Daily Links Archives: September, 2023

The Wall Street Journal asks, "Want This 6% CD? You Have to Have $5 Million." The article states, "JPMorgan Chase has got a deal for you -- if you have an extra $5 million lying around. The New York bank, the largest in the U.S., is offering customers of its private bank division a 6% rate on a six-month certificate of deposit if they put $5 million or more into the product. JPMorgan isn't exactly hurting for deposits. But like other banks, its overall deposits have declined since the Federal Reserve started raising interest rates in early 2022. Special rate offers are a bid to keep wealthy customers happy -- and maybe earn more of their business." It tells us, "Mass-market customers shouldn't expect the same. JPMorgan is paying 5% to retail banking customers who put in $100,000 or more for the same period, according to its website. Customers who put in less than $100,000 can earn 4%. The bank's basic interest-bearing checking and savings accounts still pay just 0.01%. Funds have to come from outside of JPMorgan to qualify for the 6% rate, the bank said. Other banks are advertising six-month CDs paying 5% or more." The Journal adds, "The Fed's steep rate increases changed that picture. By the start of this year, wealthy customers in particular were moving their extra cash into Treasurys and money-market funds for higher rates. Over the past year, deposits in JPMorgan's asset and wealth management unit have fallen 22%, far more than overall deposits. Wealth deposits are also down by double digits at competitors Bank of America and Wells Fargo. Banks are generally paying between 4% and 5% on new wealth-management deposits compared with around 2.5% to land regular customers' deposits, said Adam Stockton, a managing director at Curinos, a firm that tracks data including deposit rates. He said a 6% rate is very rare."

Barron's writes, "Bank Deposits Plunged in the Past Year. Schwab Took the Biggest Hit." They comment, "Banks have had an unusually rough year. Just how bad is evident in a new report from S&P Global Market Intelligence. Total deposits across U.S. banks fell 4.8%, or $872 billion, to $17.27 trillion as of June 30, according to S&P Global. The drop was the first in a data set that dates back to 1994. Among the top 15 deposit holders, Charles Schwab reported the largest year-over-year decrease in deposits of 31.1% to $304.79 billion, according to S&P Global which attributed the decline mostly to outflows from brokerage accounts." The article continues, "The S&P Global report, which looked at data from the Federal Deposit Insurance Corp, underscores just how much the business environment changed for banks over the past year. The Federal Reserve has raised rates at a rapid pace to combat record-setting inflation. As interest rates have risen, Americans have been moving money from low-paying bank accounts to higher yielding options such as money market funds. That process has been a particular headache for Schwab (SCHW). Though the company is best known for its brokerage platform, it also operates a sizable bank and sweeps customers' uninvested cash into low-paying bank accounts. As the data show, customers have been withdrawing deposits to invest in money market funds, often on Schwab's platform. The process, known as cash sorting, has been putting pressure on Schwab's earnings. When the company's outflows exceed cash on hand, it relies on costly solutions such as loans from the Federal Home Loan Banks system." Finally, Barron's says, "The majority of large U.S. banks posted declines in their deposit balances year-over-year, with almost 30% of the industrywide decline attributable to JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, according to S&P Global."

A recently published paper asks, "Does SOFR-linked Debt Cost Borrowers More Than LIBOR-Linked Debt?" The intro says, "The transition from London Interbank Offered Rate (LIBOR) to Secured Overnight Financing Rate (SOFR) affects the reference rate of floating-rate debt worth trillions of dollars. Focusing on the primary market for dollar-denominated floating rate notes (FRNs), we compare the yield spreads of FRNs linked to LIBOR and SOFR, issued by the same entity during the same month. After adjusting for the maturity-matched spread expectations from derivatives markets, we find signi cantly lower spreads for SOFR-linked FRNs. A qualitatively similar pattern emerges for syndicated loans, despite identi cation challenges. Hence, concerns that the benchmark transition resulted in higher borrowing costs are unwarranted." Written by Sven Klingler of BI Norwegian Business School and Olav Syrstad of Norges Bank, it explains, "The transition from London Interbank Offered Rate (LIBOR) to Secured Overnight Financing Rate (SOFR) is one of the most signi cant events in fi nancial markets to date -- it affects the reference rate for loans and other floating rate debt worth trillions of dollars and has sparked an ongoing debate between policymakers and market participants. While policy makers endorse SOFR as robust reference rate, one problem with SOFR is its disconnect from market-wide funding conditions as it captures the cost of funding US Treasuries overnight.... Lenders in SOFR-linked debt therefore lose the hedging benefi t of receiving higher interest payments during funding crises, which was inherent in LIBOR.... If the lenders value these hedging benefits, the transition from LIBOR to SOFR has an adverse effect on borrowing conditions for floating-rate debt. The aim of our study is to test for this adverse effect by comparing the borrowing costs associated with floating-rate debt tied to LIBOR and SOFR." The study adds, "The primary market for dollar-denominated floating rate notes (FRNs) is an ideal laboratory for our analysis -- we observe issuances linked to both LIBOR and SOFR from the same entity during the same month. In addition, the predetermined payment schedule of FRNs allows us to extract maturity-matched spread expectations from derivatives markets and adjust for the expected difference in variable rate payments. Our main fi nding contrasts with the concerns outlined above: Borrowers pay lower adjusted yield spreads for FRNs linked to SOFR and therefore benefit from a 'SOFR discount'. This discount is strongest for FRNs (i) maturing after the announced LIBOR cessation date, (ii) associated with underwriters more active in SOFR-linked debt, and (iii) facing high demand from money market mutual funds (MMFs)."

