Daily Links Archives: January, 2023

Money fund yields inched higher again last week, with our Crane 100 Money Fund Index (7-Day Yield) rising two basis points to 4.14% for the week ended Friday, 1/27. Yields rose by 2 basis points the previous week, and they're up from 4.05% on 12/31/22. They're up from 3.59% on Nov. 30, 2.88% on Oct. 31 and 2.66% on Sept. 30. Yields should move higher again following an expected Feb. 1 Fed hike on Wednesday. The top-yielding money market funds have broken above 4.50% and should move towards 4.75% and 5.0% in coming weeks. (See our "Highest-Yielding Money Funds" table above). The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 675), shows a 7-day yield of 4.03%, up 2 bps in the week through Friday. Prime Inst MFs were up 1 bp at 4.27% in the latest week. Government Inst MFs rose by 2 bps to 4.07%. Treasury Inst MFs up 4 bps for the week at 4.06%. Treasury Retail MFs currently yield 3.80%, Government Retail MFs yield 3.77%, and Prime Retail MFs yield 4.08%, Tax-exempt MF 7-day yields were down at 1.82%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (1/27), 38 funds (808 total) have fallen below the 2.0% yield mark this past week, and many continue to rise over 4.0%; 130 funds yield between 0.00% and 1.99% with $114.9 billion, or 2.2%; 8 funds yield between 2.00% and 2.99% with $11.5 billion, or 0.2%; 256 funds yield between 3.00% and 3.99% ($1.147 trillion, or 22.1%), and 414 funds yield 4.0% or more ($3.921 trillion, or 75.5%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged last week at 0.52%. The latest Brokerage Sweep Intelligence, with data as of Jan. 27, shows that there were no changes over the past week. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.

An SEC filing for the UBS Series Funds explains, "The purpose of this supplement to the prospectus and SAI for UBS Select Prime Investor Fund, UBS Select Government Investor Fund, UBS Select Treasury Investor Fund, and UBS Select ESG Prime Investor Fund, each a series of UBS Series Funds, is to notify you that, at the recommendation of UBS Asset Management (Americas) Inc., the funds' administrator, the Board of Trustees of the Trust approved Agreements and Plans of Reorganization providing for the acquisition of the assets and liabilities of each fund by its respective 'Acquiring Fund,' as set out in the below chart, each also a series of the Trust. The Agreements and Plans of Reorganization set forth the terms by which each of the funds will transfer its assets and liabilities in exchange for shares of the respective Acquiring Fund, followed by the distribution of shares of the Acquiring Fund to the shareholders of each respective fund and the complete liquidation of each fund (collectively, the 'Reorganizations'). Each Acquiring Fund has an identical investment objective and investment strategy to that of each respective fund." The filing shows that the UBS Select Prime Investor Fund merged into the UBS Select Prime Institutional Fund, the UBS Select Government Investor Fund merged into the UBS Select Government Institutional Fund, the UBS Select Treasury Investor Fund merged into the UBS Select Treasury Institutional Fund and the UBS Select ESG Prime Investor Fund merged into the UBS Select ESG Prime Institutional Fund. UBS adds, "After the Reorganizations are consummated, shareholders of each of the funds will become shareholders of the respective Acquiring Fund. The Reorganizations are intended to be tax-free, meaning that shareholders of each of the funds will become shareholders of the respective Acquiring Fund without realizing any gain or loss for federal income tax purposes. The Reorganizations do not require shareholder approval, and you are not being asked to vote on the Reorganizations. Shareholders who own shares of a fund as of the record date will receive an Information Statement/Prospectus containing further information regarding the Reorganizations, which are scheduled to take place on or about January 20, 2023."

