News Archives: August, 2022
The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds" for July 2022 Tuesday. ICI's "Trends" report shows that money fund assets increased $34.3 billion in July to $4.575 trillion. This follows an increase of $25.0 billion in June, a decrease of $8.0 billion in May, a decrease of $71.0 billion in April, an increase of $9.6 billion in March, a decrease of $38.3 billion in February, a decrease of $136.1 billion in January and an increase of $136.1 billion in December (coincidentally the exact same size as January's decline). For the 12 months through July 31, 2022, money fund assets increased by $65.5 billion, or 1.5%.
The monthly release states, "The combined assets of the nation's mutual funds increased by $1.07 trillion, or 4.8 percent, to $23.38 trillion in July, 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 $34.20 billion in July, compared with an outflow of $62.53 billion in June.... Money market funds had an inflow of $31.78 billion in July, compared with an inflow of $33.57 billion in June. In July funds offered primarily to institutions had an inflow of $12.85 billion and funds offered primarily to individuals had an inflow of $18.93 billion. "
The Institute's latest statistics show that Taxable funds and Tax Exempt MMFs were mixed last month. Taxable MMFs increased by $40.9 billion in July to $4.479 trillion. Tax-Exempt MMFs decreased $6.7 billion to $96.6 billion. Taxable MMF assets increased year-over-year by $60.1 billion (1.4%), and Tax-Exempt funds rose by $5.4 billion over the past year (5.9%). Bond fund assets increased by $84.5 billion (1.8%) in July to $4.879 trillion, and they've decreased by $694.1 billion (-12.5%) over the past year.
Money funds represent 19.6% of all mutual fund assets (down 0.8% from the previous month), while bond funds account for 20.9%, according to ICI. The total number of money market funds was 297, down 3 from the prior month and down from 314 a year ago. Taxable money funds numbered 238 funds, and tax-exempt money funds numbered 59 funds.
ICI's "Month-End Portfolio Holdings" confirm yet another decline in Treasuries and increase in Repo last month. Repurchase Agreements remained the largest composition segment in June, increasing $33.7 billion, or 1.4%, to $2.415 trillion, or 53.9% of holdings. Repo holdings have increased $777.3 billion, or 47.5%, over the past year. (See our August 10 News, "August Portfolio Holdings: Fed Repo Almost $2.1 Tril; T-Bills Dip Again.")
Treasury holdings in Taxable money funds fell again last month, though they remained the second largest composition segment. Treasury holdings decreased $31.6 billion, or -2.3%, to $1.353 trillion, or 30.2% of holdings. Treasury securities have decreased by $566.2 billion, or -29.5%, over the past 12 months. U.S. Government Agency securities were the third largest segment; they increased $15.5 billion, or 4.2%, to $381.5 billion, or 8.5% of holdings. Agency holdings have fallen by $108.3 billion, or -22.1%, over the past 12 months.
Certificates of Deposit (CDs) remained in fourth place; they jumped by $24.5 billion, or 15.9%, to $152.9 billion (4.0% of assets). CDs held by money funds fell by $7.4 billion, or -4.0%, over 12 months. Commercial Paper remained in fifth place, up $8.7 billion, or 7.4%, to $127.3 billion (2.8% of assets). CP has decreased by $23.4 billion, or -15.5%, over one year. Other holdings decreased to $15.6 billion (0.3% of assets), while Notes (including Corporate and Bank) inched up to $3.2 billion (0.1% of assets).
The Number of Accounts Outstanding in ICI's series for taxable money funds increased to 58.102 million, while the Number of Funds fell this past month to 238. Over the past 12 months, the number of accounts rose by 13.648 million and the number of funds decreased by 12. The Average Maturity of Portfolios was a record low 24 days, down 2 from June. Over the past 12 months, WAMs of Taxable money have decreased by 14.
Crane Data also 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 Aug. 26) includes Holdings information from 73 money funds (up 10 from two weeks ago), which represent $2.585 trillion (up from $2.135 trillion) of the $5.034 trillion (51.4%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website, and note that we didn't publish last week due to vacations.)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.355 trillion (up from $1.104 trillion two weeks ago), or 52.4%; Treasuries totaling $914.5 billion (up from $747.8 billion two weeks ago), or 35.4%, and Government Agency securities totaling $136.2 billion (up from $117.3 billion), or 5.3%. Commercial Paper (CP) totaled $58.2 billion (up from two weeks ago at $52.1 billion), or 2.3%. Certificates of Deposit (CDs) totaled $40.3 billion (up from $38.7 billion two weeks ago), or 1.6%. The Other category accounted for $55.3 billion or 2.1%, while VRDNs accounted for $25.7 billion, or 1.0%.
The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $1.027 trillion (39.7%), the US Treasury with $914.5 billion (35.4% of total holdings), Federal Home Loan Bank with $83.5B (3.2%), Federal Farm Credit Bank with $46.6B (1.8%), Fixed Income Clearing Corp with $41.7B (1.6%), BNP Paribas with $39.1B (1.5%), RBC with $35.6B (1.4%), JP Morgan with $22.0B (0.9%), Barclays PLC with $20.9B (0.8%) and Citi with $17.6B (0.7%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($232.6B), Goldman Sachs FS Govt ($205.9B), BlackRock Lq FedFund ($152.7B), Morgan Stanley Inst Liq Govt ($149.6B), Fidelity Inv MM: Govt Port ($122.2B), Dreyfus Govt Cash Mgmt ($122.1B), BlackRock Lq Treas Tr ($112.9B), State Street Inst US Govt ($109.2B), Allspring Govt MM ($104.0B) and Goldman Sachs FS Treas Instruments ($102.5B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
Fitch Ratings published "Local Government Investment Pools:2Q22," which shows LGIP assets tracked by Fitch breaking over $500 billion for the first time ever. They write, "Fitch Ratings' two local government investment pool (LGIP) indices experienced aggregate asset increases in the second quarter of 2022 (2Q22). This marks the third consecutive quarter of gains. Combined assets for the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index were $504 billion at the end of 2Q22, representing increases of $39 billion qoq and $81 billion yoy." (Note: We're still taking registrations to our upcoming European Money Fund Symposium, which is Sept. 27-28 in Paris, France. We hope to see you there!)
The update tells us, "Fitch expects pool managers to continue a low weighted average maturity (WAM), defensive position to maintain competitive yields and navigate the Fed's tightening monetary policy. The market is still pricing in additional rate hikes at the Fed's next two meetings, with some market participants expecting rate cuts as soon as early 2023. Both Fitch indices ended 2Q22 with improved average yield and lower maturity profiles, responding quickly to Fed rate hikes."
It says, "The Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index ended the quarter with average net yields of 1.27% and 1.18%. The WAM of the Fitch Liquidity LGIP Index decreased to 28 days, down six days qoq but still higher than money market funds at 16 days, while the duration of the Fitch Short-Term LGIP Index ticked down to 0.94 years, a small decrease from 1.1 years at the end of 1Q22."
The Q2 brief adds, "The Fitch Liquidity LGIP Index decreased exposures to treasuries and increased exposure to agency and repos by -7%, 5%, and 3%, respectively. Short-term treasury bill yields have remained below the Fed Funds Rates as demand has outpaced supply. Additional Federal Home Loan Bank issuance in 2Q22 and competitive repo rates presented managers with more attractive opportunities."
In other news, money fund yields inched higher again in the latest week, but they should remain flat until the Fed's Sept. 21 meeting. Our Crane 100 Money Fund Index (7-Day Yield) rose 2 basis points to 1.99% the week ended Friday, 8/26. Yields rose by 3 basis points the previous week, 5 bps the week before that, and 33 basis points the week before that. On average, they're up from 1.57% on July 29, up from 1.18% on June 30 and more than triple their level of 0.58% on May 31. MMF yields are up from 0.21% on April 29, 0.15% on March 31 and 0.02% on February 28 (where they'd been for almost 2 years prior).
Yields should remain flat at around 2.0% on average in coming weeks, but they should jump once again if the Fed hikes by another 75 basis points as expected on their next meeting Sept. 21. Our broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 680), shows a 7-day yield of 1.88%, up 2 bps in the week through Friday. The Crane Money Fund Average is up 85 bps since beginning of July and up 141 bps from 0.47% at the beginning of June.
Prime Inst MFs were up 2 bps to 2.13% in the latest week, up 86 bps since the start of July and up 149 bps since the start of June (close to double from the month prior). Government Inst MFs rose by 2 bps to 1.92%, they are up 82 bps since start of July and up 138 bps since the start of June. Treasury Inst MFs up 4 bps for the week at 1.91%, up 87 bps since beginning of July and up 141 bps since the beginning of June.
Treasury Retail MFs currently yield 1.66%, (up 4 bps for the week, up 86 bps since July and up 136 bps since June), Government Retail MFs yield 1.62% (up 2 bps for the week, up 83 bps since July started and up 136 bps since June started), and Prime Retail MFs yield 1.98% (up 2 bps for the week, up 91 bps from beginning of July and up 150 bps from beginning of June), Tax-exempt MF 7-day yields fell by 9 bps to 1.26%, they are up 70 bps since the start of July and up 88 bps since the start of June.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (8/26), just 25 funds (out of 823 total) still yield between 0.00% and 0.99% with assets of $4.5 billion, or 0.1% of total assets; 178 funds yield between 1.00% and 1.49% with $185.7 billion in assets, or 3.7%; 144 funds yielded between 1.50% and 1.74% with $319.7 billion or 6.4%; 194 funds yielded between 1.75% and 1.99% ($1.574 trillion, or 31.3%); 209 funds yielded between 2.00% and 2.24% ($2.427 trillion, or 48.2%) and 73 funds yielded 2.25% or more ($523.3 billion, or 10.4%).
Brokerage sweep rates were flat over the past week following last week (when Ameriprise Financial and TD Ameritrade tweaked their rates upwards). Our latest Brokerage Sweep Intelligence shows brokerages paying an average of 0.26% on FDIC insured deposits, up from 0.16% a month ago and up from 0.05% two months ago. 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 0.26%. This follows increases over the past couple of months but also follows 2 straight years of yields at 0.01%. Sweep yields were 0.12% on average at the end of 2019 and 0.28% on average at the end of 2018. The latest Brokerage Sweep Intelligence, with data as of Aug. 26, shows no changes over the previous week.
Last week, BSI reported that Ameriprise Financial decreased rates to 0.10% for all balances between $1K and $249K, to 0.20% for balances between $250K and $999K, to 0.30% for balances between $1 million and $4.9 million, and to 0.45% for balances of $5 million and over for the week ended August 19. TD Ameritrade increased rates to 0.15% for all balances between $1k and over $5 million. Just three of 11 major brokerages still offer rates of 0.01% for balances of $100K (and most other tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
Federal Reserve Board Chair Jerome Powell spoke on "Monetary Policy and Price Stability" Friday in Jackson Hole, Wyoming, and indicated that interest rate hikes will keep coming until inflation is back at 2%. He says, "The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. 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. The burdens of high inflation fall heaviest on those who are least able to bear them."
Powell continues, "Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
He explains, "The U.S. economy is clearly slowing from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers. Inflation is running well above 2 percent, and high inflation has continued to spread through the economy. While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down."
The Fed Chair tells us, "We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. At our most recent meeting in July, the FOMC raised the target range for the federal funds rate to 2.25 to 2.5 percent, which is in the Summary of Economic Projection's (SEP) range of estimates of where the federal funds rate is projected to settle in the longer run. In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause."
He says, "July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting. We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases."
Powell comments, "Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. Committee participants' most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4 percent through the end of 2023. Participants will update their projections at the September meeting."
He states, "Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century. In particular, we are drawing on three important lessons. The first lesson is that central banks can and should take responsibility for delivering low and stable inflation. It may seem strange now that central bankers and others once needed convincing on these two fronts, but as former Chairman Ben Bernanke has shown, both propositions were widely questioned during the Great Inflation period."
Powell tells the Jackson Hole Symposium, "Today, we regard these questions as settled. Our responsibility to deliver price stability is unconditional. It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed's tools work principally on aggregate demand. None of this diminishes the Federal Reserve's responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job."
He continues, "The second lesson is that the public's expectations about future inflation can play an important role in setting the path of inflation over time. Today, by many measures, longer-term inflation expectations appear to remain well anchored. That is broadly true of surveys of households, businesses, and forecasters, and of market-based measures as well. But that is not grounds for complacency, with inflation having run well above our goal for some time."
Powell adds, "If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. Unfortunately, the same is true of expectations of high and volatile inflation. During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decisionmaking of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions. As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, 'Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.'"
He also says, "Of course, inflation has just about everyone's attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched. That brings me to the third lesson, which is that we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now."
Finally, Powell adds, "These lessons are guiding us as we use our tools to bring inflation down. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done."
This month, BFI interviews Fort Washington Investment Advisors' Managing Director & Senior Portfolio Manager Scott Weston and Senior Portfolio Manager Laura Mayfield. Fort Washington is the investment subsidiary for Western & Southern Financial Group, and manages a number of funds for Touchstone Investments. Touchstone recently announced the launch of a new Touchstone Ultra Short Income ETF. Our Q&A follows. (Note: The following is reprinted from the August issue of Bond Fund Intelligence, which was published on Aug. 12. Contact us at info@cranedata.com to request the full issue or to subscribe. BFI is $500 a year, or $1,000 including our Bond Fund Intelligence XLS spreadsheet.)
BFI: Give us some history. Weston: Fort Washington's Ultra-Short Duration composite was incepted in 1995. So, we've been in this ultra-short space for about 27 years. I started at Fort Washington in 1999 and in 2001 Brent Miller and I assumed management of the ultra-short composite and began migrating it from a credit-only focus to a multisector focus with an emphasis on structured products. We had a strong conviction that the ultra-short duration markets were inefficient and structured securities provided a consistent source of alpha in this part of the curve. We believe this value proposition holds true.
We assumed management of the Touchstone Ultra Short Duration Fixed Income Fund in 2008. At the time, it was a government-focused strategy. Then in 2010, the Fund's directors changed the Fund's focus to a multisector strategy, allowing us to fully execute our ultra-short duration style of investing. The allocation to structure typically ranges anywhere from 50% to 70% of Fund assets - we expect the ETF to be similar.
BFI: Tell us about the new ETF. Mayfield: Touchstone Investments is launching four ETFs here in a short timeframe. These are the first ETFs for Touchstone, the Touchstone Ultra Short Income ETF being one of them. The thought process is pretty simple. We've seen that there's strong demand for ultra-short duration strategies in ETF form. Our mutual fund, Touchstone Ultra-Short Duration Fixed Income Fund, has a really strong track record, and it compares favorably to some of the ETF managers that have been successful in garnering assets in the ETF space for ultra-short duration. Our investment process is consistent and repeatable, so it makes a ton of sense for us to launch this strategy in ETF form.
BFI: How is the ultra-short sector faring? Mayfield: It has been a challenging year for the space overall. Our strategy has held up really well. The Morningstar Ultra Short Bond category average is down more than a percent over the past year, which is a lot for Ultra Short. But it's still a very safe haven compared to Core Fixed Income or longer-duration strategies. If you look at the Bloomberg U.S. Aggregate Index, it's down 10% for its 1-year trailing return at this point. You just had the perfect storm of a historically severe shock to rates, and then significant spread widening on top of that. There aren't a lot of ways for fixed income funds to produce positive returns in that type of environment, and not many have.
So, for us, our portfolio construction process is designed so that the portfolio generates significant organic liquidity to meet redemptions, and that minimizes the risk that we're ever forced sellers in this type of environment. That's exactly why we designed it that way, and that approach has really paid off for us. Over the past year and a half, the funds who've been forced sellers in this environment are locking in mark-to-market losses, whereas our shareholders should benefit from the full recovery in the securities we hold, even to the extent that there's negative mark-to-market volatility. We're holding those bonds to maturity and they're going to get paid off at par. We don't have credit concerns about the ability to get repaid at par. When you look at the carnage out there across fixed income as a whole, ultra-short duration has really been a safe haven on a relative basis, and we're really proud of how our track record has held up.
BFI: Discuss the ETF vs. the fund. Mayfield: The investment philosophy and the process will be identical, but the ETF is designed to have a little bit higher risk-return profile than the mutual fund. So, the ETF allows for up to 15% exposure to below investment grade securities, whereas the mutual fund vehicle is investment-grade only. We've always thought the mutual fund caters to investors who [are] 'inside-out' investors, meaning that they are traditional cash or enhanced cash investors that are extending out into ultra-short duration to pick up a little bit of additional yield. We know that they are highly sensitive to volatility and capital preservation, so we manage the strategy accordingly. That won't change with the ETF. It is just going to have a little bit higher risk-return profile than the mutual fund, but within that framework.
