News Archives: November, 2022
The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds" for October 2022 Tuesday. ICI's monthly "Trends" report shows that money fund assets increased $36.8 billion in October to $4.607 trillion. Meanwhile, bond fund assets continued their steep decline, falling by $88.1 billion to $4.445 trillion. Money fund assets surpassed bond fund assets last month for the first time since 2010; bond funds have declined by over $1.1 trillion year-to-date in 2022. (The bond fund totals don't include bond ETFs, which total $1.204 trillion as of 10/31, according to ICI.) (Note: Crane Data updated its November Short-Term Bond Fund Holdings yesterday, which are available to our Bond Fund Wisdom subscribers. The latest files are available via our "Content" page or here. Let us know if you'd like to see the latest cut.)
Money funds' October asset increase follows a gain of $4.2 billion in Sept., a decrease of $6.4 billion in August, and increases of $34.3 billion in July and $25.0 billion in June. MMFs decreased $8.0 billion in May and $71.0 billion in April. They increased $9.6 billion in March, decreased $38.3 billion in February, and decreased $136.1 billion in January. For the 12 months through Oct. 31, 2022, money fund assets increased by $53.6 billion, or 1.2%. (For the month of November through 11/28, MMF assets have increased by $37.1 billion to $5.091 trillion according to Crane's MFI XLS, which tracks a broader universe of funds than ICI. Crane Data's Prime asset totals have increased by $35.1 billion in November to $1.031 trillion.)
ICI's monthly release states, "The combined assets of the nation's mutual funds increased by $683.92 billion, or 3.2%, to $21.87 trillion in October, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an outflow of $58.68 billion in October, compared with an outflow of $56.54 billion in September.... Money market funds had an inflow of $31.10 billion in October, compared with an outflow of $2.31 billion in September. In October funds offered primarily to institutions had an outflow of $15.13 billion and funds offered primarily to individuals had an inflow of $46.22 billion."
The Institute's latest statistics show that Taxable funds and Tax Exempt MMFs were both higher last month. Taxable MMFs increased by $25.1 billion in October to $4.496 trillion. Tax-Exempt MMFs jumped $11.7 billion to $111.3 billion. Taxable MMF assets increased year-over-year by $30.0 billion (0.7%), and Tax-Exempt funds rose by $23.6 billion over the past year (26.9%). Bond fund assets fell by $88.1 billion (after plummeting by $238.5 billion in Sept.) to $4.445 trillion; they've decreased by $1.162 trillion (-20.7%) over the past year.
Money funds represent 21.1% of all mutual fund assets (down 0.5% from the previous month), while bond funds account for 20.3%, according to ICI. The total number of money market funds was 291, down one from the prior month and down from 307 a year ago. Taxable money funds numbered 236 funds, and tax-exempt money funds numbered 55 funds.
ICI's "Month-End Portfolio Holdings" confirm yet another jump in Repo and plunge in Treasuries last month. Repurchase Agreements remained the largest composition segment in October, increasing $74.5 billion, or 3.1%, to $2.481 trillion, or 55.2% of holdings. Repo holdings have increased $502.7 billion, or 25.4%, over the past year. (See our Nov. 10 News, "Nov. MF Portfolio Holdings: Repo, Treasury Down; Agency, CDs, CP Up.")
Treasury holdings in Taxable money funds fell again, but they remained the second largest composition segment. Treasury holdings plunged $105.3 billion, or -8.3%, to $1.165 trillion, or 25.9% of holdings. Treasury securities have decreased by $565.1 billion, or -32.7%, over the past 12 months. U.S. Government Agency securities were the third largest segment; they increased $34.9 billion, or 7.8%, to $481.5 billion, or 10.7% of holdings. Agency holdings have fallen by $67.9 billion, or 16.4%, over the past 12 months.
Certificates of Deposit (CDs) remained in fourth place; they increased by $32.2 billion, or 4.7%, to $209.3 billion (4.7% of assets). CDs held by money funds rose by $23.8 billion, or 12.8%, over 12 months. Commercial Paper remained in fifth place, up $20.5 billion, or 3.7%, to $167.6 billion (3.7% of assets). CP increased $14.4 billion, or 9.4%, over one year. Other holdings increased to $18.1 billion (0.4% of assets), while Notes (including Corporate and Bank) inched up to $3.5 billion (0.1% of assets).
The Number of Accounts Outstanding in ICI's series for taxable money funds increased to 59.350 million, while the Number of Funds fell by one fund to 236. Over the past 12 months, the number of accounts rose by 13.413 million and the number of funds decreased by 11. The Average Maturity of Portfolios was a record low 15 days, down 3 days from September. Over the past 12 months, WAMs of Taxable money have decreased by 22.
Money fund yields were higher yet again last week as our Crane 100 Money Fund Index (7-Day Yield) rose 3 more basis points to 3.57% in the week ended Friday, 11/25. Yields rose by 5 basis points the previous week and are up from 2.88% on Oct. 31 and 2.66% on Sept. 30. Yields should continue to inch higher as they digest the remainder of the Fed's Nov. 2 75 bps rate hike, and they should approach 4.0% by year end, if, as expected, the Fed hikes rates again (probably by 50 bps) on Dec. 14. The top-yielding money market funds are already touching 4.0% (see our "Highest-Yielding Money Funds" table above). (Note: We're still taking registrations for our upcoming Money Fund University, which will be Dec. 15-16 in Boston. Please join us, and feel free to stop by Crane Data's Holiday Cocktail Party at MFU on Dec. 15 from 5-7pm!)
Our broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 677), shows a 7-day yield of 3.44%, up 3 bps in the week through Friday. Prime Inst MFs were up 3 bps to 3.72% in the latest week. Government Inst MFs rose by 3 bps to 3.43%. Treasury Inst MFs up 5 bps for the week at 3.45%. Treasury Retail MFs currently yield 3.26%, Government Retail MFs yield 3.22%, and Prime Retail MFs yield 3.56%, Tax-exempt MF 7-day yields were down at 1.52%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (11/25), just 136 funds (out of 816 total) still yield between below 2.0%, with assets of $115.6 billion, or 2.3% of total assets; 64 funds yielded between 2.00% and 2.99% with $68.4 billion, or 1.3%; 616 funds yield 3.00% or more ($4.896 trillion, or 96.4%), and 9 funds have now officially broken over the 4.0% yield barrier.
Brokerage sweep rates saw no changes over the past week. Our Crane Brokerage Sweep Index, the average rate for brokerage sweep clients (almost all of which are swept into FDIC insured accounts; only Fidelity sweeps to a money market fund), was unchanged this past week at 0.40% but is up from 0.34% at the start of November. The latest Brokerage Sweep Intelligence, with data as of Nov. 25, shows no rate changes over the previous week. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
In other news, Federated Hermes' features Money Market CIO Deborah Cunningham in a brief video entitled, "Back in Style." She is asked, "Has the Fed's quantitative tightening program impacted the liquidity space?" Cunningham responds, "The quantitative program by the Fed has definitely started to add securities back into the marketplace. The liquidity team that we manage here, however, focuses on short term treasury securities, those being basically treasury bills, treasury bonds, treasury notes that are less than a year in duration, and that's not where the quantitative tightening focus has been from the Federal Reserve."
She continues, "What they have instead focused on are longer- and medium-term treasury securities. Where that has been a little bit helpful has been in the repurchase agreement market. Repos are transactions that we use within our money market products, and when there's more collateral out there to back these repurchase agreements, like there is from the quantitative tightening perspective with longer dated treasury and agency securities, that's a little bit of a benefit. But it is not as much of a benefit as it would be if the securities that were being put back into the marketplace were on a direct ownership basis, eligible for money market funds."
Finally, a recent Dreyfus posting, entitled, "Meet the Manager with Brian Wiese," summarizes, "Dreyfus' senior portfolio manager and trader shares who and what were his major career influences, the impact the great financial crisis had on him as well as the highlight of his career so far."
Wiese says, "When I first started my career in 1995 at AIG SunAmeria Asset Management, the youngest person on the desk was usually responsible for the least risky assets. As the young person on the desk, I began at the short end of the curve (yields less than one year) and originally intended to migrate out to riskier, longer duration assets. At the time though, the market was migrating toward short duration assets and the influx of clients demanded a dedicated manager. I embraced the opportunity, which led to a fulfilling career managing short duration assets."
He explains, "I stayed with AIG until 2006, at which time I moved to BNY Mellon as a senior portfolio manager and trader for their securities (sec) lending cash collateral reinvestment portfolios. When I made the migration to sec finance, preservation of capital was still a major focus, but it introduced a layer of risk and complexity to my investment expertise that I welcomed. I spent 16 years in sec finance at BNY Mellon, when the opportunity to come to work for Dreyfus came up, I was excited because it was clear that leadership is thinking about liquidity solutions holistically."
Wiese adds, "After the great financial crisis (GFC) in 2008, you began to see more tenured and high quality management teams at the front end. The view that the most inexperienced person on the desk should be responsible for the shortest duration investments has been dispelled, and rightfully so. Clients and the investment industry in general are more aware of the risks because the notional values are so large. Clients now demand investment professionals who have managed funds through different market cycles. Some people in the industry today have never seen a rising rate environment and I think that's something that differentiates our team and is a huge value add to clients."
J.P. Morgan published its "Short-Term Fixed Income 2023 Outlook" last week, and entitled it, "More supply and higher yields, what's not to like?" Authors Teresa Ho, Pankaj Vohra and Holly Cunningham tell us, "The sharp rise in rates this year was a welcome relief for the US money markets-markets that were plagued by the Fed's zero interest rate policy for at least two years. Even so, it was not all good news, as high inflation and tight labor markets pushed the Fed to embark on one of the most aggressive tightening cycles in modern history. In response, liquidity investors significantly shortened duration at a time when the supply-and-demand mismatch in the money markets was substantial.... [T]his pushed short-dated T-bills and SOFR to trade meaningfully through RRP.... All told, balances at the Fed's ON RRP continued to grow, increasing from $1.5tn at the start of the year to $2.1tn, as investors used the facility as a source of backstop supply, to shorten duration, and/or to ensure their yields stayed at or above RRP." (Note: JPMorgan's Teresa Ho will present the "Instruments of the Money Markets Intro" at our upcoming Money Fund University, which is Dec. 15-16 in Boston.)
The 2023 Outlook explains, "In 2023, we are more optimistic about conditions in the money markets. While the path of future interest rates remains uncertain, it appears the Fed's aggressive campaign is mostly behind us.... Fed funds is expected to peak at 5%, meaning 100bp more of tightening. In the grand scheme of things, this is not a particularly negative environment for consumer demand nor for credit losses as we enter into the most well-telegraphed recession in modern history."
It says, "In turn, this should give way for investors to extend out the curve, alleviating the demand for very short-dated money market products, including MMFs. At the same time, money market supply is expected to pick up meaningfully (+$1.6tn), with T-bills leading the charge. We should also see incremental supply come through in the form of repos, discos, and CP/CDs, as the Fed continues to step away as a buyer of Treasuries and MBS and drains liquidity from the system. Taken together, we should see the supply-demand gap in the money markets narrow sharply next year, draining RRP and allowing the Fed to continue QT."
J.P. Morgan comments, "Against this backdrop, MMF reform will continue to loom, though we expect it to be finalized soon. While this will have a detrimental impact on the prime fund industry, the financial impact on broader money markets will likely be more muted relative to the last round of reforms implemented in 2016. USD Libor will also fully sunset in June 2023, leaving market participants with SOFR and no accurate gauge of credit spreads going forward."
They continue, "Net, reflecting our macro outlook and technicals, we expect money market rates to continue to drift higher and pause at the end of the tightening cycle, in step with fed funds.... The T-bills and the CP/CD curve should flatten as investors begin to extend out the curve. SOFR should start drifting higher in the fed funds corridor, trading flat or above RRP. Spreads should widen as the supply-demand gap narrows. In the 1-3y sector, we like fixed versus floating given compelling breakevens."
The Outlook states, "Regardless of the resting stop, by the time the Fed is done with the most aggressive tightening cycle in modern history, cash yields should be around 5%. While inflation-adjusted yields will likely remain in negative territory, nominal yields (using MMF yields as a proxy) will likely reach levels last seen in 2007 when the fed funds rate was at 5.25%.... As we have seen this year, the high beta of rate hikes passed through in the money markets is allowing MMFs to effectively compete with stock and bond investments as well as bank deposits.... The former (stocks and bonds) has demonstrated substantial negative returns, while the latter (deposits) has barely passed on any of the rate hikes."
It continues, "To be sure, while taxable MMF balances have declined by about $110bn YTD, relative to their current levels ($4.9tn), the drop is tiny (-2.2%). Furthermore, MMFs tend to see seasonal inflows during the last two months of the year; so by year-end, balances could be even higher, offsetting the decline. Notably, prime MMFs have been the primary contributor to the relative steadiness in overall taxable AUMs, as retail and internal asset managers sought the safe havens of MMFs for stability and yield in the face of an inverted yield curve and very volatile equity and fixed income markets.... Meanwhile, government MMFs lost about $320bn YTD, reflecting, we think, some normalization of the last minute buildup of cash at the end of last year (+$238bn in 4Q21) and corporations making greater use of their cash as they've had to deal with inflation (higher input costs) and higher rates (higher borrowing costs)."
The piece summarizes, "In 2023, we see factors that argue both for higher and lower balances. We don't have a crystal ball, but on net, we believe MMF balances will be flat to down next year, though they will still be significantly above pre-pandemic levels. Below, we discuss some factors at play: Bank deposit yields: Deposit betas at banks will likely continue to be low relative to prior tightening cycles, even as deposit yields gradually rise next year.... As a result, the attractiveness of MMFs should continue to pull money away from deposits. Indeed, during the last two tightening cycles, MMFs continued to receive inflows even when the Fed paused. In fact, they didn't experience outflows until 6-9 months after the Fed began cutting rates."
JPM cites as negative factors, the "Increased use of cash: Grappling with inflation and higher borrowing costs, corporations appear to have been drawing down their cash to help fund their expenses [and] Curve extension: To the degree markets are anticipating the Fed to be on hold or even to begin easing next year, duration will figure more prominently in portfolio management discussions."
The Outlook adds, "While MMF AUMs should moderately decline next year, total money market supply is expected to substantially increase by around $1.6tn or ~12% in 2023, predominately driven by Treasury bills.... Meanwhile, we estimate credit supply (total ex-Treasuries) to increase by about $564bn or ~9% in 2023, thanks to QT contributing to additional Agency discos, Agency FRNs, and bank CP/CD issuance. In addition, we look for continued growth in non-financial CP outstandings, as corporate issuers look for cheaper financing in CP versus out the curve. If we're right, total supply balances would be meaningfully above their 3y averages, which should help narrow the supply-demand gap and drain some of the $2.1tn at the Fed's ON RRP."