Money fund yields rose 1 bp this past week to 5.17%, after remaining unchanged for the three weeks prior, as measured by our Crane 100 Money Fund Index for the week ended Friday, 9/22. The Crane 100 is an average of 7-day yields for the 100 largest taxable money funds. We expect yields to remain flat in coming days as they've finished digesting the Fed's (last) July 26th 25 basis point hike. Yields were 5.16% on 8/31, 5.09% on July 31, 4.94% on June 30, 4.61% on March 31 and 4.05% on 12/31/22. The vast majority of money market fund assets now yield 5.0% or higher. Assets of money market funds rose by $21.2 billion last week to $6.019 trillion according to Crane Data's Money Fund Intelligence Daily, and they have risen by $39.9 billion since the start of September (after rising $98.3 billion in August). Weighted average maturities were unchanged last week. The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 682), shows a 7-day yield of 5.06%, unchanged in the week through Friday. Prime Inst MFs were up 1 bp at 5.27% in the latest week. Government Inst MFs were up 1 bp at 5.13%. Treasury Inst MFs up 1 bp for the week at 5.11%. Treasury Retail MFs currently yield 4.88%, Government Retail MFs yield 4.84%, and Prime Retail MFs yield 5.09%, Tax-exempt MF 7-day yields were up 61 bps to 3.35%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (9/22), 24 money funds (out of 809 total) yield under 3.0% with $18.1 billion in assets, or 0.3%; 105 funds yield between 3.00% and 3.99% ($100.2 billion, or 1.7%), 225 funds yield between 4.0% and 4.99% ($1.265 trillion, or 21.0%) and 455 funds now yield 5.0% or more ($4.636 trillion, or 77.0%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.62%. The latest Brokerage Sweep Intelligence, with data as of Sept. 22, 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.

Morningstar writes on bond fund and money market funds in "6 Charts On Where Bond Fund Investors Are Putting Their Money." The piece tells us, "Investors have favored bond funds over stock funds for many years, but as interest rates stay elevated, they are shifting where they put their money. Prior to the big rise in interest rates in 2022, investors gravitated toward short-term and high-yield bond funds. Now, with interest rates higher across the board, investors are choosing safer government and long-term bond funds and taking advantage of high interest rates on money market funds." Under the section, "Investors Take Advantage of Money Market High Yields," they state, "Instead of exploring riskier corners of the bond market, many investors are taking advantage of higher yields on money market funds. The average seven-day yield on a money market fund sits at 4.27%, up from 1.72% a year ago and a mere 0.01% two years ago. Investors pulled $53.6 billion from money market funds last year but have feverishly returned to them since then. These funds have collected $724 billion this year, outpacing flows to all long-term funds. Investors particularly flocked to money market funds in the first quarter, after the collapse of some regional banks caused panic over the safety of bank deposits."

MarketWatch posted the piece, "When Fed rates plateau, expect these key investors to join the $6 trillion charge into money-market funds." It says, "Like Taylor Swift, assets in money-market funds keep setting records this year. But a key group of investors isn't even leading the charge, said Deborah Cunningham, chief investment officer, global liquidity markets at Federated Hermes. Cranes data tracked total assets in the industry as topping $6 trillion for the first time ever in August, with those levels potentially eclipsing $7 trillion by year's end. 'Retail flows have fueled the asset growth in this cycle,' Cunningham said ahead of the Federal Reserve's rate decision on Wednesday, when its policy rate is expected to remain unchanged at a 22-year high. 'Institutional flows will happen at the end of this year, and into 2024,' she said, should historical patterns in the half-century-old industry end up repeating." The article explains, "That's because institutions in Fed hiking cycles tend to buy Treasury bills and other cash-like investments directly from the source, she said. 'It's only when rates plateau, then stay there for a while, and then start to go down the other side, that you see institutional demand go into money-market funds,' she said. 'The reason for that is funds have a weighted average maturity that is 30, 40 or 50 days, so they lag the direct market, and keep rates higher for longer when interest rates are going down.' Cunningham heads the roughly $530 billion cash management effort at Federated Hermes, a unique group that is both women-led and longstanding, with its leadership climbing the ranks of the firm through the 1980s and '90s. Paige Wilhelm heads prime liquidity for the group, while Susan Hill leads government liquidity and Mary Jo Ochson oversees tax-free liquidity investments and short-term municipal bonds." Marketwatch adds, "Money-market funds started seeing more inflows in mid-2022 when the Fed first began lifting its rate from a 0%-0.25% range. They shot higher this March after the collapse of Silicon Valley Bank, while hitting a record $6 trillion of assets (see chart) after July when the Fed bumped up its rate to a current 5.25%- 5.5% range. While institutional assets tend to migrate into money-market funds when Fed rates start falling, other factors, including the typically strong year-end period for inflows and fears of uninsured bank deposits, could play prominent roles in the coming months, said Peter Crane, president and publisher of Crane Data and Money Fund Intelligence."

