News Archives: January, 2007

The Federal Reserve left rates unchanged at 5.25%, saying that "some inflation risks remain". While markets expect a flat Fed funds for almost all of 2007, we believe the Fed will resume its hiking campaign at its June 27 meeting and believe Fed funds will rise to 6.0% by year-end.

Standard and Poor's assigned its AAAm rating to the $7.4 billion Dreyfus Institutional Preferred Money Market Fund and the $23.8 billion Dreyfus Institutional Cash Advantage Fund. AAA ratings, which cover almost 40% of money fund assets, are often required on investments large investors and fiduciaries.

The 2007 New York Cash Exchange Program (May 30-June 1) is available. Don't miss "Comparing Online Money Market Trading Portals" with Elyse Weiner of Citi, Marianne Bamonte of LaSalle, Paul Rice of TreasuryCurve, and panel host Peter Crane. Mellon LMS's Kirk Black will also discuss "Portal Technology" at NYCE.

HSBC Direct is offering a temporary 6.0% APY (5.84% rate) for new money in its online savings account says Reuters. Alas, the offer is for "new money" only and lasts just 3 months, at which point it will revert to the current 4.94% rate (5.05% APY).

Federated Investors (FII), the 4th largest manager of money funds, hosted a conference call on 4th quarter earnings Friday. CEO Chris Donohue says "Cash continues to be a favored investment option." Federated, benefiting from its huge presence in the brokerage "sweep" channel, increased money fund and cash separate accounts by $10.5 billion in Q4 and another $3 billion in January.

Thanks to Credit Suisse Securities "Asset Backed Commercial Paper Weekly Newsletter" for noting that S&P's conference call on "Revised Counterparty and Supporting Criteria" is available for replay at 1-402-998-0539. (Conference name, PG32269917, Passcode: SANDP)

The 4th quarter was spectacular for money fund asset growth. Crane Data's Money Fund Intelligence XLS shows cash funds gaining 12% in the latest quarter alone ($229 billion). Gargantuan asset gains were seen by JPMorgan (up $21.0 billion, 14.2%), Federated Investors (up $17.1 billion, 13.2%), Morgan Stanley (up $16.8 billion, or 31.1%), and BlackRock (up $16.5 billion, or 11.0%).

Mutual Fund Business Attracting New Entrants It's been a long-time, but companies are again entering the mutual fund business. Yesterday, CalPERS, the California Public Employees Retirement System, announced plans to launchs its own line of investment products, and Jackson National Life filed a series of funds, including Jackson Perspective Money Market Fund.

Standard & Poor's Ratings Services has rated the $4.25 billion Dreyfus Government Cash Management Fund AAAm, saying "the rating reflects the fund's extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit, market and/or liquidity risks."

SIFMA, the Securities Indsutry and Financial Markets Association, says in its January 2007 Research U.S. Market Outlook, "Commercial paper outstanding will be $2.17 trillion at the end of 2007, an increase of 12.5 percent over $1.92 trillion outstanding on November 30, 2006."

Stephen Velluto, Managing Director of Corporate Treasury at General Electric, has been elected President of the Commercial Paper Issuers Working Group (CPIWG), a not for profit representing the largest direct issuers of CP. Marian Trano Lepisto from Intesa SanPaolo is the new Vice President; Donna Cymbal of HSBC Finance the Treasurer; and Barry Gallogly of Caixa Geral the new Secretary.

Fidelity Money Market Fund (SPRXX), formerly Spartan Money Market Fund, is now yielding 5.0% (7-day simple yield as of 1/19/07), and has added that fact to its banner advertisements campaign. Finally, a money fund speaks up about its yield!

Money Fund Expenses Average Less Than 1/2 Percent. The latest Money Fund Intelligence lists our Crane Money Fund Average for Expenses at 0.45%, while our Crane 100 Index averages expense ratios of 0.38%. Institutional money funds charged 0.19% on average while Individual money funds charged 0.60% as of December 2006.

Assets of money market mutual funds and of commercial paper declined in the latest week, according to ICI and Federal Reserve figures. Both had been poised to hit record levels, but they've been delayed by fears of a rate hike and a move into repo. Money funds lost $11.64 billion to $2.379 trillion (institutional lost $15.94 billion while retail rose $4.29 billion), and CP outstandings fell $14.2 billion to $1.984 trillion.

Standard & Poor's Ratings Services issued a release with three criteria tweaks yesterday, implementing "new criteria for single-name credit default swaps", "maintain[ing] the current credit quality guidelines for money market ratings categories", and changing foreign bank branch deposit criteria for its Principal Stability Fund Ratings.

The former No. 1-yielding bank savings account, E-Loan, is fading fast from our Top 5 rankings. The account debuted with an eye-popping 5.5% APY just two months ago, but is now holding on with a 5.12% rate. As with almost all No. 1 ranked banks, life at the top is very short.

