News Archives: March, 2023
The Securities and Exchange Commission's latest monthly "Money Market Fund Statistics" summary shows that total money fund assets increased by $52.1 billion in February to an all-time high of $5.340 trillion. Assets at February month-end were above their previous $5.29 trillion January 2023 record. The SEC shows that Prime MMFs increased by $35.4 billion in February to $1.173 trillion, Govt & Treasury funds increased $16.1 billion to $4.048 trillion and Tax Exempt funds increased $0.6 billion to $119.8 billion. Taxable yields jumped again in February after surging in January. 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. (Month-to-date in March through 3/21, total MMF assets have skyrocketed by $242.0 billion to a record $5.494 trillion, according to our MFI Daily.) (Note: For `those attending this week's Bond Fund Symposium, welcome to Boston! Attendees and subscribers may access the materials in our "Bond Fund Symposium 2023 Download Center.")
February's overall asset increase follows an increase of $53.2 billion in January, $54.8 billion in December, $48.5 billion in November and $35.6 billion in October. But assets decreased $9.4 billion in September. MMFs increased $3.5 billion in August, $57.4 billion in July and $26.6 billion in June. They decreased $19.7 billion in May and $63.3 billion in April. But MMFs increased $40.1 billion in March. MMFs decreased $29.3 billion in February 2022. Over the 12 months through 2/28/23, total MMF assets have increased by $279.4 billion, according to the SEC's series.
The SEC's stats show that of the $5.340 trillion in assets, $1.173 trillion was in Prime funds, up $35.4 billion in February. Prime assets were up $86.2 billion in January, $10.5 billion in December, $28.0 billion in November, $36.6 billion in October, $15.8 billion in September, $43.5 billion in August, $56.6 billion in July, $8.5 billion in June and $9.4 billion in May. Prime was down $11.7 billion in April, up $29.5 billion in March and down $2.7 billion last February. Prime funds represented 22.0% of total assets at the end of February. They've increased by $348.3 billion, or 42.3%, over the past 12 months. (Note that the SEC's series includes a number of internal money funds not tracked by ICI, though Crane Data includes most of these assets in its collections.)
Government & Treasury funds totaled $4.048 trillion, or 75.8% of assets. They increased $16.1 billion in February, decreased $33.2 billion in January and increased $41.3 billion in December and $23.1 billion in November. Govt MMFs decreased $12.8 billion in October, $20.8 billion in September and $47.1 billion in August. They increased $8.2 billion in July and $14.4 billion in June. But they decreased by $36.7 billion in May and $57.1 billion in April. They increased $8.7 billion in March, but decreased by $25.8 billion in February. Govt & Treasury MMFs are down $95.9 billion over 12 months, or -2.3%. Tax Exempt Funds increased $0.6 billion to $119.8 billion, or 2.2% of all assets. The number of money funds was 293 in February, down 5 from the previous month and down 19 funds from a year earlier.
Yields for Taxable MMFs and Tax Exempt MMFs moved higher yet again in February. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on February 28 was 4.72%, up 22 bps from the prior month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 4.79%, up 19 bps from the previous month. Gross yields were 4.61% for Government Funds, up 25 basis points from last month. Gross yields for Treasury Funds were up 23 bps at 4.61%. Gross Yields for Tax Exempt Institutional MMFs were up 160 basis points to 3.15% in February. Gross Yields for Tax Exempt Retail funds were up 147 bps to 3.31%.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 4.65%, up 21 bps from the previous month and up 455 basis points from 2/28/22. The Average Net Yield for Prime Retail Funds was 4.53%, up 20 bps from the previous month, and up 450 bps since 2/28/22. Net yields were 4.34% for Government Funds, up 24 bps from last month. Net yields for Treasury Funds were also up 24 bps from the previous month at 4.39%. Net Yields for Tax Exempt Institutional MMFs were up 160 bps from January to 3.04%. Net Yields for Tax Exempt Retail funds were up 147 bps at 3.06% in February. (Note: These averages are asset-weighted.)
WALs and WAMs were mostly down in February. The average Weighted Average Life, or WAL, was 38.2 days (up 0.4 days) for Prime Institutional funds, and 39.0 days for Prime Retail funds (down 0.4 days). Government fund WALs averaged 60.4 days (down 0.1 days) while Treasury fund WALs averaged 53.5 days (down 3.2 days). Tax Exempt Institutional fund WALs were 9.5 days (down 0.9 days), and Tax Exempt Retail MMF WALs averaged 15.6 days (down 0.2 days).
The Weighted Average Maturity, or WAM, was 17.8 days (up 1.4 days from the previous month) for Prime Institutional funds, 17.8 days (up 2.4 days from the previous month) for Prime Retail funds, 10.5 days (up 1.4 days from previous month) for Government funds, and 18.8 days (down 1.6 days from previous month) for Treasury funds. Tax Exempt Inst WAMs were down 1.0 days to 9.3 days, while Tax Exempt Retail WAMs were down 0.7 days from previous month at 14.6 days.
Total Daily Liquid Assets for Prime Institutional funds were 53.8% in February (up 0.8% from the previous month), and DLA for Prime Retail funds was 47.8% (up 2.0% from previous month) as a percent of total assets. The average DLA was 74.4% for Govt MMFs and 98.8% for Treasury MMFs. Total Weekly Liquid Assets was 68.2% (down 1.2% from the previous month) for Prime Institutional MMFs, and 60.2% (up 0.3% from the previous month) for Prime Retail funds. Average WLA was 85.5% for Govt MMFs and 99.3% for Treasury MMFs.
In the SEC's "Prime Holdings of Bank-Related Securities by Country table for February 2023," the largest entries included: Canada with $114.0 billion, Japan with $104.2 billion, the U.S. with $92.5B, France with $72.4 billion, the Netherlands with $41.0B, Germany with $38.7B, Aust/NZ with $35.8B, the U.K. with $35.2B and Switzerland with $5.7B. The gainers among the "Prime MMF Holdings by Country" included: Japan (up $5.4B), the U.S. (up $3.5B), Germany (up $1.7B) and France (up $0.5B). Decreases were shown by: Netherlands (down $6.5B), the U.K. (down $4.6B), Canada (down $1.7B), Switzerland (down $1.7B) and Aust/NZ (down $0.3B).
The SEC's "Prime Holdings of Bank-Related Securities by Region" table shows The Americas had $206.5 billion (up $1.8B), while Eurozone had $170.6B (down $7.2B). Asia Pacific subset had $164.8B (up $10.8B), while Europe (non-Eurozone) had $98.6B (down $4.2B from last month).
The "Prime MMF Aggregate Product Exposures" chart shows that of the $1.162 trillion in Prime MMF Portfolios as of February 28, $513.7B (44.2%) was in Government & Treasury securities (direct and repo) (up from $479.8B), $291.5B (25.1%) was in CDs and Time Deposits (up from $283.2B), $184.5B (15.9%) was in Financial Company CP (down from $196.2B), $123.9B (10.7%) was held in Non-Financial CP and Other securities (up from $118.2B), and $48.7B (4.2%) was in ABCP (up from $47.7B).
The SEC's "Government and Treasury Funds Bank Repo Counterparties by Country" table shows the U.S. with $193.3 billion, Canada with $101.4 billion, France with $97.0 billion, the U.K. with $42.5 billion, Germany with $13.0 billion, Japan with $81.2 billion and Other with $25.2 billion. All MMF Repo with the Federal Reserve was up $108.4 billion in February to $2.097 trillion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs 5.6%, Prime Retail MMFs with 4.8%, Tax Exempt Inst MMFs with 0.2%, Tax Exempt Retail MMFs with 1.4%, Govt MMFs with 11.9% and Treasury MMFs with 7.6%.
After dipping slightly on Friday, money fund assets resumed their asset surge on Monday, rising $27.0 billion to a record $5.447 trillion. According to our MFI Daily, total MMF assets have increased by $118.6 billion over the past week and by $194.3 billion month-to-date in March (through 3/20/23). The near-record inflows continue to attract lots of media attention, the latest entrant being MarketWatch's "Money-market funds swell to record $5.4 trillion as assets pour in at fastest pace since pandemic after SVB collapse." Their article tells us, "Assets held by money-market mutual funds swelled to a record high $5.4 trillion last week as inflows hit the fastest pace since the start of the COVID-19 pandemic following the collapse of Silicon Valley Bank. This latest milestone marks the culmination of what has been a banner year for money funds. What started as a trickle of inflows last March after the Federal Reserve delivered its first interest-rate hike since 2018 has surged into a flood, with more than $460 billion flowing into money funds since mid-March 2022 as the Fed has hiked its policy rate by nearly 5 percentage points, according to Crane." (Reminder: Last chance to register for our `Bond Fund Symposium, which is March 23-24 in Boston! Attendees and subscribers may access the materials in our "Bond Fund Symposium 2023 Download Center.")
It continues, "Nearly half of that sum -- $228 billion -- has arrived since the start of 2023, and the rapid inflows seen during the two weeks through Friday has coincided with a flight of deposits from regional lenders, exacerbating a trend of shrinking bank deposits that started in 2022.... When rates were at rock-bottom levels, keeping money in cash was seen as a drag on portfolio returns. But now, even Wall Street luminaries like Bridgewater Associates founder Ray Dalio -- who once encouraged investors to keep their money in stocks and bonds by declaring that 'cash is trash' -- have changed their tune."
MarketWatch's Joseph Adinolfi writes, "All of the inflows accrued to funds that invest exclusively in Treasurys or [Government securities], Crane data showed. So-called 'prime' funds, which buy short-term corporate and bank debt, actually saw money leave in favor of government funds, which are believed to be safer, according to Peter Crane, president of Crane Data. Crane, who has monitored money-market mutual funds for more than half of their five-decade existence, said he believes the pickup in the pace of inflows has been driven by concerns about the stability of regional U.S. lenders triggered by the collapse of Silicon Valley Bank."
He explains, "Money-market funds are now, on average, offering annualized returns north of 4%, Crane said as portfolio managers aim to keep their funds' duration as extremely short-term levels. Typically, money-fund rates are far more attractive than interest rates that investors receive in their checking and savings accounts. Data from Bankrate.com showed the average interest rate on bank savings accounts is a paltry 0.2%. But Crane said investors are also responding to the perceived safety of money-market funds, which invest in short-dated bonds that are easier to hold to maturity."
They quote Peter Crane, "The higher rate is one thing, but safety is also a factor.... Banks are buying three-year Treasurys. Money funds are buying three-week Treasurys.... Maturities are about as short as they have ever been."
MarketWatch also quotes Federated Hermes' Deborah Cunningham, "Part of the reason why the deposits have been leaving is simply an awakening that happened in the market with the news of SVB.... Pretty much everybody in the money market space is rolling overnight repos at this point that's just been the strategy."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of March 17) includes Holdings information from 79 money funds (up 34 from a week ago), which totals $2.541 trillion (up from $1.355 trillion) of the $5.420 trillion in total money fund assets (or 46.9%) tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here.)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.479 trillion (up from $843.6 billion a week ago), or 58.2%; Treasuries totaling $599.4 billion (up from $294.9 billion a week ago), or 23.6%, and Government Agency securities totaling $265.6 billion (up from $101.2 billion), or 10.5%. Commercial Paper (CP) totaled $83.1 billion (up from a week ago at $51.7 billion), or 3.3%. Certificates of Deposit (CDs) totaled $37.3 billion (up from $19.1 billion a week ago), or 1.5%. The Other category accounted for $53.4 billion or 2.1%, while VRDNs accounted for $23.3 billion, or 0.9%.
The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $931.8 billion (36.7%), the US Treasury with $599.4 billion (23.6% of total holdings), Federal Home Loan Bank with $192.9B (7.6%), Fixed Income Clearing Corp with $165.6B (6.5%), Federal Farm Credit Bank with $69.3B (2.7%), JP Morgan with $45.9B (1.8%), RBC with $34.1B (1.3%), Citi with $32.3B (1.3%), Barclays PLC with $27.6B (1.1%) and BNP Paribas with $25.8B (1.0%).
The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($252.8B), Fidelity Inv MM: Govt Port ($152.4B), Federated Hermes Govt ObI ($145.1B), Morgan Stanley Inst Liq Govt ($136.1B), Dreyfus Govt Cash Mgmt ($118.9B), BlackRock Lq FedFund ($116.7B), Fidelity Inv MM: MM Port ($100.5B), Goldman Sachs FS Treas Instruments ($96.3B), BlackRock Lq Treas Tr ($95.8B) and Allspring Govt MM ($88.1B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Money fund yields were slightly higher last week after jumping last month following the Fed's 25 basis point hike on Feb. 1. Our Crane 100 Money Fund Index (7-Day Yield) was up 2 bps at 4.42% in the week ended Friday, 3/17. Yields were unchanged the previous week and they're up from 4.15% on Jan. 31, 2023. Money fund yields have risen from 4.05% on 12/31/22, from 3.59% on Nov. 30, from 2.88% on Oct. 31 and from 2.66% on Sept. 30. Yields should be flat in coming days, and it's now unclear whether the Fed will hike rates again at its next meeting on March 22. The top-yielding money market funds remain flat at just over 4.70%. (Note: We look forward to seeing those of you attending our Bond Fund Symposium later this week (3/23-24) in Boston! Attendees and subscribers may access the conference binder, Powerpoints and recordings (afterwards) via our "Bond Fund Symposium 2023 Download Center.")