Two recent Prospectuses Supplement filings announce the liquidations of Morgan Stanley California Tax-Free Daily Income Trust and Morgan Stanley Tax-Free Daily Income Trust. The first filing tells us, "The Board of Trustees of Morgan Stanley California Tax-Free Daily Income Trust approved a Plan of Liquidation with respect to the Trust on June 15, 2023. The liquidation of the Trust will occur only if liquidation pursuant to the Plan of Liquidation is approved by shareholders. If shareholder approval is obtained, the Liquidation is expected to occur on or about September 15, 2023. The Trust will suspend the offering of its shares to all investors at the close of business on or about July 11, 2023." It explains, "Subject to shareholder approval and pursuant to the Plan of Liquidation, substantially all of the assets of the Trust will be liquidated, known liabilities of the Trust will be satisfied or provided for, the remaining proceeds will be distributed to the Trust's remaining shareholders of record equal to their proportionate interest in the Trust, and all of the issued and outstanding shares of the Trust will be redeemed on the Liquidation Date. Additional information regarding the Liquidation will be included in proxy materials that are anticipated to be mailed to shareholders on or about July 26, 2023 seeking votes from shareholders on the proposed Liquidation. This supplement is not a solicitation of a proxy." The filing adds, "Morgan Stanley Investment Management Inc. believes that the Liquidation is in the best interests of the Trust and its shareholders. In order to facilitate the Liquidation, the Adviser or its affiliates expect to purchase shares of the Trust before the record date in an amount in excess of 50% of the Trust's outstanding shares. The Adviser or its affiliates intend to vote those shares "FOR" the Liquidation. Such share ownership and associated voting intentions create potential conflicts of interest. Prior to the Liquidation Date, the Trust will engage in business activities for the purpose of winding up its business and affairs and transitioning the Trust's holdings to cash and cash equivalents in preparation for the orderly Liquidation and subsequent distribution of proceeds to remaining shareholders as of the close of business on the Liquidation Date. Prior to the Liquidation Date, the Trust may no longer pursue its investment objective or be managed consistent with its stated investment strategies, which may impact the Trust's performance. Shareholders may bear increased brokerage and other transaction expenses relating to the sale of portfolio investments prior to the Liquidation Date. Prior to the Liquidation Date, shareholders of the Trust may: exchange their shares of the Trust for shares of the appropriate class of any other Morgan Stanley fund that is open to investment, subject to the requirements and limitations in that Morgan Stanley fund's prospectus; remain invested in the Trust; or redeem their shares at any time in the manner described in the Trust's Prospectus. Unless shares of the Trust are held in a tax-qualified account, the liquidation of shares held by a shareholder will generally be considered a taxable event." For more on liquidations, see these recent Crane Data News articles: "JPMorgan Liquidates E*Trade Shares" (9/7/23), "Morgan Stanley Latest to Abandon ESG MMFs" (8/16/23), "Goldman Liquidating Resource Shares" (7/19/23), "SSGA to Liquidate State Street ESG Liquid Reserves" (9/19/22), "DWS Liquidating Govt Cash Mgmt Fund" (7/7/22), and "Cavanal Hill Liquidates $71M U.S. Treasury Service Class, Added to Fed RRP List" (5/22/23).

