Daily Links Archives: July, 2023
Barron's: It's a Good Time for Savers
Barron's writes, "It's a Good Time for Savers. 3 Places to Park Your Cash Now." They tell us, "There may be some uncertainty over the Federal Reserve's moves on interest rates over the next few months, but regardless of what the Fed does, it is still a good time for savers. The Fed's rapid rate-hikes not only mean they can earn interest on their nest eggs, savers also finally have options for how to do so. Yields on money-market funds are hovering around 5%, which is well above the 0.5% average for savings accounts, according to Bankrate data. With the Fed seemingly intent on raising rates by 25 basis points to a range of 5.25% to 5.5% at its meeting this week, that yield looks pretty healthy." Tom Essaye, founder of Sevens Report Research, told Barron's, "Money markets pay 5% and they're incredibly safe. It's a great place to park cash while deciding what you want to do." The piece continues, "For investors taking a more bullish view on the economy, high yield or corporate debt could be a place to invest. The SPDR Bloomberg High Yield Bond ETF (JNK) currently yields 6.4% while the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) yields 5.6% -- both a tick above current money market rates. There could be even more upside for investors, presuming the economy doesn’t turn south." It adds, "'We're at a point here where, after 500 bps of tightening, we're approaching the end. We probably have one or two more hikes,' Jeff Weaver, senior portfolio manager at Allspring Global Investments, said recently at a Crane Data conference. With the Fed likely to leave rates higher for longer because of a tight labor market and high inflation, going out on the curve does make sense. 'But certainly, we’re nearing the end of the interest-rate hike cycle and it does warrant some extension,' he said." Of course, investors can be forgiven for avoiding the coin flip on the path of the economy and instead sticking with money markets. Sometimes simpler is better -- and just as profitable."
MarketWatch on Money-Market Funds
MarketWatch tells us, "Want 5% yields? After Fed hike, it may be time to ditch high-yield savings accounts for money-market funds." The article says, "People focused on saving cash are poised to get another boost from the Federal Reserve on Wednesday as the central bank delivers another interest-rate hike. Even so, rising interest rates have not been lifting all accounts equally. The Fed raised the benchmark rate by 25 basis points to 5.25%-5.50%, the highest rate in 22 years. It marks the 11th rate hike of the Fed's last 12 meetings. Many high-yield savings accounts now have annual percentage yields of around 4%, up from an average of approximately 0.5% in March 2022, according to DepositAccounts.com, a platform that compares rates in U.S. savings accounts." It explains, "However, yields for many money-market mutual funds are now hovering at 5%, up from an average of 0.43% in March 2022, according to Crane Data, which tracks the industry. The seven-day yields for many money-market funds should hit the 5% mark as early as this weekend as the funds start absorbing the rate hike, according to Peter Crane, president and publisher of Crane Data. Money market funds -- low-risk mutual funds composed of holdings like high-quality government debt, repurchase agreements and corporate debt -- have swelled in size. On Tuesday, total assets in the funds hit a record-breaking $5.9 trillion, up $5.2 trillion at the end of 2022, according to Crane. The assets in funds geared at retail investors hit $1.97 trillion, up more than 20% year to date, Crane said. The mutual funds for institutional investors climbed to $3.81 trillion, up 10% over the same time period. 'Retail has been where the action has been over the last year,' Crane said. `The spread between deposit rates and money-market fund yields 'are finally big enough to make it worth moving,' he said." The MarketWatch piece asks, "So is it worth pulling money from high-yield savings accounts to chase even higher yields in money-market funds? Money-market funds have less liquidity, slightly higher risk -- hence the higher yield, experts say. Isabel Barrow, director, financial planning at Edelman Financial Engines, said yield is important, but it's not everything. Federal Deposit Insurance Corp. currently insures bank deposits up to $250,000 per account, while money-market funds are not covered by FDIC insurance, she said."
Fed Goes One Louder with 11th Hike
The Federal Reserve's Open Market Committee raised short-term interest rates for the 11th time in the past year and half Wednesday, bringing its Federal funds rate target up a quarter-point to a range of 5.25-5.50%. The release, entitled, "Federal Reserve issues FOMC statement," tells us, "Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks." It explains, "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective." The FOMC statement adds, "In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." We expect money fund yields to move higher in coming days as funds digest this most recent move.