BFI: What are you buying? Mayfield: This is a great environment to be putting money to work in the ultra-short space, and we're really excited about the opportunities that we're seeing right now. There are plenty of things that we're cautious about, namely inflation, recession risk, the Fed, all of those things. But we're seeing some really attractive risk-return profiles out there, especially in structured products. We are stress testing bonds through any number of scenarios, and we've been able to add bonds with really attractive yields to the portfolio with solid credit profiles that we expect to hold up in spite of all those risks and stresses.. So, we've been especially active in different segments of the ABS market, as well as RMBS, CLOs, and CMBS.
BFI: Does the advisor market drive ETFs? Weston: It's a retail product and that's what we're hearing as well - the FAs like the product. They like the lower fees, the higher returns, and the tax efficiency - it works well on their platforms. Some FAs cannot use the mutual fund on their platform, but they can use the ETF. So, it appeals to a broader investor base.
BFI: Tell us more about the base. Weston: We've got a pretty healthy mix of investors in the mutual fund. If you look at the distribution across the various share classes, you see about one third of the investor base in the institutional share class. The other two thirds are retail investors who tend to be concentrated in the lower fee share classes. We expect that the ETF will have a similar distribution.
BFI: What's the outlook going forward? Weston: I think the challenge that the ultra-short space had at the beginning of Q4 last year, when rates started rising, was that there was just no yield. Historically, yield has been the buffer, or the anchor, that produced stable returns in fixed income portfolios - for core-fixed, for ultra-short, for any fixed income strategy. Yields were just very, very skinny and as a result, we've seen challenging returns year-to-date. But, since rates started rising in Q4 last year, we're up about 300 basis points in the one-year part of the curve, and credit spreads have widened substantially - spreads in some sectors have doubled or tripled. So, we're in a much better place today - the weighted-average gross market yield on the fund is now over 4%.
As Laura noted earlier, we're seeing some very good opportunities in the ultra-short space. So we think it's an attractive time to be thinking about the strategy. This core yield should help buffer the rate spread and volatility that we anticipate as the Fed and the markets wrestle with inflation and the prospects for a soft landing. So, if the Fed's rate forecast, or Fed funds futures market, are close to being right, we think that bodes well for the ultra-short space and we should generate positive returns for the remainder of the year.
But given the uncertainty that we face, with the outlook for inflation and potential recession, we're playing it pretty close to the vest. We're shorter duration and we're maintaining an upward quality bias. We think that's going to be key to managing risk and generating positive returns for the remainder of the year.
Yesterday, we excerpted from European Fund and Asset Management Association's 2022 Fact Book, which "provides an in-depth analysis of trends in the European fund industry." (See the press release here.) Today, we quote from a sidebar entitled, "Public debt ratios for European MMFs: Is the European short-term public debt market large enough?" It explains, "The market turmoil of March 2020 led some categories of European MMFs to experience significant withdrawals, with consequent liquidity concerns. However, the overall European MMF industry, aided by the comprehensive nature of the EU MMFR framework, proved robust during this recent crisis. Yet both the ESRB and ESMA have made proposals aimed at amending the MMFR, in order to make MMFs more resilient. While a number of those would indeed deliver a more resilient MMFR industry, such as the recommendation to de-link liquidity thresholds from the possible imposition of fees and gates, others would prove impractical, where not plainly unfeasible." (Note: Learn more at our upcoming European Money Fund Symposium, which will take place Sept. 27-28 in Paris, France.)
EFAMA writes, "Among these latter categories is the ESRB’s recommendation for additional public debt liquidity requirements for VNAV and LVNAV funds. Accordingly: Short-term VNAV should have at least 5% of additional public debt assets; Standard VNAV should have at least 10% of additional public debt assets; and, LVNAV should have at least 15% of additional public debt assets. Although ESMA believes that the additional public debt liquidity buffer should be optional, it nevertheless considers that the ESRB’s recommendations could provide a good working basis for these calculations."
They tell us, "These additional liquidity buffers would prove unworkable for two interrelated reasons. First, the data suggest that the portion of the EUR-denominated short-term public debt market for the constitution of an additional public debt liquidity buffer is simply not large enough. Second, other (non-MMF) players, such as banks and other financial institutions, typically rely heavily on high-quality, short-term public debt and could suffer from supply constraints were MMFs to also compete for these."
Discussing "EUR MMFs and the EUR short-term public debt market," the sidebar says, "Net assets of EUR MMFs amounted to around EUR 612 billion at the end of 2021, of which 20% were LVNAV and less than 1% PD CNAV; an estimated 53% were standard VNAV and 27% were short-term VNAV. Applying the additional public debt liquidity requirements proposed by the ESRB would result in EUR MMFs requiring approximately EUR 59 billion of additional short-term public debt assets. Total outstanding short-term debt (with less than a year of original maturity) issued in the euro area at the end of 2021 amounted to EUR 675 billion. This would mean that the additional public debt liquidity requirements for EUR MMFs would require 9% of all outstanding EUR short-term public debt. However, the MMFR imposes additional requirements, such as a maximum residual maturity of 190 days for the public debt holdings of short-term MMFs. This will clearly further limit the potential supply of short-term public debt that can be used for additional liquidity buffers."
It continues, "Data on debt with a shorter maturity than one year is hard to find. Data on the STEP (short-term euro paper) market could give an indication. STEP is a quality label for short-term debt, established to foster the integration of the European markets for short-term paper through the convergence of market standards and practices. The total size of the public STEP market with a residual maturity of less than 184 days is EUR 58 billion. However, an important caveat on this data is that several of the largest EUR public short-term debt issuers, such as France and Germany, are not included."
EFAMA comments, "Even if the total EUR short-term public debt market were, in theory, large enough to accommodate the additional public debt buffer for MMFs suggested by the ESRB, the above analysis does not take into account the other users of this type of paper. Looking at the types of investors that currently hold EUR short-term public debt, MMFs currently hold only 15% of the available total. Commercial banks are the largest holders of public debt, with about one-third of the total short-term public debt issued in the eurozone. This type of paper plays a crucial role in their liquidity ratios. In addition, other large investors -- such as insurers and pension funds (11%) and long-term investment funds (7%) -- rely heavily on short-term public debt. A sudden increase in demand for short-term public debt by MMFs – particularly for the more highly rated and shorter-dated segments - could cause significant supply shortages for these other users."
In other news, the U.S. Treasury's Office of Financial Research published a blog on "Non-centrally Cleared Bilateral Repo." It tells us, "For years, regulators have called for greater insight and transparency into the U.S. repurchase agreement (repo) market. As a crucial source of funding and liquidity for the U.S. financial system, repos provide short-term financing to banks, securities dealers, and other financial institutions to fund their liquidity provisions and leveraged investments. Currently, the daily volume of transactions on all U.S. repo markets exceeds $4 trillion."
The piece says, "Within the U.S. repo market, the non-centrally cleared bilateral segment -- where repo transactions are conducted between two firms without the involvement of a central counterparty or custodian -- has been a blind spot for regulators. Unlike other repo segments where information and data are regularly published, the wholly bilateral nature of these transactions means there is no central source of data on this segment of the repo market."
It continues, "Until recently, little was known about non-centrally cleared bilateral repos. In January of 2022, the Federal Reserve Bank of New York updated their primary dealer statistics to capture the segments of the repo market used by primary dealers.... On average during the first three quarters of 2022, the non-centrally cleared bilateral market made up $1.19 trillion of primary dealer reverse repo (60% of the total) and $0.94 trillion of primary dealer repo (37% of the total). At more than $2 trillion in total exposure, this would make non-centrally cleared bilateral repo the largest segment of the repo market in gross exposure by primary dealers. Moreover, our estimated series prior to 2022 shows that primary dealer volumes in non-centrally cleared bilateral reverse repo have been stable during the previous three years, averaging $1.10 trillion (60% of the total) in 2021 and $1.20 trillion (62% of the total) in 2020."
The OFR piece states, "Non-centrally cleared bilateral repo likely contains a greater share of riskier collateral than other segments of the repo market. One feature of the market that attracts primary dealers is the ability to lend against non-Fedwire eligible specific collateral (centrally cleared specific collateral markets are limited to Treasuries and non-mortgage-backed agency securities).... [O]ur estimates show that non-centrally cleared bilateral is the primary venue for the use of asset-backed securities (ABS), agency excluding MBS, and agency commercial mortgage-backed securities (CMBS) collateral in reverse repo for primary dealers."
It also says, "Finally, the non-centrally cleared bilateral market plays an important role in trading by non-bank financial institutions. For instance, non-centrally cleared is likely a key source of leverage for hedge funds.... Since there is no central source data on the non-centrally cleared bilateral market, OFR is laying the groundwork to fill this critical gap through a data collection. Collecting more data on this market is critical for three reasons: 1. Non-centrally cleared bilateral trades constitute a major segment of the U.S. repo market, as we have shown in this blog. More timely and comprehensive data can help regulators identify emerging risks in this market and make well-informed policy decisions."
The blog adds, "[I]n our conversations with market participants they pointed to three advantages of non-centrally cleared bilateral repo: 1. Market participants report that many institutions do not have access to sponsored repo, and that onboarding new sponsored members can be costly and time-consuming. 2. Sponsored repo has until recently been limited to overnight Treasury collateral and non-MBS agency securities, so market participants point out that non-centrally cleared bilateral repo allows for a greater variety of trades. 3. Trades by relative value hedge funds are often naturally netted, so novating them to FICC would not yield additional benefits. Meanwhile, market participants report that in non-centrally cleared bilateral repo, dealers can offer lower haircuts on these funding packages than would be imposed by FICC on sponsored trades. These responses by market participants highlight the importance of the non-centrally cleared repo market and reinforce the need for more data regarding its functioning."
A press release entitled, "EFAMA publishes 2022 industry Fact Book," tells us, "The European Fund and Asset Management Association (EFAMA) has released its 2022 industry Fact Book. The 2022 Fact Book provides an in-depth analysis of trends in the European fund industry, with an emphasis on what happened in 2021. It also includes an extensive overview of the regulatory developments across 28 European countries and a wealth of data." (Note: We recently learned of the Fact Book from EFAMA's Federico Cupelli, who will be speaking at our upcoming European Money Fund Symposium, which is Sept. 27-28 in Paris, France. Registrations are still being taken, so we hope to see you in France next month!)
EFAMA Director General Tanguy van de Werve comments, "Beyond providing in-depth analysis of recent trends in the European investment fund industry, this year’s edition of the Fact Book analyses several issues highly relevant for our industry, including the current limitations of the Sustainable Financial Disclosure Regulation (SFDR), the review of the ELTIF regulation, the opportunity cost of saving excessively in bank deposits, as well as some proposals to amend the money market funds regulation. We hope that these analyses will contribute to a better understanding of the structural and regulatory environment that affects the outlook for the industry.”
The section on "UCITS money market funds," explains, "Net assets of MMFs increased only slightly in 2021 (EUR 1.5 trillion), following two years of solid increases. MMFs also stopped attracting net inflows, as net sales turned negative (EUR 2 billion) against a background of strong economic recovery and continued low interest rates. The small net outflows of 2021 stand in stark contrast to the record inflows the previous year (EUR 215 billion), as investors responded to the economic uncertainties surrounding the pandemic by rushing into MMFs."
It continues, "Net asset growth of MMFs amounted to 4% in 2021, which was solely attributable to market appreciation, as net outflows were close to zero. Compared to long-term UCITS, MMF asset growth reflects net sales rather closely, as the valuation of the short-term instruments that MMFs mainly invest in varies little over time. Exchange rate effects can, however, have an impact on MMF asset growth."
EFAMA states, "There used to be an inverse relationship between the inflows into MMFs and short-term interest rates. This correlation has become much less pronounced in recent years, as short-term interest rates dropped below zero. In this low-to-negative interest rate world, investors seeking safety or liquidity still consider MMFs a good investment solution for dealing with uncertainty; investors’ response to the pandemic in 2020 has confirmed this.... The MMF market is dominated by three domiciles. Ireland held the largest market share of UCITS MMF net assets (43%), followed by Luxembourg (28%) and France (24%). Combined, they represent 95% of the European total."
They write, "The EU Money Market Fund Regulation (MMFR) was adopted in 2016 and came into full effect in January 2019. The Regulation introduced a specific authorisation procedure for all MMFs managed or marketed in the EU, along with prescriptive rules for eligible assets, portfolio diversification, the credit quality of fund holdings, risk management obligations, stress-testing, asset valuation and NAV calculation rules. In addition, the MMFR sought to improve transparency by specifying disclosure obligations to investors and reporting obligations to national competent authorities."
Discussing "Types of MMFs," EFAMA says, "The MMFR distinguishes between three main categories of money market funds: Public Debt Constant Asset Value (PDCNAV) MMFs; Low Volatility Net Asset Value (LVNAV) MMFs; and, Variable Net Asset Value (VNAV) MMFs. Aside from these categories, the MMFR also distinguishes between Short-term and Standard MMFs. Short-term MMFs are required to adhere to tighter investment rules than Standard MMFs. All three types of funds may be categorised as Short-term MMFs: Public Debt CNAV, LVNAV and Short-term VNAV. Standard MMFs must be variably priced, therefore making all Standard MMFs VNAV funds."
They explain, "PDCNAV and LVNAV MMFs use amortised cost accounting -- provided certain conditions are met -- to value all of their assets and maintain a net asset value (NAV), or value of a share of the fund, at €1/£1/$1. Public Debt CNAV MMFs must invest a minimum of 99.5% of their assets in public debt. Units/shares in an LVNAV MMF can be purchased or redeemed at a constant price, as long as the value of the assets in the fund does not deviate by more than 0.2% from par. VNAV MMFs refer to funds that use mark-to-market accounting to value some of their assets. The NAV of these funds will vary with the changing value of the assets and -- in the case of an accumulating fund -- by the amount of income received. PDCNAV and LVNAV grew in both 2020 and 2021. Net assets of regular VNAV increased strongly in 2020, but decreased in 2021 as outflows that year were mainly concentrated in that segment of the MMF market."
The Fact Book continues, "MMFs can also be broken down by base currency <b:>`_. Three main base currencies accounted for 99.5% of UCITS net assets at the end of 2021. EUR was in first place with 43% of net assets, followed by USD (33%) and GBP (24%). The share of EUR-dominated MMFs has been falling, from 52% in 2011 to 38% in 2019. Consequently, the market shares of USD- and GBP-denominated MMFs rose over the same period, edged up by generally higher interest rates in those currencies. This trend reversed in 2020, when the market share of EUR-dominated MMFs shot up again, and the share of USD MMFs dropped."
It adds, "An overview of the 2021 holdings of MMFs by geographical region shows that 46% of the short-term paper held by UCITS MMFs was issued in Europe. The United States accounted for 27% and Asia-Pacific for 7%.... Following the United States (27%), short-term securities issued in France made up 26% of the MMF assets at the end of 2021. Canada (19%), the United Kingdom (6%) and Germany (4%) complete the top five. Comparing the asset breakdown by base currency and issuing country shows that MMFs with the USD or GDP as a base currency invested a substantial proportion of their assets in securities issued in a non-base currency country. Often, countries such as Canada or Japan (or companies based there) issue short-term debt in a major currency to attract more international investors. MMFs can also invest in non-base currency-denominated debt and hedge the currency exposure. The MMFR does require all non-base currency exposures to be fully hedged." (See also our May 25 News, "ICI Publishes 2022 Fact Book, Reviews US, Worldwide Money Funds in '21.")
Money fund yields inched higher in the latest week, but they're plateauing after jumping following the Fed's 75 bps hike in late July. Our Crane 100 Money Fund Index (7-Day Yield) rose 3 basis points to 1.97% the week ended Friday, 8/19. Yields rose by 5 basis points the previous week and 33 basis points the week before that. On average, they're up from 1.57% on July 29, up from 1.18% on June 30 and more than triple their level of 0.58% on May 31. MMF yields are up from 0.21% on April 29, 0.15% on March 31 and 0.02% on February 28 (where they'd been for almost 2 years prior). Yields should remain flat at around 2.0% on average in coming weeks, though they should jump once again following the next Fed meeting on Sept. 21. Our broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 676), shows a 7-day yield of 1.86%, up 4 bps in the week through Friday. The Crane Money Fund Average is up 83 bps since beginning of July and up 139 bps from 0.47% at the beginning of June.