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 687), shows a 7-day yield of 4.31%, up 1 bp in the week through Friday. Prime Inst MFs were up 1 bp at 4.51% in the latest week. Government Inst MFs rose by 2 bps to 4.38%. Treasury Inst MFs up 1 bp for the week at 4.35%. Treasury Retail MFs currently yield 4.12%, Government Retail MFs yield 4.09%, and Prime Retail MFs yield 4.34%, Tax-exempt MF 7-day yields were up at 2.15%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (3/17), just 30 money funds (out of 823 total) yield between 0.00% and 1.99% with $5.5 billion, or 0.1%; 107 funds yield between 2.00% and 2.99% with $109.3 billion, or 2.0%; 91 funds yield between 3.00% and 3.99% ($73.9 billion, or 1.4%), and 595 funds yield 4.0% or more ($5.231 trillion, or 96.5%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.54% after decreasing 1 bp two weeks prior. The latest Brokerage Sweep Intelligence, with data as of March 17, shows that there was no changes over the past week. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
In other news, surprisingly, neither ICI's Eric Pan nor the SEC's William Birththistle discussed pending money market mutual fund reforms at this week's 2023 ICI Investment Management Conference. ICI's President & CEO Pan said Monday, "It's always a pleasure to address members of the most important industry in finance. And it's a privilege to be joined today and tomorrow by so many leaders from the Securities and Exchange Commission. At this conference, we'll hear from Commissioner Mark Uyeda and SEC staff from the Divisions of Investment Management, Enforcement, and Examinations. And of course, as soon as I'm done speaking, we'll hear from the Director of the Division of Investment Management, William Birdthistle. I know one of the highlights of this conference is hearing directly from the regulators, and we're all excited for Director Birdthistle's remarks."
He tells us, "Mutual funds are at the heart of this [economic] progress. `They are the original and greatest democratizing force in the investing space, and to this day, they give people unprecedented access to the capital markets. All told, more than 100 million Americans, most of them middle-class, depend on mutual funds to achieve their savings goals, from education to homeownership. And as we all know, mutual funds are especially important for retirement. For the great majority of Americans, the mutual fund is the cornerstone of their secure financial future."
Pan explains, "I do worry, however. It sometimes appears that policymakers favor a bank-centric prudential regulatory view toward the capital markets, which translates into looking for ways to eliminate as much risk as possible from the financial system. But this approach is inconsistent with the historical regulatory approach that has worked so well for so long. Consider, for example, the US regulatory regime's traditional reliance on regulatory tools like disclosure, which explicitly recognizes the risks inherent in investing."
He comments, "Applying a bank prudential regulatory lens to our capital markets will harm far more people than it helps. Different levels of risk and risk pricing are implicit within investment markets, and trying to eliminate risk will stifle the progress that investors deserve and what our capital markets depend on. More to the point, it will limit access to returns generated by mutual funds, holding back the progress we hope to deliver for an even greater share of Americans. The fact is that countries in Europe and Asia often look to the US for inspiration. They envy our vibrant capital markets and look to move their own economies away from relying so much on bank financing. They dream of giving their citizens the same level of investment opportunities that the average American enjoys today."
Pan states, "That's why I'm so concerned that regulators are at risk of limiting Americans' investment options. And, to this end, I have serious concerns with the pace and scale of the SEC's current agenda. The Commission has issued a slew of rule proposals on a wide range of topics where much more work needs to be done to understand their cumulative effect on the markets and investors. Many of the rules also seem to be fall into the category of solutions in search of articulated problems."
He adds, "Other proposals raise similar concerns. Yet the most worrisome of all is the SEC's latest proposal on mandatory swing pricing, hard close and liquidity risk management. The proposal is breathtaking in scope, and it's no exaggeration to say that it represents the most significant transformation of the mutual fund industry in generations. First, in our opinion, the SEC did not adequately explain and quantify the problem it's trying to solve.... On that note, our second concern is that the SEC is not accounting for the sizeable compliance costs this mandate will impose.... Our third concern is centered on dilution."
Pan concludes, "But the SEC's current approach stands in contrast to its history. Let me be clear: ICI has always been, and always will be, a strong supporter of thoughtful, measured policy. It's in our DNA. We have an 80-plus-year track record of supporting regulations that improve the market and protect investors. We also have a duty to share our perspective and expertise to move policies in a better direction." (See also Birdthistle's "Remarks at the ICI Investment Management Conference.")
We continue to see a flurry of articles on money market funds and the flight from uninsured bank deposits. The Financial Times published, "Cash pours into US money market funds as investors flee bank turmoil," which states, "Investors have funneled cash to US money market funds over the past week amid concerns over the safety of some bank deposits after the collapse of two large lenders. The funds had more than $120bn of net inflows in the week to Wednesday, according data from the Investment Company Institute, the largest net weekly inflow since June 2020. The bulk of them poured into money market funds backed by government securities, according to the ICI. The cash moved into money market funds -- a type of mutual fund that invests in cash and safe securities -- during a week unsettled by the collapse of Silicon Valley Bank and Signature Bank. On Sunday federal regulators stepped in to protect all depositors from losses at the two lenders." (Note: Crane Data showed money fund assets continuing their big asset gains on Thursday, rising another $37.3 billion to a record $5.425 trillion. Month-to-date, they've jumped by $172.5 billion. Reminder: We're still taking registrations for next week's Bond Fund Symposium, March 23-24, in Boston.)
The FT states, "Tuesday marked the biggest day of inflows into money market funds, according to Goldman Sachs and EPFR, a data provider. While interest rates on bank deposits have increased at some banks, significantly higher returns are now available on low-risk assets such as money market funds after the Federal Reserve lifted rates to their highest level in 15 years."
They add, "This week's surge has been particularly notable, given that March 15 is a day when many US corporations pay tax, and typically move cash out of money markets. 'It was corporate tax day and typically that leads to outflows, but it was an inflow day,' said Deborah Cunningham, chief investment officer of global liquidity markets at Federated Hermes. Inflows by retail investors into money market funds have been 'large and accelerating' over the past week, Goldman Sachs wrote in a note on Thursday." (See too: Fox Business's "`Big week for money market funds amidst financial turmoil.")
Also, Bloomberg says, "Executives Yank Money From Banks as Some Deposits Look Riskier." The piece explains, "With Credit Suisse Group AG having wobbled this week and a handful of regional US banks collapsing, company executives are getting more concerned about where they can safely keep their cash. Some of them are yanking money from their banks and depositing it at other lenders, moving it to money market funds, or buying Treasury bills directly, according to corporate treasurers and advisers. The rapid moves are leaving certain banks with quick drops in deposits while helping to pull borrowing rates lower on short-term government debt, adding to turmoil in financial markets."
It continues, "Money market funds, which invest in short-term debt securities including Treasuries and commercial paper, have seen $97.1 billion of inflows since Friday and $108.21 billion in the past seven days, according to Crane Data, which tracks these funds, bringing total balances to $5.38 trillion -- the highest level in their five-decade history, according to Crane. Recent inflows into money market funds in part came from companies, said Peter Crane, president of Crane Data. 'It's most likely corporates diversifying away from uninsured deposits, given the seizure of SVB on Friday,' he said, adding that this trend will likely continue as companies seek to reduce their exposure to banks and generate higher yield on their cash investments."
Bloomberg also writes, "At $3.62 trillion, U.S. corporate cash levels at the end of December were $329 billion lower than the peak recorded in December 2021, according to Carfang Group, which analyzed Fed data published last week. Still, corporate cash holdings climbed $109 billion in the fourth quarter compared with the previous quarter." (See also Bloomberg's piece last week, "SVB Clients in Limbo After Seeking Refuge in Money-Market Funds.")
Reuters posted, "US banking system sound but not all deposits guaranteed, Yellen says." It tells us, "The U.S. banking system remains sound and Americans can feel confident that their deposits are safe, Treasury Secretary Janet Yellen said on Thursday, but she denied that emergency actions after two large bank failures mean that a blanket government guarantee now existed for all deposits. In her first public remarks since the weekend's emergency measures with other regulators to ensure no depositors at Silicon Valley Bank and Signature Bank suffered losses from those lenders' collapse, Yellen was pressed during a hearing before the U.S. Senate Finance Committee if that meant all uninsured deposits were now guaranteed."
The article continues, " "A bank only gets that treatment," she told U.S. Republican Senator James Lankford, if supermajorities of the boards of the Federal Reserve, the Federal Deposit Insurance Corp and "I, in consultation with the president, determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences." Her comment was the first explicit indication of regulators' views about the limits of the weekend's extraordinary guarantee that ensured that tens of billions in uninsured deposits at Silicon Valley and Signature were not lost."
It adds, "But it was clear that the FDIC insurance limit of $250,000 per depositor remained in place and that any future failure would need to pose risks similar to those seen at Silicon Valley and Signature. In their cases, Yellen said, 'the chances of contagion that other banks might be regarded as unsound and suffer runs, seemed extremely high, and the consequences would be very serious.' More than $9.2 trillion of U.S. bank deposits were uninsured at the end of last year, accounting for more than 40% of all deposits, according to U.S. central bank data. Those uninsured deposits are not distributed evenly across the country, FDIC data shows."
Finally, Federated Hermes' update, "Next steps: The Fed's response to the collapse of SVB puts pressure on the Treasury and the FOMC decision next week," states, "While the aftershocks may still claim more banks, though it seems unlikely, it is important to know that strict SEC regulations require money market funds to only invest in the highest quality issuers, which is why Federated Hermes’ money market, stable net asset value, microshort, ultrashort and fixed-income funds, as well as Treasury pools, do not have exposure to Silicon Valley Bank (SVB), Signature Bank or Silvergate. These regulations also require money market funds to be transparent to investors, so those same investors can monitor daily and weekly liquidity levels, specific issuer holdings, maturities of holdings and other elements. Treasury pools also are transparent, following the status quo requirements of their individual states."
They write, "Trading has been volatile, with most liquidity products industry-wide in risk-off mode, meaning sticking with purchases of very short-term securities, primarily those maturing overnight. Few were buying floating-rate paper or 3-, 6-, 12-month Treasuries. Prior to next week’s FOMC meeting, it will not be surprising to see excess liquidity given the expectation of higher rates. However, based on industry asset flows yesterday and so far today, investors seem to be acting like nothing happened: some are purchasing, some redeeming but overall no unusual outflows."
ICI's most recent "Money Market Fund Assets" report shows money fund totals jumping $121 billion in the latest week, breaking over the $5.0 trillion barrier for the first time ever. It was the 5th largest weekly increase ever and the largest in history if you exclude 4 coronavirus lockdown panic weeks in March and April 2020. The failure of Silicon Valley Bank has raised concerns over uninsured bank deposits, and large investors are fleeing into money funds. Over the past 52 weeks, money fund assets have risen $456 billion, or 10.0%, with Retail MMFs rising by $408 billion (28.3%) and Inst MMFs rising by $48 billion (1.5%). ICI shows assets up by $280 billion, or 5.9%, year-to-date in 2023, with Institutional MMFs up $111 billion, or 3.6% and Retail MMFs up $169 billion, or 10.1%. (Reminder: We're still taking registrations for Crane's Bond Fund Symposium, which is next week, March 23-24, in Boston. We hope to see you there!)
The weekly release says, "Total money market fund assets increased by $120.93 billion to $5.01 trillion for the week ended Wednesday, March 15, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $144.65 billion and prime funds decreased by $18.05 billion. Tax-exempt money market funds decreased by $5.66 billion." ICI's stats show Institutional MMFs surging $100.8 billion and Retail MMFs rising $20.2 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.128 trillion (82.3% of all money funds), while Total Prime MMFs were $776.2 billion (15.5%). Tax Exempt MMFs totaled $110.6 billion (2.2%).
ICI explains, "Assets of retail money market funds increased by $20.15 billion to $1.85 trillion. Among retail funds, government money market fund assets increased by $34.17 billion to $1.23 trillion, prime money market fund assets decreased by $9.63 billion to $515.66 billion, and tax-exempt fund assets decreased by $4.39 billion to $98.89 billion." Retail assets account for over a third of total assets, or 36.8%, and Government Retail assets make up 66.8% of all Retail MMFs.
They add, "Assets of institutional money market funds increased by $100.78 billion to $3.17 trillion. Among institutional funds, government money market fund assets increased by $110.48 billion to $2.90 trillion, prime money market fund assets decreased by $8.42 billion to $260.50 billion, and tax-exempt fund assets decreased by $1.27 billion to $11.67 billion." Institutional assets accounted for 63.2% of all MMF assets, with Government Institutional assets making up 91.4% of all Institutional MMF totals.