Weekly Fund Portfolio Holdings
Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of July 21) includes Holdings information from 85 money funds (up 23 from a week ago), which totals $3.303 trillion (up from $2.554 trillion) of the $5.876 trillion in total money fund assets (or 56.2%) tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.730 trillion (up from $1.361 trillion a week ago), or 52.4%; Treasuries totaling $983.0 billion (up from $748.9 billion a week ago), or 29.8%, and Government Agency securities totaling $275.0 billion (up from $226.3 billion), or 8.3%. Commercial Paper (CP) totaled $107.9 billion (up from a week ago at $61.6 billion), or 3.3%. Certificates of Deposit (CDs) totaled $82.5 billion (up from $62.6 billion a week ago), or 2.5%. The Other category accounted for $86.6 billion or 2.6%, while VRDNs accounted for $38.5 billion, or 1.2%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $983.0 billion (29.8% of total holdings), the Federal Reserve Bank of New York with $854.6 billion (25.9%), Fixed Income Clearing Corp with $222.0B (6.7%), Federal Home Loan Bank with $199.8B (6.0%), Federal Farm Credit Bank with $64.8B (2.0%), JP Morgan with $61.7B (1.9%), Barclays PLC with $52.9B (1.6%), RBC with $52.5B (1.6%), BNP Paribas with $51.8B (1.6%) and Citi with $49.0B (1.5%). The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($257.8B), JPMorgan US Govt MM ($257.6B), Fidelity Inv MM: Govt Port ($175.9B), JPMorgan 100% US Treas MMkt ($159.7B), Morgan Stanley Inst Liq Govt ($159.5B), Federated Hermes Govt ObI ($143.3B), BlackRock Lq FedFund ($142.5B), BlackRock Lq Treas Tr ($115.3B), Allspring Govt MM ($106.9B) and Fidelity Inv MM: MM Port ($105.2B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Average Yields Poised to Break 5.0%
Money fund yields inched up by just one basis point over the past week, but we expect them to jump late this week (following the FOMC's meeting on Wednesday). Our Crane 100 Money Fund Index (7-Day Yield) was up 1 bp to 4.96% in the week ended Friday, 7/21, after also increasing by 1 bp the week prior. Yields are up from 4.90% on May 31, 4.64% on April 30, 4.61% on March 31, 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. They've increased from 3.59% on Nov. 30, from 2.88% on Oct. 31 and from 2.66% on Sept. 30. Over half of money market fund assets now yield above the 5.0% level. Assets of money market funds rose by $35.5 billion last week to $5.876 trillion according to Crane Data's Money Fund Intelligence Daily. Weighted average maturities were flat on the week at 23 days (Crane 100), but they rose by 3 days during June. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 682), shows a 7-day yield of 4.86%, up 2 bps in the week through Friday. Prime Inst MFs were up 4 bps at 5.05% in the latest week. Government Inst MFs were up 1 bp at 4.92%. Treasury Inst MFs up 2 bps for the week at 4.92%. Treasury Retail MFs currently yield 4.70%, Government Retail MFs yield 4.62%, and Prime Retail MFs yield 4.88%, Tax-exempt MF 7-day yields were up 14 bps at 2.40%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (7/21), 11 money funds (out of 811 total) yield under 2.0%; 117 funds yield between 2.00% and 2.99% with $115.5 billion, or 2.0%; 6 funds yield between 3.00% and 3.99% ($4.2 billion, or 0.1%), 418 funds yield between 4.0% and 4.99% ($2.090 trillion, or 35.6%) and 259 funds now yield 5.0% or more ($3.666 trillion, or 62.4%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.59% after rising 3 bps ten weeks ago. The latest Brokerage Sweep Intelligence, with data as of July 21, shows that there was no changes over the past week. Three of the 11 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
FedNow, Banks' Newest Headache
The Wall Street Journal writes on "Banks' Newest Fed Headache: Nonstop Instant Payments," which says, "The Federal Reserve expects to launch a new system this month aiming to make payments in the U.S. banking system available immediately, around the clock. Although it is a boon to consumers and many businesses, some analysts warn that FedNow could destabilize banks' reliance on customer cash, fanning the flames of deposit flight that became the bane of several regional banks this spring. Under an existing system called ACH (automated clearinghouse), transactions typically take several days to settle. That can be frustrating for those waiting to receive their funds but often benefits banks that use the money in the interim. FedNow also allows smaller lenders to easily adopt the program, whereas another real-time network built by big banks has struggled to gain traction." The piece continues, "FedNow's launch comes at a precarious time, during the Fed's year-plus effort to raise interest rates and quell inflation. Banks are competing with money-market funds and other higher-yielding products for deposits, and paying up to borrow elsewhere. U.S. commercial-bank deposits were down $705 billion in June from a year ago." It adds, "Big outflows from uninsured depositors -- those with accounts larger than $250,000 -- might be less likely via FedNow as well. Large withdrawals helped force regulators to swiftly shut down Silicon Valley Bank and its peers. FedNow limits transactions to $500,000 at a time, though instant transfers across more than one account could occur. The bottom line, said Ethan M. Heisler, editor in chief of The Bank Treasury Newsletter, is that 'banks will need to sit on a lot more cash than they are used to.'"