Prime Inst MFs were up 2 bps to 2.11% in the latest week, up 84 bps since the start of July and up 147 bps since the start of June (close to double from the month prior). Government Inst MFs rose by 2 bps to 1.90%, they are up 80 bps since start of July and up 136 bps since the start of June. Treasury Inst MFs up 4 bps for the week at 1.87%, up 83 bps since beginning of July and up 137 bps since the beginning of June. Treasury Retail MFs currently yield 1.62%, (up 5 bps for the week, up 82 bps since July and up 132 bps since June), Government Retail MFs yield 1.60% (up 3 bps for the week, up 81 bps since July started and up 134 bps since June started), and Prime Retail MFs yield 1.96% (up 3 bps for the week, up 89 bps from beginning of July and up 148 bps from beginning of June), Tax-exempt MF 7-day yields rose by 4 bps to 1.35%, they are up 79 bps since the start of July and up 95 bps since the start of June.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (8/19), just 23 funds (out of 819 total) still yield between 0.00% and 0.99% with assets of $5.6 billion, or 0.1% of total assets; 163 funds yield between 1.00% and 1.49% with $161.1 billion in assets, or 3.2%; 171 funds yielded between 1.50% and 1.74% with $397.9 billion or 7.9%; 208 funds yielded between 1.75% and 1.99% ($1.820 trillion, or 36.3%); 195 funds yielded between 2.00% and 2.24% ($2.136 trillion, or 42.6%) and 59 funds yielded 2.25% or more ($491.2 billion, or 9.8%).
Brokerage sweep rates also crept higher over the past week, as Ameriprise Financial and TD Ameritrade tweaked their rates upwards. Our latest Brokerage Sweep Intelligence shows brokerages paying an average of 0.26% on FDIC insured deposits, up from 0.16% a month ago and up from 0.05% two months ago. 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), unchanged this past week at 0.26%. This follows increases over the past couple of months but also follows 2 straight years of yields at 0.01%. Sweep yields were 0.12% on average at the end of 2019 and 0.28% on average at the end of 2018. The latest Brokerage Sweep Intelligence, with data as of Aug. 19, shows two changes over the previous week.
BSI reports that Ameriprise Financial decreased rates to 0.10% for all balances between $1K and $249K, to 0.20% for balances between $250K and $999K, to 0.30% for balances between $1 million and $4.9 million, and to 0.45% for balances of $5 million and over for the week ended August 19. TD Ameritrade increased rates to 0.15% for all balances between $1k and over $5 million. Just three of 11 major brokerages still offer rates of 0.01% for balances of $100K (and most other tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
In other news, Reuters writes, "Stablecoin Tether's reserves fell $16 billion in second quarter." They explain, "Tether, the world's largest stablecoin by market value, said on Friday it had reserves worth $66.4 billion at the end of June, down from $82.4 billion at the end of March, a fall which Tether said was due to fulfilling $16 billion worth of redemptions."
The article explains, "The reserves statement on Tether's website came a day after it said it had switched to accountancy firm BDO Italia to certify its reserves and would aim to release monthly reports by the end of the year. Tether's $66.4 billion reserve assets exceed its $66.2 billion liabilities, BDO Italia said in the statement."
Reuters quotes Joseph Edwards of Securitize Capital, "The report itself looks positive for Tether, because it reinforces that there's probably no bank run big enough to run them down to the parts of their treasury that might be questionable.... The questionable part of the report is switching auditor yet again, especially given that it's to a division with no existent presence in English-language markets. They're within their rights to do so, but it'll do little to silence critics."
The piece adds, "Tether said in emailed comments that BDO is a top-five firm and that working with BDO Italia 'aligns with our commitment to the Tether community to work with a larger and more experienced firm.' Its website shows it has published reports vouching for its reserves from at least five other firms since 2017."
Finally, they write, "The company's holdings of U.S. Treasury bills fell to $28.9 billion in the second quarter, the statement said, a $10.3 billion drop from the $39.2 billion it held in the first quarter. Commercial paper and certificates of deposit were down to $8.4 billion, showing an $11.7 billion drop. In July, Tether said it had slashed its commercial paper holdings as part of a plan to reduce exposure to riskier assets."
This month, MFI interviews David R. Jones, President & CEO of CastleOak Securities. CastleOak Securities is a minority-owned dealer and one of the first firms to offer both an online money market trading portal and a D&I share class in the money fund space. We discuss the latest in diversity, corporate investing and cash below in our Q&A. (Note: The following is reprinted from the August issue of Money Fund Intelligence, which was published on Aug. 5. Contact us at info@cranedata.com to request the full issue or to subscribe, and let us know too if you'd like to see our latest list of ESG, Social and D&I share class money market funds.)
MFI: Give us some history. Jones: I founded the firm back in 2006, and we've grown CastleOak to be one of the largest diverse investment banks on Wall Street. We've got six offices around the country and are headquartered in New York. We’ve grown the firm from four individuals ... and now we've got over 55 employees. We focus on the capital markets for our clients, and that includes primary issuance, both in debt and equity, and also the secondary trading that goes along with that. On the fixed income side, back in 2010 when I brought Dan Davis and his team on, that's when we got into the Treasury, Agency and Money Market space. We've got a very strong presence on the secondary side in the front end of the curve.
In 2011, we got into the portal business by starting a partnership with State Street, where we launched our Money Fund Access program, giving our broker clients access to over 20 different money market fund families through our dedicated portal. Over the years, we've had assets grow to over $16 billion on that portal. Last year, we hired in two more seasoned professionals to augment our existing Money Fund Solutions team, so now we feel like we have a lot of depth and experience on the bench.
Also, just recently we launched our designated share classes, in partnership with Morgan Stanley. We've got two funds with them, Morgan Stanley Institutional Liquidity Government and MSILF ESG Prime. So, we've got a great combination of products for our clients who are managing their cash, whether they want to buy direct, whether they want to use managers to invest in funds, or whether they want to go direct to designated share class.
Our clients are the bluest of blue-chip corporate issuers, institutional investors, and government entities. We have the largest money management clients, which are the most sophisticated investors -- the BlackRocks, the Wellingtons of the world -- all the way down to billion-dollar asset managers like Pugh Asset Management and Garcia Hamilton.
MFI: Talk about D&I investing today. Jones: D&I [diversity & inclusion] investing has been around for a while. It started with folks understanding that doing business with diverse suppliers was a good idea when their employees or their customers were diverse. Later on, it transferred into supplier diversity -- buying widgets from minority-owned companies and things like that. Now it's across the board in professional services like banking and legal services.
Unfortunately, this momentum has come about because of many, many tragic events like the death of George Floyd. But the spotlight is there now. I don't want to say it's not always been at the C-suite level, but now it is clearly a C-suite conversation for corporations. In most major corporations, it is permeating throughout the firm. [They're looking at] what people are doing, what corporations are doing, not only internally -- are they hiring a diverse workforce? -- but also in terms of who folks are doing business with. They're concerned about doing business and doing good at the same time. They're looking beneath the surface for substance as well, which benefits firms like ours.
MFI: Did D&I start with governments? Jones: It starts at the top and [yes], the governments and municipalities ... it evolved on that side earlier. But now you're seeing that there are more diverse people at the upper echelons of corporate America. So that is resonating with them and you're starting to see that push. Senior executives are spotlighting or highlighting the need for diversity. There's still a long way to go, there's no doubt about that. But I think it is getting to where corporate America is following suit and allowing diverse managers and diverse broker dealers the opportunity to participate. When you see corporations like Verizon, AT&T, Apple and those caliber companies including diverse firms in their syndicates or in the funds that they're investing in, others look at this and realize that they should be doing the same thing. So, it's snowballing.
We are benefiting from that. We are well positioned. We have a very good coverage plan throughout our organization, public and private. It's always been in our DNA. We're not relying on others to do our calling; we're doing our calling ourselves. When people know you're out there, you've been consistent about the quality of the firm and its people, and clients know who they're doing business with ... it helps.
MFI: Are these deals exclusive? Jones: The strength of our firm has been based on the relationships we've developed. We're not out there just saying, 'Hey, just do business with us because we're a minority-owned firm.' We develop relationships. I would say that the deals we have are somewhat unique. We don't have an exclusive agreement with Morgan Stanley, but we're the only minority firm they're working with in the share class space. I think there are others out there who have multiple relationships. We also have a strong relationship with State Street on the portal side. These are world class firms that could do business with anyone, but they have partnered with us.
I don't think the larger firms are just like, 'Come one, come all and we'll do a partnership.' You've got to court some corporate clients. Especially in the money fund space, gathering assets is key. I think a lot of the larger fund managers are looking at this as a way they can increase assets under management, saying, 'If folks are putting money in these designated share classes, we should look into that.' In our world, we're doing the same thing. That's the name of our game. We're trying to increase the assets, not only in our portal but also in our share class.
There are some funds out there that are sort of stand-alone -- that's all they do in the space. We do feel we're differentiated in that we have experts across the curve in the fixed-income space. This is just one quiver in our arsenal, so we can meet a client's needs wherever they may be. But in particular on the short end, we feel that we are experts there. These are just a couple of the products, the fund portal and the share class, that we can offer to our clients. If they want to go direct, we can help them in managing their short-term liquidity needs.
MFI: What's your biggest priority? Jones: We think we've had a successful launch to our designated share classes with Morgan Stanley. But we just added a charitable donation component to them, because we see that there are some clients that would like to be able to have their assets generate fees to go to a charity. We're working diligently and just announced that we're going to be donating part of our revenue to the United Negro College Fund (UNCF). We feel that their mission aligns with ours. We do see that this is getting traction, that the charitable component is important to a lot of our clients.
But the transparency of exactly what's going to these charities needs to be in the spotlight as well. There are plenty of firms that have funds that have announced things like that, but when you look through the lens and try to find out how much is actually being donated, you really can't find that out. We've announced that we're going to donate 2 basis points of the assets invested directly in our share class to charity. We can help our clients track their ESG-related spending in a clear and straightforward way.
MFI: What are customers saying? Jones: Let me say, they are happy they're getting some income on their cash, that's for sure. There have been a lot of headwinds of late.... It's really hard to get people focused. As you talk about money market reform, people want to keep their ear to what's going on, but nobody really knows exactly what's happening.... I think as we look at, 'What are their priorities?' Capital preservation is key. Liquidity is key, and yield is up there. Now that they're getting more yield, they're getting more interested in what's going on in the marketplace and in where they can put their money for more yield.... So, we're optimistic going into the second half of the year, with full fees being paid, yields rising, etc. We're optimistic about our asset growth.
MFI: What about revenue sharing? Jones: This is a low margin business, so when you start talking about third-party distributors and platforms, the fees start getting chopped up pretty quickly. But I do think that you get the assets on the portal [almost any way you can]. Our model is not about saying 'Let's go to zero and see what we can do.' We want to be fair as we gather assets.... We're not willing to disrupt the marketplace in terms of how business is done. I'm not shy to say, and our clients appreciate, that this is a for-profit business. We've got to be competitive. But it's hard to do business and do good with our charitable component if we're waiving fees.
MFI: Any other thoughts? Jones: The first half of the year was challenging. [In] our portal and money fund business, revenue was down because we had compressed fees. Now we're back to the full fee levels. We're very optimistic as people look at where they can get yield in the short end that our corporate clients will be back in money funds. I do think that there's still money on the sidelines and people are looking for that yield.... We're optimistic that we can move the needle there.
We're also coming from a lower base. You've got $5 trillion in money funds, and less than 1% of those funds are invested in D&I share class funds. Our funds in particular -- we're like $1.3 billion or so in the designated share class -- we feel there's a good opportunity for us to grow our assets.
Higher yields in money market funds should bring heavy assets inflows in the coming months, but not quite yet it seems. The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows assets falling for the third week in a row in August after 4 straight weeks of gains in July. Year-to-date, MMFs are down by $143 billion, or -3.0%, with Institutional MMFs down $158 billion, or -4.9% and Retail MMFs up $15 billion, or 1.0%. Over the past 52 weeks, money fund assets are up by $40 billion, or 0.9%, with Retail MMFs rising by $56 billion (3.9%) and Inst MMFs falling by $16 billion (-0.5%). (For the month of August through 8/17, MMF assets have increased by $23.4 billion to $5.021 trillion according to Crane's MFI XLS, which tracks a broader universe of funds than ICI.)
ICI's weekly release says, "Total money market fund assets decreased by $5.42 billion to $4.56 trillion for the week ended Wednesday, August 17, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $17.81 billion and prime funds increased by $9.94 billion. Tax-exempt money market funds increased by $2.46 billion." ICI's stats show Institutional MMFs decreasing $11.6 billion and Retail MMFs increasing $6.1 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.972 trillion (87.1% of all money funds), while Total Prime MMFs were $490.7 billion (10.8%). Tax Exempt MMFs totaled $99.1 billion (2.2%).
ICI explains, "Assets of retail money market funds increased by $6.14 billion to $1.48 trillion. Among retail funds, government money market fund assets decreased by $2.48 billion to $1.13 trillion, prime money market fund assets increased by $7.18 billion to $261.17 billion, and tax-exempt fund assets increased by $1.44 billion to $88.79 billion." Retail assets account for just under a third of total assets, or 32.5%, and Government Retail assets make up 76.4% of all Retail MMFs.
They add, "Assets of institutional money market funds decreased by $11.56 billion to $3.08 trillion. Among institutional funds, government money market fund assets decreased by $15.34 billion to $2.84 trillion, prime money market fund assets increased by $2.76 billion to $229.54 billion, and tax-exempt fund assets increased by $1.01 billion to $10.34 billion." Institutional assets accounted for 67.5% of all MMF assets, with Government Institutional assets making up 92.2% 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.)
In other news, J.P. Morgan Securities published "A Stablecoin Market Update" in its latest "U.S. Fixed Income Strategy." Authors Teresa Ho, Alex Roever and Holly Cunningham explain, "Since we last published on stablecoins in May, the size of the stablecoin market has shrunk, along with the broader cryptocurrency market. According to CoinMarketCap, the size of the stablecoin market has fallen from a peak of ~$180bn in early April to ~$147bn currently, based on the six issuers that we track. TerraUSD's (UST) collapse earlier this year erased about $18bn, contributing to about 57% of the overall market decline. Tether (UST) suffered a similar fate, despite fundamental differences between the two (TerraUSD is an algorithmicstablecoin, while Tether is asset-backed). Nevertheless, Tether's market cap still decreased by $16bn. Notably, USD Coin (USDC) was the only stablecoin issuer that gained market share, as they increased their market cap by $3.7bn during the same time period."
They tell us, "Overall, Tether and USD Coin remain dominant players, comprising over 80% of the stablecoin market. However, it is clear that market confidence in Tether as a stablecoin has been gradually eroding, with the events over the past few months accelerating that dynamic. Indeed, nearly two years ago, Tether represented 78% of the market, while USD Coin 13%. Presently, Tether only commands 45% of the market, while USD Coin 37%. In fact, USD Coin's market share increased by 10% over just the last couple of months."
JPM writes, "We believe one of the primary drivers behind the dramatic shift has been the superior transparency and asset quality of USD Coin's reserve assets versus those of Tether, particularly in the wake of TerraUSD's collapse and Celsius's bankruptcy. In the case of USD Coin, in addition to monthly attestation reports by a large US-based accounting firm, the issuer also provides weekly updates of its reserve asset allocation. As of August 12, it had $54.0bn of USDC in circulation, backed by $54.5bn of reserve assets. Of the latter amount, $42.5bn (79%) was in short-duration US Treasuries; the remainder $11.5bn (21%) was in cash."
They continue, "In contrast, Tether provides quarterly attestation reports by a Cayman-based accounting firm that details its reserve asset allocation. As of March 31, it had $82.3bn in total reserve assets. However, only $39.3bn (47%) and $4.1bn (5%) were in Treasury bills and cash, respectively. The remainder were in CP/CD (24%), MMFs (8%), and other asset classes such as secured loans, corporate bonds, and digital tokens."
The piece adds, "Interestingly, in early July, Tether announced that it intends to reduce its CP holdings." (See our Aug. 15 Link of the Day, "Tether Says No More Chinese CP.") JPM states, "Based on this, it appears maturing CP will be reinvested in Treasury bills. Combining this with Circle's investment, this would make stablecoin issuers a sizable player in Treasury bills, currently comprising 2% of the market as of May 2022, with considerable room to grow should stablecoins become a form of digital payment.... In fact, they hold more Treasury bills than prime MMFs, offshore MMFs, primary dealers, Berkshire Hathaway, or international organizations."