Dreyfus published a new "Meet The Manager" Q&A with Senior Portfolio Manager Peter Henshaw. They ask, "Why liquidity solutions?" Henshaw responds, "I wanted to be more involved in investment management and trading, and so I pursued internal opportunities across BNY Mellon. In 2004, I jumped at the opportunity to join the Dreyfus taxable money market desk. I was aware of the strong history of Dreyfus' money market funds dating back to 1974, as well as Dreyfus' formidable industry presence. I joined a talented team of seasoned professionals and was excited by the scope of front-end investing. Daily, we make portfolio decisions based on our expectations for Federal Reserve (Fed) policy, upcoming economic data, issuer credit quality, regulatory constraints, and technicals like future supply of government securities. It's a much more dynamic environment than many appreciate." When asked, "Why are money market funds such an important tool for investors and what could potentially change about the tools available?" He comments, "Money market funds are important for many reasons. The sheer volume of assets in domestic money market funds, $4.8 trillion (as of December 2022), speaks to its role in the broader economy. Corporates look to money market funds for sources of funding at low interest rates. The U.S. Treasury and U.S. government-sponsored agencies all borrow significantly from money market funds. Both institutional and retail investors entrust their cash managers with considerable responsibility. They employ us to be stewards of a very critical portion of their assets --- assets they utilize for short-term operational liquidity as well as for capital preservation.... Investors are happy to see yield on their cash. They are also concerned about when interest rates will peak, how persistent this excessive inflation will be, and the possibility of an upcoming recession." Henshaw adds, "Forthcoming regulatory changes are also at the forefront of investors' minds and how institutional prime funds are managed is likely to change. The Securities Exchange Commission (SEC) modified 2a-7 rules after the Great Financial Crisis (GFC), and the COVID-19 pandemic is the impetus for another round of reforms. It will be well-received if the SEC decouples money market fund liquidity thresholds from fee and gate thresholds. However, 'swing pricing,' where a fund's net asset value (NAV) is adjusted by a swing factor representing certain trading and portfolio costs during periods of significant redemptions, will be more challenging for investors and fund managers to accept and implement. Increases to required daily and weekly liquidity thresholds should have little impact on government money market funds, if mandated."

A Prospectus Supplement filing for the $335 million Invesco Tax-Free Cash Reserve Portfolio says, "On January 19, 2023, the Board of Trustees of Short-Term Investments Trust approved a Plan of Liquidation and Dissolution, which authorizes the termination, liquidation and dissolution of the Fund. In order to effect such liquidation, the Fund will close to investments by new accounts after the close of business on February 24, 2023. Existing shareholders will continue to be able to invest in the Fund until the close of business on or about April 10, 2023 when no further purchases or exchanges into the Fund will be accepted as the Fund prepares for liquidation on or about April 24, 2023 as described below. The liquidation may occur sooner if at any time before the Liquidation Date there are no shares outstanding in the Fund. The liquidation may also be delayed or occur sooner if unforeseen circumstances arise. Shareholders of the Fund may redeem their shares at any time prior to the Liquidation Date. The Fund reserves the right, in its discretion, to modify the extent to which sales of shares are limited prior to the Liquidation Date." It adds, "To prepare for the closing and liquidation of the Fund, the Fund's portfolio managers may increase the Fund's assets held in cash and similar instruments in order to pay for Fund expenses and meet redemption requests. As a result, the Fund may deviate from its stated investment strategies and policies and may no longer be managed to meet its investment objective.... At any time prior to the Liquidation Date, shareholders may redeem their shares of the Fund pursuant to the procedures set forth in the prospectus." For more on recent liquidations, see our Sept. 19, 2022 News, "SSGA to Liquidate State Street ESG Liquid Reserves," and our July 7, 2022 News, "DWS Liquidating Govt Cash Mgmt Fund."

The Wall Street Journal says, "Rich Customers Pull Money From Banks Offering Paltry Interest Rates." The article tells us, "Wealthy savers are starting to take their cash out of bank accounts in search of higher yields. Big banks are still paying paltry interest on checking and savings accounts despite the Federal Reserve's steepest rate increases in decades. Their wealth-management customers are done waiting: They are moving the extra savings they accumulated during the pandemic into products whose rates have more closely tracked the Fed. The typical savings account is paying a 0.33% interest rate, according to the Federal Deposit Insurance Corp. Treasury notes, money-market funds and brokered certificates of deposit, meanwhile, are all paying between 4% and 5%." They quote Jason Goldberg of Barclays PLC, "Every time the Fed hikes, the opportunity cost of leaving idle cash in low-yielding accounts increases. You're seeing consumers who have extra cash being proactive with it." The Journal piece explains, "The divergence was on display in Bank of America Corp.'s fourth-quarter earnings earlier this month. Deposits at the bank's wealth unit, which includes Merrill Lynch Wealth Management, fell 17% in 2022 to $324 billion. Deposits in the consumer unit fell 0.6% to $1 trillion. Affluent customers moved money into money-market funds and Treasurys, Chief Executive Brian Moynihan said on a call with analysts, while the typical consumer-banking customer simply had less extra money to make such investments. The bank paid just 0.06% on consumer deposits in the fourth quarter and 0.88% on U.S. interest-bearing deposits across all businesses." It adds, "The flight of wealth deposits poses a big business issue for firms such as Charles Schwab Corp., which relies on the extra cash that investors leave in their accounts for a large part of its revenue. The biggest U.S. banks have a wider range of businesses. They also accumulated so many extra deposits at the start of the pandemic that losing some isn't a huge problem. Still, they are starting to try to stem outflows by offering higher interest rates to their wealthy clientele. Wells Fargo & Co.'s wealth-management deposits dropped by 28% to $139 billion in 2022 from a year earlier. The bank's consumer deposits were down 3%. At JPMorgan Chase & Co., deposits fell 17% in its asset- and wealth-management unit and 1% in consumer banking."