ICI: MMF Assets Inch Higher in Week
The Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets inching higher after declining for four of the past five weeks. Assets have risen by $638 billion, or 13.2%, over the prior 21 weeks (breaking the $5.4 billion at the end of May). ICI shows assets up by $723 billion, or 15.3%, year-to-date in 2023, with Institutional MMFs up $372 billion, or 12.2% and Retail MMFs up $352 billion, or 21.0%. Over the past 52 weeks, money fund assets have risen $876 billion, or 19.1%, with Retail MMFs rising by $553 billion (37.4%) and Inst MMFs rising by $323 billion (10.4%). Their weekly release says, "Total money market fund assets increased by $4.22 billion to $5.46 trillion for the week ended Wednesday, July 19, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $1.01 billion and prime funds increased by $7.56 billion. Tax-exempt money market funds decreased by $4.35 billion." ICI's stats show Institutional MMFs falling $3.0 billion and Retail MMFs rising $7.2 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.495 trillion (82.3% of all money funds), while Total Prime MMFs were $850.0 billion (15.6%). Tax Exempt MMFs totaled $113.2 billion (2.1%). ICI explains, "Assets of retail money market funds increased by $7.21 billion to $2.03 trillion. Among retail funds, government money market fund assets increased by $5.57 billion to $1.35 trillion, prime money market fund assets increased by $5.34 billion to $574.10 billion, and tax-exempt fund assets decreased by $3.69 billion to $102.47 billion." Retail assets account for over a third of total assets, or 37.2%, and Government Retail assets make up 66.7% of all Retail MMFs. They add, "Assets of institutional money market funds decreased by $2.99 billion to $3.43 trillion. Among institutional funds, government money market fund assets decreased by $4.55 billion to $3.14 trillion, prime money market fund assets increased by $2.22 billion to $275.94 billion, and tax-exempt fund assets decreased by $663 million to $10.71 billion." Institutional assets accounted for 62.8% of all MMF assets, with Government Institutional assets making up 91.7% of all Institutional MMF totals. (According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets have increased by $20.0 billion in July through 7/19 to $5.866 trillion. 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.)
SEC Commissioner Peirce on "No" Vote
As we've mentioned, the SEC released its 424-page "Money Market Fund Reforms" last week, and we continue to excerpt and analyze the rules and commentary surrounding them. (See the MMF Reforms press release here and the Fact Sheet here.) Today, we quote from SEC Commissioner Hester Peirce "No" Vote "Air Dancers and Flies: Statement on Adoption of the Latest Round of Money Market Fund Reforms." (See all the other Commissioner's Statements here.) She says, "Thank you, Chair Gensler. I am pleased that we are removing the tie between liquid asset thresholds and fees and gates and that we are not moving forward with swing pricing. I could have supported the final money market fund rule if we had been equally prudent with respect to other elements of the rule. But today's adoption contains the same flaw that tanked the 2014 money market fund rulemaking -- an insistence that our own judgment is superior to that of money market funds, their sponsors, their boards, and their shareholders. Accordingly, I will be voting no today." Peirce explains, "The final rule, drawing on the experience from March 2020, eliminates the link between liquidity fees and gates and weekly liquid assets dropping below 30 percent of fund assets. As one commenter explained, 'the general consensus' is 'that the possibility of liquidity fees and gates increased uncertainty, created confusion in the market, and may have made it more difficult for a money market fund to manage redemptions.' The evidence of how poorly our rule functioned in a time of stress forms the basis for today's elimination of the link between a particular liquidity threshold and fees and gates. That change is good. `Having seen in 2020 that one regulatory mandate for money market funds did not work, we now grasp for another -- mandatory fees for institutional prime and institutional tax-exempt funds. Much like an air dancer -- the inflatable tubular figure dancing to drum up business for a tire or furniture store near you -- the Commission has the habit of lurching from one side to the other when regulating money market funds, and so it is with today's amendments. Just as we were in 2014 with fees and gates tied to liquidity thresholds, and again in December 2021 with swing pricing, we are once more convinced that we have found the solution to first-movers and share dilution. We wobble from codifying consideration of redemption gates to forbidding it and mandating redemption fees instead. We will not even allow fund boards the freedom to opt out of implementing them." She adds, "Even as we lurch our way through different solutions, we have yet to identify precisely the problem we are trying to solve. The release speaks generally of the potential for early redeemers to dilute the fund at the expense of remaining fund investors, but we absolve ourselves of having to 'conduct a data analysis on the extent to which money market fund shareholders have experienced dilution in the past' by saying we lack sufficient information. How then can we know if the benefits to investors of the rule outweigh the costs to investors? The dilution problem may not be material in money market funds, which are flush with short-term liquidity that (absent a regulatory incentive to sell longer-term assets first) can be used to meet redemptions without diluting remaining shareholders. We do not need a new solution to a problem that we have not shown to exist. You might be saying, 'Well, we can live with mandatory redemption fees; they are better than mandatory swing pricing.' To the Commission's credit, we listened to what commenters said; mandatory swing pricing is out. But we are not making a serious effort to hear from commenters on mandatory liquidity fees. The proposing release discussed the use of liquidity fees as an alternative to fight dilution costs in the proposal, but it also rejected that option, in part, because liquidity fees 'could introduce additional operational complexity and cost,' and could 'require more coordination with a fund's service providers than swing pricing.' Some commenters suggested that the burdens associated with liquidity fees would likely be less oppressive than those of swing pricing." Finally, Peirce states, "That many commenters found a liquidity fee preferable to swing pricing is hardly a full-throated endorsement of a liquidity fee. Those same commenters also likely would prefer one fly in their soup to four, but I suspect that most would check none of the above if given that choice."