ICI Chief Economist Sean Collins comments, "Investors flocked to US government money market funds in the past week, apparently looking for an alternative to some banks. In addition, prime money market funds saw small outflows."
According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets increased by $67.4 billion for the month of February (through 2/28/23), and they've risen another $135.2 billion over the first 15 days of March to a record $5.388 trillion. (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.)
In other news, Bloomberg writes about money market funds in two articles: "You Can Trust Your Money Fund Not to Fail This Time" and "Schwab Clients Shift From Prime Funds to Safer Portfolios." The former says, "In recent history, when there have been tremors in the banking system, money-market funds have shuddered.... If anyone is worried this time around -- as would be natural -- they can rest a bit easier. In 2008, the Reserve Primary Fund, a money-market fund, 'broke the buck'.... But we've come a long way. As investors second-guess the safety of just about everything after the failure of three regional US banks and the nosedive of Credit Suisse Group AG, there's no reason to think money-market funds are poised for another reckoning."
They explain, "First, the landscape has changed. Just before the Great Recession, prime money-market funds, or those that mostly invested in corporate debt such as the kind issued by Lehman, comprised almost 60% of total money fund assets, according to Crane Data. Now, the majority of money-market funds, or 76%, only hold Treasuries or government bonds -- that's it.... In fact, some US money-market funds don't even buy the debt of US banks because their ratings often aren't high enough. European banks may be excluded, too. Federated Hermes Inc., which is one of the biggest providers of money-market funds, said this week during a webinar that debt from Credit Suisse, Deutsche Bank AG and Commerzbank AG weren't on 'approved' lists of corporate paper -- and hadn't been for some time."
Bloomberg adds, "Another thing that's different this time around: the maturity of the debt held by most money-market funds. In the Lehman era, it was common for funds to hold debt that matured in six months or even a year. That's changed. The average weighted maturity for a holding is now just two weeks, meaning everything is a lot more liquid and investors can more easily get their money back."
Their article on Schwab's money funds tells us, "Charles Schwab Corp. was hit with $8.8 billion in net outflows from its prime money market funds this week as investors scrutinized the brokerage's resilience amid questions about the health of the wider financial industry. Clients pulled money from two Schwab Value Advantage Money funds, which had a combined $195 billion of assets as of March 15, representing the largest redemptions in at least six months, according to company data compiled by Bloomberg. The data cover the three days through March 15."
It continues, "Schwab's money market funds are stress-tested for their exposure to interest rate changes and have daily and weekly liquidity levels above regulatory requirements, according to Mike Peterson, a company spokesman. The company's prime funds have seen significant growth in assets over the last year, he said. 'In a rising interest rate environment, we had clients taking advantage of fast-rising yields and now with market volatility, as we would expect, clients are seeking the relative safety of government funds,' Peterson said in an email."
The piece adds, "Investors have rushed into Treasury and government money market funds in the last week, pushing combined money fund assets to a record $5.39 trillion as of March 15, according to Crane Data, a firm that specializes in monitoring the industry. More than $100 billion has flowed into money funds in the last week, according to the firm."
The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (a.k.a. "Flow of Funds") late last week. Among the 4 tables it includes on money market mutual funds, the Fourth Quarter 2022 edition shows that Total MMF Assets increased by $139 billion to $5.223 trillion in Q4'22. The Household Sector, by far the largest investor segment with $2.794 trillion, saw the biggest asset increase in Q4, followed closely by Nonfinancial Corporate Businesses. The Fed's latest Z.1 numbers, which contain one of the few looks at money fund investor segments available, also showed noticeable increases for the Other Financial Business (formerly Funding Corps), the Life Insurance Companies and the Mutual Fund categories in Q4 2022. (Note: Crane Data's Money Fund Intelligence Daily shows money fund assets skyrocketing this week, increasing by $37.7 billion on Monday and $47.8 billion Tuesday to a record $5.376 trillion. Month-to-date, money fund assets are up an impressive $123.6 billion.)
The Property-Casualty Insurance, Private Pension Funds, State & Local Governments, Nonfinancial Noncorporate Business, the Rest of the World and the Exchange-traded fund categories saw small asset increases in Q4. The State & Local Govt Retirement category was the only one that saw an asset decrease last quarter. Over the past 12 months, the Private Pension Funds, Life Insurance Companies, Household Sector, Rest of World and Nonfinancial Corporate Business categories showed the biggest asset increases, while Other Financial Business, Household Sector, State & Local Govt Retirement and Property-Casualty Insurance saw the biggest asset decreases.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows that total assets increased by $139 billion, or 2.7%, in the fourth quarter to $5.223 trillion. The largest segment, the Household sector, totals $2.794 trillion, or 53.5% of assets. The Household Sector increased by $42 billion, or 1.5%, in the quarter. Over the past 12 months through December 31, 2022, Household assets were down $10 billion, or -0.4%.
Nonfinancial Corporate Businesses, the second-largest segment according to the Fed's data series, held $819 billion, or 15.7% of the total. Assets here increased by $38 billion in the quarter, or 4.8%, and they've increased by $6 billion, or 0.8%, over the past year. Other Financial Business was the third-largest investor segment with $556 billion, or 10.6% of money fund shares. This category jumped $19 billion, or 3.5%, in the latest quarter. Other Financial Business, which we believe includes Securities Lending, has decreased by $35 billion, or -5.9%, over the previous 12 months.
The fourth-largest segment, Mutual Funds (a recent addition to the tables), held $270 billion (5.2%). Private Pension Funds, was the 5th largest category with 4.8% of money fund assets ($252 billion); it was up by $7 billion (2.6%) for the quarter and up $23 billion, or 10.0% over the last 12 months. The Rest of World remained sixth place in market share among investor segments with 3.5%, or $184 billion, while Nonfinancial Noncorporate Business held $126 billion (2.4%), Life Insurance Companies held $87 billion (1.7%), State & Local Governments held $56 billion (1.1%), Exchange-traded Funds held $35 billion (0.7%), Property-Casualty Insurance held $27 billion (0.5%), and State & Local Govt Retirement held $18 billion (0.3%) according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in “Security Repurchase Agreements” with $2.977 trillion, or 57.0% and "Debt Securities," or Credit Market Instruments, with $2.022 trillion, or 38.7% of the total. Debt securities includes: Open market paper ($254 billion, or 4.9%; we assume this is CP), Treasury securities ($1.064 trillion, or 20.4%), Agency and GSE-backed securities ($580 billion, or 11.1%), Municipal securities ($118 billion, or 2.3%) and Corporate and foreign bonds ($6 billion, or 0.1%).
Another large MMF position in the Fed's series includes `Time and savings deposits ($190 billion, or 3.6%). Money funds also hold minor positions in Miscellaneous assets ($33 billion, or 0.3%) and Foreign deposits ($1 billion, 0.0%). Note: The Fed also lists "Variable Annuity Money Funds," which currently total $43 billion.
During Q4, Debt Securities were down $91 billion. This subtotal included: Open Market Paper (up $8 billion), Treasury Securities (down $192 billion), Agency- and GSE-backed Securities (up $88 billion), Corporate and Foreign Bonds (unchanged) and Municipal Securities (up $5 billion). In the fourth quarter of 2022, Security Repurchase Agreements were up $233 billion, Foreign Deposits were unchanged, Time and Savings Deposits were down by $20 billion, and Miscellaneous Assets were up $17 billion.
Over the 12 months through 12/31/22, Debt Securities were down $547 billion, which included Open Market Paper (up $28B), Treasury Securities (down $751B), Agencies (up $170B), Municipal Securities (up $7B), and Corporate and Foreign Bonds (down $1B). Foreign Deposits (up $1B), Time and Savings Deposits were up $47B, Securities repurchase agreements were up $481 billion and Miscellaneous Assets were up $36B.
The L.121 table shows `Stable NAV money market funds with $4,589 billion, or 87.9% of the total (up $178.4 or 4.0% in Q4 and up $3B or 0.1% over 1-year), and Floating NAV money market funds with $634 billion, or 12.1% (down $39.7B or -5.9% in Q4 and up $15B or 2.4% over 1-year). Government money market funds total $4.064 trillion, or 77.8% (up $52.5B or 1.3% in Q4 and down $240B or -5.6% over 1-year), Prime money market funds total $1.040 trillion, or 19.9% (up $74.2B or 7.7% in Q4 and up $233B or 28.9% over 1-year) and Tax-exempt money market funds $119B, or 2.3% (up $12.2B or 11.4% in Q4 and up $25B or 26.3% last year).
The Federal Reserve made changes to the Z.1 tables four quarters ago. Describing a "Money market funds sector data source change," the report says, "The money market mutual funds (MMF) sector (tables F.121 and L.121) has been revised beginning 2010:Q4 to reflect a change in data source to Securities and Exchange Commission Form NMFP. The level of assets and shares outstanding of the sector have increased due to the inclusion of private placement MMFs in the source data. Changes in the level due to changes in the data source in 2010:Q4 are recorded as other volume changes in the Financial Accounts."
On "Mutual funds sector holdings of money market funds," Z.1 tells us, "The mutual funds sector (tables F.122 and L.122) has been revised beginning 2010:Q4 to reflect holdings of money market funds not previously reported on the tables. In addition, holdings of repurchase agreements, commercial paper, corporate bonds, and miscellaneous assets have been revised. Additional and revised holdings are estimated using data from Morningstar and Investment Company Institute.... The exchange-traded funds sector (tables F.124 and L.124) has been revised beginning 2010:Q4 to reflect holdings of money market funds not previously reported on the tables."
Crane Data's latest Money Fund Intelligence International shows that assets in European or "offshore" money market mutual funds fell slightly over the past month to $1.066 trillion. EUR & GBP MMFs declined over the past 30 days, while USD funds increased. European MMF assets remain below their record high of $1.101 trillion set in mid-December 2021. These U.S.-style money funds, domiciled in Ireland or Luxembourg but denominated in US Dollars, Pound Sterling and Euros, decreased by $6.7 billion over the 30 days through 3/13. But the totals are still up $36.3 billion (3.5%) year-to-date. (Note that decreases in the U.S. dollar caused Euro and Sterling totals to jump when they're translated back into dollars. 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.)
Offshore US Dollar money funds are up $7.6 billion over the last 30 days and are up $29.7 billion YTD to $579.2 billion. Euro funds decreased E1.1 billion over the past month. YTD, they're down E11.7 billion to E168.7 billion. GBP money funds decreased L10.6 billion over 30 days; they are down by L19.6 billion YTD to L243.9B. U.S. Dollar (USD) money funds (197) account for half (54.3%) of the "European" money fund total, while Euro (EUR) money funds (95) make up 17.4% and Pound Sterling (GBP) funds (127) total 28.3%. We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers Tuesday), below.
Offshore USD MMFs yield 4.52% (7-Day) on average (as of 3/13/23), up from 4.49% a month earlier. Yields averaged 4.20% on 12/30/22, 0.03% on 12/31/21, 0.05% on 12/31/20, 1.59% on 12/31/19 and 2.29% on 12/31/18. EUR MMFs finally left negative yield territory 6 months ago; they're yielding 2.35% on average, up from 2.17% a month ago and up from 1.48% on 12/30/22, -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 3.87%, up 12 bps from a month ago, and up from 3.17% on 12/30/22. Sterling yields were 0.01% on 12/31/21, 0.00% on 12/31/20, 0.64% on 12/31/19 and 0.64% on 12/31/18.
Crane's March MFI International Portfolio Holdings, with data as of 2/28/23, show that European-domiciled US Dollar MMFs, on average, consist of 25% in Commercial Paper (CP), 15% in Certificates of Deposit (CDs), 34% in Repo, 8% in Treasury securities, 16% in Other securities (primarily Time Deposits) and 2% in Government Agency securities. USD funds have on average 65.2% of their portfolios maturing Overnight, 4.9% maturing in 2-7 Days, 11.3% maturing in 8-30 Days, 4.1% maturing in 31-60 Days, 4.7% maturing in 61-90 Days, 6.5% maturing in 91-180 Days and 3.3% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (30.1%), France (15.1%), Canada (12.2%), Japan (10.5%), Sweden (7.7%), the Netherlands (4.6%), the U.K. (3.7%), Australia (3.4%), Germany (2.1%) and Belgium (1.4%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $50.2 billion (8.2% of total assets), Federal Reserve Bank of New York with $43.0B (7.1%), Fixed Income Clearing Corp with $32.4B (5.3%), Credit Agricole with $26.3B (4.3%), RBC with $24.2B (4.0%), BNP Paribas with $20.6B (3.4%), Sumitomo Mitsui Banking Corp with $17.7B (2.9%), Nordea Bank with $17.6B (2.9%), Mizuho Corporate Bank Ltd with $14.2B (2.3%) and Skandinaviska Enskilda Banken AB with $14.2B (2.3%).