While we're excited for next week's European Money Fund Symposium in Edinburgh, Scotland (9/25-26), Crane Data is also making preparations for our "basic training" Money Fund University event, which will take place December 18-19, 2023 at The Westin Jersey City Newport in Jersey City, NJ. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics, but this year's event will again feature a slightly higher level "Master's in Money Markets" agenda. The event focuses on hot topics like money market fund regulations, money fund alternatives, offshore markets, and other recent industry trends. Our educational conference features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers, and the Jersey City show will include a Holiday cocktail party and a free training session for Crane Data clients. Money Fund University offers a 2-day crash course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, and money market instruments such as commercial paper, Treasury bills, CDs and repo. We also cover portfolio construction and credit analysis. New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "cash" investing should benefit from our comprehensive program. Even experienced professionals may enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane's Money Fund University is just $750, exhibit space is $2,000, and sponsorship opportunities are $3K (Bronze), $4K (Silver), and $5K (Gold). A block of rooms has been reserved at The Westin Jersey City Newport. (Please reserve before 11/17.) We'd like to thank our past and pending MFU sponsors -- Dreyfus/BNY Mellon, J.P. Morgan Asset Management, Fitch Ratings, TD Securities, S&P Global Ratings, Dechert LLP, BlackRock, Fidelity Investments, K&L Gates, Federated Hermes, Credit Suisse and State Street -- for their support, and we look forward to seeing you in Jersey City in December. Crane Data is also preparing the preliminary agenda for our next Bond Fund Symposium, which will be held March 25-26, 2024, at the Loews Philadelphia Hotel in Philadelphia, Pa. Our Bond Fund Symposium offers a concentrated program for fixed-income managers and dealers with a focus on the ultra-short segment. Registration for Bond Fund Symposium is $1000; exhibit space is $2,000 (includes 2 tickets); and sponsorship opportunities are $3K, $4K, $5K, and $6K. Finally, we'll also soon be making plans for our next "big show," Money Fund Symposium, which will be held June 12-14, 2024, at The Westin in Pittsburgh. Let us know if you'd like more details on any of our events, and we hope to see you in Edinburgh next week, in Jersey City in December, in Philly in March or in Pittsburgh in June 2024!

Money fund yields remained unchanged for the third straight week, averaging 5.16%, as measured by our Crane 100 Money Fund Index for the week ended Friday, 9/15. The Crane 100 is an average of 7-day yields for the 100 largest taxable money funds. We expect yields to remain flat in coming days as they've finished digesting the Fed's (last) July 26th 25 basis point hike. Yields were 5.16% on 8/31, 5.09% on July 31, 4.94% on June 30, 4.61% on March 31 and 4.05% on 12/31/22. The vast majority of money market fund assets now yield 5.0% or higher. Assets of money market funds fell by $23.6 billion last week to $5.998 trillion according to Crane Data's Money Fund Intelligence Daily, and they have risen by $18.7 billion since the start of September (after rising $98.3 billion in August). Weighted average maturities were unchanged last week. The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 682), shows a 7-day yield of 5.06%, up 1 bp in the week through Friday. Prime Inst MFs were up 1 bp at 5.26% in the latest week. Government Inst MFs were up 1 bp at 5.12%. Treasury Inst MFs up 1 bp for the week at 5.10%. Treasury Retail MFs currently yield 4.87%, Government Retail MFs yield 4.83%, and Prime Retail MFs yield 5.08%, Tax-exempt MF 7-day yields were down 37 bps to 2.74%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (9/15), 111 money funds (out of 809 total) yield under 3.0% with $85.8 billion in assets, or 1.4%; 20 funds yield between 3.00% and 3.99% ($38.2 billion, or 0.6%), 225 funds yield between 4.0% and 4.99% ($1.255 trillion, or 20.9%) and 453 funds now yield 5.0% or more ($4.619 trillion, or 77.0%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.62% after rising 1 bp five weeks prior. The latest Brokerage Sweep Intelligence, with data as of Sept 15, 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.

The Financial Times writes "Nervy investors pour $1tn into money market funds." They tell us, "Investors have poured $1tn into global money market funds so far in 2023, attracted by the best yields available in years and uncertainty over the outlook for the US economy. The flood of cash into money market funds over the past eight-and-a-half months -- a trend concentrated mainly in the US -- puts the vehicles on course for record inflows of $1.5tn by the end of this year, according to Bank of America Securities, citing annualised data from flow tracker EPFR. Strategists at the US bank wrote overnight that the persistent flood of cash into such funds, which typically hold very low risk assets such as short-dated government debt that are easy to buy and sell, reflected 'one trillion dollars of doubt' about the outlook for the economy and riskier assets." See also, The Wall Street Journal's "Rising Rates Make Big Companies Even Richer." It states, "The winners from higher rates were high-quality borrowers, who locked in low interest rates around the pandemic with bonds maturing further in the future than any time this century. Higher rates have little immediate impact on their borrowing costs -- only affecting bonds when they are refinanced—while they earn more on their cash piles straight away." The piece adds, "Take Microsoft, the world's second-most valuable company. It has more cash and short-term investments than debt, so it was never going to be threatened by higher rates. But it has also fixed its borrowing costs: It paid exactly the same interest, $492 million, in the latest quarter as a year earlier. However, it earned substantially more on its cash and short-term investments, with the annualized rate rising to about 3.3% from 2.1%; combined with a small increase in its hoard to $111 billion, it earned $905 million in interest just in the quarter, up from $552 million. Microsoft's experience appears to be reflected economywide. Corporate net interest payments -- that is, interest paid on debt minus that received on savings -- fell as interest rates rose, the opposite of what usually happens."

The Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets hitting record levels for 8th week out of the past 9 (they were down a hair 3 weeks ago), breaking above the $5.6 trillion level last week for the first time ever. ICI's weekly asset series rose to a record $5.643 trillion, and shows MMFs up over $1.09 trillion, or 24.0%, over the past 52 weeks. Assets are up by $908 billion, or 19.2%, year-to-date in 2023, with Institutional MMFs up $469 billion, or 15.3% and Retail MMFs up $438 billion, or 26.1%. (Totals are up $822.3 billion, or 17.1%, since 2/22/23.) Over the past 52 weeks, money funds have risen $1.091 billion, or 24.0%, with Retail MMFs rising by $606 billion (40.1%) and Inst MMFs rising by $484 billion (15.9%). Their weekly release says, "Total money market fund assets increased by $17.70 billion to $5.64 trillion for the week ended Wednesday, September 13, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $16.26 billion and prime funds increased by $2.98 billion. Tax-exempt money market funds decreased by $1.54 billion." ICI's stats show Institutional MMFs rising $7.6 billion and Retail MMFs rising $10.1 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.637 trillion (82.2% of all money funds), while Total Prime MMFs were $888.7 billion (15.8%). Tax Exempt MMFs totaled $116.7 billion (2.1%). ICI explains, "Assets of retail money market funds increased by $10.14 billion to $2.12 trillion. Among retail funds, government money market fund assets increased by $5.34 billion to $1.39 trillion, prime money market fund assets increased by $5.76 billion to $618.30 billion, and tax-exempt fund assets decreased by $964 million to $105.79 billion." Retail assets account for over a third of total assets, or 37.5%, and Government Retail assets make up 65.8% of all Retail MMFs. They add, "Assets of institutional money market funds increased by $7.57 billion to $3.53 trillion. Among institutional funds, government money market fund assets increased by $10.92 billion to $3.25 trillion, prime money market fund assets decreased by $2.78 billion to $270.44 billion, and tax-exempt fund assets decreased by $572 million to $10.88 billion." Institutional assets accounted for 62.5% of all MMF assets, with Government Institutional assets making up 92.0% of all Institutional MMF totals. According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets broke the $6.0 trillion level on Sept. 1 and hit a record $6.046 trillion on Tuesday, 9/2, before easing back to $6.036 trillion Wednesday. Assets have risen by $56.8 billion in September through 9/13 after rising by $98.3 billion in August and $34.7 billion in July. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.

The Wall Street Journal writes that, "`Banks Load Up on $1.2 Trillion in Risky 'Hot' Deposits." It explains, "At midyear, Zions Bancorp reported holding $8.5 billion in brokered deposits, an obscure but costly banking industry product that is drawing attention from regulators. At this time last year, the Salt Lake City-based bank had practically none. Many industry players view brokered deposits as a double-edged sword. They can be a quick and easy way for a bank to shore up its balance sheet. The deposits are typically much more expensive because banks have to pay higher interest rates to lure in those customers, along with other fees. Regulators and bankers say they are also a type of 'hot' money that is prone to disappear when a bank hits a rough patch, since these yield-seeking customers don't tend to be loyal. U.S. banks collectively held more than $1.2 trillion in brokered deposits in the second quarter, according to a Wall Street Journal analysis of data from the Federal Deposit Insurance Corp. The total marked an 86% increase from a year earlier. Brokered deposits are what they sound like: A bank can go to a third-party broker such as Morgan Stanley or Fidelity to find customers to invest in the bank's high-yielding certificates of deposit. That allows the bank to get big influxes of money at once, rather than customer by customer. Lots of banks are loading up on them -- a sign of the distress that continues to afflict many lenders who now must compete for customer funds they long took for granted. `Brokered deposits nearly doubled at Citizens Financial and Ally Financial in the second quarter, compared with a year ago. They were up even more sharply at M&T Bank, KeyCorp and Comerica. Bank of America, Wells Fargo and other megabanks also leaned on them more." It adds, "But at some smaller regional banks, such as Associated Banc-Corp and Valley National Bancorp, brokered deposits accounted for more than 10% of domestic deposits, a level that can make regulators wary. The FDIC can charge higher insurance fees to banks that have high concentrations of brokered deposits. When rates were low and pandemic stimulus was at its peak, customers flooded banks with their idle cash. But now that rates are high, and expected to stay that way, customers have been parking their money elsewhere for higher yields."

The Bond Buyer writes, "Gensler doubles down on controversial money market fund rules." It says, "Securities and Exchange Commission Chairman Gary Gensler defended his rulemaking agenda, this time in front of the Senate Banking Committee, as serious concerns were raised about the rules. The amendments to money market fund rules -- which include a provision the money market fund industry largely opposed that requires liquidity fees for net redemptions exceeding 5% -- approved in July, were questioned by the panel. The recent amendments will impact tax-exempt money market funds -- healthy money market funds are important to the municipal bond market since they purchase municipal securities and municipal issuers use the funds as investors." They quote Gensler, "Taking into account public comment, the final money market rules, as adopted, will require liquidity fees instead of the originally proposed swing pricing requirement. Liquidity fees, compared with swing pricing, offer many of the same benefits and fewer of the operational burdens." The piece adds, "Gensler used his time on the Senate floor to defend the virtually universal belief of the banking sector and lawmakers that his regulatory agenda is being enacted far too fast for the industry or investors to catch up." See his brief comments, "Oral Testimony of Gary Gensler Before the United States Senate Committee on Banking, Housing, and Urban Affairs."