NY Fed on "Runs on Stablecoins"
The Federal Reserve Bank of New York recently posted a paper to its "Liberty Street Economics" blog entitled, "Runs on Stablecoins." They write, "Stablecoins are digital assets whose value is pegged to that of fiat currencies, usually the U.S. dollar, with a typical exchange rate of one dollar per unit. Their market capitalization has grown exponentially over the last couple of years, from $5 billion in 2019 to around $180 billion in 2022. Notwithstanding their name, however, stablecoins can be very unstable: between May 1 and May 16, 2022, there was a run on stablecoins, with their circulation decreasing by 15.58 billion and their market capitalization dropping by $25.63 billion.... In this post, we describe the different types of stablecoins and how they keep their peg, compare them with money market funds -- a similar but much older and more regulated financial product, and discuss the stablecoin run of May 2022." The piece explains, "Stablecoins use different mechanisms to peg their value. The top four stablecoins by market capitalization are Tether (USDT), USD Coin (USDC), Dai (DAI), and Binance USD (BUSD). Among these, USDT, USDC, and BUSD are ostensibly backed by traditional financial assets. Part of the backing of USDT is comprised of U.S. Treasury bills and corporate bonds, but also consists of relatively risky assets such as precious metals. In contrast, USDC and BUSD are backed by cash deposited in U.S. banks, short-term U.S. Treasury bills, and other relatively low-risk assets such as reverse repo contracts collateralized by U.S. treasuries. Moreover, the issuers of USDC and BUSD are based in the United States and regulated by U.S. authorities, unlike the issuer of USDT, which is not based in the United States." The post continues, "Stablecoins backed by traditional financial assets resemble the structure of money market mutual funds (MMFs). Users can mint new coins by depositing dollars with the issuer. When users want to withdraw their dollars, they send their stablecoins back to the issuer, who returns dollars to users' bank accounts. To be sure, there are important differences. First, MMFs are regulated by the Securities and Exchange Commission under Rule 2a-7, which sets minimum portfolio liquidity and maturity standards, among other things, while stablecoins are not. Second, stablecoins are traded on multiple exchanges, whereas MMF shares are not traded on exchanges. Finally, stablecoin units can be used as collateral in decentralized finance protocols, increasing the interconnection between different blockchain applications, whereas tokenization of MMF shares is nascent." Discussing the meltdown of the Terra stablecoin, the blog adds, "This dynamic is similar to what we have observed in recent runs on the MMF industry, when investments flowed from riskier prime funds to less risky government funds. And as with MMF runs, stablecoin runs can propagate to broader asset classes; the May 2022 stablecoin run, for instance, affected the broader crypto market, with approximately $200 billion in crypto market value (beyond stablecoins) being wiped out over eight days.... In May 2022, there was a run on Terra, an algorithmic stablecoin whose price broke its peg of $1 and crashed to zero. The run spilled over to the entire stablecoin sector, with stablecoins backed by riskier assets heavily affected and investors fleeing to less risky U.S.-based stablecoins regulated by U.S. authorities. As the digital asset ecosystem continues to grow, its potential to affect traditional financial markets and a broader section of households and firms could grow accordingly."
Crane 100 Index Inches Up to 4.95%
Money fund yields inched up by one basis point over the past week. Our Crane 100 Money Fund Index (7-Day Yield) was up 1 bp at 4.95% in the week ended Friday, 7/14, after also increasing by 1 bp 2 weeks prior. Yields are up from 4.90% on May 31, 4.64% on April 30, 4.61% on March 31, 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. They've increased from 3.59% on Nov. 30, from 2.88% on Oct. 31 and from 2.66% on Sept. 30. Over half of money market fund assets now yield above the 5.0% level. Assets of money market funds rose by $97 million last week to $5.841 trillion according to Crane Data's Money Fund Intelligence Daily. Weighted average maturities were flat on the week at 23 days (Crane 100), but they rose by 3 days during June. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 692), shows a 7-day yield of 4.84%, up 1 bp in the week through Friday. Prime Inst MFs were unchanged at 5.01% in the latest week. Government Inst MFs were up 1 bp at 4.91%. Treasury Inst MFs up 2 bps for the week at 4.90%. Treasury Retail MFs currently yield 4.68%, Government Retail MFs yield 4.61%, and Prime Retail MFs yield 4.86%, Tax-exempt MF 7-day yields were down 77 bps at 2.26%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (7/14), 26 money funds (out of 822 total) yield under 2.0%; 104 funds yield between 2.00% and 2.99% with $114.2 billion, or 2.0%; 6 funds yield between 3.00% and 3.99% ($868 million, or 0.0%), 448 funds yield between 4.0% and 4.99% ($2.229 trillion, or 38.2%) and 238 funds now yield 5.0% or more ($3.487 trillion, or 59.7%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.59% after rising 3 bps nine weeks ago. The latest Brokerage Sweep Intelligence, with data as of July 14, shows that there was one change over the past week. RW Baird increased rates to 2.99% for accounts between $1 million and $1.99 million and to 3.86% for accounts of $5 million or greater. Three of the 11 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
Gensler's Statement on Money Funds
