Daily Links Archives: December, 2018

Forbes.com's "In A Bold Asset Grab, Robinhood Offers 3% Interest On Checking And Savings Accounts" says, "More financial technology startups are wading into a crowded, stodgy business: checking accounts. Last spring, personal finance app Acorns and lending startup SoFi announced new debit cards. 'Neobank' Chime has been offering free online checking accounts since 2014, and it has 2.3 million users today. Now Robinhood is crashing the party, offering 3% interest on both checking and savings accounts. That's the highest rate on the market. It dwarfs the national average of 0.10% for savings accounts, and it's well above the second-highest rate of 2.25% offered by BBVA, according to Bankrate.com." The piece adds, "Founded in 2013, Robinhood has built a base of more than 6 million users by providing commission-free stock and cryptocurrency trades.... Across Robinhood's six million accounts, Forbes estimates its customers' assets are in the tens of billions of dollars (the company declined to comment on total assets). Why is Robinhood expanding into checking accounts? The main reason seems to be to seize market share. As competition for digital-first deposit accounts heats up, and as JPMorgan Chase walks further onto Robinhood's turf by offering free stock trades, Robinhood wants to hoard more customers for their long-term value, even if it loses money in the short term. Co-CEO Baiju Bhatt says Robinhood aims 'to make it so that customers don't need to go anywhere else for financial services.' To help fund the sky-high 3% rate, Bhatt says the startup will invest customers' deposits into other securities like Treasurys. But short-term Treasury yields are well below 3%, so Robinhood will initially take a loss on that spread. It will make up for some of that difference on the interchange fees (charged to merchants) it will collect when someone uses a Robinhood debit card to make a purchase. But the program likely won’t be profitable in the short term." See also, the misguided Bloomberg Opinion piece, "Robinhood's 3% Interest Checking Is Just a Money-Market Fund."

Bloomberg writes on "The Death of Fed Funds?" The article says, "The debate to replace the Federal Reserve's key interest rate has begun. Spurred by declining volumes and the dominance of a few participants in the market for fed funds, the central bank has started discussing potential alternative policy benchmarks as it seeks firmer control over the nation’s short-term interest rates.... Federal Open Market Committee members brought up two potential alternatives at last month's meeting, and they could hardly be more different. What's more, some strategists say a policy-targeting pivot could come as soon as next year." They quote Bank of America Corp.'s Mark Cabana, "The Fed knows that fed funds is flawed.... It's probably fatally flawed in their mind, and in the market's mind." It's possible to have a new rate by the end of 2019.... The way the Fed will likely do this is if they are targeting a range of money-market rates and looking at fed funds, OBFR and secured funding rates to make a determination of policy. It won't be as specific to fed funds." Bloomberg continues, "Not everyone agrees. Despite its flaws, fed funds is likely to remain the central bank's preferred rate for now, given OBFR's limitations and the dramatic changes to Fed communication that would be necessary to transition to a repo-based rate, according to Barclays Plc strategist Joseph Abate." Abate says, "The Fed is tied to the funds rate now as the funds rate is first of all seen as a measure of liquidity, and more importantly pressure in the rate is seen as an indication of the Fed's future policy path.... If that doesn't change, then -- and this is a philosophical question -- does it matter that there is volume underneath it? It hasn't mattered up until now because there is volume."

Crane Data is gearing up for its next "basic training" conference, Money Fund University. Our 9th annual MFU will take place at the Stamford Marriot Hotel in Stamford, Conn., January 17-18, 2019. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers. (See the agenda here or e-mail us to request the latest brochure.) Money Fund University offers a 2-day crash course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, and money market instruments such as commercial paper, CDs and repo. We also cover portfolio construction and credit analysis. At our Stamford event in January, we will also take a look at newly implemented European money market fund regulations and we'll also include a mini "Bond Fund University" segment on ultra-short bond funds and money fund alternatives. Attendee registration for Crane's Money Fund University is just $500, exhibit space is $2,000, and sponsorship opportunities are $3K (Bronze), $4K (Silver), and $5K (Gold). A block of rooms has been reserved at the Stamford Marriot Hotel. We'd like to thank our past and pending MFU sponsors -- Dreyfus/BNY Mellon CIS, J.P. Morgan Asset Management, Fitch Ratings, TD Securities, S&P Global Ratings, Dechert LLP, Fidelity and Federated -- for their support, and we look forward to seeing you in Stamford in January. Visit www.moneyfunduniversity.com to register or for more details. Crane Data is also preparing for its next Bond Fund Symposium (March 25-26, 2019, at the Loews Philadelphia Hotel), and our next "big show," Money Fund Symposium, which will be held June 24-26, 2019, at the Renaissance Boston. Watch for details on these shows in coming weeks and months.