Allspring Money Market Funds latest "Overview, Strategy, and Outlook" comments on the "U.S. Government sector," "Without a doubt, the aforementioned dynamics between the Fed, inflation, and the markets were the leading story of the year, resulting as they did in interest rates about 3.50% higher now than projected by the Fed and the markets a year ago. If the Fed's battle with inflation was the headliner, though, there was another smaller story playing out -- one about government security supply, the changes in which pushed yields around even as they generally rose with the Fed's moves. The two largest components of supply in the government money markets are Treasury bills (T-bills) and the Fed's reverse repurchase (repo) program (RRP), which together are always (as currently constructed) sufficient to meet demand. That's because the Fed built the RRP to be functionally unlimited, not as an altruistic gesture, but necessarily to transmit monetary policy to the economy by having rates go up when the Fed says they're going up." They write, "T-bills are another story, as they're the perceived gold standard for safe assets worldwide (using the term loosely, as they're arguably better than gold), and for folks without access to the RRP they're the easy choice for parking short-term money. The pretty solid rate floor the RRP has placed under markets such as the repo and federal funds markets gets spongy when it comes to T-bills, and we particularly see that when T-bill supply is contracting. Looking back a year, total T-bills outstanding had declined about $1.2 trillion during 2021, so the market began 2022 fairly desperately seeking the perceived safe assets it so coveted. In 2022, although supply ended the year just $70 billion lower, it waxed and waned throughout the year and so, too, did investors' prospects and patience." Allspring adds, "During periods of expanding supply, T-bill yields began to approach fair value as determined by the RRP rate adjusted for expected Fed interest rate moves. In contrast, during contractions, T-bills got considerably more expensive than the RRP, which is also an essentially risk-free rate, as it's an obligation of the Fed and is also secured by U.S. Treasury securities. That richness reached a crescendo at the end of the year, when short supply teamed up with year-end window-dressing demand to drive 4-week T-bill yields 69 bps lower than the RRP. To clarify, the 4-week T-bill auction near year-end yielded 3.61% while the RRP rate for the entirety of that T-bill’s existence is expected to be 4.30%. If you have a choice, one perceived safe asset is definitely preferable."

Fitch Ratings published, "Stablecoin Risks Extend Beyond Reserving Practices," which tells us, "Reserve practices for major stablecoins have become more conservative, but stablecoin holders continue to face other sources of risk, some of which have been spotlighted in the failure of major cryptocurrency entities, says Fitch Ratings. These include incomplete attestations, weaknesses in the legal rights of stablecoin holders, and contagion risks linked to the cryptocurrency ecosystem. The overall capitalisation of the stablecoin sector has shrunk significantly since the collapse of Terra in May 2022, falling from around USD189 billion at end-April to around USD144 billion at end-December. The bankruptcy of the second-largest crypto exchange, FTX, amid a fraud scandal in November, followed by Binance's pause in withdrawals in December, led to heightened stablecoin redemption activity and episodic unmooring of Tether's USDT and Binance's BUSD stablecoins from par. Both tokens were only unmoored by slight amounts and stablecoin trading velocity has recovered somewhat, but these events have negatively affected sentiment towards stablecoins." They continue, "We believe market concerns and pressure from regulators have driven a trend towards more conservative reserving and some improvement in transparency, although significant variation between stablecoins remains. Reserves for the dominant stablecoins increasingly comprise short-term US Treasuries and cash. For example, Tether has said it reduced its commercial paper exposure by USD24 billion in 2022. Nonetheless, the price volatility of USDT and BUSD is still high compared with money market funds. This reflects lingering risks around reserving practices and transparency, as well as other factors such as contagion risk, counterparty risk, the legal rights of stablecoin holders (notably around redemption rights) and operational risks, including cyber risks." Fitch adds, "We expect the close linkages between major stablecoins and the broader crypto sector to remain a focus for regulators." See also, an earlier piece, "BlackRock's Stablecoin Money Fund Draws Bank Lobby Warning," by ignites, which tells us, "The Bank Policy Institute, whose board members include the chief executives of JPMorgan Chase and Bank of America, has sounded the alarm on BlackRock's $28 billion Circle Reserve Fund. The government money fund, which launched in November, stores a portion of the reserves for Circle Internet Financial's USDC stablecoin. Circle is the only entity allowed to purchase shares of the money fund, and the financial technology firm has said it expects those reserve assets to be 'fully transitioned' to the fund by the end of March 2023. The root of the ... institute's concerns is that BlackRock plans to apply for the money fund to access the Federal Reserve's overnight reverse repurchase agreement facility.... If the Fed grants such access to the money fund, it would render the stablecoin a 'back-door' central bank digital currency, the Bank Policy Institute wrote in a Jan. 4 post on its website."