As we mentioned in several News and Link of the Day pieces last week, the SEC released its 424-page "Money Market Fund Reforms," and we continue to excerpt and analyze them. (See the MMF Reforms press release here and the Fact Sheet here.) Today, we quote from SEC Chair Gary Gensler's "Statement on Money Market Funds." (See all the other Commissioner's Statements here.) He says, "Today [July 12], the Commission is considering adopting final rules to enhance money market funds' liquidity and investor protection. I support this adoption because it will enhance these funds' resiliency and ability to protect against dilution. Money market funds -- nearly $6 trillion in size today -- provide millions of Americans with a deposit alternative to traditional bank accounts. Using these funds, shareholders can get market-based returns, fully backed dollar-for-dollar by readily marketable securities. Money market funds, though, have a potential structural liquidity mismatch. 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 explains, "As a result, when markets enter times of stress, some investors -- fearing dilution or illiquidity -- may try to escape the bear. This can lead to large amounts of rapid redemptions. We have observed this play out in times of stress, including during the 2008 financial crisis and the 'dash for cash' in March 2020. Left unchecked, such stress can undermine these critical funds." Gensler explains, "In enacting the 1940 Investment Company and Investment Advisers Acts, Congress understood how important it is for open-end funds to manage effectively liquidity and dilution. In that light, the Commission over the years has adopted rules to address such risks for money market funds. We did so through reforms in 2010 and 2014, in response to the 2008 financial crisis. Given the market events of March 2020, I think it is important that to take further action to manage these risks. President's Working Group and Financial Stability Oversight Council reports under different Treasury secretaries and presidents have highlighted these issues as well. Today's adoption will enhance money market funds' liquidity, anti-dilution practices, and transparency in a number of ways." He tells us, "First, the rules will increase money-market funds' minimum liquidity requirements. Specifically, the rules will require money market funds to hold greater proportions of their total assets in securities that can be liquidated within one business day as well as within five business days. This will provide a more substantial buffer in the event of rapid redemptions. Second, the rules will prevent money market funds from temporarily halting redemptions (so-called gates). These gates may have encouraged runs in March 2020 and may be procyclical in times of stress. Removing these gates may remove incentives for preemptive redemptions. Third, the rules will require institutional prime and institutional tax-exempt money market funds -- funds that serve institutional rather than everyday investors -- to impose liquidity fees on redeeming investors during times of stress. Such fees will help ensure that during stress times, redeeming investors rather than remaining investors bear the cost of redemptions. These funds, which have faced the largest redemptions in past stress periods, represent currently 11 percent of the broader money market funds space. Under existing rules, these funds are those that use a floating net asset value, whereby their institutional investors at times may redeem at a value other than $1.00 per share." Finally, Gensler adds, "Based upon public feedback, today's final rules will require liquidity fees instead of the originally proposed swing pricing requirement. I believe that liquidity fees, compared with swing pricing, offer many of the same benefits and fewer of the operational burdens. Fourth, the rules will amend certain reporting requirements to improve the transparency of money market funds. In addition to these reforms, today's rules will amend Form PF for large liquidity fund advisers to align their reporting requirements with those of money market funds. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors."
ICI: MMF Assets Retreat to $5.45 Tril.
The Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets declining for the fourth week in the past five weeks. (Prior to this, MMFs had hit records for 7 straight weeks, and in 13 weeks out of the past 15. They hit a record last week too.) Assets have risen by $634 billion, or 13.1%, over the prior 20 weeks (breaking the $5.4 billion at the end of May). ICI shows assets up by $719 billion, or 15.2%, year-to-date in 2023, with Institutional MMFs up $375 billion, or 12.3% and Retail MMFs up $345 billion, or 20.5%. Over the past 52 weeks, money fund assets have risen $881 billion, or 19.3%, with Retail MMFs rising by $555 billion (37.8%) and Inst MMFs rising by $326 billion (10.5%). Their weekly release says, "Total money market fund assets decreased by $20.37 billion to $5.45 trillion for the week ended Wednesday, July 12, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $29.61 billion and prime funds increased by $10.16 billion. Tax-exempt money market funds decreased by $912 million." ICI's stats show Institutional MMFs falling $25.6 billion and Retail MMFs rising $5.2 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.494 trillion (82.4% of all money funds), while Total Prime MMFs were $842.5 billion (15.4%). Tax Exempt MMFs totaled $117.5 billion (2.2%). ICI explains, "Assets of retail money market funds increased by $5.23 billion to $2.02 trillion. Among retail funds, government money market fund assets decreased by $241 million to $1.35 trillion, prime money market fund assets increased by $5.45 billion to $568.76 billion, and tax-exempt fund assets increased by $30 million to $106.16 billion." Retail assets account for over a third of total assets, or 37.1%, and Government Retail assets make up 66.6% of all Retail MMFs. They add, "Assets of institutional money market funds decreased by $25.60 billion to $3.43 trillion. Among institutional funds, government money market fund assets decreased by $29.37 billion to $3.15 trillion, prime money market fund assets increased by $4.72 billion to $273.72 billion, and tax-exempt fund assets decreased by $943 million to $11.37 billion." Institutional assets accounted for 62.9% of all MMF assets, with Government Institutional assets making up 91.7% of all Institutional MMF totals. (According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets have increased by $10.3 billion in July through 7/13 to $5.857 trillion. 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.)