Euro MMFs tracked by Crane Data contain, on average 47% in CP, 23% in CDs, 20% in Other (primarily Time Deposits), 9% in Repo, 0% in Treasuries and 1% in Agency securities. EUR funds have on average 41.7% of their portfolios maturing Overnight, 9.9% maturing in 2-7 Days, 19.7% maturing in 8-30 Days, 10.3% maturing in 31-60 Days, 5.8% maturing in 61-90 Days, 8.1% maturing in 91-180 Days and 4.5% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (33.6%), Japan (14.2%), the U.S. (6.8%), Canada (5.9%), Austria (5.6%), the U.K. (5.4%), Sweden (5.0%), the Netherlands (4.4%), Belgium (4.2%) and Germany (4.1%).
The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E10.5B (6.9%), Erste Group Bank AG with E6.9B (4.5%), BNP Paribas with E6.9B (4.5%), Societe Generale with E6.7B (4.4%), Republic of France with E6.3B (4.1%), Credit Mutuel with E6.1B (4.0%), Mizuho Corporate Bank Ltd with E5.8B (3.8%), Sumitomo Mitsui Banking Corp with E5.1B (3.3%), BPCE SA with E5.0B (3.3%) and Barclays PLC with E5.0B (3.2%).
The GBP funds tracked by MFI International contain, on average (as of 2/28/23): 33% in CDs, 24% in CP, 24% in Other (Time Deposits), 16% in Repo, 2% in Treasury and 1% in Agency. Sterling funds have on average 36.0% of their portfolios maturing Overnight, 12.6% maturing in 2-7 Days, 11.5% maturing in 8-30 Days, 11.5% maturing in 31-60 Days, 11.3% maturing in 61-90 Days, 11.8% maturing in 91-180 Days and 5.3% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (19.6%), Japan (16.8%), Canada (13.5%), the U.K. (11.4%), Australia (6.2%), the Netherlands (5.7%), the U.S. (5.0%), Sweden (3.8%), Spain (3.4%) and Germany (2.5%).
The 10 Largest Issuers to "offshore" GBP money funds include: Mitsubishi UFJ Financial Group Inc with L7.7B (4.9%), Mizuho Corporate Bank Ltd with L6.8B (4.3%), RBC with L5.7B (3.7%), Toronto-Dominion Bank with L5.5B (3.5%), Banco Santander with L5.2B (3.3%), Barclays PLC with L5.0B (3.2%), Credit Mutuel with L4.9B (3.1%), Sumitomo Mitsui Trust Bank with L4.7B (3.0%), Societe Generale with L4.7B (3.0%) and Credit Agricole with L4.7B (3.0%).
In related news, ICI released its latest monthly "Money Market Fund Holdings" summary, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. Their release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in February, prime money market funds held 43.6 percent of their portfolios in daily liquid assets and 58.9 percent in weekly liquid assets, while government money market funds held 82.4 percent of their portfolios in daily liquid assets and 88.6 percent in weekly liquid assets." Prime DLA was up from 40.7% in January, and Prime WLA was up from 58.5%. Govt MMFs' DLA was down from 84.6% and Govt WLA decreased from 90.6% the previous month.
ICI explains, "At the end of February, prime funds had a weighted average maturity (WAM) of 19 days and a weighted average life (WAL) of 45 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 13 days and a WAL of 58 days." Prime WAMs were 3 days longer and WALs were unchanged from the previous month. Govt WAMs were unchanged and WALs were 1 day shorter from January.
Regarding Holdings by Region of Issuer, the release tells us, "Prime money market funds' holdings attributable to the Americas rose from $358.08 billion in January to $400.60 billion in February. Government money market funds' holdings attributable to the Americas rose from $3,686.39 billion in January to $3,700.28 billion in February."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $400.6 billion, or 52.2%; Asia and Pacific at $133.6 billion, or 17.4%; Europe at $224.3 billion, or 29.2%; and, Other (including Supranational) at $9.5 billion, or 1.2%. The Government Money Market Funds by Region of Issuer table shows Americas at $3.700 trillion, or 93.7%; Asia and Pacific at $73.6 billion, or 1.9%; Europe at $155.5 billion, 3.9%, and Other (Including Supranational) at $19.1 billion, or 0.5%.
The March issue of our Bond Fund Intelligence, which will be sent to subscribers Tuesday morning, features the stories, "Latest on Sustainable, ESG Bond Funds: Ultra-Short Hot," which reviews recent news on ESG funds, and "McNerny & Schneider Talk Ultra-Shorts on ETF Edge," which excerpts from a recent CNBC ETF Edge interview. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns plunged in February while yields jumped. 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. Also: Please join us for Crane's Bond Fund Symposium, which will be held next week, March 23-24, 2023, in Boston, Mass.)
Our "ESG Bond Funds" article says, "The Wall Street Journal published an article entitled 'Sustainable Funds Dodged Outflows in 2022 Market Rout,' which says, 'Sustainable funds that invest based on factors such as companies' carbon footprints and workforce diversity attracted new investment in 2022, despite a broad market selloff that punished many sectors. Investments into U.S. sustainable funds including stocks, bonds and other categories fell to $3.1 billion in 2022 from $69.2 billion a year earlier, according to Morningstar. Conventional funds that don't consider environmental, social or governance factors, also known as ESG, suffered more than $370 billion in withdrawals last year.'"
It continues, "The article tells us, 'Fixed-income funds accounted for $2.4 billion of all sustainable investment inflows, or about 75%, a surprising performance given how rising interest rates have punished many bondholders. Morningstar identified 129 sustainable bond funds last year, up from 47 in 2018. Sustainable products benefit from a flood of capital chasing greener investments in response to a warming planet, while governments and regulators increasingly are setting ambitious climate targets pushing companies to shrink their carbon footprints.'"
Our "McNerny & Schneider" piece states, "CNBC's show 'ETF Edge' recently featured PIMCO's Jerome Schneider and J.P. Morgan Asset Management's James McNerny on a segment entitled, 'Active ETFs are making a comeback.' They discuss, 'Bond ETFs are bouncing back this year. Here's why.' (Note: Both Schneider and McNerny will be speaking at next week's Bond Fund Symposium in Boston.)"
It continues, "Schneider explains, 'We still foresee, at PIMCO, 3% core CPI as we end 2023. So, it's still elevated beyond the FOMC's current comfort zone. But I think where that ultimately leads to is a bit of uncertainty leading investors to think about ... how to insulate portfolios.... Just look at what's happened over the past four weeks of trading. We've had rates rally, rates sell off, all things corresponding to the uncertain outlook between the divergence of market views, between the market itself and the Federal Reserve.'"
Our first News brief, "Returns Fall, Yields Jump in February," which says, "Bond fund returns plunged and yields jumped last month. Our BFI Total Index fell 1.49% over 1-month and is down 5.39% over 12 months. The BFI 100 fell 1.72% in Feb. and lost 6.74% over 1-year. Our BFI Conservative Ultra-Short Index was up 0.20% over 1-month and is up 1.36% for 1-year; Ultra-Shorts rose 0.12% and are up 0.56% over 12 mos. Short-Term returned -0.74% and -2.85%, and Intm-Term fell 2.22% and -8.69% over 1-year. BFI's Long-Term Index fell 2.60% and -11.13%. High Yield fell 0.90% in Feb. and fell 3.74% over 1-year."
A second News brief, "WSJ's 'Welcome to the 5% World, Where Yield Chases You' says, 'Bonds are getting beaten down again. That means they can do a better job of protecting the rest of your portfolio.... Investors have resumed worrying the Federal Reserve will have to crank up interest rates higher and longer to stifle inflation, after dismissing such fears a few short weeks ago. So long-term Treasury securities have lost about 5% so far this month, and the bond market as a whole is off about 3%. That dark cloud has several layers of silver lining.'"
Another brief, "Morningstar's '5 Short-Term Bond Funds That Disappointed Investors' tells us, 'Investors expect short-term bond funds to be a haven during times of rising interest rates and turmoil in the markets. But when fund managers take on riskier bets in search of higher yields, that can backfire.... During last year's beatdown in the bond market, even conservatively managed short-term bond funds lost money. The average fund in the short-term bond Morningstar Category posted a 5.2% decline, the biggest ... decline in history, according to Morningstar Direct.' The funds mentioned include: Mass Mutual Short Duration Bond (MSTZX), Thompson Bond (THOPX), PGIM Short-Term Corporate Bond (PBSMX), Thornburg Limited Term Income (THRLX) and American Funds Intermediate Bond Fund of America (RBOGX)."
A BFI sidebar, "Bloomberg on 'Cash' ETFs," says, "Bloomberg Intelligence posted a note entitled, 'Cash Is King: 'Cash' Hoarding Grows to Record in ETFs as Distributions Rise.' They write, 'Assets in cash-like ETFs have climbed to a record $87 billion after one their best months of flows. Cash alternatives like the SPDR Bloomberg 1-3 Month T-Bill ETF have outperformed 90% of all ETF strategies over the past 12 months, and increased distribution payouts are luring more investors deterred by equity-market volatility.'"
Finally, another sidebar, "MStar on 5 Ultra-Shorts," says, "Morningstar's '5 Ultra-Short-Term Bond Funds With High Yields' tells us 'For the first time in years, investors have more choices when looking for a place to store cash that is both low-risk and paying high yields. One of those options: `ultra-short-term bond funds. After 8 interest-rate hikes from the Federal Reserve, short-term rates have risen to decadelong high levels. The average fund in the ultrashort Morningstar Category currently yields around 4.2%; a year ago, it yielded less than 1%. As investors experienced quite painfully in 2022, when interest rates rise, bond prices fall. But an ultra-short-term bond fund limits the sensitivity to changes in interest rates.'"
The Wall Street Journal writes, "Circle's USDC Stablecoin Breaks Peg With $3.3 Billion Stuck at Silicon Valley Bank." They explain, "A major cryptocurrency operated by Circle Internet Financial Ltd. meant to mimic the value of the U.S. dollar dropped sharply after the company said it had $3.3 billion tied up in the collapsed Silicon Valley Bank. USD Coin fell below 87 cents on Saturday morning, according to data from CoinDesk. The virtual currency, known as a stablecoin, is designed to trade exactly at $1. It is backed by real U.S. dollars and short-term government debt, and sits at the heart of cryptocurrency trading. Breaking its peg with the dollar has the potential to send shock waves through the cryptocurrency world still reeling from the collapse of FTX. For crypto traders, the decline in the value of USD Coin is reminiscent of the worst moments of the 2008 financial crisis when money-market funds that most investors treated as the equivalent of cash 'broke the buck' in the wake of Lehman Brothers failure."
The Journal says, "Another stablecoin, Dai, also broke from its $1 peg, trading as low as 90 cents Saturday. Dai, the fourth-largest stablecoin worth around $5 billion, is partially backed by USD Coin, also known by traders as USDC." The article continues, "The USD Coin reserves remaining at Silicon Valley Bank comprise about 8% of the roughly $40 billion in assets backing the token, according to Circle. Circle has said it maintains around 20% of its holdings in bank deposits and 80% in three-month government securities. Without access to the bank deposits, Circle may face difficulty meeting redemption requests.... Like banks, stablecoins are subject to runs. If holders of the coins believe there aren't enough dollars in reserve, they may rush to exchange their coins -- or to sell them to someone else. That selling has driven down the price."
It adds, "Cryptocurrency investors redeemed more than $2 billion in Circle's stablecoin in the past 24 hours, according to blockchain data provider Nansen as of 10 p.m. ET on Friday. The pace of USD Coin redemptions accelerated through Friday, with most of the USD Coin burned in the last eight hours, Nansen said.... As with Silicon Valley Bank, Circle is a creature of the tech startup community. It earned early backing from Silicon Valley firms and later started its own Circle Ventures investment firm. It also has deep ties on Wall Street. Circle has raised around $850 million from investors including asset manager BlackRock Inc., Fidelity Management and hedge fund firm Marshall Wace. Bank of New York Mellon Corp. serves as the primary custodian for USD Coin reserves, according to Circle."
In other news, MarketWatch discusses the looming debt ceiling battle in its article, "As money-market funds rake in cash, analysts see debt-ceiling risks." The piece explains, "As investors pour cash into money-market funds, analysts are warning that the Congressional standoff over raising the federal government's debt limit will put pressure on these traditional safe haven holdings. Money-market funds focused on U.S. Treasury securities, generally considered the safest of money funds, 'could face increased volatility in the Treasury market and heightened investor redemptions as the debt ceiling deadline approaches,' Fitch Ratings said in a late February report. If investors stampede out of money-market funds as that deadline nears, the funds' managers may be forced to sell Treasury holdings in a volatile market, putting them at greater risk of 'breaking the buck,' or falling below the steady $1 share price money funds typically aim to maintain, analysts say." (See our March 7 News, "March MFI: Treasury Debt Ceiling, BlackRock's Clay; Federated's 10-K" and our Feb. 24 News, "MMF Assets Run at Record Again; JPMorgan, Fitch Warn on Treasury Debt.")