The Wall Street Journal's CFO Journal posted a piece entitled, "The Morning Ledger: Big Banks' Corporate Deposits Surge Amid Higher Interest Rates." They write, "Finance executives boosted their deposits at big banks in the fourth quarter in expectation of a potential economic downturn and as the Federal Reserve continued to increase interest rates. JPMorgan Chase & Co. late last week said its corporate deposits totaled $14.2 billion for the quarter ended Dec. 31, up from $396 million in the prior-year period. Citigroup Inc. recorded $31.8 billion in corporate deposits, up from $5.8 billion, and Wells Fargo & Co. booked $54.37 billion, up from $32.22 billion, financial documents show. Unlike its peers, Bank of America Corp. saw corporate deposits, listed under its 'All Other' business line, fall 6% to $19.9 billion as of Dec. 31 from $21.18 billion a year earlier." The article explains, "Overall deposit accounts at banks declined over the course of 2022 after a runup during the height of the pandemic. Total deposits were down 5% at JPMorgan, 6% at Bank of America and 7% at Wells Fargo in the fourth quarter compared with the prior-year period. Companies are shifting more of their cash into money-market funds because they consider them nearly as safe as cash and value that invested amounts remain highly liquid and accessible. Yields on money-market funds on average climbed to 4.05% in December from 0.02% a year earlier amid higher interest rates, according to Crane Data, which tracks money funds." CFO Journal adds, "Money-market yields will likely rise after the Fed raises rates again in early February, said Peter Crane, president of Crane Data. Money-market funds and corporate deposits typically see big seasonal jumps in assets at the end of the year, he added."

BlackRock hosted its latest "Q4'22 earnings call last week (see the Seeking Alpha transcript here), which briefly mentioned money market funds. CFO Gary Shedlin comments, "During the year, we invested in Circle and became the primary manager of the U.S. DC cash reserves.... BlackRock's cash management platform experienced $32 billion of net outflows in the fourth quarter and $77 billion of net outflows for the year. Despite a particularly challenging year for the broader institutional liquidity industry, BlackRock became the number one international money market provider. And as rates stabilize, we are well positioned to grow market share by leveraging our scale, product breadth, technology, and risk management capabilities." CEO Larry Fink says, "The role of bonds in the portfolio is increasingly relevant. For the first time in years, investors can actually earn very attractive yields without taking much duration or credit risk. Just a year ago, the U.S. two-year treasury note was yielding approximately 90 basis points, and today, they're earning over 4% with corporate bonds earning over five and high-yield earning eight. Clients are coming to BlackRock to help them pursue generational opportunities in the bond market, and our leading $3.2 trillion fixed income and cash platform is well positioned to capture accelerating demand."

Money fund yields inched higher again last week, with our Crane 100 Money Fund Index (7-Day Yield) rising three basis points to 4.10% for the week ended Friday, 1/13. Yields rose by 1 basis point the previous week. But they're up from 3.59% on Nov. 30, 2.88% on Oct. 31 and 2.66% on Sept. 30. Yields should be flat or inch higher in January, then jump again following an expected Feb. 1 Fed hike. The top-yielding money market funds have broken above 4.50% and should move towards 4.7% in coming weeks. (See our "Highest-Yielding Money Funds" table above). The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 681), shows a 7-day yield of 3.99%, up 5 bps in the week through Friday. Prime Inst MFs were up 3 bps at 4.25% in the latest week. Government Inst MFs rose by 7 bps to 4.04%. Treasury Inst MFs up 6 bps for the week at 3.99%. Treasury Retail MFs currently yield 3.78%, Government Retail MFs yield 3.77%, and Prime Retail MFs yield 4.07%, Tax-exempt MF 7-day yields were down at 2.24%. According to Tuesday's Money Fund Intelligence Daily, with data as of Friday (1/13), 25 funds (820 total) have fallen below the 2.0% yield mark this past week, and many continue to rise over 4.0%; 26 funds yield between 0.00% and 1.99% with $6.8 billion, or 0.1%; 119 funds yield between 2.00% and 2.99% with $126.8 billion, or 2.4%; 300 funds yield between 3.00% and 3.99% ($1.389 trillion, or 26.8%), and 375 funds yield 4.0% or more ($3.659 trillion, or 70.6%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged last week at 0.52%. The latest Brokerage Sweep Intelligence, with data as of Jan. 13, shows that there were no changes over the past week. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.