Finally, they comment, "For better or worse, we began the year digesting SEC's reform proposal for MMFs, released in mid-December of last year. A quick 60-day comment period later, followed by two new SEC Commissioners being sworn in this past summer and a technological error in the SEC's system that prompted them to reopen the comment period for 14 days in October, it appears the industry will soon see a final rule from the SEC. At this point, we think a final rule could be released as early as December, though early 2023 seems more likely. Unfortunately, despite universal MMF industry opposition against swing pricing, it seems the SEC continues to be enamored with it. In fact, the SEC's latest rule proposal requires open-end mutual funds and ETFs to also use swing pricing as a form of liquidity management. Our best guess is that the final rule on MMF reform will impose swing pricing for institutional prime funds."
ICI's latest weekly "Money Market Fund Assets" report shows money fund assets rising again in the past week, the 3rd increase in the past 4 weeks. Over the past 52 weeks, money fund assets are up by $43 billion, or 0.9%, with Retail MMFs rising by $175 billion (12.2%) and Inst MMFs falling by $131 billion (-4.2%). ICI shows assets down by $64 billion, or -1.4%, year-to-date, with Institutional MMFs down $206 billion, or -6.4% and Retail MMFs up $142 billion, or 9.6%. (Note: Register soon for our upcoming Money Fund University, which will be Dec. 15-16 in Boston.)
The weekly release says, "Total money market fund assets increased by $16.12 billion to $4.64 trillion for the six-day period ended Tuesday, November 22, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $7.29 billion and prime funds increased by $10.30 billion. Tax-exempt money market funds decreased by $1.47 billion." ICI's stats show Institutional MMFs rising $7.7 billion and Retail MMFs increasing $8.4 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.926 trillion (84.6% of all money funds), while Total Prime MMFs were $603.2 billion (13.0%). Tax Exempt MMFs totaled $111.6 billion (2.4%).
ICI explains, "Assets of retail money market funds increased by $8.38 billion to $1.61 trillion. Among retail funds, government money market fund assets increased by $779 million to $1.15 trillion, prime money market fund assets increased by $8.90 billion to $365.80 billion, and tax-exempt fund assets decreased by $1.30 billion to $99.14 billion." Retail assets account for over a third of total assets, or 34.7%, and Government Retail assets make up 71.1% of all Retail MMFs. They add, "Assets of institutional money market funds increased by $7.74 billion to $3.03 trillion. Among institutional funds, government money market fund assets increased by $6.51 billion to $2.78 trillion, prime money market fund assets increased by $1.40 billion to $237.37 billion, and tax-exempt fund assets decreased by $175 million to $12.46 billion." Institutional assets accounted for 65.3% of all MMF assets, with Government Institutional assets making up 91.8% of all Institutional MMF totals.
(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.) For the month of November through 11/23, MMF assets increased by $25.7 billion to $5.080 trillion according to Crane's MFI XLS, which tracks a broader universe of funds than ICI. Crane Data's Prime asset totals, which broke the $1.0 trillion level three weeks ago, increased $32.0 billion MTD (and $26.8 billion in October) to $1.027 trillion. Given that November and December are the two strongest months of the year seasonally, we expect big inflows in the coming weeks.
In other news, ignites wrote earlier this month a piece called, "Fidelity: We Offer 8x Competitors' Yields on Cash," which tells us, "Fidelity has started a new ad campaign, plugging the yield it offers on investors' cash as '8x the industry average rate.' The ad features a giant green '8x' in a field with the sun shining behind it. 'A really big deal for your cash,' the ad reads. The ad is being served up on Instagram and other social media platforms, a spokesperson said."
The article continues, "The campaign underscores the steady climb of short-term yields that money market funds and other cash vehicles have experienced since the Federal Reserve began a series of rates hikes in March.... Investors who click through the ad to Fidelity's website ... see the firm's comparison of the seven-day yield on its $239 billion Government Money Market Fund with 'the industry average rate' for a default sweep product: 2.65% for the period ended Oct. 28, versus 0.20% for the industry."
It explains, "Fidelity also includes the rate a brokerage client on Schwab's platform would get through its default sweep product: 0.40%. Fidelity in 2019 made the Government Money Market Fund its cash sweep default for brokerage and retirement accounts. Schwab, meanwhile, transitioned away from using money market funds as brokerage sweep products, completing the shift several years ago."
A Schwab spokesperson tells ignites, "[W]e do not believe clients should leave money they intend for long-term savings and investments in any sweep vehicle -- whether it is a cash sweep feature like we offer at Schwab, or a default sweep money market funds at another provider.' Investors can get a better return in the current market environment by moving that cash into what Schwab calls 'purchased' money market funds, FDIC-insured certificates of deposit or even savings accounts, he said. '[W]e encourage them to do just that, and make it easy for them,' he said, adding that some of Schwab's money funds have seven-day yields up to 3.85%, 'well over the sweep money market fund yields investors may find elsewhere.'"
The piece states, "A Fidelity spokesperson compared the Government Money Market Fund's yield to that of other brokerage sweep accounts, rather than other money market funds. Crane Data's index of brokerage sweep accounts had a seven-day yield of 0.32% for balances below $100,000 as of Nov. 4. For higher account balances, the seven-day yield for sweep accounts ranged from 0.34% to 0.89%. The 100 largest taxable money funds tracked by Crane Data had an average seven-day yield of 3.45% as of Nov. 10."
Finally, it quotes Crane Data's Peter Crane, "Cash is getting hot. So any marketing that focuses on cash is going to get more attention.... Three percent [yield] is the headline. It's not 'times whatever." ignites adds, "It's not the first time that Fidelity has called attention to its use of money market funds as the default sweep option, rather than lower-yielding deposit accounts. In August 2019, the firm took out a full-page Wall Street Journal ad, taking aim at Schwab, E*Trade and TD Ameritrade. 'Your cash never had it so good,' the ad said. Schwab then responded in kind with a full-page ad in the Sunday New York Times for its brokerage services. Crane Data dubbed it 'Cash of the Titans.'" (See Crane Data's August 13, 2019 News "`Cash of the Titans: Schwab vs. Fidelity; MF Yields Dip Below 2.0 Percent.")
Crane Data is now making plans for its sixth annual ultra-short bond fund event, Bond Fund Symposium, which will take place March 23-24, 2023 at the Hyatt Regency Boston. Crane's Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent networking venue, for bond fund and fixed-income professionals. After cancelling our 2020 Boston event and holding a virtual BFS in 2021, we returned to live events in March 2022 with our BFS in Newport Beach, Calif. We look forward to seeing the "cash-plus" community in person again in 2023! Registrations are now being accepted ($1,000) and sponsorship opportunities are available. We review the preliminary agenda and details below, and we also give an update on our upcoming "basic training" show, Money Fund University, which will be held next month in Boston, Dec. 15-16.
Bond Fund Symposium's Day One (3/23) morning agenda includes: Welcome to Bond Fund Symposium 2023, with Peter Crane of Crane Data; Keynote: Ultra-Shorts: Yield Is Back After Rough Year with Jerome Schneider of PIMCO and Dave Martucci of J.P. Morgan A.M.; Regulatory Update: Bond Fund Issues '23 with Jamie Gershkow of Stradley Ronon Stevens & Young and Aaron Withrow of Dechert LLP; and ETF & Near-Cash ETF Trends, with Brian McMullen of Invesco and James Palmieri of State Street Global Advisors. (Note: The agenda is still a work in progress, so let us know if you're interested in speaking or have any requests.)
The Day One afternoon agenda includes: Senior Portfolio Manager Perspectives with Joanne Driscoll of Putnam Investments Dave Rothweiler of UBS Asset Management and Morten Olsen of Northern Trust AM; Ultra-Shorts, LGIPs & Bond Fund Ratings with Peter Gargiulo of Fitch Ratings and Guyna Johnson of S&P Global; Government & ABS Sector Discussions with Sue Hill of Federated Hermes and Laura Mayfield of Fort Washington Investment Advisors; and, Major Issues in Fixed-Income Investing featuring Wells Fargo's Logan Miller as moderator, Matthew Brill of Invesco and Brett Wander of Charles Schwab. Monday will close with a reception sponsored by Wells Fargo Securities.
Day Two's agenda includes: Bond Market Strategists: Rates & Risks with Michael Cloherty of UBS, Teresa Ho of J.P. Morgan Securities and Ira Jersey of Bloomberg Intelligence; State of the Bond Fund Marketplace with Crane and Shelly Antoniewicz of the Investment Company Institute; Bond Funds in Europe & ESG Update with Henry Shilling of Sustainable Research & Analysis and David Callahan of Lombard Odier I.M.; Money Funds & Conservative Ultra-Shorts with Crane and Kerry Pope of Fidelity Investments.
Portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of bond funds and fixed-income investing will benefit from our comprehensive program. A block of rooms has been reserved at the Hyatt Regency. We'd like to thank our past sponsors and exhibitors -- Wells Fargo Securities, Fitch Ratings, Fidelity Investments, J.P. Morgan Asset Management, Allspring Global, S&P Global Ratings, DTCC, StoneX, Invesco, BofA Securities, Northern Trust, Bloomberg Intelligence, Goldman Sachs, Federated, Payden & Rygel, PIMCO and Dechert -- for their support. (We'd love to get some new ones!) E-mail us for more details.
Also, our 12th Annual Crane's Money Fund University will be held December 15-16, 2022 at the Hyatt Regency Boston. Crane's Money Fund University covers the history of money funds, interest rates, regulations (Rule 2a-7), ratings, rankings, money market instruments such as commercial paper, CDs and repo, and portfolio construction and credit analysis. We also include segments on offshore money funds and ultra-short bond funds. (Note Too: Crane Data is hosting its Holiday cocktail party during MFU on Dec. 15 from 5-7pm, so please join us in Boston at the Hyatt Regency!)
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 Boston Hyatt Regency.
Money Fund University's comprehensive program is good for anyone -- beginners and experienced professionals looking for a refresher -- alike. The agenda is available online and we are now accepting registrations. (We're also willing to "comp" tickets for large Crane Data or sponsor clients, so let us know if you're interested.)
We'll also soon be gearing up for our next "big show," Money Fund Symposium, which will be held June 21-23, 2023, at the Hyatt Regency in Atlanta. (Let us know if you'd like details on speaking or sponsoring.) Also, mark your calendars for next year's European Money Fund Symposium, which will be held Sept. 25-26, 2023, in Edinburgh, Scotland. Watch for details on these shows in coming weeks and months.
The Federal Reserve Bank of New York published new entry on its "Liberty Street Economics blog asking, "How Do Deposit Rates Respond to Monetary Policy?" It tells us, "When the Federal Open Market Committee (FOMC) wants to raise the target range for the fed funds rate, it raises the interest on reserve balances (IORB) paid to banks, the primary credit rate offered to banks, and the award rate paid to participants that invest in the overnight reverse repo (ON RRP) market to keep the fed funds rate within the target range.... When these rates change, market participants respond by adjusting the valuation of financial products, of which a significant category is deposits. Understanding how deposit terms adapt to changes in policy rates is important to understanding the impact of monetary policy more broadly. In this post, we evaluate the pass through of the fed funds rate to deposit rates (that is, deposit betas) over the past several interest rate cycles and discuss factors that affect deposit rates." (Note: For those attending our Money Fund University, Dec. 15-16 in Boston, Mass, at the Hyatt Regency, please make your hotel reservations ASAP. Our discounted room rate expires Nov. 22. Clients are also welcome to stop by the cocktail party on 12/15 from 5-7pm!)
The piece explains, "Deposits make up an $18 trillion product category that is critical to the funding structure of banks and a key source of savings for households and businesses. The degree to which changes in the target fed funds rate pass through to deposits is important for bank funding, monetary policy transmission, and depositors' finances. The deposit beta is the portion of a change in the fed funds rate that is passed on to deposit rates. For example, if the target fed funds rate is raised by 50 basis points and in response a bank increases its deposit rate 25 basis points, the deposit beta is 50 percent. In a rising rate environment like the one we are currently in, low deposit betas boost bank earnings but limit payouts to depositors."
It continues, "We estimate the evolution of deposit betas using data from Bank Holding Company (BHC) regulatory filings (FR Y-9C). To infer the annualized rates being paid on deposits we sum across all BHCs and scale the interest expense paid on deposits by total interest-bearing (IB) deposits for each quarter. Although we focus on the rates paid on IB deposits, including noninterest bearing accounts does not affect our general findings. We focus on the industry-level deposits given our interest in the overall pass-through of monetary policy to deposit rates."
The blog says, "Deposit rates follow the fed funds rate but are typically lower, particularly when the fed funds rate is elevated. Prior research has found that betas are lower when the fed funds rate is rising than when it is falling; therefore, we focus our analysis on periods with rising rates. We consider the current cycle as well as three tightening cycles over the last thirty years: 1994:Q1-1995:Q2, 2004:Q3-2007:Q2, and 2015:Q4-2019:Q2.... [W]e calculate the cumulative beta as the cumulative change in deposit rates relative to the cumulative change in the fed funds rate over several tightening cycles."
It states, "[D]eposit betas started higher in the 2004 rate cycle and peaked at a cumulative beta approaching 60 percent, whereas in the cycle post the financial crisis, betas start near zero and ultimately never exceeded 40 percent. The 1990s look to be an intermediate example with no response in the first several quarters but a rapid and growing beta toward the end of the tightening cycle. Peak betas have fallen by about 30 percent, a significant decrease, since the 2000s."
Discussing "The Role of Deposit Supply," the NY Fed writes, "The changes in the deposit betas since the 1990s occur concurrently with large changes in the monetary policy regime and financial conditions, especially since the Global Financial Crisis (GFC). In particular, deposits have increased significantly as a source of funding for the banking sector. One reason banks may be reluctant to raise deposit rates is that they have more deposits than they really need, so they are willing to allow depositors to seek better rates elsewhere."
They add, "We consider two measures of deposit supply to help explain the evolution of betas over the past several decades. Since the financial crisis, deposits have grown steadily as a share of bank assets, specifically invested assets like loans.... [S]ince the financial crisis, HTM [held to maturity] securities have increased significantly in response to regulatory changes and they are unlikely to be sold, particularly in a rising rate environment, so we include them with loans."
The blog also says, "Lending relative to deposit funding has fallen since 2007 and is particularly low following the COVID recession. The patterns reflect the growth of deposit funding during the period where the fed funds rate is close to zero. These ratios were also low at the onset of the 1994 rate cycle. Hence the level of deposits appears to be roughly correlated with the responsiveness of deposit rates to fed funds hikes that is, the deposit betas)."