Bloomberg writes "Fidelity dominates money-market industry as assets grow to $629 billion." The article says, "Fidelity Investments is dominating a business that is thriving even as stocks and bonds struggle. Fidelity's money-market assets grew to $629 billion as of Oct. 31 -- nearly twice as much as its closest rival, Vanguard Group, according to Crane Data. The Boston-based fund company has added more than $50 billion this year, mostly from inflows. Rising short-term interest rates have lifted yields on the cash-like funds to about 2%, magnifying their allure at a time when other asset classes are under pressure. The trend has helped companies including Vanguard, JPMorgan Chase & Co. and Goldman Sachs Group Inc. As the biggest provider, Fidelity is benefiting the most, raising its market share to more than 20%." The piece quotes Peter Crane, "Fidelity has more buckets and bigger buckets than anyone else and it is starting to rain again," and they quote Fidelity's Tim Huyck, "Some of the smaller players have exited and we have been the beneficiary of that." Bloomberg adds, "Fidelity has another edge: Its 20 million brokerage customers. When those clients sell securities and leave money in cash, it sits in the firm's money-market funds. Those deposits represent more than one-third of Fidelity's money-fund assets. Industrywide, expense ratios on large money-market funds average about 27 basis points, or 0.27%, according to Crane Data. While their fee levels are below those on most active equity and bond funds, 'it is a relatively attractive business, in part because it is very stable,' said Kenneth Lee, an analyst at RBC Capital Markets.... Fidelity has been offering money funds since 1974, when it became the first provider to allow customers to write checks from their accounts. Closely held Fidelity doesn't publicly break out revenue for the segment, but Crane estimated it could be as much as $1.7 billion annually based on current management fees."

Last week, Forbes.com wrote the article, "Enhanced Yield: Buyer's Guide to Short-Term Bond Funds." They ask, "Where should you put your rainy-day fund?" The piece tells us, "A low-risk piece of paper from the U.S. Treasury yields 2.8%. You're probably not getting anything like that on the cash you have sitting in a bank. What follows is an instruction manual on extracting the most from uninvested cash. We'll look at money funds, CDs, bond ETFs, terminating ETFs and Treasury notes. Some of these options entail a bit of risk. All of them offer better returns than the stingy amounts paid on checking accounts." On "Money funds," Forbes writes, "These days the yield curve is rather flat, which is another way of saying that you don't get a particularly rich reward for stretching out the maturity of your fixed-income portfolio and taking the risk that rates will rise. So, there is much to be said for parking your cash in a money-market fund. You'll be at the low end of the yield curve but you won't be taking chances." The post adds, "The tricky business is attaching a money market fund to your transaction account (where you receive direct deposits and disburse electronic payments).... You can stash your rainy-day kitty in an exchange-traded fund that owns short-term bonds, those due in three years or less."

The Investment Company Institute released its latest weekly "Money Market Fund Assets" report yesterday. It shows a huge drop in money fund assets. (Our MFI Daily, which wasn't published Wednesday due to the Bush Memorial Day, showed a decline of $50.3 billion on Tuesday, Dec. 4, but an increase of $63.3 billion yesterday. We're guessing the outflows were related to the market closing Wednesday.) ICI's latest assets series shows MMFs plunging after 6 straight weeks of strong gains. Government assets plunged, while Prime and Tax Exempt MMFs increased. Overall assets are now up $71 billion, or 2.5%, YTD, and they've increased by $102 billion, or 3.6%, over 52 weeks. Retail MMFs have increased by $103 billion, or 10.1%, while Inst MMFs are down $31 billion, or -1.7%, YTD. Over 52 weeks, Retail money funds have gained $120 billion, or 12.1%, while Inst money funds are down $18 billion, or -1.0%. ICI writes, "Total money market fund assets decreased by $34.50 billion to $2.91 trillion for the six-day period ended Tuesday, December 4, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $40.45 billion and prime funds increased by $4.21 billion. Tax-exempt money market funds increased by $1.74 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.217 trillion (76.2% of all money funds), while Total Prime MMFs stand at $548.0 billion (19.0%). Tax Exempt MMFs total $138.5 billion, or 4.8%. They explain, "Assets of retail money market funds decreased by $3.27 billion to $1.12 trillion. Among retail funds, government money market fund assets decreased by $7.78 billion to $658.29 billion, prime money market fund assets increased by $2.85 billion to $326.47 billion, and tax-exempt fund assets increased by $1.66 billion to $131.77 billion." Retail assets account for over a third of total assets, or 38.4%, and Government Retail assets make up 59.0% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds decreased by $31.23 billion to $1.79 trillion. Among institutional funds, government money market fund assets decreased by $32.67 billion to $1.56 trillion, prime money market fund assets increased by $1.36 billion to $225.75 billion, and tax-exempt fund assets increased by $78 million to $8.45 billion." Institutional assets account for 61.6% of all MMF assets, with Government Inst assets making up 86.9% of all Institutional MMFs.