The New York Times writes on "Investing When Your Time Horizon Is Short. Subtitled, "Cut back on stock and bond holdings, and focus on money market funds, C.D.s, Treasury bills and other options that are now offering high yields, our columnist says," the piece tells us, "Money market fund yields now average more than 4 percent, for large funds sampled by Peter G. Crane, the president of Crane Data in Westborough, Mass. Major companies like Vanguard, Fidelity, Schwab and T. Rowe Price offer such funds. Their yields have rapidly soared from near zero over the last year, following the lead of the Federal Reserve, and they are highly likely to rise closer to 5 percent if the Fed continues to raise interest rates, as it has indicated it intends to do." The piece continues, "Some high-yield savings accounts -- which carry government guarantees, unlike the higher-yielding money market funds-- are now offering interest rates above 3 percent, according to Bankrate.com. Bank C.D.s of a duration of one year or more are beginning to provide yields above 4 percent. Treasury notes with a maturity of two years are offering yields over 4 percent, and Treasury inflation, or I bonds, are paying 6.89 percent. In short, at the beginning of 2022, short-term holdings offered almost nothing appealing. Now, there is a broad range of options with relatively handsome yields, though none look particularly good when inflation is still running at a 6.5 percent annual rate, as the latest numbers show. For the year as a whole, after including dividends, the S&P 500 lost 18 percent, the worst return since 2008. The average stock mutual fund fell 18 percent as well." It adds, "For bonds, it was the worst year in all of modern history, said Edward McQuarrie, an emeritus professor at the Leavey School of Business at Santa Clara University. The 12-month stretch through October was the worst for any 12 months since 1794. The calendar 2022 year returns were terrible, too. The average taxable bond mutual fund lost 9.9 percent for the year. And long-term Treasury bonds, as measured by two leading exchanged-traded funds, the Vanguard Long-Term Treasury E.T.F. and the iShares 20+ Year Treasury Bond E.T.F., lost nearly 30 percent of their value."

ICI's latest weekly "Money Market Fund Assets" report shows money fund assets declining after they hit a record $4.814 trillion last week. Money funds fell following their biggest weekly increase since April 29, 2020; they've risen in 8 of the past 11 weeks, rising by $221.0 billion, or 4.8%, since October 26. Over the past 52 weeks, money fund assets are up by $131 billion, or 2.8%, with Retail MMFs rising by $251 billion (16.9%) and Inst MMFs falling by $120 billion (-3.8%). ICI shows assets up by $70 billion, or 1.5%, year-to-date in 2023 (the first 2 weeks), with Institutional MMFs up $14 billion, or 0.5% and Retail MMFs up $56 billion, or 3.3%. (See our Jan. 5 News, "Money Fund Assets Hit Record $5.23 Trillion; Weekly Holds; Fed Minutes.") The weekly release says, "Total money market fund assets decreased by $8.87 billion to $4.81 trillion for the week ended Wednesday, January 11, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $33.52 billion and prime funds increased by $18.93 billion. Tax-exempt money market funds increased by $5.73 billion." ICI's stats show Institutional MMFs falling $21.2 billion and Retail MMFs increasing $12.3 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.986 trillion (83.0% of all money funds), while Total Prime MMFs were $697.3 billion (14.5%). Tax Exempt MMFs totaled $121.6 billion (2.5%). ICI explains, "Assets of retail money market funds increased by $12.30 billion to $1.73 trillion. Among retail funds, government money market fund assets decreased by $3.76 billion to $1.19 trillion, prime money market fund assets increased by $10.99 billion to $439.85 billion, and tax-exempt fund assets increased by $5.06 billion to $108.49 billion." Retail assets account for over a third of total assets, or 36.1%, and Government Retail assets make up 68.4% of all Retail MMFs. They add, "Assets of institutional money market funds decreased by $21.17 billion to $3.07 trillion. Among institutional funds, government money market fund assets decreased by $29.76 billion to $2.80 trillion, prime money market fund assets increased by $7.93 billion to $257.41 billion, and tax-exempt fund assets increased by $662 million to $13.09 billion." Institutional assets accounted for 63.9% of all MMF assets, with Government Institutional assets making up 91.2% of all Institutional MMF totals. Month-to-date in January 2023 (through 1/11/23), money fund assets decreased by $5.4 billion, according to our Money Fund Intelligence Daily. (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.)