Federal Reserve statistics for 2006 show bank savings and money market deposit account assets increasing by just $64 billion, or 1.8%, in 2006, their slowest growth in over a decade. MMDAs, driven in part by "bankerage" or brokerage sweeps to banks, had averaged a smoking $275 billion a year gain over the past 5 years. Money funds, especially retail funds, reversed a five year period of slow or negative growth with a huge $310 billion, or 16.6% jump in 2006.

India's leading business daily, Business Standard, says of China, "The mutual fund sector is also growing rapidly. While money market funds have dropped in assets as the stock market boomed, the aggregate mutual fund assets are in excess of $100 billion. India's, on the other hand, are about $80 billion." JPMorgan recently launched the first Chinese yuan AAA institutional money fund.

Crane Data's latest monthly survey of brokerage sweep rates shows Raymond James with the highest rate for an $100K balance among the big brokerages with a 4.59% yield. Ameriprise ranks second with a 3.93% rate. The lowest default sweep rates are from Merrill Lynch (1.45%), UBS (1.50%) and Smith Barney (1.52%). The Crane Brokerage Sweep Index is 2.66%. Note that all brokerages have higher-yielding money fund and other options available.

Bond Buyer says "Auction Agents Pay SEC $1.6 Million" to settle bid impropriety charges in the $300 billion auction rate securities market. Deutsche Bank, Bank of New York and Wilmington Trust, which account for 90% of the market, settled. Money funds, who buy the bulk of ARS, have complained recently about volatility and possible manipulation in the markets.

The Investment Company Institute's weekly money fund asset series showed a modest decline of $1.77 billion to $2.39 trillion for the week ended Wednesday, January 10. Retail assets saw inflows of $3.78 billion on dividend and bonus money, while institutions saw outlows of $5.55 billion.

With the NYSE and the Fed closed Monday for MLK Day, money funds also will be closed. Most close early Friday (1/12) too, including Barclays (2pm), Citi (noon), Fidelity (3pm), HSBC (noon), Lehman (1pm), Merrimac (1pm), Milestone (2pm), MS (3pm), and UBS (3pm). But some, inluding American Beacon and The Reserve, will be open late. (We'll update as we get additional info.)

The January 2007 Issue of Money Fund Intelligence features an interview with the inventor of the money fund, Bruce Bent of The Reserve. The article, "First Family of Cash: The Reserve's Primary Fund", quotes Bent, "The idea of giving the dollar back was the heart of the thing."

Commercial paper, unsecured high quality short term debt that is used extensively in money market mutual funds, has been growing like gangbusters over the past year. CP outstandings have been hitting record highs of late, and the total CP supply (now $1.992 trillion) is likely to break $2 trillion in the next week or two. Watch it and learn more on the Federal Reserve's site!.

Over 50 money market funds returned 5.0% or greater in calendar 2006, according to the January issue of Money Fund Intelligence. Ranking No. 1 was Credit Suisse Inst MMF (CUTXX) with a 5.12% return, followed closely by Barclays Institutional MMF I (BGIXX) and Morgan Stanley Inst Liquidity Portfolio I (MPUXX) with 5.11% returns. The Crane 100 Index returned 4.73% for 2006. See the new MFI for the full rankings.

This week the ICI released a "draft taxonomy for eXtensible Business Reporting Language (XBRL) data tagging by the mutual fund industry". The SEC's XBRL initiative is welcomed by Crane Data, whose mission too is to simplify and democratize mutual fund risk and return information.

Money market mutual fund assets rose $10 billion to tie their all-time record high of $2.392 trillion, set in December 2002. The Investment Company Institute's weekly asset series has increased in 9 of the last 10 weeks, surging by $138 billion since Nov. 1 and rising by over $325 billion in 2006.

Five Tips Choosing a Money Market (excerpt of Crane MarketWatch article): 1. Safety: A given with "cash", but bigger is better. Investments yielding over Fed funds, currently 5.25%, are suspect; 2. Liquidity: Look for daily access, number of checks, minimums, etc. 3. Convenience: Check for long-term fund and brokerage account options. 4. Yield: Is it a market rate and is your comparison current? Is the rate annualized, simple or compound? 5. Taxability: Would a tax-exempt money fund be better? ("Yes" only for the highest tax bracket and high-tax states.)

Money fund yields are offering savers a "real" return (after inflation) of almost 3% (5% minus a 2% CPI). This marks one of the highest real returns in history. Yields, at 4.99%, are also well above their 10-year average of 3.67%. With above-average nominal, real and historical yields, cash is looking like a screaming buy in 2007.

In 2006, our Crane 100 Money Fund Index returned 4.66%, vs. 2.95% in 2005 and 1.06% in 2004. Money funds should return around 5.00% in 2007. Money fund assets increased by $325 billion, or 16%, to a record $2.38 trillion in 2006. We predict an asset jump of almost $500 billion, or 20%, in 2007, which would bring the total to $2.85 trillion. The Top Funds in 2006 among 425 were: #1 CS Inst Prime MMF A (5.10%); #2 Barclays Inst MMF I and MS Inst Liq MMP I (5.09%); #4 American Beacon MM Select (5.07%); and #5 AIM STIC Prime Inst and Vanguard Prime MMF Inst (5.06%).