SEC Adopts Money Mkt Fund Reforms
As we said in a bulletin to Money Fund Intelligence subscribers earlier, the U.S. Securities & Exchange Commission (SEC) passed new Money Market Fund Reforms Wednesday morning, which abandoned their swing pricing proposal for Prime and Tax Exempt Institutional money market funds and replaced it with a mandatory liquidity fee regime. They also increased liquidity and disclosure requirements. The "Fact Sheet" says, "The Commission is considering adopting amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The amendments are designed to improve the resilience and transparency of money market funds by: Increasing minimum liquidity requirements to provide a more substantial buffer in the event of rapid redemptions; Removing provisions from the current rule that permit a money market fund to temporarily suspend redemptions and removing the regulatory tie between the imposition of liquidity fees and a fund's liquidity level; Requiring certain money market funds to implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors; and Enhancing certain reporting requirements to improve the Commission’s ability to monitor and assess money market fund data." The full 424-page final rule and the Chair Gensler's and the Commissioner's statements are also now available. (The webcast should be posted for replay soon too.) The press release, "SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers," says, "The Securities and Exchange Commission today adopted amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The amendments will increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The amendments will also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are designed to reduce the risk of investor runs on money market funds during periods of market stress." It continues, "To address concerns about redemption costs and liquidity, the amendments will require institutional prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund's liquidity costs are de minimis. In addition, the amendments will require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. These amendments are designed to protect remaining shareholders from dilution and to more fairly allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly." SEC Chair Gary Gensler comments, "Money market funds -- nearly $6 trillion in size today -- provide millions of Americans with a deposit alternative to traditional bank accounts. Money market funds, though, have a potential structural liquidity mismatch. As a result, when markets enter times of stress, some investors -- fearing dilution or illiquidity -- may try to escape the bear. This can lead to large amounts of rapid redemptions. Left unchecked, such stress can undermine these critical funds. I support this adoption because it will enhance these funds' resiliency and ability to protect against dilution. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors." The release adds, "Separately, the amendments will also modify certain reporting forms that are applicable to money market funds and large private liquidity funds advisers. The rule amendments will become effective 60 days after publication in the Federal Register [which should be in several weeks] with a tiered transition period for funds to comply with the amendments. The reporting form amendments will become effective June 11, 2024."
Bloomberg on MFs Regulatory Revamp
Bloomberg writes that, "Money-Market Funds Brace for Biggest Regulatory Revamp in Years," which says, "The money-market industry is gearing up for its biggest overhaul in years." (See also, Bloomberg's "SEC Removes ‘Swing Pricing’ From Money-Market Fund Overhaul Plan.") The piece explains, "Participants in the $5.5 trillion space await the US Securities and Exchange Commission's vote Wednesday on rules reshaping the money-market industry for the third time since 2008. That's when the Reserve Primary Fund, the original money market fund first created in 1970, was forced to reprice its shares below $1, in a shift that became known as 'breaking the buck,' after investors pulled $40 billion in just two days. While proposed changes were revealed more than 18 months ago, it's not clear what final rules will be approved. At one end of the spectrum are the low-hanging fruit, mainly removing the liquidity threshold that imposes fees on withdrawals and improving reporting requirements. On the other end lie more onerous policies, such as forcing investors to pay a fee to pull out funds." The piece quotes K&L Gates LLP's Jon-Luc Dupuy, "We're all really waiting with bated breath to see where it’s going. I'm not a betting person normally, so I couldn't bet what it would be." Bloomberg's article tells us, "The best-case scenario for many in the industry would be if the SEC tackles those simpler changes like removing links between fees and liquidity levels first, with a pledge to continue working on the more complicated policies. This is similar to the post-financial crisis period when regulators adopted daily and weekly liquidity requirements, higher credit quality, and shorter maturity limits in 2010. It followed with the more onerous pieces like floating net asset values for institutional prime funds, and liquidity gates and fees in 2014. Meanwhile, the cash parked at money-market funds climbed to a fresh record through the week ended July 5 as short-term rates above 5% continue to lure investors to money-market assets."
Money Fund Yields Flat at 4.94%