Finally, the update adds, "It didn't take long for tokenized MMFs to emerge. In late May, JPM transferred the token representation of BlackRock's MMF shares as collateral on its private blockchain. This opens the door for a wider range of assets to be pledged as collateral and also demonstrates that there could be potential demand for tokenized MMFs. One of the concerns we previously noted with regulating stablecoins like banks is that it could encourage a rotation from bank deposits and MMFs towards stablecoins, disintermediating the traditional financial system and leading to less credit and liquidity provided to the broader economy. Arguably, with the ability to transfer tokenized MMF shares as collateral, we could see less money rotate out of MMFs and into stablecoins. Somewhat interestingly, this might create a secondary market for MMF shares to the degree that shareholders decide to trade their tokenized MMF shares as opposed to redeeming from MMFs. It's still too early to know how this will play out, but it might have implications for liquidity in the money markets."
The Securities and Exchange Commission's latest monthly "Money Market Fund Statistics" summary shows that total money fund assets increased by $57.4 billion in July to $5.102 trillion. The SEC shows that Prime MMFs increased by $56.6 billion in July to $916.6 billion, Govt & Treasury funds increased $8.2 billion to $4.081 trillion and Tax Exempt funds decreased $7.4 billion to $104.1 billion. Taxable yields jumped again in July after surging in June. 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: We hope to see you next month at our European Money Fund Symposium, which will take place Sept. 27-28 in Paris, France.)
July's asset increase follows an increase of $26.6 billion in June, decreases of $19.7 billion in May and $63.3 billion in April, an increase of $40.1 billion in March, and decreases of $29.3 billion in February and $125.1 billion in January. Assets gained $122.9 billion in December, $53.7 billion in November, $7.9 billion in October, $19.9 billion in September and $24.9 billion in August. Over the 12 months through 7/31/22, total MMF assets have increased by $116.1 billion, according to the SEC's series. (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.)
The SEC's stats show that of the $5.102 trillion in assets, $916.6 billion was in Prime funds, up $56.6 billion in July. Prime assets were up $8.5 billion in June, $9.4 billion in May, down $11.7 billion in April, up $29.5 billion in March, down $2.7 billion in February, up $10.7 billion in January, and down $20.5 billion in December, $21 billion in November and $12.1 billion in October. This follows an increase of $2.6 billion in September, but a decrease of $8.1 billion in August. Prime funds represented 18.0% of total assets at the end of July. They've increased by $41.4 billion, or 4.7%, over the past 12 months. (Month-to-date in August through 8/15, total MMF assets have increased by $16.5 billion, according to our MFI Daily.)
Government & Treasury funds totaled $4.081 trillion, or 80.0% of assets. They increased $8.2 billion in July, $14.4 billion in June, decreased by $36.7 billion in May, decreased $57.1 billion in April, increased $8.7 billion in March, decreased by $25.8 billion in February and $135.2 billion in January, after increasing by $144.4 billion in December, $76.0 billion in November, $21.0 billion in October, $20.4 billion in Sept. and $32.8 billion in August. Govt & Treasury MMFs are up $71.1 billion over 12 months, or 1.8%. Tax Exempt Funds decreased $7.4 billion to $104.1 billion, or 2.0% of all assets. The number of money funds was 306 in July, down 1 from the previous month and down 12 funds from a year earlier.
Yields for Taxable MMFs and Tax Exempt MMFs surged higher again in July. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on July 31 was 1.86%, up 37 bps from the prior month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 2.08%, up 45 bps from the previous month. Gross yields were 1.88% for Government Funds, up 42 basis points from last month. Gross yields for Treasury Funds were up 48 bps at 1.82%. Gross Yields for Tax Exempt Institutional MMFs were up 37 basis points to 1.25% in July. Gross Yields for Tax Exempt Retail funds were up 17 bps to 1.15%.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 1.77%, up 33 bps from the previous month and up 172 basis points from 7/31/21. The Average Net Yield for Prime Retail Funds was 1.72%, up 39 bps from the previous month, and up 170 bps since 7/31/21. Net yields were 1.60% for Government Funds, up 38 bps from last month. Net yields for Treasury Funds were also up 46 bps from the previous month at 1.58%. Net Yields for Tax Exempt Institutional MMFs were up 30 bps from June to 1.08%. Net Yields for Tax Exempt Retail funds were up 11 bps at 0.84% in July. (Note: These averages are asset-weighted.)
WALs and WAMs were mixed in July. The average Weighted Average Life, or WAL, was 43.5 days (down 0.5 days) for Prime Institutional funds, and 48.6 days for Prime Retail funds (up 0.3 days). Government fund WALs averaged 68.3 days (down 0.4 days) while Treasury fund WALs averaged 70.9 days (down 3.7 days). Tax Exempt Institutional fund WALs were 9.6 days (up 0.4 days), and Tax Exempt Retail MMF WALs averaged 16.9 days (up 0.2 days).
The Weighted Average Maturity, or WAM, was 21.4 days (up 0.9 days from the previous month) for Prime Institutional funds, 17.8 days (up 2.4 days from the previous month) for Prime Retail funds, 22.8 days (down 1.8 days from previous month) for Government funds, and 31.3 days (down 2.4 days from previous month) for Treasury funds. Tax Exempt Inst WAMs were up 0.6 days to 9.6 days, while Tax Exempt Retail WAMs were up 0.2 days from previous month at 16.4 days.
Total Daily Liquid Assets for Prime Institutional funds were 51.1% in July (down 1.2% from the previous month), and DLA for Prime Retail funds was 38.6% (down 1.2% from previous month) as a percent of total assets. The average DLA was 80.8% for Govt MMFs and 97.9% for Treasury MMFs. Total Weekly Liquid Assets was 66.1% (up 0.2% from the previous month) for Prime Institutional MMFs, and 53.8% (up 1.5% from the previous month) for Prime Retail funds. Average WLA was 88.7% for Govt MMFs and 98.9% for Treasury MMFs.
In the SEC's "Prime Holdings of Bank-Related Securities by Country table for July 2022," the largest entries included: Canada with $85.6 billion, Japan with $71.4 billion, France with $61.0 billion, the U.S. with $55.6B, the Netherlands with $32.5B, Aust/NZ with $28.4B, the U.K. with $24.6B, Germany with $22.2B and Switzerland with $8.0B. The gainers among the "Prime MMF Holdings by Country" included: France (up $10.0B), the Netherlands (up $10.0B), the U.S. (up $5.3B), Germany (up $3.1B) and Canada (up $0.8B). Decreases were shown by: the U.K. (down $5.0B), Aust/NZ (down $2.5B), Switzerland (down $1.3B) and Japan (down $0.4B).
The SEC's "Prime Holdings of Bank-Related Securities by Region" table shows The Americas had $141.2 billion (up $6.1B), while Eurozone subset had $130.5B (up $27.2B). Asia Pacific had $119.4B (down $1.6B), while Europe (non-Eurozone) had $78.5B (up $4.9B from last month).
The "Prime MMF Aggregate Product Exposures" chart shows that of the $916.4B billion in Prime MMF Portfolios as of July 31, $402.0B (43.9%) was in Government & Treasury securities (direct and repo) (up from $384.7B), $210.7B (23.0%) was in CDs and Time Deposits (up from $188.6B), $154.1B (16.8%) was in Financial Company CP (up from $149.3B), $119.9B (13.1%) was held in Non-Financial CP and Other securities (up from $109.0B), and $29.7B (3.2%) was in ABCP (up from $27.6B).
The SEC's "Government and Treasury Funds Bank Repo Counterparties by Country" table shows the U.S. with $93.3 billion, Canada with $83.9 billion, France with $92.9 billion, the U.K. with $33.4 billion, Germany with $9.8 billion, Japan with $78.6 billion and Other with $21.3 billion. All MMF Repo with the Federal Reserve was up $35.3 billion in July to $2.098 trillion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs 5.6%, Prime Retail MMFs with 8.0%, Tax Exempt Inst MMFs with 0.6%, Tax Exempt Retail MMFs with 1.6%, Govt MMFs with 12.8% and Treasury MMFs with 11.8%.
Money fund yields continued inching higher after jumping immediately after the Fed's latest 75 bps hike on July 27. Our Crane 100 Money Fund Index (7-Day Yield) rose 5 basis points to 1.94% the week ended Friday, 8/12. Yields rose by 33 basis points the previous week and 23 basis points the week before that. On average, they're up from 1.57% on July 29, up from 1.18% on June 30 and more than triple their level of 0.58% on May 31. MMF yields are up from 0.21% on April 29, 0.15% on March 31 and 0.02% on February 28 (where they'd been for almost 2 years prior). Yields should keep inching higher and should approach 2.0% on average in coming days. Our broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 671), shows a 7-day yield of 1.82%, up 7 bps in the week through Friday. The Crane Money Fund Average is up 79 bps since beginning of July and up 135 bps from 0.47% at the beginning of June.
Prime Inst MFs were up 6 bps to 2.09% in the latest week, up 82 bps since the start of July and up 145 bps since the start of June (close to double from the month prior). Government Inst MFs rose by 7 bps to 1.88%, they are up 78 bps since start of July and up 134 bps since the start of June. Treasury Inst MFs up 7 bps for the week at 1.83%, up 79 bps since beginning of July and up 133 bps since the beginning of June. Treasury Retail MFs currently yield 1.57%, (up 5 bps for the week, up 77 bps since July and up 127 bps since June), Government Retail MFs yield 1.57% (up 9 bps for the week, up 78 bps since July started and up 131 bps since June started), and Prime Retail MFs yield 1.93% (up 8 bps for the week, up 86 bps from beginning of July and up 145 bps from beginning of June), Tax-exempt MF 7-day yields rose by 19 bps to 1.31%, they are up 75 bps since the start of July and up 91 bps since the start of June.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (8/12), just 28 funds (out of 818 total) still yield between 0.00% and 0.99% with assets of $11.0 billion, or 0.2% of total assets; 187 funds yield between 1.00% and 1.49% with $176.3 billion in assets, or 3.5%; 183 funds yielded between 1.50% and 1.74% with $953.8 billion or 19.0%; 196 funds yielded between 1.75% and 1.99% ($1.333 trillion, or 26.5%); 179 funds yielded between 2.00% and 2.24% ($2.202 trillion, or 43.8%) and 45 funds yielded 2.25% or more ($346.5 billion, or 6.9%).
Brokerage sweep rates also inched higher over the past week too, as Ameriprise Financial tweaked its rates upwards. Our latest Brokerage Sweep Intelligence shows brokerages paying an average of 0.26% on FDIC insured deposits, up from 0.16% a month ago and 0.05% two months ago. 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), rose 1 basis point to 0.26%. This follows increases over the past couple of months but also follows 2 straight years of yields at 0.01%. Sweep yields were 0.12% on average at the end of 2019 and 0.28% on average at the end of 2018. The latest Brokerage Sweep Intelligence, with data as of Aug. 12, shows one change over the previous week.
BSI reports that Ameriprise Financial increased rates to 0.11% for all balances between $1K and $99K, to 0.13% for balances between $100K and $249K, to 0.20% for balances between $250K and $499K, to 0.21% for balances between $500K and $999K, to 0.33% for balances between $1 million and $4.9 million, and to 0.46% for balances of $5 million and over for the week ended August 12. Just three of 11 major brokerages still offer rates of 0.01% for balances of $100K (and most other tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
On other 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 July, prime money market funds held 36.5 percent of their portfolios in daily liquid assets and 52.9 percent in weekly liquid assets, while government money market funds held 88.2 percent of their portfolios in daily liquid assets and 93.8 percent in weekly liquid assets." Prime DLA was up from 32.6% in June, and Prime WLA was also up from 49.4%. Govt MMFs' DLA increased from 87.3% in June and Govt WLA increased from 92.7% the previous month.
ICI explains, "At the end of July, prime funds had a weighted average maturity (WAM) of 17 days and a weighted average life (WAL) of 55 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 26 days and a WAL of 69 days." Prime WAMs were 1 day longer and WALs were 2 days shorter from the previous month. Govt WAMs were 2 day shorter and WALs were 2 days shorter from June.
Regarding Holdings by Region of Issuer, the release tells us, "Prime money market funds' holdings attributable to the Americas rose from $204.49 billion in June to $212.71 billion in July. Government money market funds' holdings attributable to the Americas declined from $3,798.43 billion in June to $3,782.80 billion in July."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $212.7 billion, or 45.5%; Asia and Pacific at $90.7 billion, or 19.4%; Europe at $157.9 billion, or 33.8%; and, Other (including Supranational) at $5.9 billion, or 1.3%. The Government Money Market Funds by Region of Issuer table shows Americas at $3.783 trillion, or 94.3%; Asia and Pacific at $72.8 billion, or 1.8%; Europe at $138.2 billion, 3.4%, and Other (Including Supranational) at $16.1 billion, or 0.4%.
Crane Data's latest MFI International shows that assets in European or "offshore" money market mutual funds declined over the past month to $973.8 billion. European MMF assets declined during the first 4 1/2 months of 2022, then increased over 2 months. But they've declined since. They remain below their record high of $1.101 trillion in mid-December 2021. These U.S.-style money funds, domiciled in Ireland or Luxembourg but denominated in US Dollars, Pound Sterling and Euros, decreased by $16.5 billion over the 30 days through 8/11. (Note that the increase in the U.S. dollar has caused Euro and Sterling totals to decline when they're translated back into dollars.) The totals are down $89.2 billion (-8.4%) year-to-date. Offshore US Dollar money funds are up $3.7 billion over the last 30 days and are up $2.8 billion YTD to $537.2 billion. Euro funds rose E17.2 billion over the past month. YTD they're down E5.6 billion to E152.8 billion. GBP money funds increased L3.7 billion over 30 days; they are down by L18.7 billion YTD to L228.4B. U.S. Dollar (USD) money funds (206) account for over half (55.2%) of the "European" money fund total, while Euro (EUR) money funds (96) make up 16.1% and Pound Sterling (GBP) funds (133) total 28.7%. We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which will go out to subscribers Tuesday), below. (Note: Make your plans and hotel reservations soon for our upcoming European Money Fund Symposium, which is Sept. 27-28, 2022, in Paris, France.)
Offshore USD MMFs yield 2.05% (7-Day) on average (as of 8/11/22), up from 1.34% 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 yield -0.20% on average, 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 1.46%, up 41 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 August MFII Portfolio Holdings, with data as of 7/31/22, show that European-domiciled US Dollar MMFs, on average, consist of 23% in Commercial Paper (CP), 15% in Certificates of Deposit (CDs), 28% in Repo, 16% in Treasury securities, 17% in Other securities (primarily Time Deposits) and 1% in Government Agency securities. USD funds have on average 59.5% of their portfolios maturing Overnight, 7.1% maturing in 2-7 Days, 6.5% maturing in 8-30 Days, 8.7% maturing in 31-60 Days, 6.3% maturing in 61-90 Days, 10.1% maturing in 91-180 Days and 1.9% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (29.7%), France (16.0%), Canada (12.2%), Japan (10.6%), Sweden (7.0%), the Netherlands (4.2%), Australia (3.9%), the U.K. (3.9%), Germany (2.4%) and Austria (1.9%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $89.0 billion (16.4% of total assets), RBC with $30.8B (5.7%), Credit Agricole with $23.8B (4.4%), BNP Paribas with $23.2B (4.3%), Sumitomo Mitsui Banking Corp with $22.9B (4.2%), Federal Reserve Bank of New York with $21.4B (3.9%), Barclays with $14.6B (2.7%), Skandinaviska Enskilda Banken AB with $13.5B (2.5%), Societe Generale with $13.4B (2.5%) and Fixed Income Clearing Corp <b:>`_ with $12.5B (2.3%).
Euro MMFs tracked by Crane Data contain, on average 40% in CP, 20% in CDs, 29% in Other (primarily Time Deposits), 10% in Repo, 1% in Treasuries and 0% in Agency securities. EUR funds have on average 41.1% of their portfolios maturing Overnight, 10.4% maturing in 2-7 Days, 16.7% maturing in 8-30 Days, 16.8% maturing in 31-60 Days, 5.7% maturing in 61-90 Days, 6.6% maturing in 91-180 Days and 2.6% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (31.9%), Japan (13.4%), the U.S. (7.4%), Sweden (6.5%), Germany (5.8%), the U.K. (5.8%), Canada (5.1%), Austria (4.5%), the Netherlands (4.0%) and Switzerland (3.8%).