The Federal Reserve Bank of New York's "Liberty Street Economics blog features a posting entitled, "Foreign Banking Organizations in the United States and the Price of Dollar Liquidity," which tells us, "Foreign banking organizations (FBOs) in the United States play an important role in setting the price of short-term dollar liquidity. In this post, based on remarks given at the 2022 Jackson Hole Economic Policy Symposium, we highlight FBOs' activities in money markets and discuss how the availability of reserve balances affects these activities. Understanding the dynamics of FBOs' business models and their balance sheet constraints helps us monitor the evolution of liquidity conditions during quantitative easing (QE) and tightening (QT) cycles." On "FBOs' Balance Sheets," they comment, "We focus our discussion on the branches and agencies of foreign banks in the United States, excluding foreign subsidiaries. These FBOs have distinct balance sheets compared to U.S. banks, featuring a higher share of reserves, a lower share of deposits, larger positions with overseas affiliates, and overall more flexibility in balance sheet adjustments (see chart). The FBOs are marginal price setters of the price of dollar liquidity in the wholesale funding markets for at least two important reasons. First, they generally do not have access to deposits insured by the Federal Deposit Insurance Corporation (FDIC), so they primarily depend on wholesale funding and capital market borrowing for their dollar needs. Second, the FBOs help intermediate flows of dollar liquidity in the international financial markets to foreign market participants, acting as a key bridge between onshore and offshore dollar funding markets." The blog adds, "Through the lens of FBOs, we have learned that fluctuations in dollar funding conditions crucially depend on the supply of bank reserves and banks' balance sheet constraints. When reserves are ample or abundant, money market rates have downside risks if the supply of reserves is greater than banks' balance sheet space to engage in IOR arbitrage. When reserves are scarce, money market rates have upside risks if the supply of reserves is lower than banks' demand for reserves arising from regulations or risk management motives."

The website Ledger Insights writes, "Rabobank runs blockchain commercial paper pilots with Euroclear, Northern Trust." They tell us, "Rabobank used blockchain to issue €40 million in one-week maturity euro commercial paper across 19 pilot transactions. With rising interest rates, blockchain is coming to the fore to empower shorter settlement times, enabling intraday transactions and hence improving liquidity. The commercial paper, denominated in euros and pounds, was issued by the Dutch State Treasury, Rabobank Treasury and Austria's Erste Bank, with Northern Trust Asset Management as the investor. Rather than taking two days, the issuance, distribution and settlement took under 30 minutes and cost less than the conventional process. Liquidity was enabled on both the primary and secondary markets." Rabobank's Roland van der Vorst, comments, "Blockchain's reputation as a technology with legitimate applications for global financial markets has undoubtedly been shaken by the turmoil surrounding cryptocurrencies. The scale and success of our pilot, delivered in partnership with some of the biggest financial institutions in Europe, will hopefully help to address misconceptions and show the revolutionary impact innovation in this space can truly have." The article adds, "Rabobank developed the platform based on R3's enterprise blockchain Corda, which was also used in pilots last year."

Money fund yields inched higher again last week, with our Crane 100 Money Fund Index (7-Day Yield) rising just one basis point to 4.07% for the week ended Friday, 1/6. Yields rose by 2 basis points the previous week. But they're up from 3.59% on Nov. 30, 2.88% on Oct. 31 and 2.66% on Sept. 30. Yields should be flat or inch higher in January, then jump again following an expected Feb. 1 Fed hike. The top-yielding money market funds have broken above 4.50% and should move towards 4.7% in coming weeks. (See our "Highest-Yielding Money Funds" table above). The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 680), shows a 7-day yield of 3.95%, up 2 bps in the week through Friday. Prime Inst MFs were unchanged at 4.22% in the latest week. Government Inst MFs rose by 2 bps to 3.97%. Treasury Inst MFs up 3 bps for the week at 3.93%. Treasury Retail MFs currently yield 3.72%, Government Retail MFs yield 3.73%, and Prime Retail MFs yield 4.06%, Tax-exempt MF 7-day yields were down at 2.84%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (1/6), every money market fund (except one)(819 total) yields over 2.0%, and almost all are now over 3.0%; 97 funds yield between 2.00% and 2.99% with $52.0 billion, or 1.0%; 389 funds yield between 3.00% and 3.99% ($1.889 trillion, or 36.2%), and 322 funds yield 4.0% or more ($3.275 trillion, or 62.8%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, rose one basis point last week to 0.52% as Ameriprise Financial and TD Ameritrade tweaked rates higher. The latest Brokerage Sweep Intelligence, with data as of Jan. 6, shows that Ameriprise Financial Services increased rates to 0.45% for all balances between $100K and $249K, to 0.60% for balances between $250K and $499K, to 0.75% for balances between $500K and $999K, to 1.73% for balances between $1 million and $4.9 million, and increased rates to 1.98% for all balances over $5 million. TD Ameritrade increased rates to 0.35% for all balances between $1K and over $5 million. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.