Money fund yields were flat over the past week. Our Crane 100 Money Fund Index (7-Day Yield) was unchanged at 4.94% in the week ended Friday, 7/7, after increasing by 1 bp the week prior. Yields are up from 4.90% on May 31, 4.64% on April 30, 4.61% on March 31, 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. They've increased from 3.59% on Nov. 30, from 2.88% on Oct. 31 and from 2.66% on Sept. 30. Over half of money market fund assets now yield above the 5.0% level. Assets of money market funds fell by $5.5 billion last week to $5.841 trillion according to Crane Data's Money Fund Intelligence Daily. Weighted average maturities were flat on the week at 23 days (Crane 100), but they rose by 3 days during June. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 694), shows a 7-day yield of 4.83%, unchanged in the week through Friday. Prime Inst MFs were unchanged at 5.01% in the latest week. Government Inst MFs were unchanged at 4.90%. Treasury Inst MFs up 1 bp for the week at 4.88%. Treasury Retail MFs currently yield 4.66%, Government Retail MFs yield 4.61%, and Prime Retail MFs yield 4.86%, Tax-exempt MF 7-day yields were down 53 bps at 3.03%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (7/7), one money fund (out of 824 total) yield under 2.0%; 53 funds yield between 2.00% and 2.99% with $36.8 billion, or 0.6%; 82 funds yield between 3.00% and 3.99% ($89.9 billion, or 1.5%), 475 funds yield between 4.0% and 4.99% ($2.648 trillion, or 45.3%) and 213 funds now yield 5.0% or more ($3.066 trillion, or 52.5%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.59% after rising 3 bps eight weeks ago. The latest Brokerage Sweep Intelligence, with data as of July 7, shows that there were no changes over the past week. Three of the 11 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
ignites: SEC May Ditch Swing Pricing
Last week, ignites featured the news piece, "SEC Vote on Money Funds May Not Include Swing Pricing," which says, "The Securities and Exchange Commission is expected to finalize its proposed reforms to money market funds ... Wednesday, according to a newly posted meeting agenda. The latest round of money market fund reforms were proposed in December 2021 and included a provision that would require swing pricing for institutional prime and institutional tax-exempt money market fund types when redeeming. The proposal would also remove the link between weekly liquid asset thresholds and so-called liquidity fees and redemption gates, which critics argued created more of a cement floor than a cushion for shareholders." The piece continues, "The agenda item provides no detail about the contours of the final rule. This would be the third reform of the product type since the financial crisis of 2008, when the bankruptcy of Lehman Brothers led the $64.8 billion Reserve Primary Fund, a money market fund, to have a net asset value of less than $1.00 per share, or 'break the buck,' forcing it to cease operations and liquidate. The first reform was finalized in 2010 and the second in 2014. In March 2020, money market funds accepted Federal Reserve liquidity backstops to prevent another fund from breaking the buck amid the American onset of the coronavirus pandemic. Since then, SEC Chair Gary Gensler, Federal Reserve Chair Jerome Powell, Treasury Secretary Janet Yellen and international regulators have all criticized money market funds as a risk to financial stability.... Last month, Gensler hinted that the SEC may substitute swing pricing for liquidity fees. The language in the announcement does not mention swing pricing, noted Stephen Cohen, a partner at Dechert." Cohen comments to ignites, "I think there's a good chance [swing pricing won't be in the final rule], but I wouldn't want to put a percentage to it.... If the industry had its way, it would just remove liquidity fees and gates and increase the daily and weekly liquid assets and call it a day, but I think the SEC wants to institute some sort of anti-dilutive measure." They quote "Pete Crane, chief executive of Crane Data, also is 'contrarian' and thinks the SEC will '[abandon] its infatuation with 'swing pricing' and [switch] to a tiered liquidity fee structure for prime institutional money funds that see big outflows,' he said. Neither swing pricing nor amended liquidity fees should affect money market funds much, because at least 75% of money market fund assets are Treasury or government money funds, he said. The ICI is less optimistic that much will change from the proposal, said Stephen Bradford, senior director of public affairs for the fund trade group. 'I expect a majority for swing pricing as proposed, and there is a slim likelihood, but still a likelihood, that they may pivot to a fee,' he said."
Assets Bounce Back to Record $5.47T
The Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets rebounding to record levels following 3 weeks of declines. (MMFs had hit records for 7 straight weeks, and in 13 weeks out of the past 15, prior to a mid-June swoon.) Assets have risen by $654 billion, or 13.6%, over the prior 19 weeks (breaking the $5.4 billion at the end of May). ICI shows assets up by $740 billion, or 15.6%, year-to-date in 2023, with Institutional MMFs up $400 billion, or 13.1% and Retail MMFs up $339 billion, or 20.2%. Over the past 52 weeks, money fund assets have risen $917 billion, or 20.1%, with Retail MMFs rising by $555 billion (38.0%) and Inst MMFs rising by $362 billion (11.7%). Their weekly release says, "Total money market fund assets increased by $43.70 billion to $5.47 trillion for the week ended Wednesday, July 5, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $28.79 billion and prime funds increased by $10.51 billion. Tax-exempt money market funds increased by $4.40 billion." ICI's stats show Institutional MMFs jumping $26.5 billion and Retail MMFs rising $17.3 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.524 trillion (82.6% of all money funds), while Total Prime MMFs were $832.3 billion (15.2%). Tax Exempt MMFs totaled $118.4 billion (2.2%). ICI explains, "Assets of retail money market funds increased by $17.25 billion to $2.02 trillion. Among retail funds, government money market fund assets increased by $10.18 billion to $1.35 trillion, prime money market fund assets increased by $4.87 billion to $563.32 billion, and tax-exempt fund assets increased by $2.20 billion to $106.13 billion." Retail assets account for over a third of total assets, or 36.8%, and Government Retail assets make up 66.8% of all Retail MMFs. They add, "Assets of institutional money market funds increased by $26.45 billion to $3.46 trillion. Among institutional funds, government money market fund assets increased by $18.61 billion to $3.18 trillion, prime money market fund assets increased by $5.63 billion to $269.00 billion, and tax-exempt fund assets increased by $2.20 billion to $12.31 billion." Institutional assets accounted for 63.2% of all MMF assets, with Government Institutional assets making up 91.9% of all Institutional MMF totals. (According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets rose by $20.7 billion in June through 6/30 and another $29.8 billion in July through 7/5 to $5.876 trillion. 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.)