The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E9.0B (6.0%), BNP Paribas with E6.7B (4.5%), Societe Generale with E6.4B (4.3%), DZ Bank AG with E5.6B (3.8%), Mizuho Corporate Bank Ltd with E5.2B (3.5%), Natixis with E5.1B (3.4%), Credit Mutuel with E4.9B (3.3%), Sumitomo Mitsui Banking Corp with E4.9B (3.3%), Mitsubishi UFJ Financial Group Inc with E4.5B (3.0%) and Republic of France with E4.3B (2.9%).
The GBP funds tracked by MFI International contain, on average (as of 7/31/22): 34% in CDs, 20% in CP, 25% in Other (Time Deposits), 19% in Repo, 2% in Treasury and 0% in Agency. Sterling funds have on average 40.1% of their portfolios maturing Overnight, 12.0% maturing in 2-7 Days, 13.8% maturing in 8-30 Days, 7.0% maturing in 31-60 Days, 11.3% maturing in 61-90 Days, 10.5% maturing in 91-180 Days and 5.3% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (17.7%), Canada (17.1%), Japan (16.8%), the U.K. (10.3%), Australia (6.3%), the U.S. (4.8%), the Netherlands (4.4%), Sweden (4.3%), Germany (3.8%) and Spain (3.1%).
The 10 Largest Issuers to "offshore" GBP money funds include: Mitsubishi UFJ Financial Group Inc with L7.0B (4.6%), BNP Paribas with L6.9B (4.6%), Mizuho Corporate Bank Ltd with L6.3B (4.2%), RBC with L6.3B (4.2%), Toronto-Dominion Bank with L6.3B (4.2%), Bank of Nova Scotia with L5.8B (3.8%), Barclays with L5.7B (3.8%), Societe Generale with L5.3B (3.5%), Sumitomo Mitsui Banking Corp with L5.3B (3.5%) and Banco Santander with L4.7B (3.1%).
In related news, Fitch Ratings published a release entitled, "Chinese Money Market Fund Market to Continue Expanding." They write, "China for the first time overtook Europe as the world's second-largest money market fund (MMF) market in 2Q22, accounting for about 18% of global MMF assets, after the US (55%) and before Europe (17%), says Fitch Ratings. Chinese MMFs have expanded at a five-year compound annual growth rate of about 16% to end-June 2022. Total assets under management reached a record high of CNY11.0 trillion in May 2022, but decreased slightly to CNY10.6 trillion in June, according to Asset Management Association of China."
Fitch tells us, "China's MMF market has also become more diversified, as the largest fund has shrunk in recent years and flows have been diverted into other funds. The market share of the largest MMF and the top-five MMFs fell to 7% and 15%, respectively, in June 2022, from highs of over 30% and 60% in 2014. The Chinese MMF yield dropped to below 1.6% as of August 2022, from 2.7% at end-2020, as short-term interest rates moved downwards. This level is close to the 2020 nadir of 1.5%. We expect China's policy interest rate to remain stable in the next 12 months, which should limit further downward pressure of the MMF yield."
They add, "Regulatory reforms since 2015 have brought Chinese MMFs closer to international standards, however, there is still a substantial discrepancy between MMFs in China and those in western markets. The 2022 regulatory reform proposals focus on large MMFs, which are classified as 'Important'. These MMFs will be subject to stricter rules, but we do not expect Fitch-rated Chinese MMFs to be affected, as their size falls below the threshold for 'Important' MMFs."
The August issue of our Bond Fund Intelligence, which were sent to subscribers Friday morning, features the lead story, "ICI Looks at Core Bond Funds & Market Impact in March '20," which reviews a recently published "Viewpoint" about 3/20; and, "Touchstone Ultra Short ETF; Weston, Mayfield Comment," our most recent "profile" with Fort Washington's Scott Weston and Laura Mayfield. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns rebounded strongly in July while yields rose for the 10th 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 lead article, "ICI recently posted a 'Viewpoint' entitled, 'Core Bond Mutual Funds Had Little Impact on the Investment Grade Corporate Bond Market.' They write, Core bond mutual funds' activities during March 2020 had little impact on the investment grade corporate bond market. According to an ICI study, the timing and small size of core bond mutual funds' daily net sales of investment grade corporate bonds is inconsistent with some policymakers' narrative that they substantially amplified market stresses. In addition, core bond mutual funds' net sales generally accounted for a relatively small share of daily trading volume. And, even when their share of daily trading rose to a peak of 20 percent on March 12, 2020, bid-ask spreads on investment grade corporate bonds were unchanged."
ICI's piece explains, "As a follow-up to a previous post, we examine daily net purchases and sales of investment grade bonds by 'core bond' mutual funds during March 2020 using data from an ICI survey. This analysis should help allay concerns policymakers may have about whether these funds' sales pressured the investment grade corporate bond market on any specific day in March 2020."
Our "Touchstone" profile states, "This month, BFI interviews Fort Washington Investment Advisors' Managing Director & Senior Portfolio Manager Scott Weston and Senior Portfolio Manager Laura Mayfield. Fort Washington is the investment subsidiary for Western & Southern Financial Group, and manages a number of funds for Touchstone Investments. Touchstone recently announced the launch of a new Touchstone Ultra Short Income ETF. Our Q&A follows."
BFI says, "Give us some history." Weston responds, "Fort Washington's Ultra-Short Duration composite was incepted in 1995. So, we've been in this ultra-short space for about 27 years. I started at Fort Washington in 1999 and in 2001 Brent Miller and I assumed management of the ultra-short composite and began migrating it from a credit-only focus to a multisector focus with an emphasis on structured products. We had a strong conviction that the ultra-short duration markets were inefficient and structured securities provided a consistent source of alpha in this part of the curve. We believe this value proposition holds true."
Our first News brief, "Returns Rebound; Yields Higher," says, "Bond fund returns rebounded sharply in July after falling 5 of the previous 6 months. Yields jumped for the 10th month in a row. Our BFI Total Index rose 2.24% over 1-month but fell 6.57% over 12 months. The BFI 100 gained 2.57% in July but lost 6.91% over 1-year. Our BFI Conservative Ultra-Short Index was up 0.21% over 1-month but down 0.69% for 1-year; Ultra-Shorts rose 0.35% and fell -1.69%. Short-Term returned 1.06% and -4.00%, and Intm-Term rose 2.49% in July but is down 8.31% over 1-year. BFI's Long-Term Index rose 2.97% and -11.35%. High Yield rose 4.58% in July and -6.17% over 1-year."
A second News brief, "Bloomberg Says, 'Vanguard Steals BlackRock Crown for World's Biggest Bond ETF.' They write, 'The Vanguard Total Bond Market ETF (BND), with assets of roughly $83.8 billion, has surpassed the $83.2 billion iShares Core US Aggregate Bond ETF (AGG) to become the world's biggest bond ETF, Bloomberg data show.'"
Another brief, "The Wall Street Journal Writes, 'Pimco Notches Nearly $30 Billion in Outflows in Second Quarter.' They explain, 'Clients of bond giant Pimco pulled out the equivalent of nearly $30 billion in the second quarter, a sign of investor flight amid interest-rate hikes. Parent company German insurer Allianz said ... that the outflows were in line with overarching market trends. Pimco is one of the world's largest fixed-income investors with more than $1 trillion in assets under management. Pimco's outflows were significantly higher than expected, Citigroup analysts said Friday.'"
A third News brief, "U.S. Bond Funds Gain Biggest Weekly Inflow in 11-Months Says Reuters," reports, "U.S. bond funds recorded their biggest weekly purchase in eleven months in the week to Aug. 3 on expectations that slowing growth would prompt the Federal Reserve to slow down the pace of its rate hikes."
A BFI sidebar, "Fink: Bond ETFs Turn 20," states, "Larry Fink comments on BlackRock's latest earnings call <i:https://news.alphastreet.com/blackrock-inc-blk-q2-2022-earnings-call-transcript/>`_, 'Our iShares business ... has allowed us to deliver new solutions for clients and growth for the firm. Twenty years ago, in December 2002, iShares launched the first U.S.-domiciled bond ETF, an innovation that went on to break down many barriers in fixed-income investing. Today, both individual investors and large institutions are using bond ETFs for convenient, efficient exposures to thousands of global bonds and to make quick specialized recalibrations to their portfolio. In other words, they are using bond ETFs for active investing."
Finally, another sidebar, "BF Assets Rise in July," says, "Bond fund assets increased in July, though they saw outflows for the 8th straight month. Total assets rose by $37.0 billion to $2.836 trillion last month, according to our Bond Fund Intelligence <b:>`_. YTD, assets are down $489.1 billion (through 7/31/22), and over 1-year they've fallen by $498.2 billion, or -14.9%."
The average money market fund yield is about to hit 2% and the highest-yielding MMFs are poised to hit 2.5%, so it's no surprise that their meteoric rise is beginning to attract attention. Mutual fund news source ignites published the piece, "Top-Yielding Money Funds Crack 2%" yesterday, which states, "More than 200 money market funds surpassed 2% yields in early August -- and many are approaching 2.5%, Crane Data reports. Those represented about $1.9 trillion in assets of Aug. 5, or nearly 40% of the $5 trillion in money funds, according to the data provider. The $983 million State Street ESG Liquid Reserves Fund yielded 2.34% as of Friday, the highest rate among all U.S. money funds, Crane Data's website shows. At least three other products, two sponsored by Allspring and one by Morgan Stanley, also boasted yields that had likewise climbed above 2.30% as of last week." (See our August 9 Link of the Day, "Crane 100 MF Index Approaches 2.0%," and our August 2 News, "Money Fund Yields Jump Over 1.5%; Top Hits 2.0%.")
The ignites article continues, "The average money fund seven-day yield was 1.89% as of Aug. 7, according to Crane Data. But with the Federal Reserve's late July 75-basis-point rate hike -- its second of that magnitude in as many months -- average yields will also soon cross the 2% threshold. The federal funds target range is now between 2.25% and 2.50%. The last time money funds yielded as much was in 2019, after the Fed made a series of 25-bp increases in 2018."
It explains, "With additional rate hikes expected this year ... a growing amount of cash is moving to money funds, flow data shows. Money funds pulled in nearly $50 billion in net inflows in June and July, after the industry bounced from inflows to outflows in prior months, Crane Data shows. 'Certainly, the tide has turned there, but it's just going to take a while for ... that money to move,' said Peter Crane, the data provider's president and chief executive."
They quote BlackRock's Larry Fink from a recent call, "The yield curve will inform performance for actively managed fixed-income funds.... You are going to see money run into that [2% yields].... [Y]ou are paid to keep your money in the short end." The piece adds, "It's not just money funds' higher yields that attract assets, Crane said, but also their yields relative to the rates paid by banks and brokerages on sweep accounts."
Ignites also writes, "While money fund yields follow short-term interest rates, deposit and sweep account rates are set by the institutions that run them. Money funds 'trace' the Federal Reserve's rate increases, making deposit products a 'poor alternative, Debbie Cunningham, Federated Hermes' ... wrote last month. 'It is amazing how little that most bank rates have adjusted upward with the Fed action.' The average rate on sweep accounts at the largest brokerages has inched from 0.01% at year-end 2021 to 0.16% as of July 31, Crane Data reports."
They add, "Fee waivers on Federated Hermes' money funds are now 'de minimis,' CFO Tom Donahue said [recently].... The firm's second-quarter money fund fee waivers shrank to $9.5 million, down from $117 million a year earlier, filings show. At BNY Mellon, second-quarter fee waivers took a $66 million bite out of fee revenues, down from $252 million in the year-ago period. The flows into money funds have picked up only in recent months, but some predict that the industry will add as much at $600 billion to $1 trillion to the products' coffers, Crane said. 'A $100 billion [increase in assets] is a layup,' Crane said, 'because that's what the funds themselves will generate [in returns].'"
In related news, Dan Wiener, Editor of "The Independent Adviser for Vanguard Investors," just distributed a brief entitled, "Cash Phoenix Rises Again." He says, "You can say one thing for the Federal Reserve's battle against inflation; it's sure done wonders for money market yields. Over the past week shareholders in two of Vanguard's money funds, Cash Reserves Federal Money Market and Federal Money Market have seen their 7-day yields rise above 2%. The jump in yields has taken just a bit more than four months as these two 2-percenters both sported yields of just 0.01% in mid-March. Those yields began rising just days before the Fed's first rate hike of this cycle, a 0.25% increase on March 16. Since then ... it's been off to the races for both the Fed and money market yields."
The Adviser continues, "All of this comes as Vanguard is winding down the fee waivers put in place to keep pandemic-induced yields above zero. Vanguard began waiving fees in the latter half of 2020 and as of its most recent filing, the semi-annual report for its two state-tax-free money funds for the period ending in May, fee waivers were still in effect over the preceding six months. I would expect they are over now with the final bill clocking in at about $192.7 million. The last time Vanguard waived fees on its money market funds following the Great Financial Crisis, waivers totaled about $123.0 million. Let's just say that Vanguard executives and Vanguard shareholders should both be cheering the Fed's latest moves."
According to Crane Data's Money Fund Intelligence Daily with data as of August 9, the highest yielding funds (ranked by 7-day yield) include: Fidelity Money Market Central Fund (FID03, $1.6B, 2.48%), BlackRock Cash Inst MMF SL (BRC01, $71.8B, 2.40%), Allspring Heritage Select (WFJXX, $3.8B, 2.38%), State Street ESG Liquid Reserve Prem (ELRXX, $961M, 2.35%), UBS Select ESG Prime Preferred Fund (SSPXX, $1.8B, 2.35%), Fidelity Cash Central Fund (FID01, $50.1B, 2.34%), Fidelity Sec Lending Cash Central Fund (FID05, $36.1B, 2.34%), Morgan Stanley Inst Liq Prime Inst (MPFXX, $14.0B, 2.34%), Allspring Heritage I (SHIXX, $625M, 2.32%), Morgan Stanley Inst Liq ESG MMP CastleOak (OAKXX, n/a, 2.32%), Morgan Stanley Inst Liq ESG MMP Inst (MPUXX, $3.3B, 2.32%), Dreyfus Cash Mgmt Preferred (DCEXX, $3.0B, 2.31%), DWS ESG Liquidity Cap (ESIXX, $69M, 2.31%), DWS ESG Liquidity Inst (ESGXX, $305M, 2.31%), State Street ESG Liq Reserve Opp (OPEXX, $1M, 2.31%) and UBS Select ESG Prime Institutional Fund (SGIXX, $377M, 2.31%).
Our Crane 100 Money Fund Index is currently yielding 1.92%, while our Crane Prime Institutional Money Fund Index is yielding 2.07% on average. Note that we exclude "internal" or "private" money funds and repeated share classes in our website rankings above.
Crane Data's August Money Fund Portfolio Holdings, with data as of July 31, 2022, show Repo (led by Fed repo) jumping yet again while Treasuries continued a deep 6-month slide. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $116.1 billion to $4.939 trillion in July, after decreasing $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" two months ago, is now borrowing almost $2.1 trillion from money market funds (the total broke above $2.0 trillion last month). 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) increased $88.7 billion (3.5%) to $2.619 trillion, or 53.0% of holdings, in July, after increasing $128.6 billion in June and $52.5 billion in May. Repo decreased $9.9 billion in April but increased $100.9 billion in March. Treasury securities fell $33.2 billion (-2.3%) to $1.421 trillion, or 28.8% of holdings, after decreasing $72.5 billion in June, $145.4 billion in May, $78.6 billion in April and $79.2 billion in March. Government Agency Debt was up $24.5 billion, or 6.0%, to $430.8 billion, or 8.7% of holdings, after decreasing $14.6 billion in June, increasing $35.1 billion in May, and decreasing $1.0 billion in April. Repo, Treasuries and Agency holdings now total $4.471 trillion, representing a massive 90.5% of all taxable holdings.
Money fund holdings of CP, CDs and Other (mainly Time Deposits) holdings all rose in July. Commercial Paper (CP) increased $15.3 billion (7.2%) to $227.9 billion, or 4.6% of holdings, after decreasing $17.3 billion in June, increasing $5.8 billion in May and decreasing $0.1 billion in April. Certificates of Deposit (CDs) increased $3.6 billion (3.0%) to $122.0 billion, or 2.5% of taxable assets, after decreasing $1.0 billion in June, but increasing $3.4 billion in May and $7.3 billion in April. Other holdings, primarily Time Deposits, increased $17.3 billion (19.0%) to $108.7 billion, or 2.2% of holdings, after decreasing $21.1 billion in June and $4.7 billion in May, but increasing $28.2 billion in April. VRDNs fell to $9.9 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will post our Tax Exempt MMF holdings separately Wednesday around noon.)