The article continues, "Money-fund assets climbed $56 billion last month, hitting a record $5.3 trillion in early March, according to Crane Data. In a shift from years past, much of the recent growth in assets has come from mom and pop investors rather than big institutions, said Crane Data president Peter Crane, as those retail investors seek out higher-yielding parking spots for their cash. The 100 largest taxable money funds had an average seven-day yield of 4.39% at the end of February -- a level last seen before the 2007-2009 global financial crisis -- whereas brokerage sweep accounts tracked by Crane had an average yield of 0.43%. Money fund yields are expected to move higher after the Federal Reserve's next meeting later this month."
It adds, "Past debt-ceiling crises indicate some of the challenges that money funds may face this time around. In 2011 and 2013, Congress resolved debt-ceiling issues shortly before the drop-dead date–and in both cases, short-term Treasury bill rates rose sharply about two weeks before the x-date, according to a recent report from the Federal Reserve Bank of Kansas City. Money-market funds, particularly government funds, also had unusually large outflows in the two weeks before the debt-ceiling resolution in 2013, the report said."
The aforementioned Federal Reserve Bank of Kansas City study, "Pushing the Limit: Last-Minute Debt Limit Resolutions Have Increased Market Volatility and Uncertainty," explains, "Since reaching the debt limit in January 2023, the U.S. Treasury has used extraordinary measures to fund the government. However, the Treasury estimates those measures will be exhausted later this year. To gauge possible effects, we review economic and financial market outcomes during previous debt limit episodes. In each case, these episodes led to increased borrowing costs, financial market volatility, and uncertainty, particularly when the resolutions were prolonged."
The paper explains, "The U.S. Treasury reached its statutory debt limit on January 19, 2023, and began using extraordinary measures to continue funding the government without increasing the debt. However, it expects to reach the 'x-date,' at which time extraordinary measures will be exhausted, sometime mid-year. Treasury debt serves as a bedrock of the global financial system, being a key source of collateral for many financial transactions and held broadly by investors. As a result, concerns about Treasury debt obligations, or even uncertainty about how those concerns will be resolved, could have broad destabilizing consequences for the economy."
It continues, "Prior U.S. debt ceiling episodes differed in how quickly a resolution was reached, providing a natural setting for understanding how economic and financial conditions could respond to various resolution timelines today. For example, in October 2021, Congress reached a temporary resolution several weeks in advance of the projected x-date, while resolutions in 2011 and 2013 occurred just days before the x-date."
The KC Fed says, "In addition, financial intermediaries experienced greater liquidity strains when debt ceiling episodes were resolved closer to the expected x-date. Chart 2 shows that money market funds, particularly government funds, experienced unusually large outflows in the two weeks prior to the debt ceiling resolution in 2013. During this time, large commercial banks experienced an associated influx of deposits (not shown). However, these flows quickly reversed following resolution. Because both money market funds and banks engage in maturity transformation, rapid funding outflows could potentially destabilize the financial system."
They comment, "The economic environment during previous debt limit episodes differs from the current episode in three important ways, potentially changing how markets may react to the ongoing debate. First, in both the 2011 and 2013 debt limit episodes, the Federal Reserve was in an accommodative policy stance and providing additional liquidity to the financial system. Today, in contrast, the Federal Reserve is actively withdrawing liquidity from financial markets by shrinking its balance sheet. Thus, any disruption to market liquidity could strain banks and money market funds. Second, government money market fund assets grew substantially since 2013 following money market fund reforms in 2016 and pandemic-era increases in the Federal Reserve's balance sheet. Thus, liquidity swings could be larger and more destabilizing today."
The study adds, "Third, money market funds use the Federal Reserve's overnight reverse repurchase facility (ON RRP) -- which allows them to make loans collateralized by government debt to the Federal Reserve -- to a much larger extent today than during previous episodes (Marsh and Sengupta 2022). Although money market funds could harbor concerns about holding collateral with limited marketability, participants may be more willing to transact with the Federal Reserve. Indeed, the Federal Open Market Committee (FOMC) appeared willing to accept Treasury securities in Federal Reserve operations at market prices during past episodes (Davidson 2017). If money market funds expect that the FOMC may be willing to do so again, they may shift their investments to the ON RRP, reducing investor fears and tempering run risk."
Crane Data's March Money Fund Portfolio Holdings, with data as of Feb. 28, 2023, show that Repo holdings jumped to near record levels after dropping last month. Treasury continued a 12-month slide, and Government agencies also fell. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $34.5 billion to $5.123 trillion in February, after increasing $49.7 billion in January and $72.6 billion in December. They decreased $24.6 billion in November. MMFs increased $57.7 billion in October and $15.2 billion in September. Repo remained the largest portfolio segment after hitting record levels two month ago, 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" nine months ago, saw Fed RRP issuance held by MMFs jump $106.0 billion to $2.080 trillion. Agencies were the third largest segment, CP remained fourth, ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among taxable money funds, Repurchase Agreements (repo) increased $98.2 billion (3.5%) to $2.927 trillion, or 57.1% of holdings, in February, after decreasing $111.2 billion in January and increasing $253.2 billion in December. Repo decreased $24.4 billion in November and $6.0 billion in October. But it increased $74.4 billion in September. Treasury securities fell $41.2 billion (-3.9%) to $1.010 trillion, or 19.7% of holdings, after decreasing $17.8 billion in January and $77.5 billion in December. Treasury holdings fell $65.0 billion in November, $41.8 billion in October and $84.8 billion in September. Government Agency Debt was down $27.0 billion, or -4.4%, to $587.1 billion, or 11.5% of holdings. Agencies increased $51.8 billion in January, decreased $24.5 billion in December, but increased $53.6 billion in November, $55.0 billion in October and $35.9 billion in September. Repo, Treasuries and Agency holdings now total $4.524 trillion, representing a massive 88.3% of all taxable holdings.
Money fund holdings of CP and CDs decreased in February. Commercial Paper (CP) decreased $7.3 billion (-2.6%) to $274.7 billion, or 5.4% of holdings. CP holdings increased $36.3 billion in January, decreased $16.9 billion in December, increased $7.7 billion in November and $19.3 billion in October. Certificates of Deposit (CDs) decreased $4.5 billion (-2.6%) to $169.1 billion, or 3.3% of taxable assets. CDs increased $24.1 billion in January, decreased $4.3 billion in December, increased $4.4 billion in November and $15.5 billion in October. Other holdings, primarily Time Deposits, increased $15.6 billion (12.0%) to $145.9 billion, or 2.8% of holdings, after increasing $66.5 billion in January, decreasing $57.0 billion in December and $1.0 billion in November. Other holdings increased $16.0 billion in October. VRDNs rose to $10.2 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will post our Tax Exempt MMF holdings separately Friday around noon.)
Prime money fund assets tracked by Crane Data jumped to $1.148 trillion, or 22.4% of taxable money funds' $5.123 trillion total. Among Prime money funds, CDs represent 14.7% (down from 15.6% a month ago), while Commercial Paper accounted for 24.0% (down from 25.4% in January). The CP totals are comprised of: Financial Company CP, which makes up 16.0% of total holdings, Asset-Backed CP, which accounts for 4.2%, and Non-Financial Company CP, which makes up 3.8%. Prime funds also hold 5.0% in US Govt Agency Debt, 3.3% in US Treasury Debt, 30.4% in US Treasury Repo, 0.4% in Other Instruments, 10.6% in Non-Negotiable Time Deposits, 4.3% in Other Repo, 5.3% in US Government Agency Repo and 0.5% in VRDNs.
Government money fund portfolios totaled $2.685 trillion (52.4% of all MMF assets), down from $2.694 trillion in January, while Treasury money fund assets totaled another $1.291 trillion (25.2%), up from $1.284 trillion the prior month. Government money fund portfolios were made up of 19.7% US Govt Agency Debt, 13.6% US Government Agency Repo, 11.6% US Treasury Debt, 54.8% in US Treasury Repo, 0.1% in Other Instruments. Treasury money funds were comprised of 51.2% US Treasury Debt and 48.8% in US Treasury Repo. Government and Treasury funds combined now total $3.976 trillion, or 77.6% of all taxable money fund assets.
European-affiliated holdings (including repo) decreased by $27.7 billion in February to $477.7 billion; their share of holdings dropped to 9.3% from last month's 9.9%. Eurozone-affiliated holdings decreased to $333.1 billion from last month's $333.3 billion; they account for 6.5% of overall taxable money fund holdings. Asia & Pacific related holdings rose to $213.8 billion (4.2% of the total) from last month's $211.1 billion. Americas related holdings rose to $4.424 trillion from last month's $4.367 trillion, and now represent 86.4% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (up $95.7 billion, or 4.1%, to $2.451 trillion, or 47.8% of assets); US Government Agency Repurchase Agreements (up $2.9 billion, or 0.7%, to $426.5 billion, or 8.3% of total holdings), and Other Repurchase Agreements (down $0.4 billion, or -0.9%, from last month to $49.3 billion, or 1.0% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $11.9 billion to $183.6 billion, or 3.6% of assets), Asset Backed Commercial Paper (up $0.9 billion to $47.8 billion, or 0.9%), and Non-Financial Company Commercial Paper (up $3.8 billion to $43.3 billion, or 0.8%).
The 20 largest Issuers to taxable money market funds as of Feb. 28, 2023, include: the Federal Reserve Bank of New York ($2.080T, 40.6%), US Treasury ($1.010T, 19.7%), Federal Home Loan Bank ($480.0B, 9.4%), Fixed Income Clearing Corp ($177.0B, 3.5%), Federal Farm Credit Bank ($97.6B, 1.9%), RBC ($91.1B, 1.8%), JP Morgan ($78.0B, 1.5%), BNP Paribas ($65.5B, 1.3%), Citi ($58.4B, 1.1%), Goldman Sachs ($58.0B, 1.1%), Bank of America ($50.6B, 1.0%), Mitsubishi UFJ Financial Group Inc ($49.2B, 1.0%), Barclays ($45.2B, 0.9%), Sumitomo Mitsui Banking Corp ($41.2B, 0.8%), Credit Agricole ($41.2B, 0.8%), Mizuho Corporate Bank Ltd ($39.0B, 0.8%), Societe Generale ($34.3B, 0.7%), Toronto-Dominion Bank ($34.1B, 0.7%), Bank of Nova Scotia ($31.1B, 0.6%) and Bank of Montreal ($28.7B, 0.6%).
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 ($2.080T, 71.1%), Fixed Income Clearing Corp ($177.0B, 6.0%), JP Morgan ($69.4B, 2.4%), RBC ($69.0B, 2.4%), Goldman Sachs ($57.4B, 2.0%), BNP Paribas ($54.2B, 1.9%), Citi ($45.9B, 1.6%), Bank of America ($43.0B, 1.5%), Sumitomo Mitsui Banking Corp ($30.5B, 1.0%) and Barclays PLC ($27.2B, 0.9%). The largest users of the $2.080 trillion in Fed RRP include: Goldman Sachs FS Govt ($138.4B), Fidelity Govt Money Market ($136.1B), Fidelity Govt Cash Reserves ($119.3B), Vanguard Federal Money Mkt Fund ($118.3B), Fidelity Inv MM: Govt Port ($91.4B), Dreyfus Govt Cash Mgmt ($84.0B), JPMorgan US Govt MM ($84.0B), BlackRock Lq T-Fund ($60.4B), BlackRock Lq FedFund ($58.0B) and Vanguard Cash Reserves Federal MM ($54.3B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mizuho Corporate Bank Ltd ($30.6B, 5.9%), Toronto-Dominion Bank ($23.3B, 4.5%), Credit Agricole ($22.5B, 4.4%), Mitsubishi UFJ Financial Group Inc ($22.3B, 4.3%), RBC ($22.1B, 4.3%), Skandinaviska Enskilda Banken AB ($20.6B, 4.0%), Bank of Nova Scotia ($19.6B, 3.8%), Barclays PLC ($18.0B, 3.5%), Sumitomo Mitsui Trust Bank ($16.6B, 3.2%) and ING Bank ($16.0B, 3.1%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc ($14.1B, 8.3%), Sumitomo Mitsui Trust Bank ($10.8B, 6.4%), Credit Agricole ($10.6B, 6.3%), Toronto-Dominion Bank ($10.4B, 6.2%), Mizuho Corporate Bank Ltd ($9.7B, 5.7%), Sumitomo Mitsui Banking Corp ($8.8B, 5.2%), Landesbank Baden-Wurttemberg ($7.2B, 4.3%), Svenska Handelsbanken ($6.4B, 3.8%), Bank of Nova Scotia ($6.3B, 3.7%) and Barclays PLC ($6.2B, 3.7%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Bank of Nova Scotia ($13.3B, 5.5%), RBC ($12.5B, 5.2%), Toronto-Dominion Bank ($10.4B, 4.3%), National Australia Bank Ltd ($8.9B, 3.7%), Bank of Montreal ($8.7B, 3.6%), JP Morgan ($8.6B, 3.6%), Societe Generale ($8.3B, 3.4%), Mitsubishi UFJ Financial Group Inc ($8.2B, 3.4%), Barclays PLC ($7.5B, 3.1%) and Svenska Handelsbanken ($6.7B, 2.8%).