Weekly Money Fund Portfolio Holdings
Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Wednesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of June 30) includes Holdings information from 60 money funds (down 17 from a week ago), which totals $2.491 trillion (down from $2.838 trillion) of the $5.846 trillion in total money fund assets (or 42.6%) tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.384 trillion (down from $1.557 trillion a week ago), or 55.6%; Treasuries totaling $694.1 billion (down from $732.1 billion a week ago), or 27.9%, and Government Agency securities totaling $229.6 billion (down from $244.5 billion), or 9.2%. Commercial Paper (CP) totaled $67.7 billion (down from a week ago at $101.1 billion), or 2.7%. Certificates of Deposit (CDs) totaled $60.1 billion (down from $77.7 billion a week ago), or 2.4%. The Other category accounted for $30.5 billion or 1.2%, while VRDNs accounted for $24.5 billion, or 1.0%. The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $773.6 billion (31.1%), the US Treasury with $694.1 billion (27.9% of total holdings), Federal Home Loan Bank with $174.0B (7.0%), Fixed Income Clearing Corp with $164.8B (6.6%), JP Morgan with $46.9B (1.9%), Federal Farm Credit Bank with $46.1B (1.8%), RBC with $38.0B (1.5%), Goldman Sachs with $37.8B (1.5%), BNP Paribas with $30.9B (1.2%) and Citi with $29.1B (1.2%). The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($267.6B), JPMorgan US Govt MM ($254.9B), Fidelity Inv MM: Govt Port ($180.4B), Morgan Stanley Inst Liq Govt ($157.8B), JPMorgan 100% US Treas MMkt ($139.7B), Dreyfus Govt Cash Mgmt ($108.4B), Allspring Govt MM ($105.8B), Fidelity Inv MM: MM Port ($102.5B), Invesco Govt & Agency ($101.8B) and State Street Inst US Govt ($89.6B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
SFGate.com on Money Market Accounts
The website SFGate.com features a piece entitled, "Rising rates attract smart savers back to money market accounts." The article tells us, "The recent increase in interest rates on various types of savings products is bringing back money market accounts. If you weren't around for their heyday in the 1970s and 1980s, when short term interest rates reached 20%, or if you've forgotten, this guide will get you up to speed. After all, the fed funds rate has increased from 0.25% a year ago to 5.00% today. We'll explain what a money market account is, what kind of rates you can get today and more, so that you can decide whether to add one to your portfolio." It states, "In financial circles, the money market is where high-quality, short-term debt securities are traded -- generally government or corporate bonds that mature in one to 30 days. These securities are usually safe because investors have a pretty good idea of what the world will be like a month from now. Money market account rates fluctuate to reflect current market activities, and they are especially robust when interest rates are increasing. Many investors like that they're relatively safe while offering higher interest rates than you can find on traditional savings accounts. Bankrate reports that as of June 28, the average savings account paid 0.25% interest, while bank money market accounts pay as much as 4.5% and Vanguard's Federal Money Market Mutual Fund has a 7-day yield of 5.03%." The piece adds, "A money market mutual fund is an account offered by a mutual fund company or brokerage firm. It invests in money market securities and usually allows regular withdrawals. Money market account interest rates tend to be higher than bank money market accounts, but mutual funds are riskier: These accounts are not federally insured."
JPM Update on Supply, MFS, Regs
J. P. Morgan's latest "Mid-Week US Short Duration Update" gives a shout-out to our recent Money Fund Symposium conference in Atlanta. They write, "The continuing trend of deposit-to-MMF migration, the Fed's ongoing balance sheet runoff, and the possible slew of demand for T-bills from non-RRP investors could pressure reserves lower. That said, in our base case, we still assume the Fed will continue their QT efforts this year, and we do not believe EFFR will drift higher in the target range, as liquidity remains ample and RRP balances remain elevated. Furthermore, we look for SOFR to continue trading flat to RRP. We also expect T-bill valuations to richen in coming weeks with debt ceiling concerns behind us. Meanwhile, given our economists' expectation of one more 25bp Fed hike this year in July, we see EFFR and SOFR (1m trailing average) ending 2023 at 5.35% and 5.30%, respectively. During 1H23, total money market net supply (ex-Fed) increased by about $1186bn, driven primarily by increased T-bill and Agencies supply. Meanwhile, short-term credit net supply saw a modest decline. We estimate total money market net supply (ex-Fed) will increase by another $1436bn in 2H23, driven largely by the upcoming T-bill issuance. Further, we look for financial CP/CD net supply to increase by about $175bn in 2H23." The brief states, "Apart from our outlook, the Crane Data Money Fund Symposium took place in Atlanta last week, where we heard perspectives from an array of money fund managers, strategists, and other money market investors on the current state of money funds and the issues they face. Generally, money funds are still finding floaters relatively attractive given prevailing uncertainty surrounding how much higher the Fed will go. For the same reason, funds could be somewhat more cautious in extending duration further. Since the debt ceiling was pushed back to 2025, some MMFs have somewhat dialed down their balances at the ON RRP. Some expressed that they care to have relative diversity in their portfolios' repo counterparties, noting the value of FICC sponsored repo, for example. However, with so much cash in the front end and without a significant value add in diversifying repo investments, many funds remain focused on tri-party repo and Fed RRP for overnight cash management. Meanwhile, Treasury/repo money funds continued to shorten portfolios for some time after government funds began extending, but since May, the gap in WAMs between the two fund types has mostly closed, particularly as the debt ceiling has been resolved." JPM adds, "Separately, the SEC appears to have MMF reforms on its short-term priority list. As the SEC takes into consideration the very large (and growing) comment file on the proposed reforms, and with a vast majority of commentators opposed to swing pricing, it is possible that swing pricing alternatives could be discussed. Nevertheless, we think swing pricing for institutional prime MMFs will likely be imposed, and we foresee the SEC giving MMFs a 2-year implementation time period."