Money fund yields remained unchanged for the second straight week, averaging 5.16%, as measured by our Crane 100 Money Fund Index for the week ended Friday, 9/8. The Crane 100 is an average of 7-day yields for the 100 largest taxable money funds. We expect yields to remain flat in coming days as they appear to have finished digesting the Fed's (last) July 26th 25 basis point hike. Yields were 5.16% on 8/31, 5.09% on July 31, 4.94% on June 30, 4.61% on March 31 and 4.05% on 12/31/22. The vast majority of money market fund assets now yield 5.0% or higher. Assets of money market funds rose by $11.9 billion last week to $6.022 trillion according to Crane Data's Money Fund Intelligence Daily, and they have risen by $42.3 billion since the start of September (after rising $98.3 billion in August). Weighted average maturities were unchanged last week. The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 682), shows a 7-day yield of 5.05%, unchanged in the week through Friday. Prime Inst MFs were down 1 bp at 5.25% in the latest week. Government Inst MFs were down 1 bp at 5.11%. Treasury Inst MFs down 1 bp for the week at 5.09%. Treasury Retail MFs currently yield 4.87%, Government Retail MFs yield 4.82%, and Prime Retail MFs yield 5.07%, Tax-exempt MF 7-day yields were down 53 bps to 3.11%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (9/8), just 38 money funds (out of 811 total) yield under 3.0% with $21.3 billion in assets, or 0.4%; 95 funds yield between 3.00% and 3.99% ($105.0 billion, or 1.7%), 233 funds yield between 4.0% and 4.99% ($1.271 trillion, or 21.1%) and 445 funds now yield 5.0% or more ($4.624 trillion, or 76.8%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.62% after rising 1 bp four weeks prior. The latest Brokerage Sweep Intelligence, with data as of Sept 8, 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.

The Wall Street Journal writes that, "Government Money-Market Funds Are Hot. There's a State-Tax Catch." The piece states, "Higher interest rates mean higher yields on U.S. government debt, and Americans are loving it. Individual investors have plowed around $213 billion, net, into government money-market funds so far in 2023 versus outflows of around $7 billion this time last year, according to the Investment Company Institute. Besides yields that in some cases top 5%, government bonds offer safety. About 40% of this year's $213-billion inflow came in March, when the banking system was in turmoil. An added bonus: in many cases interest on government debt isn't taxable by the states. But not all federal issues qualify for this exemption, and there are added wrinkles when it comes to funds such as government money-market funds. Only some holdings in a fund may garner an exemption from state taxes, or the amount that qualifies might have to meet certain thresholds in some high-tax states. (Federal taxes will always be due.)" The Journal explains, "[T]he Constitution prohibits the states from taxing federal debt. But the prohibition provides blanket relief only for interest on Treasury securities, including savings bonds. Otherwise, Congress decides when setting up an agency whether its bonds will be state-tax free or not, according to Investment Company Institute tax attorney Katie Sunderland. The result is a mishmash. Aside from Treasury debt, state-tax free bonds include those from agencies such as the Federal Farm Credit Banks, Federal Home Loan Banks, Sallie Mae and the Tennessee Valley Authority. Yet interest on mortgage bonds from Ginnie Mae, Fannie Mae and Freddie Mac is subject to state taxes." But it adds, "Income from Treasury repurchase agreements, often called repos, is also state taxable. This is especially important because many government money-market funds have been moving into these repos the past year. The tax issues are more complex for investors purchasing government bond or money-market funds. Even if all the fund assets are issued by Uncle Sam, there's often a mix of state-taxable and state-tax-free issues."

The Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets hitting record levels for 7th week out of the past 8 (they were down a hair 2 weeks ago) and breaking above the $5.6 trillion level for the first time ever. ICI's weekly asset series jumped to a record $5.625 trillion, and shows MMFs up over $1.06 trillion, or 23.2%, over the past 52 weeks. Assets are up by $890 billion, or 18.8%, year-to-date in 2023, with Institutional MMFs up $462 billion, or 15.1% and Retail MMFs up $428 billion, or 25.5%. (Totals are up $804.6 billion, or 16.7%, since 2/22/23.) Over the past 52 weeks, money funds have risen $1.061 billion, or 23.2%, with Retail MMFs rising by $599 billion (39.7%) and Inst MMFs rising by $462 billion (15.1%). Their weekly release says, "Total money market fund assets increased by $41.83 billion to $5.62 trillion for the week ended Wednesday, September 6, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $31.38 billion and prime funds increased by $7.36 billion. Tax-exempt money market funds increased by $3.09 billion." ICI's stats show Institutional MMFs rising $24.1 billion and Retail MMFs rising $17.7 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.621 trillion (82.2% of all money funds), while Total Prime MMFs were $885.8 billion (15.7%). Tax Exempt MMFs totaled $115.1 billion (2.1%). ICI explains, "Assets of retail money market funds increased by $17.74 billion to $2.11 trillion. Among retail funds, government money market fund assets increased by $9.12 billion to $1.39 trillion, prime money market fund assets increased by $6.10 billion to $612.54 billion, and tax-exempt fund assets increased by $2.53 billion to $106.76 billion." Retail assets account for over a third of total assets, or 37.4%, and Government Retail assets make up 65.8% of all Retail MMFs. They add, "Assets of institutional money market funds increased by $24.08 billion to $3.52 trillion. Among institutional funds, government money market fund assets increased by $22.26 billion to $3.23 trillion, prime money market fund assets increased by $1.25 billion to $273.22 billion, and tax-exempt fund assets increased by $566 million to $11.46 billion." Institutional assets accounted for 62.6% 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 broke the $6.0 trillion level on Sept. 1 and hit a record $6.030 trillion on Tuesday, 9/5, before easing back to $6.022 trillion Wednesday. Assets have risen by $42.5 billion in September through 9/6 after rising by $98.3 billion in August and $34.7 billion in July. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.

A recent Prospectuses Supplement filing for the J.P. Morgan Money Market Funds, announces the liquidation of the E*Trade Shares of JPMorgan California and New York Municipal Money Market Fund, JPMorgan Liquid Assets Money Market Fund, JPMorgan Municipal Money Market Fund and JPMorgan U.S. Government Money Market Fund. The "Notice of liquidation of the E*Trade shares of the JPMorgan Money Market Funds," tells us, "The Board of Trustees of the JPMorgan Money Market Funds approved the liquidation and redemption of the E*Trade Shares of the Funds to occur on or about September 29, 2023 (the 'Liquidation Date'). On the Liquidation Date, the Funds shall distribute to its E*Trade shareholders of record an amount equal to the net asset value as calculated on the Liquidation Date. Capital gain distributions, if any, may be paid on or prior to the Liquidation Date." It explains, "Upon liquidation, shareholders may purchase any class of another J.P. Morgan Fund for which they are eligible with the proceeds of the liquidating distribution. For taxable shareholders of the E*Trade Shares of the Funds, the redemption of shares of E*Trade Shares of the Funds on the Liquidation Date will generally be treated as any other redemption of shares, i.e., as a sale that may result in a gain or loss for federal income tax purposes. Instead of waiting until the Liquidation Date, a shareholder of E*Trade Shares may voluntarily redeem his or her shares prior to the Liquidation Date to the extent that the shareholder wishes to realize any such gains or losses prior thereto. See 'Distributions and Taxes' in the Prospectus. Shareholders should consult their tax advisers regarding the tax treatment of the liquidation and redemption." The filing adds, "Effective September 27, 2023, purchases of E*Trade shares of the funds by new or existing shareholders will not be accepted. Investors should retain this supplement with the summary prospectuses, prospectuses and statement of additional information for future reference." According to Crane Data's Brokerage Sweep Intelligence publication, money fund options for E*Trade brokerage customers now include: Morgan Stanley Institutional Liquidity Funds (MSILF) Government Securities Portfolio Participant Share Class (MGPXX) and Morgan Stanley U.S. Government Money Market Trust (DWGXX). For more on liquidations, see these recent Crane Data News articles: "Morgan Stanley Latest to Abandon ESG MMFs" (8/16/23), "Goldman Liquidating Resource Shares" (7/19/23), "SSGA to Liquidate State Street ESG Liquid Reserves" (9/19/22), "DWS Liquidating Govt Cash Mgmt Fund" (7/7/22), and "Cavanal Hill Liquidates $71M U.S. Treasury Service Class, Added to Fed RRP List" (5/22/23).