The largest increases among Issuers include: Federal Reserve Bank of New York (up $106.0B to $2.080T), Goldman Sachs (up $21.1B to $58.0B), Bank of Nova Scotia (up $6.6B to $31.1B), Mizuho Corporate Bank Ltd (up $6.1B to $39.0B), Bank of America (up $5.7B to $50.6B), Societe Generale (up $4.8B to $34.3B), Wells Fargo (up $4.1B to $19.3B), DBS Bank Ltd (up $3.4B to $7.0B), Mitsubishi UFJ Financial Group Inc (up $3.1B to $49.2B) and Standard Chartered Bank (up $2.7B to $12.7B).
The largest decreases among Issuers of money market securities (including Repo) in February were shown by: US Treasury (down $41.2B to $1.010T), Barclays PLC (down $28.1B to $45.2B), Federal Home Loan Bank (down $26.9B to $480.0B), JP Morgan (down $13.6B to $78.0B), Nomura (down $10.1B to $15.4B), Citi (down $5.9B to $58.4B), Fixed Income Clearing Corp (down $2.8B to $177.0B), Landesbank Baden-Wurttemberg (down $2.4B to $12.9B), HSBC (down $2.3B to $7.7B) and Erste Group Bank AG (down $2.3B to $7.8B).
The United States remained the largest segment of country-affiliations; it represents 82.0% of holdings, or $4.203 trillion. Canada (4.3%, $220.6B) was in second place, while Japan (3.7%, $187.8B) was No. 3. France (3.5%, $177.4B) occupied fourth place. The United Kingdom (1.5%, $77.2B) remained in fifth place. Netherlands (1.1%, $55.2B) was in sixth place, followed by Sweden (1.0%, $51.9B) Germany (0.9%, $46.8B), Australia (0.8%, $39.6B), and Singapore (0.3%, $13.4B). (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 Feb. 28, 2023, Taxable money funds held 72.6% (down from 73.0%) of their assets in securities maturing Overnight, and another 7.2% maturing in 2-7 days (up from 6.5%). Thus, 79.8% in total matures in 1-7 days. Another 7.1% matures in 8-30 days, while 5.7% matures in 31-60 days. Note that over three-quarters, or 92.5% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 3.8% of taxable securities, while 2.5% matures in 91-180 days, and just 1.2% 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 Thursday, and we'll be writing our regular monthly update on the new Feb. 28 data for Friday's News. But we also uploaded a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Wednesday. (We continue to merge the two series, and the N-MFP version is now available via our Portfolio Holdings file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of Feb. 28, includes holdings information from 987 money funds (down 5 from last month), representing assets of (a record) $5.294 trillion (up from $5.258 trillion). Prime MMFs now total $1.162 trillion, or 22.0% of the total. We review the new N-MFP data, and we also look at our revised MMF expense data, which shows charged expenses and money fund revenues flat in February.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds increased to $2.965 trillion (up from $2.862 trillion), or 56.0% of all assets. Treasury holdings totaled $1.006 trillion (down from $1.048 trillion), or 19.0% of all holdings, and Government Agency securities totaled $604.8 billion (down from $630.6 billion), or 11.4%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $4.576 trillion, or a massive 86.4% of all holdings.
Commercial paper (CP) totals $284.2 billion (down from $290.7 billion), or 5.4% of all holdings, and the Other category (primarily Time Deposits) totals $179.9 billion (up from $167.5 billion), or 3.4%. Certificates of Deposit (CDs) total $169.5 billion (down from $173.9 billion), 3.2%, and VRDNs account for $85.1 billion (down from $85.6 billion last month), or 1.6% of money fund securities.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $184.5 billion, or 3.5%, in Financial Company Commercial Paper; $48.5 billion or 0.9%, in Asset Backed Commercial Paper; and, $51.2 billion, or 1.0%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($2.490 trillion, or 47.0%), U.S. Govt Agency Repo ($420.5B, or 7.9%) and Other Repo ($54.2B, or 1.0%).
The N-MFP Holdings summary for the Prime Money Market Funds shows: CP holdings of $277.9 billion (down from $284.5 billion), or 23.9%; Repo holdings of $462.6 billion (up from $420.0 billion), or 39.8%; Treasury holdings of $40.8 billion (down from $42.5 billion), or 3.5%; CD holdings of $169.5 billion (down from $173.9 billion), or 14.6%; Other (primarily Time Deposits) holdings of $143.8 billion (up from $130.8 billion), or 12.4%; Government Agency holdings of $60.8 billion (down from $67.1 billion), or 5.2% and VRDN holdings of $7.2 billion (up from $6.3 billion), or 0.6%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $184.5 billion (down from $196.2 billion), or 15.9%, in Financial Company Commercial Paper; $48.5 billion (up from $47.5 billion), or 4.2%, in Asset Backed Commercial Paper; and $44.9 billion (up from $40.8 billion), or 3.9%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($352.2 billion, or 30.3%), U.S. Govt Agency Repo ($59.9 billion, or 5.2%), and Other Repo ($50.4 billion, or 4.3%).
In related news, money fund charged expense ratios (Exp%) were a hair higher in February. Our Crane 100 Money Fund Index and Crane Money Fund Average were 0.27% and 0.38%, respectively, as of Feb. 28, 2023. 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 Wednesday 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 0.27%, up 1 bp from last month's level (and 19 bps higher than 12/31/21's 0.08%). The average is back at the level (0.27%) as it was on Dec. 31, 2019, so we estimate that funds are now charging normal expenses (but they are waiving a minimal amount of fees for competitive purposes). The Crane Money Fund Average, a simple average of all taxable MMFs, showed a charged expense ratio of 0.38% as of Feb. 28, 2023, unchanged from the month prior and now slightly below the 0.40% at year-end 2019.
Prime Inst MFs expense ratios (annualized) average 0.31% (unchanged from last month), Government Inst MFs expenses average 0.27% (unchanged from last month), Treasury Inst MFs expenses average 0.30% (unchanged from last month). Treasury Retail MFs expenses currently sit at 0.52%, (down 1 bp from last month), Government Retail MFs expenses yield 0.55% (up 1 bp from last month). Prime Retail MF expenses averaged 0.48% (unchanged from last month). Tax-exempt expenses were unchanged at 0.40% on average.
Gross 7-day yields rose again during the month ended Feb. 28, 2023. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 746), shows a 7-day gross yield of 4.58%, up 23 bps from the prior month. The Crane Money Fund Average was 1.72% at the end of 2019, 0.15% at the end of 2020 and 0.09% at the end of 2021. Our Crane 100's 7-day gross yield was up 22 bps, ending the month at 4.51%.
According to our revised MFI XLS and Crane Index numbers, we now estimate that annualized revenue for all money funds is a record $14.135 billion (as of 2/28/23). Our estimated annualized revenue totals increased from $13.746B last month and are up from $13.527B two months ago. Revenue levels are still more than four times larger than May's record-low $2.927B level. Charged expenses and gross yields are driven by a number of variables, but revenues should remain relatively flat as we enter a seasonally weak period for assets.
Crane Data's latest monthly Money Fund Market Share rankings show assets were mostly higher among the largest U.S. money fund complexes in February. Money market fund assets increased $56.1 billion, or 1.1%, last month to a record $5.260 trillion. Total MMF assets increased by $147.7 billion, or 2.9%, over the past 3 months, and they've increased by $253.1 billion, or 5.0%, over the past 12 months. In January, Fidelity became the first manager ever to break the $1.0 trillion level and it continued its gains this past month. The largest increases among the 25 largest managers last month were seen by Fidelity, Schwab, Federated Hermes, Goldman Sachs and Morgan Stanley, which grew assets by $26.5 billion, $24.4B, $10.8B, $8.2B and $5.8B, respectively. Large declines in February were seen by SSGA and Dreyfus, which decreased by $8.3 billion and $5.0B, 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 rose yet again in February, below.
Over the past year through Feb. 28, 2023, Schwab (up $185.4B, or 128.0%), Fidelity (up $106.7B, or 11.7%), Invesco (up $61.0B, or 64.3%), Federated Hermes (up $40.3B, or 12.3%), and UBS (up $39.8B, or 86.8%) were the largest gainers. Fidelity, Schwab, JPMorgan, Dreyfus, and Federated Hermes had the largest asset increases over the past 3 months, rising by $80.2B, $78.5B, $36.5B, $34.0B and $27.6B, respectively. The largest declines over 12 months were seen by: Northern (down $68.3B), BlackRock (down $54.7B), Morgan Stanley (down $54.2B), Allspring (down $26.0B) and SSGA (down $15.6B). The largest decliners over 3 months included: Goldman Sachs (down $38.4B), American Funds (down $32.8B), HSBC (down $30.2B), SSGA (down $27.5B), and Morgan Stanley (down $19.3B).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $1.034 trillion, or 19.9% of all assets. Fidelity was up $26.5B in February, up $80.2 billion over 3 mos., and up $106.7B over 12 months. Vanguard ranked second with $477.5 billion, or 9.2% market share (up $3.3B, up $25.3B and up $24.6B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock ranked in third place with $461.1 billion, or 8.9% of assets (down $3.8B, down $1.3B and down $54.7B). JPMorgan ranked fourth with $443.0 billion, or 8.5% market share (down $119M, up $36.5B and down $6.6B), while Goldman Sachs was the fifth largest MMF manager with $393.0 billion, or 7.6% of assets (up $8.2B, down $38.4B and up $25.5B for the past 1-month, 3-mos. and 12-mos.).
Federated Hermes was in sixth place with $365.2 billion, or 7.0% (up $10.8B, up $27.6B and up $40.3B), while Schwab was in seventh place with $329.5 billion, or 6.3% of assets (up $24.4B, up $78.5B and up $185.4B). Dreyfus ($274.3B, or 5.3%) was in eighth place (down $5.0B, up $34.0B and up $29.6B), followed by Morgan Stanley ($225.0B, or 4.3%; up $5.8B, down $19.3B and down $54.2B). American Funds was in 10th place ($174.6B, or 3.4%; down $100M, down $32.8B and up $22.2B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Invesco ($159.2B, or 3.1%), Allspring (formerly Wells Fargo) ($147.6B, or 2.8%), Northern ($134.8B, or 2.6%), SSGA ($130.5B, or 2.5%), First American ($112.5B, or 2.2%), UBS ($83.0B, or 1.6%), T. Rowe Price ($46.1B, or 0.9%), Western ($37.8B, or 0.7%), HSBC ($34.5B, or 0.7%) and DWS ($30.5B, or 0.6%). Crane Data currently tracks 60 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: BlackRock moves up to the No. 2 spot, JPMorgan moves up to the No. 3 spot, Goldman Sachs moves up to No. 4 and Vanguard moves down to the No. 5 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 ($1.044 trillion), BlackRock ($658.0B), JP Morgan ($648.3B), Goldman Sachs ($524.8B) and Vanguard ($477.5B). Federated Hermes ($373.0B) was in sixth, Schwab ($329.5B) was seventh, followed by Dreyfus/BNY Mellon ($294.3B), Morgan Stanley ($293.8B) and American Funds ($174.6B), 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 March issue of our Money Fund Intelligence and MFI XLS, with data as of 2/28/23, shows that yields increased again in February across the Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 746), rose to 4.26% (up 22 bps) for the 7-Day Yield (annualized, net) Average, the 30-Day Yield increased to 4.20% (up 21 bps). The MFA's Gross 7-Day Yield rose to 4.56% (up 21 bps), and the Gross 30-Day Yield also moved up to 4.50% (up 20 bps). (Gross yields will be revised Wednesday at noon, though, once we download the SEC's Form N-MFP data for 2/28/23.)
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 4.39% (up 24 bps) and an average 30-Day Yield at 4.34% (up 23 bps). The Crane 100 shows a Gross 7-Day Yield of 4.51% (up 23 bps), and a Gross 30-Day Yield of 4.46% (up 21 bps). Our Prime Institutional MF Index (7-day) yielded 4.47% (up 20 bps) as of February 28. The Crane Govt Inst Index was at 4.30% (up 23 bps) and the Treasury Inst Index was at 4.31% (up 23 bps). Thus, the spread between Prime funds and Treasury funds is 16 basis points, and the spread between Prime funds and Govt funds is 17 basis points. The Crane Prime Retail Index yielded 4.31% (up 22 bps), while the Govt Retail Index was 4.02% (up 21 bps), the Treasury Retail Index was 4.08% (up 24 bps from the month prior). The Crane Tax Exempt MF Index yielded 2.88% (up 147 bps) as of February.