It tells us, "Countering the high quantity of deposits are forces that encourage depositors to withdraw and invest elsewhere. One way to measure the opportunity cost of depositors is to look at the gap between the average fed funds rate and the rate on deposits over time (the deposit gap). This gap is representative of the earnings depositors forego. A bigger gap means that the opportunity cost of holding deposits is higher, and a smaller (or negative) gap means that it is lower. From the banks' perspective, a higher gap suggests that depositors are more likely to exit the banking sector to seek other investments."
The blog comments, "[W]e can observe that the gap is negative when rates are near zero (and deposit levels are high) and positive when rates rise. As a consequence, post GFC and prior to the 1994 tightening, deposits were more attractive to depositors and deposit supply was high relative to loans. These periods also correspond to lower initial deposit betas. However, as rates rise the gap increases, depositors move elsewhere, banks raise their rates, and cumulative deposit betas rise. In addition to the time-series, we considered cross-sectional evidence relating these measures of deposit supply to deposit betas across banks. Our results indicate that both the loans-plus-HTM securities-to-deposits ratio and the deposit gap are positively correlated to deposit betas."
Finally, it summarizes, "Since the 1990s, the response of deposits to monetary policy has been attenuated. This can be explained by the growth in deposits over the post-crisis period relative to investment opportunities. Understanding deposit pricing dynamics requires thinking about the quantities of various funding sources and the presence (or lack thereof) of competing products. Taken together, current deposit betas are lower and slower given banks significant supply of deposit funding. However, going forward the rapid increase in the fed funds rate suggests that the deposit gap will be higher than recent rate cycles, causing depositors to look elsewhere and deposit rates to rise in response."
The Securities and Exchange Commission's latest monthly "Money Market Fund Statistics" summary shows that total money fund assets broke back above the $5.1 trillion level, increasing by $35.6 billion in October to $5.131 trillion. The SEC shows that Prime MMFs increased by $36.6 billion in October to break the $1.0 trillion barrier ($1.013 trillion), Govt & Treasury funds decreased $12.8 billion to $4.000 trillion and Tax Exempt funds increased $11.8 billion to $118.6 billion. Taxable yields skyrocketed in October after surging in September. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review their latest numbers below. (Note: Register soon for our upcoming Money Fund University, which will be Dec. 15-16 in Boston.)
October's asset increase follows a decrease of $9.4 billion in September, and increases of $3.5 billion in August, $57.4 billion in July, and $26.6 billion in June. MMFs decreased $19.7 billion in May and $63.3 billion in April, but increased $40.1 billion in March. They decreased $29.3 billion in February and $125.1 billion in January. Over the 12 months through 10/31/22, total MMF assets have increased by $93.1 billion, according to the SEC's series. (Month-to-date in November through 11/17, total MMF assets have increased by $16.0 billion, according to our MFI Daily.)
The SEC's stats show that of the $5.131 trillion in assets, $1.013 trillion was in Prime funds, up $36.6 billion in October. Prime assets were up $15.8 billion in September, $43.5 billion in August, $56.6 billion in July, $8.5 billion in June and $9.4 billion in May. Prime was down $11.7 billion in April, up $29.5 billion in March, down $2.7 billion in February and up $10.7 billion in January. Prime funds represented 19.7% of total assets at the end of October. They've increased by $154.8 billion, or 18.0%, over the past 12 months. (Note that the SEC's series includes a number of internal money funds not tracked by ICI, though Crane Data includes most of these assets in its collections.)
Government & Treasury funds totaled $4.000 trillion, or 78.0% of assets. They decreased $12.8 billion in October, $20.8 billion in September and $47.1 billion in August. Govt MMFs increased $8.2 billion in July and $14.4 billion in June, but decreased by $36.7 billion in May and $57.1 billion in April. They increased $8.7 billion in March, decreased by $25.8 billion in February and $135.2 billion in January. Govt & Treasury MMFs are down $83.8 billion over 12 months, or -2.1%. Tax Exempt Funds increased $11.8 billion to $118.6 billion, or 2.3% of all assets. The number of money funds was 300 in October, down 4 from the previous month and down 14 funds from a year earlier.
Yields for Taxable MMFs and Tax Exempt MMFs jumped yet again in October. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on October 31 was 3.20%, up 23 bps from the prior month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 3.34%, up 15 bps from the previous month. Gross yields were 3.07% for Government Funds, up 16 basis points from last month. Gross yields for Treasury Funds were up 34 bps at 3.15%. Gross Yields for Tax Exempt Institutional MMFs were down 16 basis points to 2.05% in October. Gross Yields for Tax Exempt Retail funds were up 8 bps to 2.23%.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 3.15%, up 23 bps from the previous month and up 309 basis points from 10/31/21. The Average Net Yield for Prime Retail Funds was 3.07%, up 16 bps from the previous month, and up 305 bps since 10/31/21. Net yields were 2.83% for Government Funds, up 15 bps from last month. Net yields for Treasury Funds were also up 35 bps from the previous month at 2.94%. Net Yields for Tax Exempt Institutional MMFs were down 17 bps from September to 1.94%. Net Yields for Tax Exempt Retail funds were up 8 bps at 1.98% in October. (Note: These averages are asset-weighted.)
WALs and WAMs were down in October. The average Weighted Average Life, or WAL, was 35.0 days (down 2.9 days) for Prime Institutional funds, and 48.8 days for Prime Retail funds (down 2.2 days). Government fund WALs averaged 61.4 days (down 1.6 days) while Treasury fund WALs averaged 59.6 days (down 4.0 days). Tax Exempt Institutional fund WALs were 8.6 days (down 1.4 days), and Tax Exempt Retail MMF WALs averaged 15.9 days (down 2.0 days).
The Weighted Average Maturity, or WAM, was 11.8 days (down 3.0 days from the previous month) for Prime Institutional funds, 9.3 days (down 3.3 days from the previous month) for Prime Retail funds, 12.6 days (down 3.3 days from previous month) for Government funds, and 23.0 days (down 2.9 days from previous month) for Treasury funds. Tax Exempt Inst WAMs were down 1.7 days to 8.3 days, while Tax Exempt Retail WAMs were down 2.2 days from previous month at 15.1 days.
Total Daily Liquid Assets for Prime Institutional funds were 54.0% in October (up 1.6% from the previous month), and DLA for Prime Retail funds was 39.8% (down 2.0% from previous month) as a percent of total assets. The average DLA was 78.1% for Govt MMFs and 98.6% for Treasury MMFs. Total Weekly Liquid Assets was 70.3% (up 2.1% from the previous month) for Prime Institutional MMFs, and 53.8% (up 1.2% from the previous month) for Prime Retail funds. Average WLA was 87.8% for Govt MMFs and 99.2% for Treasury MMFs.
In the SEC's "Prime Holdings of Bank-Related Securities by Country table for October 2022," the largest entries included: Canada with $97.8 billion, Japan with $93.2 billion, the U.S. with $67.3B, France with $59.1 billion, the Netherlands with $37.6B, Aust/NZ with $34.1B, the U.K. with $28.8B, Germany with $25.1B and Switzerland with $7.4B. The gainers among the "Prime MMF Holdings by Country" included: Japan (up $11.8B), France (up $10.0B), Canada (up $4.7B), Aust/NZ (up $4.3B), the Netherlands (up $3.1B), the U.K. (up $3.0B), the U.S. (up $2.8B) and Switzerland (up $0.2B). Decreases were shown by: Germany (down $2.6B).
The SEC's "Prime Holdings of Bank-Related Securities by Region" table shows The Americas had $165.1 billion (up $7.4B), while Asia Pacific had $149.0B (up $18.6B). Eurozone subset had $138.7B (up $17.2B), while Europe (non-Eurozone) had $84.2B (up $10.9B from last month).
The "Prime MMF Aggregate Product Exposures" chart shows that of the $1.014 trillion in Prime MMF Portfolios as of October 31, $434.8B (42.9%) was in Government & Treasury securities (direct and repo) (up from $447.3B), $247.6B (24.4%) was in CDs and Time Deposits (up from $211.3B), $168.6B (16.6%) was in Financial Company CP (up from $159.0B), $122.4B (12.1%) was held in Non-Financial CP and Other securities (up from $115.9B), and $40.8B (4.0%) was in ABCP (up from $37.4B).
The SEC's "Government and Treasury Funds Bank Repo Counterparties by Country" table shows the U.S. with $108.9 billion, Canada with $83.9 billion, France with $70.3 billion, the U.K. with $43.9 billion, Germany with $10.2 billion, Japan with $79.3 billion and Other with $22.2 billion. All MMF Repo with the Federal Reserve was down $75.6 billion in October to $2.145 trillion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs 4.8%, Prime Retail MMFs with 5.2%, Tax Exempt Inst MMFs with 0.9%, Tax Exempt Retail MMFs with 2.2%, Govt MMFs with 12.8% and Treasury MMFs with 10.0%.
The Association for Financial Professionals recently published a guide entitled, "Money Fund Reform: The Broader Implications," which was underwritten by Allspring Global Investments and covers the ongoing discussions around money market reforms. It begins, "Late last year, the SEC proposed a number of reforms designed to improve the resilience of money market funds during times of market stress. These amendments, along with rising interest rates and general market volatility, could potentially alter demand for institutional money funds which is, not surprisingly, causing uncertainty for practitioners heading into 2023. With these potential changes likely imminent, treasurers have been left wondering what can be done now to prepare. In this guide, we take a look at the implications of the proposed changes, as well as provide treasurers with practical next steps and questions to consider in advance of these changes. A good first step, if not taken already, is to review the investment policy and procedures to ensure they remain fit for purpose in uncertain times." (Reminder: For those attending our Money Fund University, Dec. 15-16 in Boston, Mass, at the Hyatt Regency, please make your hotel reservations ASAP if you haven't done so. Our discounted room rate expires on Nov. 22. Clients and friends are also welcome to stop by the cocktail party on 12/15 from 5-7pm!)
The paper's Introduction explains, "Money funds play an important role in the economy by acting as an intermediary between borrowers and lenders, via their investment in high-quality securities, and therefore providing important liquidity to the money markets. For corporate treasurers, money funds play a dual role: they are a popular vehicle for investing corporate cash and, by actively investing in short-dated securities, they provide a market for corporate issuers of commercial paper."
It continues, "Money funds provide corporate treasurers with an alternative to banks as a location for placing short-term surplus cash. This role has become more important as banks have been required to manage their own balance sheets and sources of deposits more carefully, in order to meet stricter capital adequacy requirements."
The AFP writes, "As a direct result of liquidity pressures the SEC identified in the market in the spring of 2020, in December 2021, it proposed a package of reforms aimed at improving the resilience of money funds during times of market stress. These reforms have the potential to alter the demand for institutional money funds, particularly prime funds, as an investment vehicle for corporate short-term cash. This guide identifies the likely effects of the various SEC proposals to help treasurers prepare for possible change. It also discusses wider market issues, such as rising interest rates and general market volatility, and suggests a review of investment strategies and policies as we head into 2023."
A section titled "Overview of SEC Reforms" states, "Regulators have been concerned about the resilience of money market funds for some time, primarily due to the risk that a 'run' on one money market fund might result in liquidity problems in the money markets and, by extension, the wider economy. Following the Global Financial Crisis, regulators in the United States and abroad enacted new money market regulations to try to mitigate such liquidity problems in future. The adoption of the post-crisis reforms in the U.S. resulted in money fund investors shifting several hundreds of billions of dollars from prime money funds (which can be invested in a range of securities including commercial paper) to government funds (which have to hold the overwhelming majority of their assets under management in government securities, such as T-bills)."
It tells us, "In March 2020, during the initial stages of the coronavirus pandemic, many institutional investors redeemed their investments from prime funds, preferring to hold surplus cash either with banks or in government securities, including in government money funds. For many investors, the primary objective was to focus on ensuring access to sufficient liquidity to cover the uncertainty during the early stages of the pandemic. The Federal Reserve took a range of actions to try to preserve liquidity in the money markets, notably by establishing the Money Market Mutual Fund Liquidity Facility, which operated from March 2020 to March 2021."
The guide comments, "Following an analysis of investor behavior in March 2020, the SEC identified pressures on the money markets generally, and on institutional prime money market funds in particular. In response, it has proposed a series of reforms to try to reduce the risk that a future market event will result in a similar outcome. The proposed reforms include four key measures: 1. The removal of redemption gates and liquidity fees. 2. An increase in portfolio liquidity requirements. 3. A requirement for swing pricing for institutional prime and municipal funds. 4. Additional provisions to address the effect of potential negative interest rates. Each measure has potentially significant implications for users of money market funds. In each case, we will outline the current proposal and then identify how it could affect corporate users of money market funds."
The paper discusses the reform proposals briefly, then says, "The nature of the SEC's proposals gives an indication of the regulator's residual concerns over the central position of money market funds within the economy. Fundamentally, the SEC is concerned that a run on a particular fund has the potential to disrupt the flow of liquidity in the money markets, which in turn could undermine fundamental business activity in the economy as a whole. Critics might argue that the SEC is merely responding to the latest observable problems, so these proposed reforms are backward-looking and fail to prepare the industry for the next crisis."
It explains, "In comparison, the European Securities and Markets Authority (ESMA) adopted reforms post-financial crisis that are similar to those adopted by the SEC. Part of the regulation imposed a review of the reforms after a five-year period, such that reforms are due for review in 2022. ESMA made suggestions for reform following the events of spring 2020, with the outcome of its consultation due by the end of the year."
AFP adds, "Any time new money market fund regulations are under consideration, treasury practitioners want to know how the reforms will affect the availability and risk profile of money market funds. In practice, while some specific elements of reform will affect treasury departments directly, wider changes in the economy may also influence the use of money market funds over the coming months."
Finally, the guide quotes our Peter Crane, "Over the last twenty years, money fund investors have learned to adjust to regulation. No matter what the SEC decides, big investors will adapt this time too. Yield has not been a factor over this period, but that's also changing now."
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 Nov. 11) includes Holdings information from 45 money funds (up 3 from two weeks ago), which represent $1.319 trillion (up from $1.103 trillion) of the $5.054 trillion (26.1%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.) (Reminder: There's still time to register for our basic training event, Money Fund University, which is $750 and will take place Dec. 15-16 in Boston, Mass at the Hyatt Regency. Clients and friends are welcome to stop by the cocktail party on 12/15 from 5-7pm!)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $773.4 billion (up from $662.6 billion two weeks ago), or 58.6%; Treasuries totaling $347.8 billion (up from $305.9 billion two weeks ago), or 26.4%, and Government Agency securities totaling $93.9 billion (up from $81.1 billion), or 7.1%. Commercial Paper (CP) totaled $45.4 billion (up from two week ago at $23.2 billion), or 3.4%. Certificates of Deposit (CDs) totaled $21.8 billion (up from $7.9 billion a week ago), or 1.6%. The Other category accounted for $26.5 billion or 2.0%, while VRDNs accounted for 10.5 billion, or 0.8%.