Prime money fund assets tracked by Crane Data jumped to $902 billion, or 18.3% of taxable money funds' $4.939 trillion total. Among Prime money funds, CDs represent 13.5% (down from 14.8% a month ago), while Commercial Paper accounted for 25.4% (down from 26.6% in June). The CP totals are comprised of: Financial Company CP, which makes up 17.0% of total holdings, Asset-Backed CP, which accounts for 3.2%, and Non-Financial Company CP, which makes up 5.2%. Prime funds also hold 6.6% in US Govt Agency Debt, 6.0% in US Treasury Debt, 28.9% in US Treasury Repo, 0.3% in Other Instruments, 9.8% in Non-Negotiable Time Deposits, 5.1% in Other Repo, 2.1% in US Government Agency Repo and 0.6% in VRDNs.
Government money fund portfolios totaled $2.781 trillion (56.3% of all MMF assets), up from $2.779 trillion in June, while Treasury money fund assets totaled another $1.257 trillion (25.5%), up from $1.244 trillion the prior month. Government money fund portfolios were made up of 13.4% US Govt Agency Debt, 8.4% US Government Agency Repo, 20.8% US Treasury Debt, 57.1% in US Treasury Repo, 0.0% in Other Instruments. Treasury money funds were comprised of 62.7% US Treasury Debt and 37.0% in US Treasury Repo. Government and Treasury funds combined now total $4.038 trillion, or 81.8% of all taxable money fund assets.
European-affiliated holdings (including repo) increased by $52.0 billion in July to $397.8 billion; their share of holdings rose to 8.1% from last month's 7.2%. Eurozone-affiliated holdings increased to $278.9 billion from last month's $238.5 billion; they account for 5.7% of overall taxable money fund holdings. Asia & Pacific related holdings jumped higher to $176.6 billion (3.6% of the total) from last month's $170.8 billion. Americas related holdings rose to $4.360 trillion from last month's $4.301 trillion, and now represent 88.3% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (up $66.2 billion, or 2.9%, to $2.312 trillion, or 46.8% of assets); US Government Agency Repurchase Agreements (up $21.3 billion, or 9.2%, to $252.9 billion, or 5.1% of total holdings), and Other Repurchase Agreements (up $1.2 billion, or 2.2%, from last month to $54.3 billion, or 1.1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $5.0 billion to $152.9 billion, or 3.1% of assets), Asset Backed Commercial Paper (up $2.0 billion to $28.5 billion, or 0.6%), and Non-Financial Company Commercial Paper (up $8.3 billion to $46.6 billion, or 0.9%).
The 20 largest Issuers to taxable money market funds as of July 31, 2022, include: the Federal Reserve Bank of New York ($2.088T, 42.3%), the US Treasury ($1.421 trillion, or 28.8%), Federal Home Loan Bank ($310.6B, 6.3%), Federal Farm Credit Bank ($104.9B, 2.1%), BNP Paribas ($80.6B, 1.6%), RBC ($70.3B, 1.4%), Fixed Income Clearing Corp ($45.9B, 0.9%), Sumitomo Mitsui Banking Co ($45.0B, 0.9%), JP Morgan ($39.4B, 0.8%), Citi ($35.8B, 0.7%), Credit Agricole ($34.3B, 0.7%), Bank of America ($34.0B, 0.7%), Mitsubishi UFJ Financial Group Inc ($32.6B, 0.7%), Barclays ($31.3B, 0.6%), Toronto-Dominion Bank ($26.8B, 0.5%), Mizuho Corporate Bank Ltd ($26.1B, 0.5%), Bank of Montreal ($24.0B, 0.5%), Canadian Imperial Bank of Commerce ($21.4B, 0.4%), Goldman Sachs ($19.0B, 0.4%) and ING Bank ($17.0B, 0.3%).
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 ($2.088T, 79.7%), BNP Paribas ($74.3B, 2.8%), RBC ($50.7B, 1.9%), Fixed Income Clearing Corp ($45.9B, 1.8%), JP Morgan ($32.4B, 1.2%), Sumitomo Mitsui Banking Corp ($31.5B, 1.2%), Bank of America ($29.4B, 1.1%), Citi ($27.0B, 1.0%), Mitsubishi UFJ Financial Group Inc ($19.6B, 0.7%) and Barclays PLC ($17.9B, 0.7%) <b:>`_. The largest users of the $2.088 trillion in Fed RRP include: Vanguard Federal Money Mkt Fund ($134.1B), Goldman Sachs FS Govt ($130.4B), Fidelity Govt Money Market ($127.3B), Fidelity Govt Cash Reserves ($115.4B), JPMorgan US Govt MM ($113.3B), Morgan Stanley Inst Liq Govt ($92.8B), Federated Hermes Govt ObI ($79.0B), BlackRock Lq FedFund ($74.0B), Dreyfus Govt Cash Mgmt ($70.0B) and State Street Inst US Govt ($66.5B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Credit Agricole ($20.4B, 5.3%), RBC ($19.6B, 5.1%), Mizuho Corporate Bank Ltd ($18.7B, 4.8%), Toronto-Dominion Bank ($15.5B, 4.0%), Skandinaviska Enskilda Banken AB ($15.0B, 3.9%), Sumitomo Mitsui Banking Corp ($13.5B, 3.5%), Barclays PLC ($13.4B, 3.5%), Mitsubishi UFJ Financial Group Inc ($13.0B, 3.4%), Canadian Imperial Bank of Commerce ($12.4B, 3.2%) and Bank of Montreal ($12.3B, 3.2%).
The 10 largest CD issuers include: Sumitomo Mitsui Banking Corp ($11.4B, 9.3%), Credit Agricole ($9.7B, 8.0%), Canadian Imperial Bank of Commerce ($9.1B, 7.5%), Mitsubishi UFJ Financial Group Inc ($8.9B, 7.3%), Toronto-Dominion Bank ($7.3B, 6.0%), Bank of Nova Scotia ($6.2B, 5.1%), Sumitomo Mitsui Trust Bank ($5.7B, 4.7%), Citi ($5.1B, 4.2%), Svenska Handelsbanken ($4.7B, 3.9%) and Nordea Bank ($4.3B, 3.6%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: RBC ($13.5B, 7.3%), Bank of Montreal ($8.0B, 4.3%), Toronto-Dominion Bank ($7.6B, 4.1%), JP Morgan ($7.0B, 3.8%), BNP Paribas ($5.2B, 2.8%), National Australia Bank Ltd ($5.2B, 2.8%), Barclays PLC ($5.2B, 2.8%), Svenska Handelsbanken ($4.9B, 2.7%), Macquarie Bank Limited ($4.9B, 2.6%) and Australia & New Zealand Banking Group Ltd ($4.9B, 2.6%).
The largest increases among Issuers include: Federal Reserve Bank of New York (up $77.2B to $2.088T), Federal Home Loan Bank (up $29.8B to $310.6B), Credit Agricole (up $15.3B to $34.3B), RBC (up $5.8B to $70.3B), Barclays PLC (up $5.6B to $31.3B), BNP Paribas (up $5.0B to $80.6B), Natixis (up $4.5B to $13.5B), Svenska Handelsbanken (up $4.2B to $12.2B), Societe Generale (up $4.0B to $16.8B) and Rabobank (up $3.8B to $7.5B).
The largest decreases among Issuers of money market securities (including Repo) in July were shown by: the US Treasury (down $33.2B to $1.421T), Fixed Income Clearing Corp (down $21.9B to $45.9B), Goldman Sachs (down $10.0B to $19.0B), Landesbank Baden-Wurttemberg (down $2.8B to $5.0B), Federal Home Loan Mortgage Corp (down $2.0B to $10.6B), National Australia Bank Ltd (down $1.7B to $6.9B), Mizuho Corporate Bank Ltd (down $1.5B to $26.1B), Nordea Bank (down $1.3B to $5.1B), Lloyds Banking Group (down $1.3B to $5.1B) and Sumitomo Mitsui Banking Corp (down $1.2B to $45.0B).
The United States remained the largest segment of country-affiliations; it represents 84.7% of holdings, or $4.186 trillion. Canada (3.5%, $174.3B) was in second place, while France (3.3%, $161.1B) was No. 3. Japan (3.1%, $153.4B) occupied fourth place. The United Kingdom (1.2%, $57.3B) remained in fifth place. Netherlands (0.9%, $43.1B) was in sixth place, followed by Sweden (0.8%, $40.8B) Australia (0.6%, $30.8B), ` Germany <b:>`_ (0.6%, $30.2B) and Switzerland (0.3%, $13.8B). (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 July 31, 2022, Taxable money funds held 64.9% (up from 63.8%) of their assets in securities maturing Overnight, and another 7.0% maturing in 2-7 days (up from 6.9%). Thus, 71.9% in total matures in 1-7 days. Another 6.7% matures in 8-30 days, while 7.4% matures in 31-60 days. Note that over three-quarters, or 86.1% 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 4.7% of taxable securities, while 7.4% matures in 91-180 days, and just 1.9% 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 Tuesday, and we'll be writing our regular monthly update on the July 31 data for Wednesday's News. But we also uploaded a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Monday. (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 July 31, includes holdings information from 996 money funds (unchanged from last month), representing assets of $5.097 trillion (up from $5.033 trillion). Prime MMFs now total $916.4 billion, or 18.0% of the total. We review the new N-MFP data, and we also look at our revised MMF expense data, which shows charged expenses inching higher again and money fund revenues hitting a record $15.0 trillion annualized rate in July.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds increased to $2.644 trillion (up from $2.596 trillion), or 51.9% of all assets. Treasury holdings totaled $1.433 trillion (down from $1.466 trillion), or 28.1% of all holdings, and Government Agency securities totaled $445.8 billion (up from $423.5 billion), or 8.7%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $4.522 trillion, or a massive 88.7% of all holdings.
Commercial paper (CP) totals $236.6 billion (up from $220.5 billion), or 4.6% of all holdings, and the Other category (primarily Time Deposits) totals $148.0 billion (up from $131.9 billion), or 2.9%. Certificates of Deposit (CDs) total $122.1 billion (up from $118.5 billion), 2.9%, and VRDNs account for $68.2 billion (down from $76.9 billion last month), or 1.3% of money fund securities.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $154.1 billion, or 3.0%, in Financial Company Commercial Paper; $29.2 billion or 0.6%, in Asset Backed Commercial Paper; and, $53.2 billion, or 1.0%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($2.346 trillion, or 46.0%), U.S. Govt Agency Repo ($251.0B, or 4.9%) and Other Repo ($46.3B, or 0.9%).
The N-MFP Holdings summary for the Prime Money Market Funds shows: CP holdings of $232.1 billion (up from $216.0 billion), or 25.3%; Repo holdings of $327.5 billion (up from $314.0 billion), or 35.7%; Treasury holdings of $58.4 billion (down from $61.8 billion), or 6.4%; CD holdings of $122.1 billion (up from $118.5 billion), or 13.3%; Other (primarily Time Deposits) holdings of $108.2 billion (up from $89.2 billion), or 11.8%; Government Agency holdings of $62.2 billion (up from $53.9 billion), or 6.8% and VRDN holdings of $5.9 billion (up from $5.8 billion), or 0.6%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $154.1 billion (up from $149.3 billion), or 16.8%, in Financial Company Commercial Paper; $29.2 billion (up from $27.0 billion), or 3.2%, in Asset Backed Commercial Paper; and $48.8 billion (up from $39.7 billion), or 5.3%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($262.7 billion, or 28.7%), U.S. Govt Agency Repo ($18.7 billion, or 2.0%), and Other Repo ($46.1 billion, or 5.0%).
In related news, money fund charged expense ratios (Exp%) inched higher in July to 0.41% from 0.40% the prior month (after jumping earlier this year). Charged expenses hit a record low of 0.06% in May 2021 but remained at 0.07% for most the second half of 2021. Our Crane 100 Money Fund Index and Crane Money Fund Average were 0.29% and 0.41%, respectively, as of July 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 Monday 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 0.29%, 2 basis points higher than last month's level (and 21 bps higher than 12/31/21's 0.08%). The average is slightly above the level (0.27%) as it was on Dec. 31, 2019, so we estimate that funds are now charging normal expenses. The Crane Money Fund Average, a simple average of all taxable MMFs, showed a charged expense ratio of 0.41% as of July 31, 2022, 1 bp higher than the month prior and now above the 0.40% at year-end 2019.
Prime Inst MFs expense ratios (annualized) average 0.34% (up 2 bps from last month), Government Inst MFs expenses average 0.30% (up 2 bps from previous month), Treasury Inst MFs expenses average 0.33% (up 2 bps from last month). Treasury Retail MFs expenses currently sit at 0.55%, (up 2 bps from last month), Government Retail MFs expenses yield 0.55% (up 1 bp from last month). Prime Retail MF expenses averaged 0.54% (unchanged). Tax-exempt expenses were up 5 bps at 0.46% on average.
Gross 7-day yields rose again during the month ended July 31, 2022 (which included a 75 bps hike). (Yields should jump again in September if, as expected, the Fed hikes again.) The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 738), shows a 7-day gross yield of 1.89%, up 45 bps from the prior month. The Crane Money Fund Average has now 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 44 bps, ending the month at 1.89%.
According to our revised MFI XLS and Crane Index numbers, we now estimate that annualized revenue for all money funds is almost $15.0 billion -- $14.860 billion (as of 7/31/22), a new record level. Our estimated annualized revenue totals increased from $13.301B last month and from $12.937B two months ago, and they are now more than five times larger May's record low $2.927B level. Charged expenses and gross yields are driven by a number of variables, but revenues should continue rising in coming months as the MMF start seeing substantial inflows from bank deposits.
Crane Data's latest monthly Money Fund Market Share rankings show assets were higher among the majority of the largest U.S. money fund complexes in July. Money market fund assets increased $26.1 billion, or 0.5%, last month to $5.013 trillion. Assets increased by $35.6 billion, or 0.7%, over the past 3 months, and they've increased by $74.4 billion, or 1.5%, over the past 12 months. The largest increases among the 25 largest managers last month were seen by DWS, Goldman Sachs, Schwab, SSGA and HSBC, which grew assets by $18.6 billion, $16.7B, $14.1B, $8.6B and $8.4B, respectively. The largest declines in July were seen by Morgan Stanley, JP Morgan, Northern, Federated Hermes and BlackRock, which decreased by $32.6 billion, $12.3B, $6.8B, $4.0B and $3.1B, 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 surged again in July, below.
Over the past year through July 31, 2022, American Funds (up $63.9B, or 47.7%), Goldman Sachs (up $42.8B, or 12.3%), SSGA (up $36.4B, or 25.3%), Fidelity (up $28.8B, or 3.2%) and Schwab (up $26.4B, or 18.0%) were the largest gainers. Schwab, HSBC, Federated Hermes, SSGA and American Funds had the largest asset increases over the past 3 months, rising by $33.4B, $25.3B, $23.7B, $23.3B and $19.5B, respectively. The largest decliners over 12 months were seen by: Allspring (down $49.5B), BlackRock (down $29.8B), JP Morgan (down $28.9B), Northern (down $17.3B) and First American (down $9.3B). The largest decliners over 3 months included: BlackRock (down $30.4B), JPMorgan (down $22.3B), Allspring (down $18.3B), Northern (down $12.0B) and Invesco (down $10.6B).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $916.9 billion, or 18.3% of all assets. Fidelity was up $3.3B in July, up $19.5 billion over 3 mos., and up $28.8B over 12 months. BlackRock ranked second with $499.6 billion, or 10.0% market share (down $3.1B, down $30.4B and down $29.8B for the past 1-month, 3-mos. and 12-mos., respectively). Vanguard ranked in third place with $450.3 billion, or 9.0% of assets (up $1.9B, down $8.5B and down $7.0B). JPMorgan ranked fourth with $431.3 billion, or 8.6% market share (down $12.3B, down $22.3B and down $28.9B), while Goldman Sachs was the fifth largest MMF manager with $391.9 billion, or 7.8% of assets (up $16.7, up $8.8B and up $42.8B for the past 1-month, 3-mos. and 12-mos.).
