But one- and three-month Treasury bills are usually what you are looking at for a lot of the holdings in these particular funds."