The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $586.6 billion (44.5%), the US Treasury with $347.8 billion (26.4% of total holdings), Federal Home Loan Bank with $57.9B (4.4%), Federal Farm Credit Bank with $32.5B (2.5%), JP Morgan with $22.4B (1.7%), Fixed Income Clearing Corp with $20.1B (1.5%), Barclays PLC with $18.5B (1.4%), RBC with $18.3B (1.4%), BNP Paribas with $13.5B (1.0%) and Mitsubishi UFJ Financial Group Inc with $13.5B (1.0%).
The Ten Largest Funds tracked in our latest Weekly include: Morgan Stanley Inst Liq Govt ($136.9B), Fidelity Inv MM: Govt Port ($123.5B), Dreyfus Govt Cash Mgmt ($107.6B), Allspring Govt MM ($105.1B), State Street Inst US Govt ($91.9B), Invesco Govt & Agency ($76.7B), First American Govt Oblg ($71.6B), Fidelity Inv MM: MM Port ($71.2B), Morgan Stanley Inst Liq Treas Sec ($49.3B) and Dreyfus Treas Sec Cash Mg ($45.0B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
In related news, ICI released its latest monthly "Money Market Fund Holdings" summary, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds.
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in October, prime money market funds held 36.4 percent of their portfolios in daily liquid assets and 53.6 percent in weekly liquid assets, while government money market funds held 86.7 percent of their portfolios in daily liquid assets and 92.6 percent in weekly liquid assets." Prime DLA was down from 38.6% in September, and Prime WLA was up from 52.1%. Govt MMFs' DLA was down from 88.0% and Govt WLA decreased from 93.2% the previous month.
ICI explains, "At the end of October, prime funds had a weighted average maturity (WAM) of 9 days and a weighted average life (WAL) of 52 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 16 days and a WAL of 61 days." Prime WAMs were 4 days shorter and WALs were 3 days shorter from the previous month. Govt WAMs were 3 days shorter and WALs were 2 days shorter from September.
Regarding Holdings by Region of Issuer, the release tells us, "Prime money market funds' holdings attributable to the Americas declined from $271.68 billion in September to $268.54 billion in October. Government money market funds' holdings attributable to the Americas declined from $3,763.18 billion in September to $3,743.63 billion in October."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $268.5 billion, or 47.1%; Asia and Pacific at $116.5 billion, or 20.4%; Europe at $176.3 billion, or 30.9%; and, Other (including Supranational) at $8.8 billion, or 1.5%. The Government Money Market Funds by Region of Issuer table shows Americas at $3.744 trillion, or 94.5%; Asia and Pacific at $73.3 billion, or 1.9%; Europe at $126.3 billion, 3.2%, and Other (Including Supranational) at $16.3 billion, or 0.4%.
Crane Data's latest Money Fund Intelligence International shows that assets in European or "offshore" money market mutual funds rose over the past month to $1.024 trillion led by a surge in EUR & GBP funds. Offshore USD MMFs declined over the past 30 days. European MMF assets remain below their record high of $1.101 trillion set in mid-December 2021. These U.S.-style money funds, domiciled in Ireland or Luxembourg but denominated in US Dollars, Pound Sterling and Euros, increased by $6.5 billion over the 30 days through 11/14. The totals are down $38.6 billion (-3.6%) year-to-date. (Note that the increase in the U.S. dollar earlier this year caused Euro and Sterling totals to decline when they're translated back into dollars.)
Offshore US Dollar money funds are down $12.8 billion over the last 30 days and are up $2.9 billion YTD to $537.4 billion. Euro funds increased E21.9 billion over the past month. YTD, they're up E15.6 billion to E174.0 billion. GBP money funds increased L20.1 billion over 30 days; they are up by L27.5 billion YTD to L274.6B. U.S. Dollar (USD) money funds (196) account for half (52.5%) of the "European" money fund total, while Euro (EUR) money funds (91) make up 17.0% and Pound Sterling (GBP) funds (126) total 26.8%. We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers Tuesday), below.
Offshore USD MMFs yield 3.67% (7-Day) on average (as of 11/14/22), up from 2.90% a month earlier. Yields averaged 0.03% on 12/31/21, 0.05% on 12/31/20, 1.59% on 12/31/19 and 2.29% on 12/31/18. EUR MMFs finally left negative yield territory 2 months ago; they're yielding 1.17% on average, up from 0.49% a month ago and up from -0.80% on 12/31/21. They averaged -0.71% at year-end 2020, -0.59% at year-end 2019 and -0.49% at year-end 2018. Meanwhile, GBP MMFs yielded 2.76%, up 71 bps from a month ago, and up from 0.01% on 12/31/21. Sterling yields were 0.00% on 12/31/20, 0.64% on 12/31/19 and 0.64% on 12/31/18. (See our latest MFI International for more on the "offshore" money fund marketplace. Note that these funds are only available to qualified, non-U.S. investors.)
Crane's October MFI International Portfolio Holdings, with data as of 10/31/22, show that European-domiciled US Dollar MMFs, on average, consist of 24% in Commercial Paper (CP), 15% in Certificates of Deposit (CDs), 31% in Repo, 11% in Treasury securities, 18% in Other securities (primarily Time Deposits) and 1% in Government Agency securities. USD funds have on average 62.2% of their portfolios maturing Overnight, 11.0% maturing in 2-7 Days, 6.0% maturing in 8-30 Days, 6.2% maturing in 31-60 Days, 4.6% maturing in 61-90 Days, 7.3% maturing in 91-180 Days and 2.7% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (27.7%), France (16.8%), Canada (13.2%), Japan (10.8%), Sweden (7.4%), the Netherlands (4.5%), the U.K. (4.1%), Australia (3.5%), Germany (2.2%) and Austria (1.7%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $59.1 billion (10.7% of total assets), RBC with $29.2B (5.3%), BNP Paribas with $27.7B (5.0%), Credit Agricole with $25.1B (4.5%), Federal Reserve Bank of New York with $25.0B (4.5%), Sumitomo Mitsui Banking Corp with $17.7B (3.2%), Barclays PLC with $15.2B (2.8%), Skandinaviska Enskilda Banken AB with $14.4B (2.6%), Mizuho Corporate Bank Ltd with $13.8B (2.5%) and Fixed Income Clearing Corp with $13.4B (2.4%).
Euro MMFs tracked by Crane Data contain, on average 41% in CP, 16% in CDs, 30% in Other (primarily Time Deposits), 10% in Repo, 2% in Treasuries and 1% in Agency securities. EUR funds have on average 39.5% of their portfolios maturing Overnight, 22.9% maturing in 2-7 Days, 12.4% maturing in 8-30 Days, 4.5% maturing in 31-60 Days, 10.5% maturing in 61-90 Days, 6.4% maturing in 91-180 Days and 3.8% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (35.5%), Japan (14.1%), the U.S. (8.7%), Austria (5.5%), Sweden (5.1%), the U.K. (5.0%), Canada (4.6%), Germany (4.2%), the Netherlands (3.9%), and Belgium (3.2%).
The 10 Largest Issuers to "offshore" EUR money funds include: Republic of France with E9.3B (5.8%), Credit Agricole with E8.4B (5.3%), Credit Mutuel with E7.8B (4.9%), BNP Paribas with E7.2B (4.5%), Erste Group Bank AG with E6.4B (4.0%), Natixis with E6.3B (4.0%), Mizuho Corporate Bank Ltd with E6.1B (3.8%), Societe Generale with E5.9B (3.7%), Mitsubishi UFJ Financial Group Inc with E5.3B (3.4%) and Sumitomo Mitsui Banking Corp with E4.6B (2.9%).
The GBP funds tracked by MFI International contain, on average (as of 10/31/22): 32% in CDs, 21% in CP, 30% in Other (Time Deposits), 16% in Repo, 1% in Treasury and 0% in Agency. Sterling funds have on average 44.7% of their portfolios maturing Overnight, 21.6% maturing in 2-7 Days, 10.3% maturing in 8-30 Days, 2.3% maturing in 31-60 Days, 8.8% maturing in 61-90 Days, 9.5% maturing in 91-180 Days and 2.7% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: Japan (19.3%), France (17.4%), Canada (14.4%), the U.K. (10.3%), the Netherlands (6.0%), Australia (5.5%), the U.S. (4.9%), Sweden (4.4%), Germany (2.8%) and Spain (2.0%).
The 10 Largest Issuers to "offshore" GBP money funds include: Mizuho Corporate Bank Ltd with L10.5B (6.3%), Mitsubishi UFJ Financial Group Inc with L8.9B (5.3%), Barclays with L8.0B (4.8%), BNP Paribas with L7.1B (4.3%), Bank of Nova Scotia with L6.3B (3.8%), Sumitomo Mitsui Trust Bank with L5.8B (3.5%), RBC with L5.6B (3.4%), Societe Generale with L5.5B (3.3%), Toronto-Dominion Bank with L5.4B (3.3%) and Rabobank with L5.4B (3.3%).
The November issue of our Bond Fund Intelligence, which was sent to subscribers Tuesday morning, features the stories, "Bond Fund Assets Down Over $1.0 Trillion in Annus Horribilis," which reviews the ongoing outflows and losses in the sector, and "Gross Critiques Total Return Bond Funds; PIMCO's Ivascyn," which reviews a recent blog post from the former "Bond King". BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns fell again in October while yields rose for the 13th straight month. We excerpt from the new issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
Our "Bond Fund Assets Down" article says, "Bond fund assets declined again in October, the 10th drop in the past 11 months. ICI's asset totals show bond funds declining a massive $1.0 trillion over 12 months (through 9/30), while Crane Data's collection shows assets down another $85.5 billion in October to $2.566 trillion. YTD through 10/31, we show assets down $758.9 billion, or -22.8%."
"ICI's monthly 'Trends in Mutual Fund Investing – September 2022' shows bond fund assets down $238.5 billion, or -5.0%, to $4.533 trillion in September, after declining $107.7 billion in August. Over the 12 months through 9/30/22, bond fund assets fell by $1.067 trillion, or -19.1%. The number of funds declined in September to 2,075, down 4 for the month and down 28 over 1 year.
Our "Gross Critiques" piece states, "Bond guru Bill Gross recently posted a blog entitled, '50 Basis Deposit/No Return.' He writes, 'There are lots of 'total return' bond funds these days, almost a half century since I innovated the concept in 1987. My idea then was to combine interest income with capital gains in bond prices to produce a 'total return' over and above current yields. It worked famously until the beginning of this year."
It continues, "Admittedly, a secular bond bull market was a huge tailwind, but Pimco's Total Return Fund used a host of other non-index strategies to differentiate itself from the pack.... It led to the doubling of Pimco's total assets from $1 trillion to $2 trillion in the following few years.'"
Our first News brief, "Returns Keep Sliding; Yields Up Again," states, "Bond fund returns fell yet again in October though returns weren't as bad as September's slide. Yields rose for the 13th month in a row. Our BFI Total Index fell 0.33% over 1-month and fell 10.57% over 12 months. The BFI 100 lost 0.38% in Oct. and lost 11.79% over 1-year. Our BFI Conservative Ultra-Short Index was up 0.06% over 1-month but down 0.50% for 1-year; Ultra-Shorts fell 0.11% and 1.99%. Short-Term fell 0.13% and 6.21%, and Intm-Term fell 1.02% and 14.41% over 1-year. BFI's Long-Term Index fell 1.38% and 18.32%. High Yield rose 1.97% in Oct. and fell 9.34% over 1-year."
A second News brief, "Morningstar on '12 Top-Performing Bond Funds With High Yields,' says, 'A bright side to this year's brutal selloff in the bond market is that thanks to rising yields, bond fund investors now have considerably more options when looking to add income and the potential for total return to fixed-income portfolios. Consider that the average intermediate-term core bond fund is now yielding 3.58%, according to `Morningstar Direct, up from just 1.24% at the end of Sept. 2021 <b:>`_.'"
Another brief quotes 'Barron's 'These 3 Funds Are Beating the Bear Market in Bonds.' They write, 'Interest rates have skyrocketed this year due to the Federal Reserve's aggressive interest-rate-tightening initiative to tame inflation, causing bond prices to crater. One constituency feeling that pain is fixed-income fund managers, nearly all of whom have struggled to avoid losses. Active fixed-income funds returned an average of minus 12.1%, including interest, this year through Oct. 31, according to Morningstar.'"
A BFI sidebar, "SEC Proposes Swing Pricing, quotes the press release entitled, 'SEC Proposes Enhancements to Open-End Fund Liquidity Framework.' They tell us, 'The Securities and Exchange Commission... voted to propose amendments to better prepare open-end funds for stressed conditions and to mitigate dilution of shareholders' interests. The rule and form amendments would enhance how funds manage their liquidity risks, require mutual funds to implement liquidity management tools, and provide for more timely and detailed reporting of fund information.'"
Finally, another sidebar, "FT: BFs Ready for Rebound," explains, "The Financial Times tells us, 'Fund managers position to woo investors back to bonds.' They write, "Bond fund managers struggling through one of their worst years in decades say the tide is turning as they position to woo investors attracted by higher yields. Nearly $480bn has flowed out of US fixed income mutual funds since the start of the year, according to ICI. While some money moved into ETFs, the majority reflected retail investor flight.... However, outflows have slowed significantly in the past few weeks and even started to reverse in some areas."
The SEC released its latest quarterly "Private Funds Statistics" report, which summarizes Form PF reporting and includes some data on "Liquidity Funds," or pools which are similar to but not money market funds. The publication shows overall Liquidity fund assets were unchanged in the latest reported quarter (Q1'22) at $313 billion (same from $313 billion in Q4'21 and up from $304 billion in Q1'21). (Note: Please join us for our "basic training" event, Money Fund University, which will take place Dec. 15-16 in Boston, Mass at the Hyatt Regency. Clients and friends are welcome to stop by the cocktail party on 12/15 or our Money Fund Wisdom training session on 12/16!)
The SEC's "Introduction" tells us, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from Second Calendar Quarter 2020 through First Calendar Quarter 2022 as reported by Form PF filers." (Note: Crane Data believes the largest portion of these liquidity fund assets are securities lending reinvestment pools.)
The tables in the SEC's "Private Funds Statistics: First Calendar Quarter 2022," with the most recent data available, show 79 Liquidity Funds (most of which are "Section 3 Liquidity Funds," which are Liquidity Funds from advisers with over $1 billion total in cash), unchanged from last quarter and up 6 from a year ago. (There are 54 Section 3 Liquidity Funds out of the 79 Liquidity Funds.) The SEC receives Form PF reports from 39 Liquidity Fund advisers (23 of which are Section 3 Liquidity Fund advisers), unchanged from last quarter and up 2 from a year ago.