Federated Hermes was in sixth place with $329.3 billion, or 6.6% (down $4.0B, up $23.7B and down $2.1B), while Morgan Stanley was in seventh place with $268.6 billion, or 5.4% of assets (down $32.6B, down $1.4B and down $6.7B). Dreyfus ($243.1B, or 4.8%) was in eighth place (up $8.1B, up $10.6B and up $9.2B), followed by American Funds ($197.8B, or 3.9%; unchanged, up $19.5B and up $63.9B). SSGA was in 10th place ($180.2B, or 3.6%; up $8.6B, up $23.3B and up $36.4B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Schwab ($173.3B, or 3.5%), Northern ($161.5B, or 3.2%), Allspring (formerly Wells Fargo) ($151.5B, or 3.0%), First American ($114.5B, or 2.3%), Invesco ($109.2B, or 2.2%), HSBC ($62.9B, or 1.3%), UBS ($45.8B, or 0.9%), T. Rowe Price ($43.8B, or 0.9%), DWS ($35.2B, or 0.7%) and Western ($26.5B, 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, Goldman moves up to the No. 4 spot and, Vanguard moves down to the No. 5 spot, And SSGA moves up to the No. 9 spot while American Funds drops down to the No. 10 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 ($928.6 billion), BlackRock ($701.9B), JP Morgan ($610.3B), Goldman Sachs ($524.5B) and Vanguard ($450.3B). Federated Hermes ($339.4B) was in sixth, Morgan Stanley ($323.9B) was seventh, followed by Dreyfus/BNY Mellon ($261.7B), SSGA ($213.0B) and American Funds ($197.8B), 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 August issue of our Money Fund Intelligence and MFI XLS, with data as of 7/31/22, shows that yields skyrocketed in July for our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 738), rose to 1.43% (up 38 bps) for the 7-Day Yield (annualized, net) Average, the 30-Day Yield increased to 1.17% (up 42 bps). The MFA's Gross 7-Day Yield rose to 1.82% (up 38 bps), and the Gross 30-Day Yield also moved up to 1.57% (up 42 bps). (Gross yields will be revised Monday afternoon, though, once we download the SEC's Form N-MFP data for 7/31/22.)
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.62% (up 43 bps) and an average 30-Day Yield at 1.38% (up 48 bps). The Crane 100 shows a Gross 7-Day Yield of 1.89% (up 43 bps), and a Gross 30-Day Yield of 1.65% (up 48 bps). Our Prime Institutional MF Index (7-day) yielded 1.62% (up 34 bps) as of July 31. The Crane Govt Inst Index was at 1.49% (up 35 bps) and the Treasury Inst Index was at 1.51% (up 46 bps). Thus, the spread between Prime funds and Treasury funds is 11 basis points, and the spread between Prime funds and Govt funds is 13 basis points. The Crane Prime Retail Index yielded 1.48% (up 42 bps), while the Govt Retail Index was 1.16% (up 31 bps), the Treasury Retail Index was 1.28% (up 47 bps from the month prior). The Crane Tax Exempt MF Index yielded 0.76% (up 20 bps) as of July 31.
Gross 7-Day Yields for these indexes to end July were: Prime Inst 1.93% (up 34 bps), Govt Inst 1.77% (up 35 bps), Treasury Inst 1.83% (up 46 bps), Prime Retail 2.03% (up 42 bps), Govt Retail 1.70% (up 31 bps) and Treasury Retail 1.80% (up 47 bps). The Crane Tax Exempt Index jumped to 0.95% (up 13 bps). The Crane 100 MF Index returned on average 0.11% over 1-month, 0.23% over 3-months, 0.25% YTD, 0.26% over the past 1-year, 0.46% over 3-years (annualized), 0.95% over 5-years, and 0.54% over 10-years.
The total number of funds, including taxable and tax-exempt, unchanged in July at 888. There are currently 738 taxable funds, unchanged from the previous month, and 150 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 August issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Friday morning, features the articles: "MMF Yields Approach 2% on 2nd Fed 75; Assets $5 Trillion," which discusses the jump in yields and rise in assets in July; "CastleOak's Jones on Minority Dealers, Portals, D&I Shares," our most recent "profile"; and, "SEC's Birdthistle Speaks on MMFs, Pending Reforms," which quotes from a recent speech from the Director of the Division of Investment Management. We also sent out our MFI XLS spreadsheet Friday morning, and we've updated our database with 7/31/22 data. Our August Money Fund Portfolio Holdings are scheduled to ship on Tuesday, Aug. 9, and our August Bond Fund Intelligence is scheduled to go out on Friday, Aug. 12. (Note: Our MFI, MFI XLS and Crane Index products are all available to subscribers via our Content center.)
MFI's "Yields Approach 2%" article says, "Money fund yields surged higher again in July as the Federal Reserve hiked rates by 75 bps for the second time in 2 months. Our Crane 100 Money Fund Index (7-Day Yield) jumped by 44 basis points to 1.62% in July, and it's risen by 24 more bps already in August (through 8/3) to 1.86%. Average yields are now more than triple their level of 0.58% on May 31; they're up from 0.15% on March 31 and up from 0.02% on February 28 (where they'd been for 2 years prior)."
It continues, "The top-yielding money funds were poised just under 2.0% on 7/31, but they've since smashed through this level and are now above 2.25%. Yields continue to digest the Fed's 7/27 big hike, so the average money fund yield should break over 2.0% and the top-yielding funds should approach 2.5% in coming weeks. Money fund yields could even be as high as 3.0% or even 4.0% by year-end."
Our "CastleOak" piece explains, "This month MFI interviews David R. Jones, President & CEO of CastleOak Securities, a minority-owned dealer and one of the first firms to offer both an online money market trading portal and a D&I share class in the money fund space. We discuss the latest in diversity, corporate investing and cash. Our Q&A follows."
MFI says, "Give us some history. Jones comments, "I founded the firm back in 2006, and we've grown CastleOak to be one of the largest diverse investment banks on Wall Street. We've got six offices around the country and are headquartered in New York. We've grown the firm from four individuals ... and now we've got over 55 employees. We focus on the capital markets for our clients, and that includes primary issuance, both in debt and equity, and also the secondary trading that goes along with that. On the fixed income side, back in 2010 when I brought Dan Davis and his team on, that's when we got into the Treasury, Agency and Money Market space. We've got a very strong presence on the secondary side in the front end of the curve."
Our "Birdthistle" piece states, "U.S. Securities & Exchange Commission Division of Investment Management Director William Birdthistle recently gave a talk entitled, 'Remarks at PLI: Investment Management 2022,' where he spent some time discussing money funds. He comments, 'The final topic I would like to touch on today is `money market funds. These funds, together with a few others, have at times been called 'shadow banks.' Today, the more common, slightly less pejorative term is 'non-bank financial institution.' As a proud member of the SEC's Division of Investment Management, I tend to view the $128 trillion in regulatory assets under management subject to our oversight as a substantial universe in its own right.... But I understand that things might seem otherwise to advocates for the non-fund community."
Birdthistle explains, "Money market funds enjoyed their rise to prominence, of course, largely following the adoption of Regulation Q. Regulation Q imposed ceilings on interest rates that could be paid on bank deposits, which proved to be a competitive liability during the period of high inflation in the late 1970s and early 1980s. Instruments such as money market funds that could offer market interest rates (which peaked above 12% in 1981) prospered at the expense of bank accounts capped at the Regulation Q ceiling (which remained below 6% at the time). That moment served as the spark of life for an instrument that has since grown to hold approximately $5 trillion in assets."
MFI also includes the News brief, "Fed Hikes 75 Bps Again to 2.25-2.50%." It tells readers, "The Federal Reserve Board again hiked short-term interest rates by 75 basis points, raising its Fed funds target rate to a range of 2.25-2.50%."
Another News brief, "ICI President Eric Pan," explains, "ICI President Eric Pan posts, 'Fact-checking Statements on Money Market Fund Reform,' which briefly revisits pending SEC Money Fund Reforms and is partially in response to a recent speech by the SEC's William Birdthistle."
A third News brief, "The FT on "'`The return of cash': money market fund sector perks up on rising rates." They write, "Rising interest rates are turning the $4.6tn money market fund sector from a drag on profits into a source of earnings in a rare piece of good news for asset managers whose fees have been hit hard by falling equity and debt markets."
A sidebar, "Schwab on Cash Sorting," states, "Charles Schwab recently hosted a '2022 Summer Business Update,' which mentioned cash in a number of places. CFO Peter Crawford comments, 'Our performance was obviously helped by higher interest rates across the curve, which boosted our net interest margin and BDA [bank deposit account] yield and eliminated money fund fee waivers by the end of the quarter <b:>`_.... [T]he elimination of money fund fee waivers and organic inflows offset the impact of the market decline.'"
Another sidebar, "Fidelity Merging State MMFs," explains, "Fidelity Investments filed to liquidate and reorganize most of their State Municipal money market funds, merging its AZ, CT, MI, OH, and PA Muni MMFs into Fidelity Municipal Money Market Fund, and consolidating their CA, MA, NJ and NY State Muni fund offerings. While there haven't been many other moves in 2022, there has been a steady stream of exits in the Tax-Exempt space over the past decade. Over the past 5 years, the number of Muni MMFs has dropped from 245 to 150 <b:>`_, while the number of State funds has fallen from 116 to 53. Since June 2008, assets in `Muni MMFs have steadily declined from $490.6 billion to $111.4 billion (as of 6/30/22). Fidelity currently manages 33 Tax-Exempt MMFs with $28.0 billion; after the mergers go through, this will be reduced to 20 MFs."
Our August MFI XLS, with July 31 data, shows total assets increased $26.0 billion to $5.014 trillion, after increasing $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, $49.7 billion in November and $20.5 billion October. Our broad Crane Money Fund Average 7-Day Yield was up 46 bps to 1.43%, and our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 44 bps to 1.62% in July.
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA and the Crane 100 both were both higher at 1.82% and 1.89%, respectively. Charged Expenses averaged 0.40% and 0.27% for the Crane MFA and the Crane 100. (We'll revise expenses on Monday once we upload the SEC's Form N-MFP data for 7/31/22.) The average WAM (weighted average maturity) for the Crane MFA was a record low 22 days (down 1 day from previous month) while the Crane 100 WAM decreased 1 day to 23 days. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
ICI President Eric Pan posts a comment entitled, "Fact-checking Statements on Money Market Fund Reform" on LinkedIn, which revisits pending SEC Money Fund Reforms and is partially in response to a recent speech by the SEC's William Birdthistle. (See our July 27 News, "SEC's Birdthistle Weighs In on Money Market Funds, Pending Reforms.") Pan writes, "For over 80 years, our part of the financial industry – mutual funds, ETFs, and money market funds – has been one of the most well-regulated and transparent in the world, which is appropriate given our central role in managing money for hundreds of millions of Americans. It is therefore expected that policymakers and academics spend a lot of time thinking about us, and we appreciate the healthy dialogue we have always had with the dedicated and hard-working SEC staff about how to improve our regulatory framework. We also depend on SEC leadership having deep expertise about how funds and the markets work so that we can trust that they are exercising the right judgment to achieve the SEC mission: to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation."
He explains, "One place where we need to make sure the SEC has its facts right is in its open Rulemaking on Money Market Funds (MMFs). Like regulators, funds want financial markets that are resilient to shocks – the question is how best to get there. ICI has written extensively, based on industry-leading data, about the liquidity events of March 2020, including our comment letter to the SEC. We show, through a comprehensive analysis of data, that MMFs were not the cause of market instability as COVID was spreading around the globe. If you missed our roundtable last year on the topic, it's worth taking a look at what we discussed here and here."
Pan's piece continues, "In its proposal, the SEC wants to mandate swing pricing for prime institutional money market funds. What the SEC does not appear to realize (or has not said is its intent) is that swing pricing would cut off prime money market funds at the knees, to the detriment of investors. The products would be stripped of their cash-equivalent features, such as same-day settlement and multiple NAV strikes per day. And investors would be hit with unpredictable costs for redeeming."
He tells us, "Recent statements by SEC leadership suggest that they think their proposal on swing pricing is appropriate because they believe that MMFs in Europe already use swing pricing. That fact is that European MMFs do not use swing pricing. There is neither a regulatory mandate to use swing pricing for MMFs in Europe, nor do any European MMFs voluntarily use swing pricing. In fact, we're unaware of swing-pricing for MMFs being used anywhere in the world. There's simply no parallel in the Europe for what the SEC is proposing, and the SEC is wrong to suggest that as a justification for its rulemaking."
Pan also comments, "We've also seen suggestions by the SEC leadership that any adverse impact on MMFs would not harm investors because they would just shift their money to ultrashort bond funds. Such a conclusion seems flawed given the nature of the markets. Ultrashort bond funds are not a substitute for MMFs. Ultrashort bond funds hold riskier portfolios, can't be considered as cash equivalents by businesses, and don't have intraday liquidity since they settle tomorrow rather than today."
Finally, he adds, "And the SEC leadership knows that MMF investors cannot easily go to MMFs' closer substitute: bank deposits. Only MMFs offer a market rate of return. This becomes even more important as the Fed continues to raise interest rates. And under current banking regulations, banks won't take large amounts of new deposits like these. The fact is that MMFs are vital to our capital markets. They are ingrained in the daily economic life of our country, and that success would be very difficult to replicate. The SEC needs to be extremely careful as it considers changes here. All to say, this is a good time to measure twice, and cut once."
In other news, both S&P Global Ratings and Fitch Ratings recently released updates on the money fund sector. S&P's "U.S. Domestic 'AAAm' Money Market Fund Trends (First-Quarter 2022)" tells us, "Rated U.S. government and prime money market funds (MMFs) experienced modest declines in assets under management during the first quarter of 2022. Asset growth in government funds was mixed, with a majority of government funds seeing net asset flows reverse course and begin to decline at the beginning of the year. Net assets dropped 4% overall during the quarter. Prime fund net assets remained flat compared to the previous quarter, at $365 billion, driven by growth in local government investment pools, offset by a decrease in net assets in registered prime funds. Weakened asset growth in government funds may persist this year as rates continue to rise and a portion of assets moves into higher yielding products."
It continues, "Both government and prime funds will reap the benefits of rate hikes in terms of higher yields. During the first quarter, the seven-day and 30-day net yields for government funds grew to 0.15% and 0.07%, respectively. The seven-day and 30-day net yield for prime funds jumped to 0.26% and 0.16%, respectively. For government and prime strategies, seven-day and 30-day net yields tended to be identical until the end of the quarter, when seven-day yields briefly moved higher than 30-day yields."
S&P continues, "Typically, when rates are rising, we see a greater spread between prime and government funds, followed by investors shifting cash to prime funds from government funds. However, investors have been more conservative due to the proposed changes to Rule 2a-7 of the Investment Company Act of 1940, under which MMFs are registered.... The asset composition of government funds looked similar to the previous quarter, with continued overweight exposure to repo. This was driven by a reduction in Treasury bill supply, offset by the continued supply of the Fed's reverse repurchase program. Exposure to agency and Treasury floaters increased, although floating rate exposure remained historically low."
They add, "Managers shortened the maturity profiles of their portfolios while keeping an eye on the Fed, with the expectation of rate hikes at each of the next six meetings. Weighted average maturities drifted lower by four days for government funds and as much as 10 days for prime funds. Managers will likely have a bias toward shorter maturity profiles until we get closer to the end of the rate hike cycle.... As rates rise, fixed-income prices will fall, which has a modest impact on MMF net asset values. Therefore, the distribution of net asset values (NAV per share) for rated funds has become more dispersed compared to the previous quarter. NAV per share ranged from 0.9990 to 1.0019 for rated funds, whereas the lower bound was previously 0.9995."
Fitch also published its "U.S. Money Market Funds: July 2022," which states, "Total taxable money market fund (MMF) assets decreased by $8.7 billion, from May 31, 2022 to, 2022, according to Crane Data. Government MMFs lost $19.4 billion in assets during this period, and prime MMFs gained $10.7 billion. Total assets have decreased by $95.5 billion since Dec. 31, 2021."
They add, "Treasury holdings decreased by $72 billion while Repo holdings increased by $129 billion, from May 31 to June 30, 2022, according to Crane Data. Repo remains the largest portfolio segment, followed by Treasury.... As of June 30, 2022, institutional government and prime MMFs' net yields were 1.10% and 1.27%, respectively, per Crane Data, both up significantly from the end of May.... This increase is due to the Federal Reserve (Fed) increasing rates 75 bps on June 16, 2022, in line with market expectations. The Fed is expected to raise rates to near 3.5% by the end of 2022." (See also "Fitch Assigns 'AAAf' Rating to Florida FIT Choice Pool and Texas FIT Choice Pool.")