A website named Ledger Insights posted a piece entitled, "Banks concerned USDC stablecoin will become 'backdoor CBDC' with BlackRock help." They explain, "The Bank Policy Institute, a bank-supported think tank, published a blog post raising concerns that a proportion of the USDC stablecoin reserves could be parked at the Federal Reserve, despite the stablecoin issuer not having a central bank account. If this were allowed, in times of uncertainty when there's a flight to quality, this could result in bank runs diverting cash into the USDC stablecoin, which might be perceived as being as good as a central bank digital currency (CBDC). Since November, BlackRock has been managing a large portion of the reserve assets of the USDC stablecoin on behalf of the stablecoin issuer, Circle. BlackRock created a bespoke money market fund, the Circle Reserve Fund, which invests in U.S. short-dated Treasuries. It currently manages around two thirds of the assets of the $44 billion stablecoin, which keeps 80% of its reserves in Treasuries." The article adds, "The BPI claims that BlackRock has applied for the RRP facility. It further asserted that 20% of USDC reserves currently held at banks could be shifted to the RRP program. After publication a Circle spokesperson told Ledger Insights via email, 'In time, we expect that the Circle Reserve Fund will apply for access to the Fed's RRP program. If access is received, we would have the option to move USDC cash reserves inside the fund and into the RRP program. We would also continue to maintain a portion of our cash reserves inside the regulated U.S. Banking system. The RRP route is potentially better than a synthetic CBDC. The latter involves a digital currency that is backed by a stablecoin issuer's cash held at the central bank. This reduces counterparty risk because there's no bank risk. However, the account still belongs to a private entity which means there is some risk, whereas the counterparty of the RRP is the Federal Reserve itself." (See also the Bank Policy Institute's "Circle’s Road to a Back-Door CBDC.")

Earlier this week, The Wall Street Journal wrote, "Federal Reserve, FDIC and OCC Warn Banks About Cryptocurrency Risks," which explained, "A group of powerful bank regulators on Tuesday highlighted what they said were a litany of risks stemming from cryptocurrencies and expressed skepticism that the assets can be safely held by the financial institutions they oversee. The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said that recent failures of major crypto firms led them to exercise caution in reviewing banks' proposals to engage with the market. They highlighted fraud and scams, market volatility, legal uncertainty, and weak risk-management and governance practices at crypto firms, among other things, as reasons for concern." The regulators' release, entitled, "Agencies issue joint statement on crypto-asset risks to banking organizations," states, "Federal bank regulatory agencies today issued a statement highlighting key risks for banking organizations associated with crypto-assets and the crypto-asset sector and describing the agencies' approaches to supervision in this area. In particular, the statement describes several key risks associated with crypto-assets and the crypto-asset sector, as demonstrated by the significant volatility and vulnerabilities over the past year.... The agencies continue to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that is safe and sound, legally permissible, and in compliance with applicable laws and regulations, including those designed to protect consumers. The agencies will continue to closely monitor crypto-asset-related exposures of banking organizations, and, as warranted, will issue additional statements related to engagement by banking organizations in crypto-asset related activities." The Journal's piece adds, "They also warned of the susceptibility of so-called stablecoins -- cryptocurrencies backed by supposedly safe, dollar-denominated assets -- to potential runs by spooked investors. `Such events could cause sudden deposit outflows for banks that hold cash reserves for stablecoin issuers. The second-largest stablecoin issuer, Circle Internet Financial Ltd., said recently that it had more than $11 billion in cash held at banks including Silvergate, Bank of New York Mellon Corp., Citizens Trust Bank and Customers Bank."