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $313 billion, unchanged from Q4'21 and up $9 billion from a year ago (Q1'21). Of this total, $309 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $318 billion, unchanged from Q4'21 and up $4 billion from a year ago (Q1'21). Of this total, $314 billion in is Section 3 (large manager) Liquidity Funds.
A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $103 billion is held by Other (33.4%), $51 billion is held by Unknown Non-U.S. Investors (16.6%), $58 billion is held by Private Funds (18.6%), $24 billion is held by SEC-Registered Investment Companies (7.8%), $5 billion in held by Pension Plans (1.7%), $8 billion is held by Insurance Companies (2.6%), $3 billion is held by Non-Profits (1.0%) and $1 billion is held by State/Muni Govt. Pension Plans (0.3%).
The tables also show that 69.5% of Section 3 Liquidity Funds have a liquidation period of one day, $290 billion of these funds may suspend redemptions, and $261 billion of these funds may have gates. WAMs average a short 38 days (41 days when weighted by assets), WALs are 51 days (61 days when asset-weighted), and 7-Day Gross Yields average 0.45% (0.36% asset-weighted). Daily Liquid Assets average about 50% (49% asset-weighted) while Weekly Liquid Assets average about 60% (60% asset-weighted).
Overall, these portfolios appear shorter with a heavier Treasury exposure than money market funds in general; almost half of them (40.7%) are fully compliant with Rule 2a-7. When calculating NAVs, 74.1% are "Stable" and 25.9% are "Floating." For more, see our Jan. 27 News, "SEC Proposes Amendments to Form PF Large Liquidity Fund Reporting," and see the SEC's proposal "Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews."
In other news, the Investment Company Institute's latest weekly "Money Market Fund Assets" report shows money fund assets falling the past week after skyrocketing in the first week of November. Over the past 52 weeks, money fund assets are up by $51 billion, or 1.1%, with Retail MMFs rising by $157 billion (10.9%) and Inst MMFs falling by $105 billion (-3.4%). ICI shows assets down by $87 billion, or -1.9%, year-to-date, with Institutional MMFs down $209 billion, or -6.4% and Retail MMFs up $121 billion, or 8.3%.
The weekly release says, "Total money market fund assets decreased by $13.84 billion to $4.62 trillion for the week ended Wednesday, November 9, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $21.58 billion and prime funds increased by $7.51 billion. Tax-exempt money market funds increased by $226 million." ICI's stats show Institutional MMFs falling $16.8 billion and Retail MMFs increasing $3.0 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.924 trillion (85.0% of all money funds), while Total Prime MMFs were $580.7 billion (12.6%). Tax Exempt MMFs totaled $113.7 billion (2.5%).
ICI explains, "Assets of retail money market funds increased by $2.98 billion to $1.59 trillion. Among retail funds, government money market fund assets decreased by $4.38 billion to $1.14 trillion, prime money market fund assets increased by $6.46 billion to $348.95 billion, and tax-exempt fund assets increased by $905 million to $101.03 billion." Retail assets account for over a third of total assets, or 34.4%, and Government Retail assets make up 71.7% of all Retail MMFs.
They add, "Assets of institutional money market funds decreased by $16.82 billion to $3.03 trillion. Among institutional funds, government money market fund assets decreased by $17.20 billion to $2.78 trillion, prime money market fund assets increased by $1.05 billion to $231.76 billion, and tax-exempt fund assets decreased by $679 million to $12.66 billion." Institutional assets accounted for 65.6% of all MMF assets, with Government Institutional assets making up 92.0% of all Institutional MMF totals. (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.)
For the month of November through 11/9, MMF assets increased by $17.6 billion to $5.072 trillion according to Crane's MFI XLS, which tracks a broader universe of funds than ICI. Crane Data's Prime asset totals, which broke the $1.0 trillion level last week, increased $15.2 billion MTD (and $26.8 billion in October) to $1.011 trillion. Given that November and December are the two strongest months of the year seasonally, we expect big inflows in the coming weeks.
Crane Data's November Money Fund Portfolio Holdings, with data as of Oct. 31, 2022, show Repo (led by Fed repo) decreased and Treasuries continued a deep 9-month slide. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $57.7 billion to $4.991 trillion in October, after increasing $15.2 billion in September, decreasing $20.8 billion in August and increasing $116.1 billion in July. Holdings decreased $2.6 billion in June, $58.4 billion in May and $55.2 billion in April. Repo remained the largest portfolio segment, while Treasuries remained in the No. 2 spot. The Federal Reserve Bank of New York, which surpassed the U.S. Treasury as the largest "Issuer" five months ago, saw RRP issuance to MMFs drop $82.0 billion to $2.126 trillion. Agencies were the third largest segment, CP remained fourth, ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among taxable money funds, Repurchase Agreements (repo) decreased $6.0 billion (-0.2%) to $2.711 trillion, or 54.3% of holdings, in October, after increasing $74.4 billion in September, $23.1 billion in August, $88.7 billion in July and $128.6 billion in June. Treasury securities fell $41.8 billion (-3.3%) to $1.211 trillion, or 24.3% of holdings, after decreasing $84.8 billion in September, $82.6 billion in August, $33.2 billion in July and $72.5 billion in June. Government Agency Debt was up $55.0 billion, or 11.5%, to $533.0 billion, or 10.7% of holdings, after increasing $35.9 billion in September, $11.3 billion in August and $24.5 billion in July. Agencies decreased $14.6 billion in June. Repo, Treasuries and Agency holdings now total $4.455 trillion, representing a massive 89.3% of all taxable holdings.
Money fund holdings of CP and CDs jumped in October. Commercial Paper (CP) increased $19.3 billion (8.2%) to $254.9 billion, or 5.1% of holdings, after decreasing $7.8 billion in September, but increasing $15.4 billion in August and $15.3 billion in July. Certificates of Deposit (CDs) increased $15.5 billion (11.6%) to $149.3 billion, or 3.0% of taxable assets, after decreasing $1.6 billion in September, but increasing $13.4 billion in August and $3.6 billion in July. Other holdings, primarily Time Deposits, increased $16.0 billion (15.1%) to $121.8 billion, or 2.4% of holdings, after decreasing $1.1 billion in September, $1.8 billion in August and increasing $17.3 billion in July. VRDNs fell to $10.1 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will post our Tax Exempt MMF holdings separately Thursday around noon.)
Prime money fund assets tracked by Crane Data jumped to $999 billion, or 20.0% of taxable money funds' $4.991 trillion total. Among Prime money funds, CDs represent 14.9% (up from 14.0% a month ago), while Commercial Paper accounted for 25.6% (up from 24.6% in September). The CP totals are comprised of: Financial Company CP, which makes up 16.8% of total holdings, Asset-Backed CP, which accounts for 4.0%, and Non-Financial Company CP, which makes up 4.8%. Prime funds also hold 5.9% in US Govt Agency Debt, 3.1% in US Treasury Debt, 30.5% in US Treasury Repo, 0.3% in Other Instruments, 9.8% in Non-Negotiable Time Deposits, 4.6% in Other Repo, 3.0% in US Government Agency Repo and 0.6% in VRDNs.
Government money fund portfolios totaled $2.726 trillion (54.6% of all MMF assets), down from $2.740 trillion in September, while Treasury money fund assets totaled another $1.266 trillion (25.4%), up from $1.239 trillion the prior month. Government money fund portfolios were made up of 17.4% US Govt Agency Debt, 9.4% US Government Agency Repo, 16.1% US Treasury Debt, 56.9% in US Treasury Repo, 0.0% in Other Instruments. Treasury money funds were comprised of 58.6% US Treasury Debt and 41.4% in US Treasury Repo. Government and Treasury funds combined now total $3.992 trillion, or 80.0% of all taxable money fund assets.
European-affiliated holdings (including repo) increased by $60.3 billion in October to $407.6 billion; their share of holdings jumped to 8.2% from last month's 7.0%. Eurozone-affiliated holdings increased to $273.6 billion from last month's $242.1 billion; they account for 5.5% of overall taxable money fund holdings. Asia & Pacific related holdings jumped to $200.2 billion (4.0% of the total) from last month's $175.9 billion. Americas related holdings fell to $4.379 trillion from last month's $4.405 trillion, and now represent 87.7% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (down $15.3 billion, or -0.6%, to $2.380 trillion, or 47.7% of assets); US Government Agency Repurchase Agreements (up $29.1 billion, or 11.4%, to $285.0 billion, or 5.7% of total holdings), and Other Repurchase Agreements (down $19.8 billion, or -30.2%, from last month to $45.9 billion, or 0.9% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $9.7 billion to $167.6 billion, or 3.4% of assets), Asset Backed Commercial Paper (up $3.4 billion to $39.8 billion, or 0.8%), and Non-Financial Company Commercial Paper (up $6.2 billion to $47.6 billion, or 1.0%).
The 20 largest Issuers to taxable money market funds as of Oct. 31, 2022, include: the Federal Reserve Bank of New York ($2.126T, 42.6%), US Treasury ($1.224T, 24.5%), Federal Home Loan Bank ($425.8B, 8.5%), Federal Farm Credit Bank ($96.2B, 1.9%), Fixed Income Clearing Corp ($74.5B, 1.5%), RBC ( $67.3B, 1.3%), BNP Paribas ($58.2B, 1.2%), JP Morgan ($52.1B, 1.0%), Sumitomo Mitsui Banking Corp ($46.8B, 0.9%), Citi ($43.5B, 0.9%), Barclays PLC ($42.9B, 0.9%), Mitsubishi UFJ Financial Group Inc ($37.9B, 0.8%), Mizuho Corporate Bank Ltd ($35.1B, 0.7%), Credit Agricole <b:>`_ ($33.4B, 0.7%), Bank of America ($32.3B, 0.6%), Toronto-Dominion Bank <b:>`_ ($30.0B, 0.6%), Canadian Imperial Bank of Commerce ($24.8B, 0.5%), Bank of Montreal ($24.7B, 0.5%), Nomura ($23.2B, 0.5%) and Bank of Nova Scotia ($23.2B, 0.5%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: ` Federal Reserve Bank of New York ($2.126T, 78.8%), Fixed Income Clearing Corp ($74.5B, 2.8%), BNP Paribas ($49.0B, 1.8%), JP Morgan ($46.1B, 1.7%), RBC ($44.0B, 1.6%), Sumitomo Mitsui Banking Corp ($30.8B, 1.1%), Bank of America ($28.1B, 1.0%), Barclays PLC ($27.1B, 1.0%), Citi ($26.6B, 1.0%) and Nomura ($23.2B, 0.9%) <b:>`_. The largest users of the $2.126 trillion in Fed RRP include: Goldman Sachs FS Govt ($143.5B), Fidelity Govt Cash Reserves ($111.5B), Vanguard Federal Money Mkt Fund ($122.3B), Fidelity Govt Money Market ($123.3B), JPMorgan US Govt MM ($125.5B), Fidelity Inv MM: Govt Port ($70.6B), Federated Hermes Govt ObI ($65.5B), BlackRock Lq FedFund ($68.5B), American Funds Central Cash ($71.7B) and Morgan Stanley Inst Liq Govt ($76.3B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mizuho Corporate Bank Ltd ($27.7B, 6.2%), RBC ($23.3B, 5.2%), Toronto-Dominion Bank ($19.2B, 4.3%), Skandinaviska Enskilda Banken AB ($18.9B, 4.2%), Credit Agricole ($18.6B, 4.2%), Mitsubishi UFJ Financial Group Inc ($18.2B, 4.1%), Citi ($16.9B, 3.8%), Sumitomo Mitsui Banking Corp ($16.0B, 3.6%), Barclays PLC ($15.8B, 3.5%) and Bank of Nova Scotia ($15.2B, 3.4%).
The 10 largest CD issuers include: Sumitomo Mitsui Banking Corp ($14.3B, 9.6%), Mitsubishi UFJ Financial Group Inc ($12.9B, 8.7%), Citi ($11.8B, 7.9%), Mizuho Corporate Bank Ltd ($10.4B, 7.0%), Credit Agricole ($9.2B, 6.2%), Toronto-Dominion Bank ($9.0B, 6.1%), Canadian Imperial Bank of Commerce ($8.9B, 6.0%), Bank of Nova Scotia ($7.4B, 5.0%), Sumitomo Mitsui Trust Bank ($7.1B, 4.8%) and RBC ($5.6B, 3.8%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: RBC ($15.6B, 7.3%), Toronto-Dominion Bank ($9.7B, 4.6%), Australia & New Zealand Banking Group Ltd ($8.4B, 4.0%), Bank of Montreal ($8.4B, 4.0%), BNP Paribas ($7.8B, 3.7%), Bank of Nova Scotia ($7.8B, 3.7%), National Australia Bank Ltd ($7.3B, 3.5%), Barclays PLC ($7.3B, 3.5%), JP Morgan ($6.0B, 2.8%) and Societe Generale ($5.6B, 2.6%).
The largest increases among Issuers include: Federal Home Loan Bank (up $53.2B to $2.208T), Barclays PLC (up $19.0B to $42.9B), Credit Agricole (up $12.4B to $33.4B), Mizuho Corporate Bank Ltd (up $11.4B to $35.1B), Fixed Income Clearing Corp (up $11.1B to $74.5B), Bank of Nova Scotia (up $6.3B to $23.2B), Australia & New Zealand Banking Group Ltd (up $5.4B to $15.6B), BNP Paribas (up $4.0B to $58.2B), RBC (up $3.9B to $67.3B) and Natixis (up $3.7B to $15.5B).
The largest decreases among Issuers of money market securities (including Repo) in October were shown by: the Federal Reserve Bank of New York (down $82.0B to $2.126T), the US Treasury (down $29.6B to $1.224T), Goldman Sachs (down $3.7B to $19.1B), Banco Santander (down $2.6B to $11.8B), Sumitomo Mitsui Trust Bank (down $1.0B to $11.6B), Canadian Imperial Bank of Commerce (down $0.8B to $24.8B), National Australia Bank Ltd (down $0.6B to $9.1B), Rabobank (down $0.4B to $7.3B), Federal Farm Credit Bank (down $0.2B to $96.2B), and Nordea Bank (down $0.2B to $5.7B).
The United States remained the largest segment of country-affiliations; it represents 84.0% of holdings, or $4.192 trillion. Canada (3.7%, $186.4B) was in second place, while Japan (3.5%, $175.4B) was No. 3. France (2.8%, $138.0B) occupied fourth place. The United Kingdom (1.5%, $72.8B) remained in fifth place. Netherlands (1.0%, $50.3B) was in sixth place, followed by Sweden (0.9%, $45.3B) Australia (0.7%, $36.4B), Germany (0.7%, $35.3B), and Singapore (0.3%, $12.6B). (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Oct. 31, 2022, Taxable money funds held 72.1% (up from 69.5%) of their assets in securities maturing Overnight, and another 5.1% maturing in 2-7 days (down from 6.4%). Thus, 77.2% in total matures in 1-7 days. Another 8.0% matures in 8-30 days, while 6.7% matures in 31-60 days. Note that over three-quarters, or 91.9% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 3.7% of taxable securities, while 3.1% matures in 91-180 days, and just 1.3% matures beyond 181 days. (Visit our Content center to download, or contact us to request our latest Portfolio Holdings reports.)
Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be sent out Wednesday, and we'll be writing our regular monthly update on the new Oct. 31 data for Thursday's News. But we also uploaded a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Tuesday. (We continue to merge the two series, and the N-MFP version is now available via our Holding file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of Oct. 31, includes holdings information from 993 money funds (down 5 from last month), representing assets of $5.162 trillion (up from $5.090 trillion). Prime MMFs now total $1.014 trillion, or 19.6% of the total. We review the new N-MFP data, and we also look at our revised MMF expense data, which shows charged expenses and money fund revenues flat in October.
Our latest Form N-MFP Summary for All Funds taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds decreased to $2.735 trillion (down slightly from $2.743 trillion), or 53.0% of all assets. Treasury holdings totaled $1.221 trillion (down from $1.263 trillion), or 23.7% of all holdings, and Government Agency securities totaled $548.6 billion (up from $492.2 billion), or 10.6%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $4.505 trillion, or a massive 87.3% of all holdings.
Commercial paper (CP) totals $263.6 billion (up from $245.1 billion), or 5.1% of all holdings, and the Other category (primarily Time Deposits) totals $159.8 billion (up from $139.0 billion), or 3.1%. Certificates of Deposit (CDs) total $149.6 billion (up from $134.0 billion), 2.9%, and VRDNs account for $83.5 billion (up from $73.4 billion last month), or 1.6% of money fund securities.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $168.6 billion, or 3.3%, in Financial Company Commercial Paper; $40.5 billion or 0.8%, in Asset Backed Commercial Paper; and, $54.5 billion, or 1.1%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($2.397 trillion, or 46.4%), U.S. Govt Agency Repo ($292.2B, or 5.7%) and Other Repo ($45.9B, or 0.9%).
The N-MFP Holdings summary for the Prime Money Market Funds shows: CP holdings of $258.7 billion (up from $239.8 billion), or 25.5%; Repo holdings of $382.3 billion (down from $386.3 billion), or 37.7%; Treasury holdings of $35.6 billion (down from $44.1 billion), or 3.5%; CD holdings of $149.6 billion (up from $134.0 billion), or 14.7%; Other (primarily Time Deposits) holdings of $118.8 billion (up from $97.5 billion), or 11.7%; Government Agency holdings of $62.9 billion (up from $62.6 billion), or 6.2% and VRDN holdings of $6.4 billion (down from $6.6 billion), or 0.6%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $168.6 billion (up from $159.0 billion), or 16.6%, in Financial Company Commercial Paper; $40.5 billion (up from $37.1 billion), or 4.0%, in Asset Backed Commercial Paper; and $49.6 billion (up from $43.7 billion), or 4.9%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($306.6 billion, or 30.2%), U.S. Govt Agency Repo ($29.8 billion, or 2.9%), and Other Repo ($45.9 billion, or 4.5%).
In related news, money fund charged expense ratios (Exp%) were unchanged in October remaining at 0.39% from the prior month (after jumping earlier this year from 0.08% at the start of 2022). Our Crane 100 Money Fund Index and Crane Money Fund Average were 0.26% and 0.39%, respectively, as of Oct. 31, 2022. Crane Data revises its monthly expense data and gross yield information after the SEC updates its latest Form N-MFP data the morning of the 6th business day of the new month. (They posted this info Tuesday morning, so we revised our monthly MFI XLS spreadsheet and historical craneindexes.xlsx averages file to reflect the latest expenses, gross yields, portfolio composition and maturity breakout yesterday.) Visit our "Content" page for the latest files.
Our Crane 100 Money Fund Index, a simple average of the 100 largest taxable money funds, shows an average charged expense ratio of 0.26%, unchanged from last month's level (but 18 bps higher than 12/31/21's 0.08%). The average is slightly below the level (0.27%) as it was on Dec. 31, 2019, so we estimate that funds are now charging normal expenses (but starting to waive some fees for competitive purposes). The Crane Money Fund Average, a simple average of all taxable MMFs, showed a charged expense ratio of 0.39% as of Oct. 31, 2022, unchanged from the month prior and now slightly below the 0.40% at year-end 2019.
Prime Inst MFs expense ratios (annualized) average 0.32% (unchanged from last month), Government Inst MFs expenses average 0.28% (unchanged from previous month), Treasury Inst MFs expenses average 0.30% (down 1 bp from last month). Treasury Retail MFs expenses currently sit at 0.52%, (unchanged from last month), Government Retail MFs expenses yield 0.52% (down 1 bp from last month). Prime Retail MF expenses averaged 0.49% (down 1 bp from the previous month). Tax-exempt expenses were unchanged at 0.41% on average.
Gross 7-day yields rose again during the month ended Oct. 31, 2022. (Yields should surge higher again in November following the Nov. 2 75 bps Fed hike.) The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 741), shows a 7-day gross yield of 3.14%, up 21 bps from the prior month. The Crane Money Fund Average has passed the 1.72% at the end of 2019 and up from 0.15% the end of 2020 and 0.09% at the end of 2021. Our Crane 100's 7-day gross yield was up 18 bps, ending the month at 3.09%.
According to our revised MFI XLS and Crane Index numbers, we now estimate that annualized revenue for all money funds is $13.226 billion (as of 10/31/22). Our estimated annualized revenue totals increased from $13.171B last month but still below from $13.297B two months ago. Revenue levels are still more than four times larger than May's record low $2.927B level. Charged expenses and gross yields are driven by a number of variables, but revenues should resume their upwards trend in the next 2 months as MMFs see substantial inflows from bank deposits.
Crane Data's latest monthly Money Fund Market Share rankings show assets were mostly higher among the largest U.S. money fund complexes in October. Money market fund assets increased $42.2 billion, or 0.8%, last month to $5.072 trillion. Assets increased by $31.2 billion, or 0.6%, over the past 3 months, and they've increased by $81.0 billion, or 1.6%, over the past 12 months. The largest increases among the 25 largest managers last month were seen by Goldman Sachs, Schwab, Fidelity, Vanguard and Dreyfus, which grew assets by $22.6 billion, $22.2B, $15.8B, $9.9B and $9.7B, respectively. The largest declines in October were seen by Morgan Stanley, SSGA, Federated Hermes, First American and Allspring, which decreased by $22.5 billion, $17.6B, $6.0B, $4.9B and $4.7B, respectively. Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. The combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers. We review the latest market share totals, and look at money fund yields, which jumped again in October, below.
Over the past year through Oct. 31, 2022, Schwab (up $88.4B, or 61.0%), American Funds (up $81.2B, or 60.1%), Goldman Sachs (up $51.6B, or 14.2%), Fidelity (up $37.9B, or 4.2%) and Invesco (up $30.6B, or 33.2%) were the largest gainers. Schwab, Goldman Sachs, Fidelity, Invesco and UBS had the largest asset increases over the past 3 months, rising by $60.0B, $23.4B, $22.3B, $13.7B and $9.6B, respectively. The largest decliners over 12 months were seen by: JP Morgan (down $48.2B), Morgan Stanley (down $47.3B), Northern (down $47.2B), Allspring (down $43.4B) and BlackRock (down $42.1B). The largest decliners over 3 months included: Morgan Stanley (down $29.3B), BlackRock (down $27.2B), Northern (down $19.7B), JPMorgan (down $19.2B) and SSGA (down $8.9B).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $940.6 billion, or 18.5% of all assets. Fidelity was up $15.8B in October, up $22.3 billion over 3 mos., and up $37.9B over 12 months. BlackRock ranked second with $472.4 billion, or 9.3% market share (up $481M, down $27.2B and down $42.1B for the past 1-month, 3-mos. and 12-mos., respectively). Vanguard ranked in third place with $460.4 billion, or 9.1% of assets (up $9.9B, up $8.9B and down $4.6B). Goldman Sachs ranked fourth with $415.3 billion, or 8.2% market share (up $22.6B, up $23.4B and up $51.6B), while JPMorgan was the fifth largest MMF manager with $411.0 billion, or 8.1% of assets (down $1.5B, down $19.2B and down $48.2B for the past 1-month, 3-mos. and 12-mos.).
Federated Hermes was in sixth place with $334.3 billion, or 6.6% (down $6.0B, up $5.1B and up $6.4B), while Dreyfus was in seventh place with $244.0 billion, or 4.8% of assets (up $9.7B, up $2.9B and up $6.6B). Morgan Stanley ($239.3B, or 4.7%) was in eighth place (down $22.5B, down $29.3B and down $47.3B), followed by Schwab ($233.3B, or 4.6%; up $22.2B, up $60.0B and up $88.4B). American Funds was in 10th place ($216.4B, or 4.3%; up $558M, down $2.0B and up $81.2B).
The 11th through 20th-largest U.S. money fund managers (in order) include: SSGA ($171.2B, or 3.4%), Allspring (formerly Wells Fargo) ($148.9B, or 2.9%), Northern ($141.7B, or 2.8%), Invesco ($122.9B, or 2.4%), First American ($113.7B, or 2.2%), HSBC ($62.8B, or 1.2%), UBS ($55.2B, or 1.1%), T. Rowe Price ($49.8B, or 1.0%), DWS ($35.8B, or 0.7%) and Western ($26.4B, or 0.5%). Crane Data currently tracks 61 U.S. MMF managers, unchanged from last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg and the Cayman Islands -- are included, the top 10 managers are the same as the domestic list, except: JPMorgan moves up to the No. 3 spot, Vanguard moves down to the No. 5 spot, Morgan Stanley moves up to the No. 7 spot and Dreyfus drops down to the No. 8 spot. Global Money Fund Manager Rankings include the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products.
The largest Global money market fund families include: Fidelity ($950.5 billion), BlackRock ($693.3B), JP Morgan ($577.1B), Goldman Sachs ($553.4B) and Vanguard ($460.4B). Federated Hermes ($344.2B) was in sixth, Morgan Stanley ($300.1B) was seventh, followed by Dreyfus/BNY Mellon ($261.4B), Schwab ($233.3B) and American Funds ($216.4B), which round out the top 10. These totals include "offshore" U.S. Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into U.S. dollar totals.
The November issue of our Money Fund Intelligence and MFI XLS, with data as of 10/31/22, shows that yields jumped again in October for the Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 741), rose to 2.74% (up 17 bps) for the 7-Day Yield (annualized, net) Average, the 30-Day Yield increased to 2.62% (up 44 bps). The MFA's Gross 7-Day Yield rose to 3.10% (up 16 bps), and the Gross 30-Day Yield also moved up to 2.98% (up 42 bps). (Gross yields will be revised Tuesday afternoon, though, once we download the SEC's Form N-MFP data for 10/31/22.)
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 2.85% (up 17 bps) and an average 30-Day Yield at 2.79% (up 50 bps). The Crane 100 shows a Gross 7-Day Yield of 3.06% (up 15 bps), and a Gross 30-Day Yield of 3.00% (up 46 bps). Our Prime Institutional MF Index (7-day) yielded 2.94% (up 13 bps) as of October 31. The Crane Govt Inst Index was at 2.74% (up 11 bps) and the Treasury Inst Index was at 2.85% (up 29 bps). Thus, the spread between Prime funds and Treasury funds is 9 basis points, and the spread between Prime funds and Govt funds is 20 basis points. The Crane Prime Retail Index yielded 2.79% (up 16 bps), while the Govt Retail Index was 2.49% (up 11 bps), the Treasury Retail Index was 2.62% (up 29 bps from the month prior). The Crane Tax Exempt MF Index yielded 1.82% (up 8 bps) as of October 31.
Gross 7-Day Yields for these indexes to end October were: Prime Inst 3.23% (up 10 bps), Govt Inst 3.01% (up 11 bps), Treasury Inst 3.13% (up 29 bps), Prime Retail 3.24% (up 15 bps), Govt Retail 2.99% (up 11 bps) and Treasury Retail 3.06% (up 25 bps). The Crane Tax Exempt Index jumped to 1.67% (up 5 bps). The Crane 100 MF Index returned on average 0.23% over 1-month, 0.58% over 3-months, 0.84% YTD, 0.84% over the past 1-year, 0.50% over 3-years (annualized), 1.02% over 5-years, and 0.60% over 10-years.
The total number of funds, including taxable and tax-exempt, dropped by 2 in October to 884. There are currently 741 taxable funds, down 2 from the previous month, and 143 tax-exempt money funds (unchanged from last month). (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The November issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Monday morning, features the articles: "Money Funds Getting Hot: Barron's, FT, WSJ Articles," which discusses the growing interest in and on cash; "Morgan Stanley Talks ESG at AFP; Names OFN for Impact," which reviews Scott Wachs' session on DE&I; and, "Schwab on Cash Sorting; Sweeps Shifting to MMFs," which quotes from the brokerage's recent earnings updates. We also sent out our MFI XLS spreadsheet Monday a.m., and we've updated our Money Fund Wisdom database with 10/31/22 data. Our November Money Fund Portfolio Holdings are scheduled to ship on Wednesday, Nov. 9, and our October Bond Fund Intelligence is scheduled to go out on Tuesday, Oct. 15. (Note: Our MFI, MFI XLS and Crane Index products are all available to subscribers via our Content center. Note too: Crane Data and money market funds will be closed Friday, 11/11, for the Veterans Day Holiday.)
MFI's "Getting Hot" article says, "Money market mutual funds are hot and getting hotter, with articles on them appearing in Barron's, The Wall Street Journal and the Financial Times over the past 2 weeks. Barron's piece, 'Yields on Money-Market Mutual Funds Near 3%,' explains, 'Cash hasn't looked this good in money-market mutual funds for a long time. Yields are averaging 2.77% [now 2.96%], up from 0.02% in early January, according to Crane Data. Retail money funds could soon cross the 3% threshold, assuming that the Federal Reserve keeps raising its benchmark federal-funds rate.'"
It continues, "'Money funds follow the Fed, so there's no mystery of where yields are going,' says Peter Crane.... 'You haven't seen 3% to 4% yields since prior to the [2008-09] financial crisis,' he adds."
Our "Morgan Stanley" piece states, "Late last month, the Association for Financial Professionals hosted AFP 2022, the largest gathering of corporate treasury and cash managers in the country. The event included several sessions on money market fund investing, including one hosted by Morgan Stanley Investment Management's Scott Wachs entitled, 'Navigating Transformation in The Liquidity Investment Ecosystem.' Like some of the other sessions and a lot of the exhibit hall talk, rising rates, ESG investing, regulatory reforms and technology featured prominently in the discussion. We quote from some of the comments below, and also excerpt from a Morgan Stanley press release on its Impact share class."