Gross 7-Day Yields for these indexes to end February were: Prime Inst 4.70% (up 19 bps), Govt Inst 4.54% (up 23 bps), Treasury Inst 4.57% (up 23 bps), Prime Retail 4.66% (up 21 bps), Govt Retail 4.49% (up 20 bps) and Treasury Retail 4.40% (up 22 bps). The Crane Tax Exempt Index rose to 2.39% (up 101 bps). The Crane 100 MF Index returned on average 0.33% over 1-month, 1.00% over 3-months, 0.67% YTD, 2.15% over the past 1-year, 0.77% over 3-years (annualized), 1.21% over 5-years, and 0.73% over 10-years.
The total number of funds, including taxable and tax-exempt, rose by 6 in February to 883. There are currently 746 taxable funds, up 6 from the previous month, and 137 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 March issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Tuesday morning, features the articles: "Treasury MMFs Brace for Debt Ceiling Faceoff, Supply Shock," which reviews the risk to Treasury funds; "BlackRock's Matt Clay on European MMF Landscape," which quotes from a recent ICD webinar; and, "Federated 10-K Sheds Light on Regulatory Environment," which excerpts from Federated Hermes' annual report. We also sent out our MFI XLS spreadsheet Tuesday a.m., and we've updated our Money Fund Wisdom database with 2/28/23 data. Our March Money Fund Portfolio Holdings are scheduled to ship on Thursday, March 9, and our March Bond Fund Intelligence is scheduled to go out on Tuesday, March 14.
MFI's "Treasury MMFs Brace" article says, "While record asset levels and yields moving towards 5.0% are the big stories for money funds so far in 2023, many have begun to focus on the looming Treasury debt ceiling battle. Fitch Ratings tells us in the release, 'U.S. Debt Ceiling Uncertainty a Risk for Treasury Money Market Funds,' 'A default by the U.S. Treasury could pose liquidity and headline risks and ratings pressure for U.S. Treasury-only money market funds (MMFs), but would not necessarily result in downgrades, with considerations including the size of any exposure to defaulted securities and alternative sources of fund liquidity.'"
The piece continues, "They explain, 'The U.S. government debt limit was reached on Jan. 19, 2023. However, the Treasury Department is using 'extraordinary measures' to avoid defaulting on obligations.... The Congressional Budget Office has calculated the x-date will fall sometime between July and September 2023, though it cautioned that extraordinary measures could be exhausted sooner, and the Treasury could run out of funds before July.'"
Our BlackRock "profile" piece states, "Online money market funds trading portals ICD recently hosted a webinar entitled, 'Economic Update: Cash Investment Forecast for the Year Ahead,' featuring BlackRock Cash Management Head of International Portfolio Management Matt Clay. Clay and ICD host Luke Newman discussed a number of issues involving short-term investment trends in U.S. dollar, euro and sterling currencies. Newman says, 'I'm going to start off with a brief intro in terms of `what ICD saw in 2022, in terms of flows into the money market funds.... I'll then pass it over to BlackRock, who will be providing an economic update, an outlook at the macro level, and then talking more specifically around cash and the impact of monetary policy in general on short-term investment trends.'"
It continues, "He explains, 'We wanted to share some of the trends that we saw at ICD last year. So, we start in 2022 with low interest rates in the three main currencies, having been in a low interest rate environment for some time. Over the course of a year, we started seeing these rates rise which generated significant interest in money market funds.... For the first half of the year, assets in these funds were averaging just over the $65 billion mark. As central banks started increasing rates, you can see that assets significantly increased, peaking near to $95 billion at the end of last year. That's close to a 50% increase when compared to the first half of the year. This graph doesn't show the start of this year, but the trend has continued. So, in summary, as interest rates rise, so has the interest in money market funds.'"
Our "Federated 10-K" piece states, "Federated Hermes filed its latest '10-K Annual Report' with the SEC recently, and the 109-page document contains a wealth of information on money market mutual funds. On 'Distribution Channels,' it says, 'Federated Hermes' distribution strategy is to provide investment management products and services to more than 11,000 institutions and intermediaries, including, among others, banks, broker/dealers, registered investment advisors, government entities, corporations, insurance companies, foundations and endowments.... [I]nvestment products ... are offered and distributed in three markets.... U.S. financial intermediary (63%); U.S. institutional (28%); and international (9%).'"
MFI states, "They write, 'Financial intermediaries use Federated Hermes' products to meet the needs of their customers, who are often retail investors.... As of Dec. 31, 2022, managed assets in the U.S. financial intermediary market included $317.9 billion in money market assets.... Federated Hermes offers and distributes its products and strategies to a wide variety of domestic institutional customers including, among others, government entities, not-for-profit entities, corporations, corporate and public pension funds, foundations, endowments and non-Federated Hermes investment companies or other funds. As of Dec. 31, 2022, managed assets in the U.S. institutional market included $144.0 billion in money market assets.... [M]anaged assets in the international market included ... $15.0 billion in money market assets.'"
MFI also includes the News brief, "MMF Assets Surge to Record $5.3T," which says, "Assets jumped $56.0 billion in February to a record $5.261 trillion, according to MFI XLS, and assets jumped another $17.3 billion the first 3 days in March to $5.270 trillion, according to MFI Daily. See our sidebar on page 7 for more."
Another News brief, "Yields Up Another Quarter in Feb.," tells us, "Money fund yields moved 24 bps higher on average last month in direct response to the Fed's 25 basis point hike on Feb. 1. Our Crane 100 Money Fund Index (7-Day Yield) rose 24 basis points to 4.39% in the month ended 2/28. Money fund yields have risen from 4.05% on 12/31/22. Yields should remain flat over the next 3 weeks, but they should jump again following the Fed's next meeting on March 22 (if they hike rates again as expected)."
A sidebar, "SEC: Private Liquidity Funds," states, "The SEC released its latest quarterly 'Private Funds Statistics' report recently, which summarizes Form PF reporting and includes some data on 'Liquidity Funds,' or pools which are similar to but not money market funds. The publication shows overall Liquidity fund assets were higher in the latest reported quarter (Q2'22) at $328 billion (up from $313 billion in Q1'22 and up from $319 billion in Q2'21)."
Our March MFI XLS, with February 28 data, shows total assets increased $56.0 billion to $5.261 trillion, after increasing $22.5 billion in January, $70.2 billion in December and $55.4 billion in November. MMFs rose $42.2 billion in October, $1.7 billion in September, $2.3 billion in August, $26.0 billion in July and $31.9 billion in June. They decreased $10.7 billion in May and $74.3 billion in April. MMFs increased $24.1 billion in March, but decreased $34.6 billion last February.
Our broad Crane Money Fund Average 7-Day Yield was up 23 bps to 4.25%, and our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 24 bps to 4.39% in February. On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA and the Crane 100 both were both higher at 4.56% and 4.51%, respectively. Charged Expenses averaged 0.38% and 0.26% for the Crane MFA and the Crane 100. (We'll revise expenses on Wednesday once we upload the SEC's Form N-MFP data for 2/28/23.) The average WAM (weighted average maturity) for the Crane MFA was 17 days (unchanged from previous month) while the Crane 100 WAM remained the same at 14 days. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
AARP tells us "How to Earn More Interest on Your Savings in a new article. They state, "Interest rates on savings -- whether for cash stashed in money market mutual funds, bank money market accounts or certificates of deposit (CDs) -- are hitting levels last seen in the early 2000s. 'I'm just thrilled with all this,' says Peter Crane, publisher of Money Fund Intelligence. It's especially welcome news for retirees in need of low-risk income to help make ends meet and others seeking a safe place to set aside funds for an emergency. But not every financial institution is offering high interest rates, even to longtime customers. And even if you invest in money market mutual funds, whose yields float with the short-term market, you have to shop around for the best deal."
The piece continues, "Thank -- or blame -- the Fed. In an effort to squash inflation, the Federal Reserve has hiked its target for short-term interest rates eight times since 2021. Its key fed funds rate is now 4.5 percent to 4.75 percent and expected to go higher after the Fed's Open Market Committee meeting later in March. Typically, savings rates follow the fed funds rate, and you'll find plenty of CD offers for 4 percent or more."
It comments, "Some major banks, however, aren’t sharing the love, at least not with all their products. One reason: Banks set their own rates according to how much they need money from deposits, which they lend out at a higher rate. Many of the larger banks are flush with cash and in no hurry to lure more at higher interest rates."
AARP says, "Because interest rates are expected to keep rising, you might not want to lock in current rates with a CD, particularly in a long-term one.... Instead, consider putting your money in a high-yielding bank money market account or a money market mutual fund operated by a brokerage or mutual fund company, where you can find yields of 4 percent or more. A bank money market account's rates are set by the bank, which may be more or less than current short-term rates, depending on the bank's need for funds."
They tell us, "A money market fund, however, invests in short-term investments, such as Treasury bills, and gives you the current market rates less a management fee, which averages about 0.3 percent, according to Crane. The current average money market fund yield is 4.39 percent. Crane data expects the average yield to rise as high as 5 percent after the next Fed rate hike. Money market funds are not federally insured like most bank deposits, but they have a good track record of safety."
AARP also writes, "Monitoring CD rollovers and moving money between banks can be a chore, which is a strong argument for money market funds, Crane says. 'The funds are charging 0.3 percent and doing all that for you -- and giving you check writing and a debit card,' he says."
They add, "Higher rates are welcome news for savers. 'Back in the 1990s and early 2000s, 5 percent was the norm, and that seemed like the psychologically magic number,' Crane says. 'You could live off 5 percent.' And while inflation will erode the value of any interest-bearing account, it does so for any investment. True, 6.4 percent inflation will do big damage to a CD yielding 5 percent. It does even worse to a stock mutual fund that's losing 15 percent. 'It hits the other 85 percent you have left,' Crane says."
In other news, Wells Fargo wrote in a recent "Daily Short Stuff" a brief entitled, "SIFMA: What goes up, must come down." Author Vanessa Hubbard McMichael explains, "The SIFMA Municipal Swap index, otherwise referred to as SIFMA, is a barometer for VRDNs in the tax-exempt market. It is a 7-day index made up of tax-exempt variable rate demand obligations within a prescribed set of parameters (for example, individual securities must have a weekly reset option, not be subject to AMT, and have the highest short-term ratings, to name a few)."
She states, "Outside of seasonal periods in the calendar year, SIFMA is usually not a particularly active discussion topic amongst fixed income investors. But recently we have highlighted the surge in the weekly SIFMA index to current cycle highs, which has been fueled not by Fed policy, but by dynamics with the flow of cash. Over the past two weeks, however, the index has reversed course and quickly retreated. This week, SIFMA richened 62 basis points versus last week's reset, falling to 2.80%."
Wells continues, "The week prior, this index has declined by 56 basis points, resulting in two consecutive weeks whereby it fell and an aggregated decline of 118 basis points. Over this same period, retail tax-exempt money market funds have experienced sizable inflows, with assets growing by over $5.0 billion each week. Moreover, this week, March 1 reflected a heavier period for both maturities and coupon payments. Both dynamics have aided in the retracement of the recent surge in the weekly SIFMA index."
They add, "Still, despite the quick surge in the SIFMA rate throughout February, its value did not reach 100% of any of the typical reference rates used (versus 1-Month LIBOR or overnight SOFR). The SIFMA/LIBOR and SIFMA/SOFR ratios reached 86% and 87% mid-February, respectively. During the March/April seasonal calendar period (reflecting flows in the market associated with U.S. tax season), it is common for the SIFMA index to reach or climb above 100%. Looking back at data from April 2018 through this week, there was only one year during which the SIFMA/SOFR ratio did not touch or climb above 100%."
Our Crane Tax Exempt Index currently yields 2.73% (as of 3/2/23), down 51 bps over the past week. The Tax-Exempt Index was at 2.89% on Feb. 28, 1.40% on Jan. 31, 3.15% on Dec. 30, 2022, and 1.48% on Nov. 30, 2022. Assets in Tax-Exempt MMFs totaled $121.5 billion on 3/2, $118.8B on Feb. 28, $119.4B on Jan. 31, $117.2B on Dec. 30, 2022 and $115.3B on Nov. 30, 2022, according to our Money Fund Intelligence Daily.
ICI's latest weekly "Money Market Fund Assets" report shows money fund assets skyrocketing in the latest week to a record $4.9 trillion. Assets jumped $73.4 billion to $4.89 trillion as Institutional assets finally joining their Retail brethren with big asset gains. Over the past 52 weeks, money fund assets have risen $288 billion, or 6.2%, with Retail MMFs rising by $330 billion (22.3%) and Inst MMFs falling by $42 billion (-1.4%). ICI shows assets up by $159 billion, or 3.4%, year-to-date in 2023, with Institutional MMFs up $23 billion, or 0.8% and Retail MMFs up $135 billion, or 8.1%. (Note: We hope you'll join us later this month at Crane's Bond Fund Symposium, which takes place March 23-24, 2023, in Boston, Mass. Click here for details.)
The weekly release says, "Total money market fund assets increased by $73.38 billion to $4.89 trillion for the week ended Wednesday, March 1, the Investment Company Institute reported. Among taxable money market funds, government funds increased by $55.67 billion and prime funds increased by $12.36 billion. Tax-exempt money market funds increased by $5.35 billion." ICI's stats show Institutional MMFs jumping $51.0 billion and Retail MMFs rising $22.4 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.997 trillion (81.7% of all money funds), while Total Prime MMFs were $781.5 billion (16.0%). Tax Exempt MMFs totaled $115.1 billion (2.4%).