Charles Schwab & Co. recently hosted a "2022 Summer Business Update," which discussed the brokerage company's latest quarter and mentioned cash and money markets in a number of places. (See Crane Data's July 25 Link of the Day, "Schwab Earnings Driven by Rates.) CFO Peter Crawford comments, "Our performance was obviously helped by higher interest rates across the curve, which boosted our net interest margin and BDA [bank deposit account] yield and eliminated money fund fee waivers by the end of the quarter. [F]alling equity markets weighed on asset management fees and the ensuing decline in investor sentiment ... resulted in trading activity and margin utilization that were lower than the first quarter, but still at historically high levels."
He tells us, "Despite the crosscurrents, our performance broke multiple records. Revenue increased 13% year over year and 9% sequentially, driven by a 31% increase in net interest revenue, reflecting a 16-basis point year over year increase in our net interest margin, up 24 basis points from the first quarter and interest earning assets that largely were in line with expectations. Asset management and administrative fees [were flat], as the elimination of money fund fee waivers and organic inflows offset the impact of the market decline."
The Schwab CFO also says, "That [performance] reflects continued expansion of margins at just over 2% by Q4, deposit betas that we expect to continue to run a bit lower than the last rising rate cycle and a continuation of clients moving some of their investing cash off our balance sheet in search of higher yield. But remember, when they do that, it frees up capital that we can return to our stockholders. We continue to thoughtfully and responsibly manage our expenses, navigating this inflationary environment, driving efficiency throughout our business, and prioritizing our investments."
Responding to a question on "cash sorting" (investors migrating from lower-paying bank deposits to money market funds), Crawford says, "So I would say in aggregate, the dynamics around cash sorting in the second quarter were very consistent with our overall expectations. I know there's going to be a lot of questions about sorting, so in an attempt maybe to anticipate or perhaps preempt them, it might be helpful just to share a few high-level thoughts around sorting. I want to reiterate that our expectation is that the level of sorting won't be higher than the last rising rate cycle, and it actually could be somewhat lower, given the fact that we're not going through the whole transfer process that we were doing in the last rising rate cycle."
He tells the webinar, "We have had an influx of smaller accounts who tend to do less sorting. And we also have a client base that is much more actively trading than they were previously. We know that when clients are trading, they tend to keep more transactional cash. Second, ... we know from history that eventually cash, both total cash and on balance sheet cash, will find its level, after which point it will grow with the growth in accounts and will grow with the growth of total client assets."
Crawford comments, "Third, and this is really important, the cash is staying at Schwab. We've done a lot to create a great array of cash solutions, and we've done a lot, and continue to do a lot, to make our clients aware of those solutions, to make sure they're making smart decisions with regarding their cash. We want our clients to be happy and we want that cash to stay at Schwab, and we're certainly seeing that happen."
He adds, "Fourth, I think, you know, when you look at sorting and isolation, you're only really looking at one part of the equation. What I mean by that is that the rate increases that give rise to the sorting also help us earn more on the interest assets that remain here, the cash remains here, driving NIR higher despite lower interest earning assets. So, in the scenario that we shared, if you do the math, as an example, you'll see that we'd expect to generate roughly $500 million more in net interest revenue in the fourth quarter than we did in the second quarter, despite allowing for some continuation of the client cash sorting. And the last point I would make, the fifth point I would make, is to the extent the cash balances decrease, it frees up capital enabling us to buy back stock and drive EPS growth one way or the other."
A questioner from UBS asks, "Previously on the Spring Update, you had indicated that of roughly 20% decline in sweep cash would be the expectation based upon the experience last cycle. When we look at the pie chart that shows the cash breakdown, I would assume that that 20% would apply to really just the universe that doesn't include obviously sweep money fund, BDA has a different profile as you said, and more active oriented and checking and savings. Is that the base that we should be thinking about when applying that 20%?"
Crawford responds, "Thanks for the question. So just to clarify, I think what we said in the spring business update that we didn't expect it to be higher than that level. I mentioned that it could conceivably be lower than that. But you're right that when you think about the pool that we're talking about here, it is really that that bank sweep and perhaps to a lesser extent the free credit balances. So, it definitely is not on the total pool of cash. You're actually right about that rate."
Finally, when asked about the investment portfolio, he responds, "It's definitely one of the things that we look to actively manage. You know, our overall portfolio duration now is down to about a little over 4.0, probably more like 3.5-ish when you consider the cash we're holding more cash. So we are definitely maintaining a much more liquid portfolio today, targeting new investments to be very short. Now that gives us a lot of asset sensitivity, but also gives us a lot of liquidity to be able to support a wide range of possible outcomes around this client activity."
Money fund yields, as measured by our Crane 100 Money Fund Index (7-Day Yield), surged higher again following the Fed's 75 bps hike, rising by 23 basis points to 1.57% in the week ended Friday, 7/29. Yields rose by 6 basis points the previous week and 6 basis points the week before that. On average, they're up from 1.18% on June 30 and almost triple their level of 0.58% on May 31. MMF yields are up from 0.21% on April 29, 0.15% on March 31 and 0.02% on February 28 (where they'd been for almost 2 years prior). Yields should keep jumping in coming days as MMF portfolios adjust to the new higher Fed funds target rate of 2.25-2.5%; they should be about 2.0% on average by the end of summer. Brokerage sweep rates also inched higher over the past week too, as UBS, E*Trade and Morgan Stanley tweaked their rates upwards. Our latest Brokerage Sweep Intelligence shows brokerages paying an average of 0.18% on FDIC insured deposits, up from 0.04% a month ago and 0.01% two months ago. We review the latest money fund and brokerage sweep yields below.
Our broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 671), shows a 7-day yield of 1.44%, also up 21 bps in the week through Friday. The Crane Money Fund Average is up 97 bps from 0.47% at the beginning of June. Prime Inst MFs were up 23 bps to 1.64% in the latest week, and up 100 bps since the start of June (close to double from the month prior). Government Inst MFs rose by 22 bps to 1.51%, they are up 97 bps since the start of June. Treasury Inst MFs up 21 bps for the week at 1.51%, up 101 bps since the beginning of June. Treasury Retail MFs currently yield 1.25%, (up 21 bps for the week, and up 95 bps since June), Government Retail MFs yield 1.18% (up 20 bps for the week, and up 92 bps since June started), and Prime Retail MFs yield 1.45% (up 24 bps for the week, and up 97 bps from beginning of June), Tax-exempt MF 7-day yields rose by 31 bps to 0.68%, they are up 28 bps since the start of June.
Our Crane Brokerage Sweep Index, the average rate for brokerage sweep clients (most of which are swept into FDIC insured accounts; only Fidelity sweeps to a money market fund), inched up a basis point to 0.18%. This follows increases over the past couple of months but also follows 2 straight years of yields at 0.01%. Sweep yields were 0.12% on average at the end of 2019 and 0.28% on average at the end of 2018. The latest Brokerage Sweep Intelligence, with data as of July 29, shows three changes over the previous week.
Our latest Brokerage Sweep Intelligence reports that UBS increased rates to 0.05% for all balances between $1K and $249K, to 0.10% for balances between $250K and $999K, to 0.40% for balances between $1 million and $1.9 million, to 1.05% for balances $5 million and over for the week ended July 29. The two other changes came from E*Trade and Morgan Stanley, which both increased rates for accounts over $500K. E*Trade increased to 0.05% for balances between $500K and $999K, and to 0.15% for balances of $1 million and more. Morgan Stanley increased to 0.05% for balances between $500K and $999K, to 0.15 for balances between $1 million and $1.9 million, and to 0.30% for balances of $2 million and more. Just three of 11 major brokerages still offer rates of 0.01% for balances of $100K (and most other tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (7/29), just 38 funds (out of 818 total) still yield between 0.00% and 0.49% with assets of $6.7 billion, or 0.1% of total assets. There were 166 funds yielding between 0.50% and 0.99%, totaling $168.8B, or 3.4% of assets; 102 funds yield between 1.00% and 1.24% with $118.3 billion in assets, or 2.4%; 178 funds yield between 1.25% and 1.49% with $1.471 trillion in assets or 29.4%; 219 funds yielded between 1.50% and 1.74% with $1.517 trillion or 30.4%; and 115 funds yielded over 1.75% ($1.715 trillion, or 34.3%). (We likely saw the first fund yield over 2.0% Monday, so Tuesday's MFI Daily should show some funds over this level.)
In related news, a release entitled, "FDIC and Federal Reserve Board issue letter demanding Voyager Digital cease and desist from making false or misleading representations of deposit insurance status," explains, "The Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board today issued a joint letter demanding that the crypto brokerage firm Voyager Digital cease and desist from making false and misleading statements regarding its FDIC deposit insurance status and take immediate action to correct any such prior statements."
It explains, "According to the agencies, Voyager and certain officers and employees made various statements online, including on its website, mobile app, and social media accounts, stating or suggesting that: Voyager itself is FDIC-insured; Customers who invested with the Voyager cryptocurrency platform would receive FDIC insurance coverage for all funds provided to, and held by, Voyager, without reference to the insured depository institution account; and The FDIC would insure customers against the failure of Voyager itself."
The FDIC comments, "These representations are false and misleading. Based on the information gathered to date, it appears that these representations likely misled and were relied upon by customers who placed their funds with Voyager and do not have immediate access to their funds. The Federal Deposit Insurance Act, however, prohibits any person from representing or implying that an uninsured deposit is insured or from knowingly misrepresenting the extent and manner in which a deposit liability, obligation, certificate, or share is insured under that Act. The FDIC is authorized to enforce this prohibition against any person."
It tells us, "Voyager maintains a deposit account for the benefit of its customers at Metropolitan Commercial Bank, which is supervised by the Board. Voyager is not itself insured by the FDIC, though, and so customers who invested through its cryptocurrency platform would not receive insurance coverage in the event of Voyager's failure."
The release adds, "The FDIC deposit insurance program protects customers in the event of the failure of an FDIC-insured bank. To determine if an institution is FDIC-insured, you can ask a representative of the institution, look for the FDIC sign at the institution, or use the FDIC's BankFind tool. For more information about FDIC deposit insurance, please see the following FAQs."
See also, CBS News' "Feds tell crypto broker Voyager to stop claiming it's FDIC insured -- because it's not," which states, "Federal regulators have ordered cryptocurrency brokerage Voyager Digital to stop telling customers that their deposits are protected from losses by the Federal Deposit Insurance Corporation because that's not true, according to letters from regulators sent this week. Voyager has mentioned its federally insured status on its website, mobile app and social media accounts."
Federated Hermes hosted its Q2'22 quarterly earnings call on Friday, which contained comments on money fund asset flows, regulations, fee waivers and more. (See their press release, "Federated Hermes, Inc. reports second quarter 2022 earnings.") CEO Chris Donahue comments, "Now moving to money markets, assets increased about $19 billion in the second quarter compared to the first quarter, with nearly all of the growth coming from money market funds. The funds benefited from higher yields [and] from continued elevated liquidity levels in the financial system. Money Funds also benefited from higher yields relative to deposit alternatives. Our money market mutual fund market share, which includes sub-advised funds, was about 7.3% at the end of the second quarter up from 6.9% at the end of the first quarter. With the recent increases in short-term interest rates, money fund minimum yield-related waivers have nearly ceased. We continue to believe that the higher short-term rates will benefit money market funds over time particularly as compared to deposit rates."
He explains, "Taking a look at recent total assets, managed assets were approximately $631 billion, including $436 billion in money markets, $82.5 billion in equities, $88 billion in fixed income, $21.5 billion in alternative private markets and $3 billion in multi-asset. Money market mutual fund assets were at $296 billion."
Tom Donahue tells us, "Total revenue for the quarter increased $41 million or 13% from the prior quarter due mainly to lower money market fund minimum yield-related waivers of $66.3 million, an additional day in the quarter and higher carried interest and performance fees, partially offset by lower average long-term assets, which reduced revenue by $22.6 million and lower average money market assets, which reduced revenue by $9 million. Q2 carried interest and performance fees were $2.5 million compared to about $100,000 in Q1. Operating expenses increased $33 million or 14% in Q2 compared to Q1, driven by $48.5 million of higher distribution expense from lower money market fund minimum yield related waivers.... With short-term rates higher in Q2, the negative impact on operating income from money market fund minimum yield-related waivers decreased to about $500,000 compared to $18 million in Q1. These waivers are now de minimis."
During the Q&A, Chris Donahue is asked about recent flows and says, "It's very, very, very difficult to make a long-term comment on a couple of weeks. We have big clients, I'm looking at the list and you've got $2 billion, $4 billion, $6 billion, $3 billion days, up and down so far here in July. It's just tough to make a prognostication from that."
Money Market CIO Debbie Cunningham comments, "We had a preauthorized client departure from about a year ago that was set for this summer. So we had some outflows in May. They started in May, June, July they got larger. If you mix those out, that single one large client that has moved into another type of product with their underlying client flows we are above the industry flows with that sort of data. So basically, large clients, similar to what Chris was saying, in this case, preauthorized that we knew about and were not surprised."
On MMF fee waivers, President Ray Hanley responds, "The yield improvement happened even coming out of Q1 continued into Q2. And of course, some of that came late. So the waiver recovery was nearly complete. You'll still see a little bit of -- in your terms, normalization in Q3, but it's largely complete. So yes, the geography is at this point, reflective of what it will look like based on the current assets, current channels, current funds, and all of that can change.... But that would be based on client changes, not the yield waivers."
Asked about pending regulations, Chris Donahue answers, "We continue to repeat the sounding joy of the beauty of money market funds. We continue our efforts to talk with all of the Commissioners, to talk to the staff, and even to talk to Treasury when we can about the importance of these money funds in the market. The only update that I would [is the] timing. The rumors are, note rumors, that perhaps in October they might finalize the rule. What will be in it? I don't know. As you know, our comments have been that swing pricing is a plague on money funds, and it's a novel plague in that it's never been tried before. And we have also commented that, all you have to do is detach the fees and gates from the liquidity requirements, and you're all set to go, and let the Boards decide how to run these funds and use all the tools they have in order to do the best fiduciary response for the customers. So that's a little summary -- 'just fix what was broken, declare victory and move on' has been our message."
Given a question on the outlook for the money fund business, Donahue responds, "From a longer-term perspective, ... the increase in the money supply [has gone] up, on average, 7% over a long, long period. And the money funds ... both the industry and Federated, [with] Federated going up slightly higher. What that tells you is that as the money stock goes up, people need to put it somewhere. And money market funds as a group are a very, very valuable and efficacious place for short-term cash, whether or not people are worried about inflation or up-rates or down-rates or whatever. So, these things have proven for half a century [to be] very resilient securities and places for short-term cash. We would expect that to continue. I would certainly expect, especially given what the Fed has done, to see increased flows. All of that is subject to whatever the SEC comes up with, which probably doesn't get put into effect until sometime in '23."
Cunningham adds, "I would say at this point, we are very optimistic. We are still looking at a Fed that is increasing rates.... We are not even six months into the process, and generally, ... it takes about six months for increasing rates to impact other types of specifics in the marketplace. So, we think that they are gaining control, but certainly not there yet. Our expectation will continue to see larger increases front-ended, so another 75 basis points likely in September.... If you look at a terminal rate of somewhere in the 3.5% to 4% area, and that holding then for maybe about six months or so.... But agreeing with what Chris was saying, the flows are incoming, the money stock has increased, and we are not at zero rates anymore. So, it's a good environment for people to take cover; it's a good environment for new cash flows to be placed; it's a good environment for people to earn something in a positive sense versus other asset classes at this point."
Finally, when asked about bond fund redemptions, Hanley comments, "If you look at high yield collectively where we had about $860 million of redemptions in Q2, that's now more like about $170 million. And, again, there have been challenges with that asset class.... On the ultra-short side, it's all part of the spectrum of what's happening with liquidity options. Chris mentioned micro-shorts having some inflows. Obviously, cash has had inflows. When you get the kind of rate movement that Debbie has talked about, and you had clients who moved out to ultra-short when money market yields were down close to zero, and you could get 1% or plus or minus at an ultra-short, there is less reason to do that now. So certainly ... some of that money that's left ultra-short's washed up into the money market part of the complex. But the pace of the net redemptions looks to be decreasing. It went down slightly in Q2 compared to Q1, and it's trending to be down more again, through the very early part of Q3."