It says, "Wachs tells the Philadelphia audience, 'There are a confluence of factors across many, many different dimensions in liquidity investments that have changed, or that we anticipate are going to change pretty dramatically over the course of the next few years. So, this is a really important time for Treasury professionals to think about and consider what those changes have been and what those changes will be. How do they impact how you do your jobs, how does that change best practices and how do you optimize your liquidity investments?'"
Our "Cash Sorting" piece states, "On Charles Schwab's '2022 Fall Business Update,' CFO Peter Crawford comments, 'Bank deposits were down 10% ... due to client cash allocation decisions that were broadly consistent with our expectations, given the dramatic increase in rates.... Looking ahead to 2023, we continue to see no reason that the magnitude of client cash sorting will be dramatically different than the last rising rate environment, suggesting balances trough at some point next year.'"
MFI writes, "He explains, 'There's obviously been a lot of commentary, perhaps too much, on the topic of client cash sorting, and we continue to receive a lot of questions. I emphasize that this is a dynamic which we view as very much temporary, quite manageable, and not a factor in our long-term performance.'"
MFI also includes the News brief, "Fed Hikes 6th Time in '22; Rates Head to 4%. The Federal Reserve raised short-term interest rates for the 6th time this year and hiked by 75 basis points for the fourth time in a row. The Federal funds target rate is now in a range from 3.75% to 4.00%, its highest level since 2008. Money fund yields should surge again next week and approach 3.5% in coming weeks and 4.0% by year end."
Another News brief, "SEC Reopens Comments on Reforms, Then Closes Them Again," says, "Their release, sent out `Oct. 11, 'SEC Reopens Comment Periods for Several Rulemaking Releases Due to Technological Error in Receiving Certain Comments' tells us, 'The Securities and Exchange Commission ... reopened the public comment periods for 11 Commission rulemaking releases ... due to a technological error.... The Commission is reopening the comment periods for the affected releases until 14 days following publication of the reopening release in the Federal Register.' The period (and mystery) has now ended. See the latest 'Comments on Money Market Fund Reforms.') See also, 'SEC Proposes Enhancements to Open-End Fund Liquidity Framework,' which proposes swing pricing for bond and stock funds."
Also, a sidebar, "Q3'22 Earnings: No Waivers," states, "Federated Hermes' Q3'22 earnings and quarterly earnings call discussed the end of money fund fee waivers, increases in retail money fund assets, pending money fund regulations and more. Federated's release explains, 'There were no material voluntary yield-related fee waivers during the quarter ended Sept. 30, 2022. During the nine months ended Sept. 30, 2022, voluntary yield-related fee waivers totaled $85.3 million.... During the three and nine months ended Sept. 30, 2021, voluntary yield-related fee waivers totaled $109.2 million and $310.2 million, respectively.'"
Another sidebar, "Chinese MF Developments," says, "Reuters writes, 'China Seeking to Curb Liquidity Risks in $1.4 Trln Money Market Fund – Sources.' They explain, 'Chinese regulators have urged money market fund managers to improve investor structure and ensure adequate holdings of liquid assets, three sources told Reuters, as authorities seeks to head off liquidity risks in the $1.4 trillion sector. Securities regulators have recently asked fund managers to prevent an excessive proportion of institutional investors in money market funds, the sources said. For those funds with more than 70% of assets held by institutions, fund managers must ensure that at least 20% of the money is invested in liquid assets, while bond durations must be kept within 70 days.'"
Our November MFI XLS, with October 31 data, shows total assets increased $42.2 billion to $5.073 trillion, after increasing $1.7 billion in September, $2.3 billion in August, $26.0 billion in July and $31.9 billion in June, but decreasing $10.7 billion in May and $74.3 billion in April. MMFs increased $24.1 billion in March, decreased $34.6 billion in February and decreased $128.1 billion in January. Assets increased $104.6 billion in December and $49.7 billion in November. Our broad Crane Money Fund Average 7-Day Yield was up 32 bps to 2.74%, and our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 22 bps to 2.85% in October.
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA and the Crane 100 both were both higher at 3.10% and 3.06%, respectively. Charged Expenses averaged 0.39% and 0.26% for the Crane MFA and the Crane 100. (We'll revise expenses on Tuesday once we upload the SEC's Form N-MFP data for 10/31/22.) The average WAM (weighted average maturity) for the Crane MFA was a record low 16 days (down 2 day from previous month) while the Crane 100 WAM decreased 2 days to 15 days. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows money fund assets skyrocketing in the latest week, their second biggest increase of the year and biggest jump since the week ended March 2. Over the past 52 weeks, money fund assets are up by $77 billion, or 1.7%, with Retail MMFs rising by $152 billion (10.6%) and Inst MMFs falling by $75 billion (-2.4%). ICI shows assets down by $73 billion, or -1.6%, year-to-date, with Institutional MMFs down $192 billion, or -5.9% and Retail MMFs up $118 billion, or 8.1%. (Note: Register soon for our "basic training" event, Money Fund University, which will take place Dec. 15-16 in Boston, Mass!)
The weekly release says, "Total money market fund assets increased by $47.50 billion to $4.63 trillion for the week ended Wednesday, November 2, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $36.10 billion and prime funds increased by $7.70 billion. Tax-exempt money market funds increased by $3.70 billion." ICI's stats show Institutional MMFs jumping $36.4 billion and Retail MMFs increasing $11.2 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.945 trillion (85.2% of all money funds), while Total Prime MMFs were $573.2 billion (12.4%). Tax Exempt MMFs totaled $113.5 billion (2.4%).
ICI explains, "Assets of retail money market funds increased by $11.15 billion to $1.59 trillion. Among retail funds, government money market fund assets increased by $3.48 billion to $1.14 trillion, prime money market fund assets increased by $5.70 billion to $342.49 billion, and tax-exempt fund assets increased by $1.97 billion to $100.13 billion." Retail assets account for over a third of total assets, or 34.3%, and Government Retail assets make up 72.1% of all Retail MMFs.
They add, "Assets of institutional money market funds increased by $36.35 billion to $3.04 trillion. Among institutional funds, government money market fund assets increased by $32.62 billion to $2.80 trillion, prime money market fund assets increased by $2.00 billion to $230.71 billion, and tax-exempt fund assets increased by $1.73 billion to $13.34 billion." Institutional assets accounted for 65.7% of all MMF assets, with Government Institutional assets making up 92.0% of all Institutional MMF totals. (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.)
For the month of October through 10/31, MMF assets increased by $18.9 billion to $5.054 trillion according to Crane's MFI XLS, which tracks a broader universe of funds than ICI. Crane Data's Prime asset totals increased $26.8 billion in October to $995.4 billion. For the first two days of November, we show MMFs increasing by $26.2 billion to $5.080 trillion. Prime MMFs broke the $1.0 trillion level, rising $6.3 billion to $1.002 trillion. Given that November and December are the two strongest months of the year seasonally, we expect the big inflows to continue in coming weeks.
In other news, Fitch Ratings posted the release, "U.S. ESG Money Market Funds Held Steady in 3Q22," and published "U.S. ESG Money Market Funds: 3Q22." They tell us, "On Sept. 16, 2022, State Street announced the liquidation of the State Street ESG Liquid Reserves Fund at the end of October 2022. From the announcement until liquidation, the fund will primarily be invested in cash and/or cash equivalents. Going forward, Fitch will no longer track this fund and the non-ESG (environmental, social and governance) comparison fund, State Street Institutional Liquid Reserves Fund, in this report."
They write, "Money market funds (MMFs) shortened maturities in response to the Federal Reserve's rate hikes. Both ESG and non-ESG MMFs had average weighted average maturities of 14 days for the third quarter. Gross yields of ESG MMFs averaged 2.27% in 3Q22, the same as non-ESG MMFs. ESG MMFs' net yields averaged 2.12% during the quarter, which was 9 basis points(bps) higher than for comparable non-ESG MMFs due to the lower expense ratios of ESG funds and the lifting of fee waivers for non-ESG funds."
The update states, "The Fed increased rates by 75bps twice in 3Q22, on July 27 and Sept. 21. ESG MMFs' gross and net yields were up 155bps and 156bps, respectively, between June 30, 2022 and Sept. 30, 2022, while non-ESG MMFs' gross and net yields rose 155bps and 154bps over the same period, respectively. Following each rate hike, yield spreads decreased but quickly stabilized.... Yields will continue to increase as the Fed's benchmark federal-funds rate is expected to reach at least 425bps by the end of this year."
It adds, "Allocations in ESG MMFs remained relatively stable this quarter, but with slightly increased allocations to Bank of New York Mellon, Barclays and Bank of America during this period, totaling 5.6%, while allocations in non-ESG MMFs were increased 1.3% in total. Allocations to Federal Reserve Bank of New York and Mitsubishi UFJ increased quarter over quarter in non-ESG MMFs, while staying stable in ESG MMFs. Non-ESG MMF exposure to the Federal Reserve Bank of New York was 15.3% during this period to take advantage of the Fed's Reverse Repurchase Program (RRP) and higher rates. ESG MMFs continue to be ineligible for the Fed’s RRP due to their smaller size."
Fitch also published "U.S. Money Market Funds: October 2022," which summarizes, "Total taxable money market fund (MMF) assets increased by $7.8 billion from Aug. 31, 2022 to Sept. 30, 2022, according to Crane Data. Government MMFs lost $17.9 billion in assets during this period, and prime MMFs gained $25.7 billion. Total assets have decreased by $22.4 billion since Dec. 31, 2021."
Finally, they tell us, "Taxable MMFs decreased exposure to U.S. Treasuries from August to September. Treasury holdings decreased by $85 billion, while repo holdings increased by $75 billion, from Aug. 31, 2022 to Sept. 30, 2022, according to Crane Data. Repo remained the largest portfolio segment, for the 13th consecutive month. As of Sept. 30, 2022, institutional government and prime MMF net yields were 2.59% and 2.80%, respectively, per Crane Data. Yields are up significantly."
The Federal Reserve raised short-term interest rates for the 6th time this year and hiked by 75 basis points for the fourth time in a row on Wednesday. The Federal funds target rate is now in a range from 3.75% to 4.00%, its highest level since 2008. Money fund yields should surge again next week and easily break over 3.0% on average, and they should approach 3.5% in coming weeks and 4.0% by year end. The Fed's FOMC statement says, "Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.... The Committee is highly attentive to inflation risks."
They explain, "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 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, 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 the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. 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 public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."
Fed Chair Jerome Powell says in his "Press Conference Opening Statement," "My colleagues and I are strongly committed to bringing inflation back down to our 2 percent goal. We have both the tools that we need and the resolve it will take to restore price stability on behalf of American families and businesses. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all."
He adds, "Today, the FOMC raised our policy interest rate by 75 basis points, and we continue to anticipate that ongoing increases will be appropriate. We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. In addition, we are continuing the process of significantly reducing the size of our balance sheet. Restoring price stability will likely require maintaining a restrictive stance of policy for some time. I will have more to say about today's monetary policy actions after briefly reviewing economic developments."
Money fund assets jumped on Tuesday, the first day of November and Prime MMFs broke above the $1 trillion level for the first time since mid-2020. Crane Data's Money Fund Intelligence Daily shows assets surging by $36.9 billion to $5.091 trillion November 1st. This marks the highest asset total since the first week of 2022. Prime money market funds rose $4.7 billion Tuesday to $1.00 trillion, their highest level since August 2020. `Given that November and December are by far the strongest two months of the year for MMF inflows, we expect this to be the start of something big.
In other news, a press release entitled, "SEC Proposes Enhancements to Open-End Fund Liquidity Framework," tells us, "The Securities and Exchange Commission today voted to propose amendments to better prepare open-end funds for stressed conditions and to mitigate dilution of shareholders' interests. The rule and form amendments would enhance how funds manage their liquidity risks, require mutual funds to implement liquidity management tools, and provide for more timely and detailed reporting of fund information."
SEC Chair Gary Gensler comments, "A defining feature of open-end funds is the ability for shareholders to redeem their shares daily, in both normal times and times of stress. Open-end funds, though, have an underlying structural liquidity mismatch. This can raise issues for investor protection, our capital markets, and the broader economy. We saw such systemic issues during the onset of the COVID-19 pandemic, when many investors sought to redeem their investments from open-end funds. Today's proposal addresses these investor protection and resiliency challenges."
The release continues, "Currently, open-end funds other than money market funds and most exchange-traded funds are required to classify the liquidity of their investments into four categories, ranging from highly liquid to illiquid. The proposal seeks to improve these funds' liquidity classifications by establishing new minimum standards for classification analyses, including some that incorporate stressed conditions, and by updating the liquidity categories to limit the extent of a fund's investments in securities that do not settle within seven days. These changes are designed to help better prepare funds for stressed conditions and prevent funds from over-estimating the liquidity of their investments. Affected funds would also be required to maintain a minimum amount of highly liquid assets of at least 10 percent of net assets to help manage stressed conditions and heightened redemption levels. These funds would publicly report certain information about their liquidity profiles to improve the availability of information about liquidity risk for investors as well as information about use of liquidity classification service providers."
The SEC states, "In addition, the proposal would require open-end funds other than money market funds and exchange-traded funds to use a liquidity management tool called 'swing pricing,' which is a method to allocate costs stemming from inflows or outflows to the investors engaged in that activity, rather than diluting other shareholders. The proposal would also require a 'hard close' for relevant funds. With a hard close, investor orders would need to be received by the fund, its transfer agent, or a registered clearing agency by the time of the fund's pricing, typically 4 p.m. ET, to receive that day's price. In addition to helping to operationalize swing pricing, a hard close would help prevent late trading of fund shares and improve order processing. The release also includes questions about alternative liquidity management tools, such as the use of liquidity fees."
They add, "Finally, the proposal would provide the Commission and investors with timelier information. As proposed, funds would be required to file portfolio and other information on Form N-PORT on a monthly basis within 30 days, with the report becoming public after 30 additional days. This change would triple the amount of information currently available to investors and would apply to all registrants that report on Form N-PORT, including most open-end funds and registered closed-end funds, with certain exceptions."
In response, the release "ICI: Swing Pricing Proposal From SEC Could Severely Harm Savers" counters, "Investment Company Institute (ICI) President and CEO Eric Pan released the following statement today after the Securities and Exchange Commission (SEC) proposed rule amendments around swing pricing: 'The SEC's swing pricing proposal could have an enormous negative impact on the more than 100 million Americans who invest in funds, especially retirement savers. 63 percent of 401(k) plan assets are held in mutual funds, and these plans will be severely harmed by the SEC's proposed 'hard close,' which is likely to make it impossible for 401(k) plans to place trade orders for their participants."