Yahoo Finance writes on "Why wealthy customers are the 'most worrisome' for banks right now." Subtitled, "Investors continue to flock to money market funds in search of higher yields, posing an ongoing challenge to banks trying to keep deep-pocketed account holders," the piece states, "Money-market fund assets reached a new all-time high this week as interest rates above 5% continue to attract investors at a time when the Federal Reserve appears determined to keep rates elevated for some time. About $14 billion poured into money-market funds in the week through August 30, according to data from the Investment Company Institute. Total assets reached $5.58 trillion, versus $5.56 trillion the previous week.... This is not great news for banks that have been struggling to hold onto their depositors for the last year, especially since the failures of three sizable lenders in the spring. Since the beginning of January deposits at all US banks have fallen by $371 billion, according to data from the Federal Reserve, while money market funds have risen by more than $769 billion. Those outflows slowed during the summer, but deposits are still down for bigger banks since the end of June." It continues, "The greatest flight risk is still from the wealthy. Deposits from wealth management and corporate accounts have both fallen nearly 13% so far this year through July, according to data provider Curinos, although both stabilized during the month of July. August data is not yet available. Mass-market consumer accounts, by comparison, have fallen just 1.8%. 'Ironically, the most worrisome bank client is the very liquid high net worth client,' Tim Coffey, a bank analyst with Janney Montgomery Scott, told Yahoo Finance. 'The least concerning are the lower balance, lower income households.'" The Yahoo article says, "Many depositors have 'shifted their funds into higher-interest-bearing accounts, increasing banks' funding costs,' S&P said last month. 'The decline in deposits has squeezed liquidity for many banks while the value of their securities -- which make up a large part of their liquidity -- has fallen.' Deposits at FDIC-insured banks fell 2.5% in the first quarter of the year, the steepest quarterly drop since the regulator began collecting the data in 1984. The drop for uninsured deposits was much deeper; they fell 8.2% for the same period. 'If you're a bank and you're not offering a competitive rate, there's some flight risk,' Scott Sieffers, a bank analyst for Piper Sandler, told Yahoo Finance."

T. Rowe Price published an insight entitled, "Seeking to Optimize Cash Allocations With Low Duration Bonds." The piece, written by Cheryl Mickel, Thomas Heidenberger, and Alex Obaza, says, "Low duration bond funds, such as the T. Rowe Price Ultra Short Term Bond Fund, have provided a sustained yield advantage over time compared with a traditional money market fund. These low duration strategies can take on marginally more credit and interest rate exposure and risk, which creates the potential for compelling returns versus traditional cash management vehicles. This naturally leaves investors asking themselves about the opportunity cost of their cash holdings." They explain, "In order to capitalize on higher potential returns, an investor can consider a strategic or long-term approach to cash investing. This requires an investor to separate immediate liquidity needs from cash that is not needed for at least three to six months. Investors can consider an investment product for the latter portion, such as the T. Rowe Price Ultra Short Term Bond Fund, where they can potentially benefit from higher yield and total return compared with traditional cash alternatives." T. Rowe Price writes, "While bank accounts are insured (up to USD 250,000) by the Federal Deposit Insurance Corporation (FDIC) against the risk of bank failure, and their principal values do not fluctuate as interest rates rise or fall, the advantage of higher yields on money market funds has driven many bank customers to move their assets from deposit accounts to money market funds, contributing to the recent stress on regional banks. Retail money market funds have been a destination for assets from bank deposits due to money market funds' increased use of the Federal Reserve's reverse repo program, which provides a significant yield advantage over bank deposit rates because of the program's close tie to the federal funds rate.... However, recent money market reform regulations (SEC rule 2a-7) limit retail money market funds to a 60-day weighted average maturity (WAM) to ensure the highest level of liquidity consistent with a lower risk profile for investors. As we near the peak of the current U.S. interest rate cycle, many of these money market funds will lengthen WAMs to hold higher yields for as long as possible -- but regulatory requirements still cap their WAMs and yields. While money market mutual funds do not guarantee an investor's deposit like an FDIC-insured bank account, U.S. Treasury and government money market mutual funds are required to invest at least 99.5% of their assets in fixed income securities backed by the full faith and credit of the U.S. government. Retail prime money market mutual funds can invest in a broader range of short-term instruments, including commercial paper issued by corporations." They add, "Compared with a traditional money market fund, the Ultra Short-Term Bond Fund can cast a wider net across the universe of low duration investments, and it has the flexibility to invest in instruments that mature in as long as three years. This provides the fund with more ways to potentially source more yield from multi sector credit allocation, duration, or a combination of both while taking on additional risk. This should help keep its yield competitive with money market fund yields even as we enter an expected higher for longer interest rate environment."

The Federal Reserve Bank of Kansas City published its "Second Quarter 2023 Banking Conditions" recently, which tells us, "Banks continue to fund growth in large part through noncore borrowing sources.... Federal Home Loan Bank (FHLB) funding remains widely utilized, and while institutions have largely shed Discount Window borrowings taken on in the first quarter, banks continue to utilize Bank Term Funding Program (BTFP) borrowings. Borrowings have also been used to fund declining deposit levels.... Deposit runoff has increased across District banks, with 74 percent of banks experiencing a decrease in core deposits quarter-over-quarter. Smaller District banks (under $250MM in assets) saw the greatest level of runoff with a median decline in core deposits of 2.4 percent during the quarter. Deposit growth has been seen almost exclusively in time deposits and brokered deposits, which are generally more costly funding options." A chart on the "Change in Deposits Year-Over-Year," shows that total Deposits fell $489B, Demand Deposits fell $68B, Now & ATS fell $45B, and MMDAs fell $832B, while Time Deposits rose by $997B and Brokered Deposits rose by $487B.

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