A press release entitled, "Fitch Ratings 2019 Outlook: Global Money Market Funds" tells us, "Fitch Ratings expects ratings to remain stable across its portfolio of global money market funds (MMFs) in 2019. European money fund reform will reach completion in 2019, regulatory intervention will likely persist in China where assets have seen significant growth, and U.S. MMFs, having adjusted to 2016 reforms, could benefit from rising rates and the return of foreign cash. While the European reforms will bring about changes in the form of new structures and more stringent liquidity and diversification standards, the process has been a gradual one and the transition to the new operating environment is expected to be smooth with a number of managers having already successfully converted to post-reform formats. The U.S. remains the largest region in terms of money fund assets under management; however, China's MMF industry has experienced sustained demand hitting record asset levels and is expected to continue to grow throughout 2019. Chinese regulators remain active in tightening policy in order to manage potential liquidity and concentration risks as inflows persist and the industry could possibly adopt certain products and procedures that have been popularized by recent U.S. and European reforms. While expressively slower than the growth rate seen in China, Fitch anticipates U.S. money funds to continue to attract investors back to the space as yields rise and funds continue to exhibit muted net asset value volatility. U.S. tax reform enacted at the end of 2017 could also lead to additional flows into U.S. funds as corporations bring money back on shore."

BlackRock's BIF Money Fund, which was formerly the Merrill Lynch CMA Money Fund and at one time was the largest money fund in the world, liquidated on Friday, as Merrill Lynch takes steps to squeeze out the last segments of brokerage sweep assets left in money market funds. A Prospectus Supplement for the BBIF Money Fund and BBIF Treasury Fund says, "On September 26, 2018, the Board of Trustees of BBIF Money Fund and BBIF Treasury Fund (each individually, a 'Fund' and collectively, the 'Funds') approved a proposal to liquidate the Funds. Accordingly, on or about November 30, 2018 (the 'Liquidation Date'), all of the assets of the Funds will be liquidated completely, the shares of any shareholders holding shares on the Liquidation Date will be redeemed at the net asset value per share and each Fund will then be terminated. Shareholders may continue to redeem their Fund shares at any time prior to the Liquidation Date. The Funds may not achieve their investment objective as the Liquidation Date approaches. Shareholders should consult their personal tax advisers concerning their tax situation and the impact of the liquidations on their tax situation." For more on brokerages shifting sweep assets from money funds into lower-paying bank deposits, see our Nov. 28 News, "SF Chronicle on Brokerage Sweeps; Bloomberg on Europe Rejecting RDM," which says, "Here's a look at what some brokerage firms are doing with their sweep accounts. Merrill Lynch: Before September, Merrill Lynch clients had a choice of money market funds or bank deposits as their sweep account, but only 4 percent chose money market funds, according to a company spokeswoman. In September, Merrill made bank accounts the only sweep option for most new accounts."

A video on Charles Schwab's website asks, "Are You Going Too Short-Term in Your Bond Portfolio?" Schwab's Kathy Jones explains, "With the Federal Reserve raising interest rates over the past couple of years, short-term investments like treasury bills and CDs with maturities of under a year or so have become very popular with investors, and rightly so. In the treasury bill market, a one-year T-bill right now will generally yield around 2.3%. A year ago, you would have had to buy a seven-year treasury note to get that much yield. So, naturally, investors have gravitated to the part of the market where they can get more yield with less interest-rate risk over time. But one of the concerns that we have is that investors may be getting too short-term in their bond portfolios." She adds, "As the Federal Reserve has been raising short-term interest rates over the past couple of years, we've suggested investors focus the average duration in their fixed income portfolios in the short-to-intermediate-term area -- that is, two to five years for treasuries and investment-grade corporate bonds. And the reason is that as the Fed raises short-term rates, the yield curve tends to flatten, the difference between long- and short-term rates tends to narrow, and you get more return for less interest rate risk at the shorter end of the yield curve. But we don't think investors should abandon intermediate- or longer-term bonds entirely in their portfolios."