A Prospectus Supplement filing for the $47 million Harbor Money Market Fund tells us, "Harbor Funds' Board of Trustees has determined to liquidate and dissolve Harbor Emerging Markets Equity Fund and Harbor Money Market Fund. The liquidation of each Fund is expected to occur on December 9, 2022. The liquidation proceeds will be distributed to any remaining shareholders of the Funds on the Liquidation Date. Shareholders may exchange shares of a Fund for another Harbor fund, or redeem shares out of a Fund, in accordance with Harbor's exchange and redemption policies as set forth in the Funds' prospectus, until the Liquidation Date." It adds, "In order to ready the Funds for liquidation, each Fund's portfolio of investments will be transitioned prior to the planned Liquidation Date to one that consists of all or substantially all cash, cash equivalents and debt securities with remaining maturities of less than one year. As a result, shareholders should no longer expect that each Fund will seek to achieve its investment objective as stated in the Funds’ prospectus. Because the Fund will be liquidating, Harbor Emerging Markets Equity Fund is now closed to new investors. Harbor Money Market Fund was closed to new investors after the close of business on Friday, May 15, 2020 and will remain closed. The Funds will no longer accept additional investments from existing shareholders beginning on November 25, 2022. As of the Liquidation Date, the checkwriting privilege for shareholders in Harbor Money Market Fund will terminate. Effective immediately, check books will no longer be issued. Any checks written prior to the date of this supplement will be honored. Any checks written after the date of this supplement will be payable until the Liquidation Date." Harbor was the smallest of 61 money fund managers tracked by our Money Fund Intelligence XLS. For more on Liquidations, see these recent Crane Data News stories: "SSGA to Liquidate State Street ESG Liquid Reserves" (9/19/22); "Delaware Pauses Cash Liquidation" (11/1/21); "March MFI: Liquidations, Changes; Ameriprise's Chris Melin; Deposits" (3/5/21); and, "Rolling w/Reform Changes III: Recap of '20 Prime Exits, News & Moves" (1/7/21).

Federated Hermes Deborah Cunningham writes in her latest monthly commentary, "Sweet spot," "Cash should still reign. The liquidity industry's gain from stock and bond investor pain should continue in 2023. In particular, with yields rising with each Federal Reserve hike, money markets should retain their status as an in-demand asset class. Money funds in particular should hit a sweet spot even when hikes cease because they are able to invest further out the yield curve to seek higher yields. The Fed's quantitative tightening should finally have a meaningful effect on the front end of the curve as the amount of Treasuries moving from its balance sheet to the marketplace becomes big enough to provide relief to government money funds. We also think the municipal market will stabilize at attractive levels as early as this quarter. Lastly, the prime space should continue its success borne of large spreads over Treasuries, led by retail prime inflows." She comments, "Money fund regulation delayed? Once on the fast track, new money fund reform appears to have been passed by other pressing business. The implosion of FTX has put cryptocurrency high on the SEC's target list, and its proposal for swing pricing in non-money-market funds is facing major pushback. We are hopeful that the continued delay also is because the SEC is taking the liquidity industry concerns about potential money fund changes into account. The most troubling of these are mandating retail and government money funds to float NAVs in a negative-rate environment and for institutional prime and municipal products to adopt swing pricing in times of net redemptions. Whatever regulations are passed likely won't be implemented until 2024."

American Banker discusses, "How deposit competition reignited -- and why it should continue in 2023." They write, "When the year started, deposits were one of the more boring parts of banks' balance sheets, as they had been for several years. But then inflation took off, and the Federal Reserve hiked interest rates aggressively, which resulted in higher yields on a variety of safe investments, such as money market funds and U.S. Treasury securities. Banks, in turn, felt pressure to pay more for deposits -- to ensure that customers didn't park their money elsewhere. Suddenly the deposit market was no longer so sleepy." The article explains, "The industry was comfortable with some level of deposit outflows, given the vast amounts of cash that had flooded into the banking system from pandemic-era stimulus funds and companies' larger cash buffers. And so far, the Fed's rapid rate hikes have generally helped banks by letting them charge more on their loans. But the central bank is set to keep rates high for a while, and the ongoing reduction of its bond portfolio is also removing liquidity from the system. So analysts expect deposit costs to keep rising next year, dampening the industry's profitability by reducing the benefit of higher rates on loans." American Banker adds, "The pressures are expected to be more muted at banks with higher-quality deposits, which are less likely to leave or be repriced upward. 'We believe the quality and type of deposits will begin to separate bank stock performance,' RBC Capital Markets analyst Gerard Cassidy wrote in a note to clients. What follows is a look at how the deposit picture shifted for banks in 2022, and how the industry is responding to the new landscape."

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