Pan continues, "Mutual funds are highly liquid products that help Americans save for the future. ICI has presented extensive research regarding the experiences of funds during March 2020. There is strong evidence that funds did not cause or amplify problems in the financial markets in March 2020. It's disappointing that the SEC is not taking this research into account. The proposal to mandate swing price is unnecessary. Its rationale is built on minimizing dilution -- yet the SEC's assertions lack detail or supporting evidence. The swing pricing proposal faces insurmountable operational hurdles, risks confusing investors, and upending mutual funds' longstanding and equitable share pricing methodology."
He also says, "The proposed changes to the fund liquidity rule would make it even more prescriptive and offer no obvious benefit for fund shareholders. Instead, these changes will disrupt funds' current practices at a significant cost to investors. The changes will negatively impact the operation of many funds that investors rely on to access certain investment strategies. The Commission must realize that rushing ahead with consequential proposals, fundamentally altering the shareholder experience, is a hallmark of the 'regulation-by-hypothesis' approach that the agency's leadership is now known for."
It appears the SEC has closed its comment period on a number of rulemakings, including Money Market Fund Reforms, after a brief reopening. (See our Oct. 11 Link of the Day, "SEC Reopens Comments on Reforms.) The notice of the reopening, which was announced on October 10, and was published in the Federal Register on October 18, so the 2-week extra comment period extension ended Nov. 1. There were few substantial additions to the SEC's "Comments on Money Market Fund Reforms" page, though Federated Hermes added a couple posts. Thus, it appears the final money fund reform proposal could be back on track for release before the end of the year.
The earlier mysterious press release, "SEC Reopens Comment Periods for Several Rulemaking Releases Due to Technological Error in Receiving Certain Comments," explains, "The Securities and Exchange Commission today reopened the public comment periods for 11 Commission rulemaking releases and one request for comment due to a technological error that resulted in a number of public comments submitted through the Commission's internet comment form not being received by the Commission. The majority of the affected comments were submitted in August 2022; however, the technological error is known to have occurred as early as June 2021. To ensure that interested persons, including any affected commenters, have the opportunity to comment on the affected releases or to resubmit comments, the Commission is reopening the comment periods for the affected releases until 14 days following publication of the reopening release in the Federal Register."
Though almost all of the new comments were from bots or internet crazies, Federated Hermes CEO Chris Donahue posted a Sept. 22 letter to SEC Commissioner Jaime Lizárraga. It explains, "Thank you for taking the time to join us on a call.... We understand how busy things are for you and your staff and very much appreciate having the opportunity to provide you with information on the important role money market funds ('MMFs') play in our short-term markets and the significant benefits they provide to US investors and issuers. MMFs have provided retail investors in prime MMFs over $200 billion in estimated incremental returns over bank accounts since the 1990's, and in the current rising rate environment will continue to provide significant increased returns to everyday Americans. This is but one reason why it is imperative that any potential reform to MMFs be supported by sound quantitative data. New reforms should enhance the safety and stability of MMFs and should neither create a new bright line trigger, which will improperly incentivize investors to redeem from MMFs, or lead to a material, and entirely unnecessary, reduction in the US Government MMFs market."
Donahue continues, "I have set forth below for your convenience a summary of my four key points outlined at the onset of our conversation. 1. Swing Pricing is a plague on MMFs. It will finish off the task of regulating institutional prime MMFs out of existence. One trillion was taken out during the last round of changes and the remaining 300 billion will be largely taken out with swing pricing. 2. Discretionary fees and gates are a much better answer as opposed to swing pricing. Ensuring fund boards have lots of tools in the toolbox is the best way to enhance the resilience of MMFs. It has been endorsed by global regulators, including the FSB. Fund boards have, and will continue to, exercise their fiduciary duty, even in stressed markets. And please do not forget the Fed received 1% on all of the $53 billion of transactions and took no principal risk."
It continues, "3. Simply fixing the mistaken linkage of 30% liquidity with fees and gates is the best thing to do and the only fix supported by data. Please do not create another threshold mistake. Fix the problem and declare victory. 4. Forget requiring intermediaries to have the capacity to redeem and sell shares based on a four-digit NAV because of the remote possibility of negative rates. This will simply have the effect of eliminating at least $2 trillion dollars of sweeps in government funds because the clients, as before, will choose not to retool. The result will be more dollars in low yield deposit products. Moreover, there is an established alternative to requiring government funds to move to a four-digit NAV which will not be disruptive to investors or markets. It is the use of a 'reverse distribution mechanism' or 'RDM' for short, a method which was successfully used in Europe in a period of negative rates. At a minimum, the SEC should allow the use of a RDM as an alternative to requiring intermediaries to be capable of transacting at a four-digit NAV for all MMFs."
In related news, yesterday's Wall Street Journal contained an editorial from ICI President Eric Pan entitled, "The SEC's Rules Are Getting Unreal." Pan writes, "The Securities and Exchange Commission's job is to make markets work. But today's SEC leadership -- which as of August had proposed 26 new rules this year alone -- is ignoring the real-world effects of its regulations on market participants. Its approach can be described as 'regulation by hypothesis.' If not remedied, it will prove disastrous."
He comments, "Examples of this pedantic approach to regulation abound. Take the SEC's current rule proposal on money-market funds, which would require certain institutional money market funds to 'swing,' or adjust the fund's net asset value in the event of net redemptions. Swing pricing would remove features that investors value, such as same-day settlement and multiple net-asset-value strikes per day, and impose unpredictable costs. It may sound good in theory, proposing a way to charge investors leaving a fund, but in reality it will fundamentally alter the product, making it unattractive to investors and forcing sponsors to close and stop offering the funds. So much for healthy capital markets."
Pan also says, "It doesn't end there. The SEC has proposed an unworkable expansion of the rule regarding fund names. It is demanding that funds reduce subjective investment strategies, like growth and value, into a handful of words in a name, supported by an 80% investment policy rather than being recognized as an overall fund portfolio-management objective. This would require funds to redesign systems, purchase new data, rework system interfaces and hire staff to monitor compliance with that 80% investment policy."
He adds, "The commission itself admits that this system would be outrageously expensive to implement, with its own economists estimating an individual fund would need to pay anywhere from $50,000 to $500,000 to comply with the rule. These costs would be passed on to investors in the more than 10,000 funds across the U.S. History has shown that an expert SEC can protect investors and enhance our capital markets. We need today's SEC to show it still has the expertise to develop rules that address real problems and work in the real world. An SEC that treats regulation as an academic exercise, in which benefits are theoretical and costs are irrelevant, is a danger to all of us."
In other news, 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 Oct. 28) includes Holdings information from 42 money funds (down 29 from a week ago), which represent $1.103 trillion (down from $2.059 trillion) of the $5.054 trillion (21.8%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $662.6 billion (down from $1.162 trillion a week ago), or 60.1%; Treasuries totaling $305.9 billion (down from $577.4 billion a week ago), or 27.7%, and Government Agency securities totaling $81.1 billion (down from $141.7 billion), or 7.4%. Commercial Paper (CP) totaled $23.2 billion (down from a week ago at $67.5 billion), or 2.1%. Certificates of Deposit (CDs) totaled $7.9 billion (down from $36.0 billion a week ago), or 0.7%. The Other category accounted for $17.5 billion or 1.6%, while VRDNs accounted for 4.8 billion, or 0.4%.
The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $499.0 billion (45.2%), the US Treasury with $305.9 billion (27.7% of total holdings), Federal Home Loan Bank with $42.4B (3.8%), Federal Farm Credit Bank with $35.1B (3.2%), Fixed Income Clearing Corp with $20.6B (1.9%), JP Morgan with $18.8B (1.7%), Barclays PLC with $11.8B (1.1%), RBC with $11.8B (1.1%), Mitsubishi UFJ Financial Group Inc with $10.4B (0.9%) and Nomura with $9.0B (0.8%).
The Ten Largest Funds tracked in our latest Weekly include: Morgan Stanley Inst Liq Govt ($136.8B), Dreyfus Govt Cash Mgmt ($116.3B), Allspring Govt MM ($103.2B), Street Inst US Govt ($97.7B), First American Govt Oblg ($76.7B), Invesco Govt & Agency ($69.6B), HSBC Inv US Govt Money Mkt ($53.8B), Morgan Stanley Inst Liq Treas Sec ($50.4B), State Street Inst Treasury Plus ($47.0B) and Dreyfus Treas Sec Cash Mg ($44.8B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Charles Schwab & Co. hosted its "2022 Fall Business Update" last week where the main topic was "cash sorting," or the shifting of cash from lower-yielding sweep bank deposits into higher-yielding money market mutual funds. CFO Peter Crawford comments, "Bank deposits were down 10% sequentially due to client cash allocation decisions that were broadly consistent with our expectations, given the dramatic increase in rates.... Assuming the Fed funds rate exits 2022 at 4 1/2%, we'd expect to produce another 11 to 13% year over year increase in revenue consistent with the scenario we shared earlier. That reflects continued expansion of our net interest margin ... in Q4, a roughly 10 to 12% decline in average interest earning assets from December 2021 to December 2022, and net interest revenue higher than Q3, despite continued client cash allocation decisions and some limited and temporary borrowing from the FHB to fund some of those outflows."
He explains, "Looking ahead to 2023, we continue to see no reason that the magnitude of client cash sorting will be dramatically different than the last rising rate environment, suggesting balances trough at some point next year. We have ample sources of liquidity to support our clients and anticipate growth in both net interest margin and net interest revenue from Q4 of this year to Q4 of next year and beyond. And of course, you can expect that the higher pace of capital return we started in Q3 will continue. There's obviously been a lot of commentary, perhaps too much, on the topic of client cash sorting, and we continue to receive a lot of questions. I emphasize that this is a dynamic which we view as very much temporary, quite manageable, and not a factor in our long-term performance."
Crawford says, "I want to reiterate a few high-level observations regarding our current beliefs around sorting.... We've broken these into two categories regarding the pace of sorting and the ultimate magnitude of sorting. First, we have extensive data that suggests that the rate we pay on transactional cash has little or no impact on the pace or magnitude.... You're not going to see us change our sweep deposit pricing philosophy to catch up or to influence client behavior. We've also seen from experience and it's consistent with intuition that the pace of client cash reallocation decreases once the Fed stops hiking rates."
He continues, "Third, we have seen over time that clients seek to maintain a minimum level of transactional or sweep cash in their account, and as we reach that point any remaining client cash sorting is offset by organic cash inflows to both new and existing accounts.... Higher cash balance accounts tend to move earliest, and we've already seen them decrease their activity. And fifth, our client base today has a higher mix of clients who tend to maintain higher relative levels of transactional cash. Put all that together and we are confident that the activity we're seeing will abate, as we said in our recent CFO commentary, we believe we're now in the middle innings of this process."
Crawford adds, "There's also been a lot of speculation about what actions we may need to take to support these client cash allocation decisions. So we thought it'd be helpful to share a few facts. First, we have access to roughly $100 to $150 billion of readily available cash over the next 15 months, roughly half of that from excess cash on hand or that the investment portfolio will generate, and the other half from cash that comes in through our net new assets. Second, we also have access to a very large amount of funding from the FHLB, from retail CDs we're looking to offer and various forms of supplemental funding.... It's really important to recognize that even after we reach peak rates in this cycle, we have the ability to continue expanding our net interest margin over the following years as our fixed investment portfolio rolls over. And the NIM expansion would be additive to the through the cycle financial formula that we have delivered over the years, and I expect to continue moving forward."
On their Q3'22 earnings release, CFO Crawford notes, "Schwab's diversified financial model and a significant benefit from higher rates helped us convert ongoing success with clients into record total revenues of $5.5 billion, up 20% on a year-over-year basis. Net interest revenue increased by 44% to $2.9 billion, as rising rates helped our net interest margin to expand sequentially by 35 basis points to 1.97%. This movement more than offset the 6% contraction in interest-earning assets driven by clients' cash sorting behavior and their continued market engagement. Asset management and administration fees decreased 5% to $1.0 billion as the challenging equity markets weighed on client asset balances. Trading revenue also declined slightly to $930 million primarily due to a mix shift within client trading activity."
In a Schwab CFO Commentary, he tells us, "By now, you've had a chance to digest our recent earnings release, which discussed our strong business and financial performance in Q3. In our conversations following the release, we heard positive feedback on those results -- but also lingering questions around client cash sorting and the implications for our net interest margin and net interest revenue. In light of these questions, we wanted to reinforce a few points. The main takeaway is that we believe we're in a position to grow both our net interest margin and net interest revenue from Q3 2022 to Q4 2022 and on through Q4 2023, assuming that rates follow the current forward curve."
Crawford comments, "Why is that? Several reasons: We believe we're in the middle innings of client cash sorting, which we're tracing from May forward (remember April outflows were driven by tax season). While sorting activity has occurred faster than we expected at the beginning of the year, that is because the Fed increased rates much faster. That faster pace of sorting in 2022, however, does not change our view that the magnitude of sorting (relative to uninvested client cash) is unlikely to exceed our experience through the last rising rate cycle. And contrary to some perceptions, the net reduction in client cash on our balance sheet was actually less in September than we saw in August."
He states, "Our deposit betas (i.e., changes in our Bank Sweep rates versus changes in the Fed funds target rate) continue to be lower than the last cycle, and we see no reason for that to change. Clients at Schwab have access to a broad range of cash solutions (e.g., off balance sheet purchased money funds) that offer very attractive rates for their investment cash. For everyday cash, our Bank Sweep solution provides a rate that is currently far superior to the level offered within checking accounts at the big banks. What we have seen historically is that client interest in utilizing investment cash solutions is driven by the rate offered on those solutions and their own particular cash management priorities, rather than the specific rate offered on Bank Sweep. So while we expect to see marginal betas rise somewhat along with short-term rates, we do not anticipate a need to play 'catch up'."
The CFO also says, "Approximately 40% of our interest-earning assets are tied to shorter-term interest rates, and extension risk within our fixed securities portfolio is quite limited. Despite the dramatic increase in rates over the last three months, the duration of our overall investment portfolio remains at approximately 4 years -- with our AFS portfolio under 3.5 years. This reflects our focus on buying securities with less likelihood of slower paydowns in a rising rate environment. We expect to cover the vast majority of potential client cash sorting through cash on hand, cash generated from our investment portfolio, and organic cash brought to the firm as we attract new assets."
Finally, he adds, "We have ample access to additional sources of liquidity, including FHLB advances and potential retail CD issuance. We have used these in the past for temporary funding, and we'd expect to do so again. But our expectation is that any temporary usage won't account for more than a mid-single digit percentage of our interest-earning assets while in place, thereby limiting upward pressure on aggregate liability beta. Putting all this together, we expect to continue benefitting from rising rates in coming quarters -- delivering on growth and capital return as our financial formula helps build stockholder value through the cycle. We look forward to sharing our current perspectives with you at our Business Update on October 27."