ICI explains, "Assets of retail money market funds increased by $22.36 billion to $1.81 trillion. Among retail funds, government money market fund assets increased by $7.57 billion to $1.20 trillion, prime money market fund assets increased by $10.46 billion to $514.97 billion, and tax-exempt fund assets increased by $4.32 billion to $102.63 billion." Retail assets account for over a third of total assets, or 37.0%, and Government Retail assets make up 65.9% of all Retail MMFs.
They add, "Assets of institutional money market funds increased by $51.03 billion to $3.08 trillion. Among institutional funds, government money market fund assets increased by $48.10 billion to $2.80 trillion, prime money market fund assets increased by $1.90 billion to $266.53 billion, and tax-exempt fund assets increased by $1.03 billion to $12.44 billion." Institutional assets accounted for 63.0% of all MMF assets, with Government Institutional assets making up 90.9% of all Institutional MMF totals.
According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets increased by $67.4 billion for the month of February (through 2/28/23), and they rose another $23.4 billion on the first day of March to a record $5.276 trillion. (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.)
In other news, we quoted earlier this week from Federated Hermes' latest "10-K Annual Report" filing with the SEC. (See our March 1 News, "Federated Hermes' Annual 10-K Report on Distribution and Regulations.") Today, we quote from the remainder of the filing.
On European regulations, they comment, "The regulation of money market funds in the EU and UK is another example of potential divergence between the EU and UK post-Brexit. EU and UK money market fund regulation is considered 'equivalent' until December 31, 2025. Accordingly, UK-domiciled money market funds currently remain on par with current EU regulatory requirements. As a result, EU-based funds can still use passports to sell to UK investors. However, following various consultations, reports, and speeches by representatives of IOSCO and the FSB in 2020, 2021 and 2022, similar to the SEC in the U.S., ESMA, the BoE, the European Systemic Risk Board (ESRB), the European Banking Authority (EBA), and the International Monetary Fund (IMF), among other regulators, have been re-examining existing money market fund regulation, soliciting public comment on proposed money market fund reforms, and issuing reports and recommendations."
Federated continues, "While money market fund reform continues to be discussed in the UK and the EU, new proposals for reform have not been promulgated. It has been reported that, in late January 2023, Andrew Bailey, a governor of the BoE and Chairman of the FSB, expressed concerns regarding money market funds given their perceived impact during the recent financial crisis and the 'mini budget' crisis in the UK in September 2022, and indicated that the BoE and FCA will come out with their own money market fund reform proposals in 2023. It also has been reported that the EU has indicated that it will not be able to work on money market reform proposals until the next European Commission mandate in 2025."
They conclude, "Given the above, it is possible that the EU or UK could deviate from, or simply not adopt, any new or amended UK or EU money market fund laws, rules or regulations that could be adopted in the future. Management believes that a final SEC rule on money market fund reforms could influence the UK and EU regulators. As discussed above, Federated Hermes believes that money market funds are investment products that have proven their resiliency. Federated Hermes intends to continue to engage with UK and EU (as well as U.S.) regulators in 2023 and beyond, both individually and through industry groups, to shape any further money market fund reforms to avoid overly burdensome requirements or the erosion of benefits that money market funds provide."
The 10-K says, "Since the beginning of the fourth quarter 2022, UK and EU regulators and supervisory authorities issued, proposed, or adopted other new consultations, directives, rules, laws, and guidance that impact or could impact UK and EU investment management industry participants, including Federated Hermes. For example: On January 27, 2023, the ESMA published its 'Guidelines on stress test scenarios under the MMF Regulation,' (i.e., Money Market Fund Regulation (MMF Regulation)), which followed the ESMA's publication on November 30, 2022, of its Final Report on 'Guidelines on stress test scenarios under the MMF Regulation.' In these new Guidelines, the ESMA provides updated specifications on the types of money market fund stress tests and their calibration. Upon the new Guideline becoming effective on March 27, 2023, managers of money market funds will need to use them to conduct stress tests and complete required reporting under Article 37 of the MMF Regulation. Federated Hermes is reviewing these new Guidelines and their impact on its money market fund business."
It also comments, "Management continues to monitor and assess any lingering potential impact of the Pandemic generally, particularly on the workforce, and the impact of the increasing interest rate environment on asset values and money market fund and other fund asset flows, and related asset mixes, as well as the degree to which these factors impact Federated Hermes' institutional prime and municipal (or tax-exempt) money market business and Federated Hermes' Financial Condition. Management also continues to monitor, and expend internal and external resources in connection with, the potential for additional regulatory scrutiny of money market funds, including prime and municipal (or tax-exempt) money market funds."
In a section on "Risk Factors," the report discusses the, "Risk of Federated Hermes' Money Market Products' Ability to Maintain a Stable Net Asset Value." They state, "Approximately 40% of Federated Hermes' total revenue for 2022 was attributable to money market assets. An investment in money market funds is neither insured nor guaranteed by the FDIC or any other government agency. Federated Hermes' retail and government/public debt money market funds, and its private and collective money market funds, seek to maintain a stable or constant NAV.... It is also possible to lose money by investing in these funds. Federated Hermes devotes substantial resources, such as significant credit analysis, consideration of ESG factors and attention to security valuation, in connection with the management of its products and strategies. However, the NAV of an institutional prime or municipal (or tax-exempt) money market fund, or variable NAV fund or, if the above described conditions are met, a low-volatility NAV money market fund, can fluctuate, and there is no guarantee that a government/public debt or retail (i.e., stable or constant NAV) money market fund, or a low-volatility money market fund, will be able to preserve a stable or constant NAV in the future.... If the NAV of a Federated Hermes stable or constant NAV money market fund were to decline to less than $1.00 per share, such Federated Hermes money market fund would likely experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated Hermes' Financial Condition."
It adds, "Many of Federated Hermes' products and strategies are designed for use by institutions such as banks, insurance companies and other corporations. A large portion of Federated Hermes' managed assets, particularly money market, fixed-income, and alternative/private markets assets, are held by institutional investors. If the structure of institutional investment products, such as money market funds, changes or becomes disfavored by institutions, whether due to regulatory or market changes, competing products (such as FDIC-insured deposit products or non-transparent, actively managed ETFs) or otherwise, Federated Hermes could be unable to retain or grow its share of this market and this could adversely affect Federated Hermes' future profitability and have a material adverse effect on Federated Hermes' Financial Condition."
Finally, the 10-K states, "Increases in interest rates could have an adverse effect on Federated Hermes' revenue from money market, fixed-income, alternative/private markets and other products and strategies. In a rising short-term interest rate environment, certain investors using money market products and strategies or other short-duration fixed-income products and strategies for cash management purposes can shift these investments to direct investments in comparable instruments in order to realize higher yields. In addition, rising interest rates will tend to reduce the fair value of securities held in various investment products and strategies. Rising interest rates can also impact the value of intangible or other assets held on Federated Hermes' financial records and contribute to financial impairment."
Money fund yields moved 24 bps higher on average in February in direct response to the Fed's 25 basis point hike on Feb. 1. Our Crane 100 Money Fund Index (7-Day Yield) rose 24 basis points to 4.39% in the month ended 2/28. Money fund yields have risen from 4.05% on 12/31/22, and they're up from 3.59% on Nov. 30. They were 2.88% on Oct. 31 and 2.66% on Sept. 30 (and of course 0.02% on 12/31/21). Yields should remain flat over the next 3 weeks, but they should jump again following the Fed's next meeting on March 22 (if they hike rates again as expected). The top-yielding money market funds have broken above 4.70% and should move towards 5.0% by the time March is over. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 681), shows a 7-day yield of 4.27%, up 25 bps in February.
Prime Inst MFs were up 21 bps to 4.49% in the latest month. Government Inst MFs rose by 24 bps to 4.32%. Treasury Inst MFs were up 24 bps for the month to 4.31%. At month-end, Treasury Retail MFs yielded 4.09% (up 23 bps), Government Retail MFs yielded 4.04% (up 24 bps), and Prime Retail MFs yielded 4.33% (up 22 bps). Tax-exempt MFs' 7-day yields skyrocketed 149 bps to 2.89%. No money funds yielded below the 2.00% mark in February; just 42 funds yield between 2.00% and 2.99% with $19.3 billion, or 0.4%; 204 funds yield between 3.00% and 3.99% ($184.6 billion, or 3.5%), and the vast majority, 570 funds, now yield 4.00% or more (totaling $5.009 trillion, or 96.1%).
During the month of February (through 2/28/23), money fund assets increased by $67.4 billion to a record $5.252 trillion, according to Crane Data's Money Fund Intelligence Daily. Prime MMF assets again accounted for the lion's share of the increase, rising $56.3 billion in February to $1.156 trillion. Government assets (including Treasury MMFs) increased $11.6 billion in February to $ $3.978 trillion, while Tax Exempt assets decreased $617 million to $118.8 billion.
In other news, the Federal Deposit Insurance Corporation released its latest "FDIC Quarterly Banking Profile," which says "Despite an increase in insured deposits in the fourth quarter, total deposits declined $143.3 billion (0.7 percent) between third quarter 2022 and fourth quarter 2022. This was the third consecutive quarter that the industry reported lower levels of total deposits. A reduction in uninsured deposits was the primary driver of the quarterly decline. A decline in deposit accounts with balances greater than $250,000 (down $226.4 billion, or 2.2 percent) led the quarterly reduction. As of fourth quarter 2022, deposits represented 81.4 percent of total assets, well above the pre-pandemic average of 76.7 percent. The decline in deposits in fourth quarter 2022 was accompanied by a $322.5 billion (7.5 percent) increase in wholesale funding for the industry from the prior quarter."
It explains, "Community banks reported a nominal deposit growth rate of 0.03 percent ($621.6 million) during fourth quarter 2022, lower than the growth rate of 0.8 percent reported in third quarter 2022. However, more than half of all community banks (55.2 percent) reported a decrease in deposit balances from the prior quarter. Growth in deposit accounts with less than $250,000 (up $20.6 billion) drove total deposit growth and was almost entirely offset by a decline in uninsured balances. In the fourth quarter, growth in interest-bearing deposit balances (up $19.5 billion, or 1.2 percent) was largely offset by a decline in noninterest-bearing deposits. Deposit balances rose 3.5 percent ($77.2 billion) from one year ago. Other borrowed money rose $27.9 billion (34.6 percent) from one quarter ago because of an increase in Federal Home Loan Bank advances of $27.0 billion (35.4 percent). The share of wholesale funds to total assets was 19.2 percent in fourth quarter, up from 17.2 percent in third quarter 2022 and above the pre-pandemic average of 17.5 percent."
The press release, entitled, "FDIC-Insured Institutions Reported Net Income of $68.4 Billion in Fourth Quarter 2022," comments, "Reports from 4,706 commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reflect aggregate net income of $68.4 billion in fourth quarter 2022, a decrease of $3.3 billion (4.6 percent) from the third quarter. Lower noninterest income and higher provision expenses offset an increase in net interest income. These and other financial results for fourth quarter 2022 are included in the FDIC’s latest Quarterly Banking Profile.... The net interest margin (NIM) increased 23 basis points from a quarter ago and 82 basis points from the year-ago quarter to 3.37 percent, above the pre–pandemic average of 3.25 percent. The year–over–year growth in the NIM was the largest reported increase in the history of the QBP."
It continues, "The average yield on earning assets increased 76 basis points from third quarter 2022 to 4.54 percent due to strong loan growth and higher market interest rates. Average funding costs increased 53 basis points from the prior quarter to 1.17 percent. The average community bank quarterly NIM rose 7 basis points from the prior quarter and 48 basis points from the year–ago quarter to 3.71 percent. The community bank NIM is now above its pre–pandemic average of 3.63 percent. The average yield on earning assets rose 44 basis points quarter over quarter and 104 basis points year over year, while average funding costs rose 37 basis points quarter over quarter and 56 basis points year over year."
FDIC Chairman Martin Gruenberg comments, "Rising short-term interest rates and continued loan growth supported a quarter-over-quarter increase in the net interest margin for the industry as a whole and community banks. The change in deposit rates paid by banks continued to lag the change in rates charged on loans. Additional short-term interest rate increases combined with longer asset maturities may also affect bank balance sheets in coming quarters. Unrealized losses on available-for-sale and held-to-maturity securities remained elevated at $620 billion. Higher market interest rates may also erode real estate and other asset values as well as weaken borrowers' loan repayment ability. These will be matters of ongoing supervisory attention by the FDIC."
He tells us, "The net interest margin for the banking industry as a whole widened for the third consecutive quarter, increasing 23 basis points from last quarter to 3.37 percent, and is now above the pre-pandemic average of 3.25 percent. Despite the improvement, the net interest margin improved at a slower pace than the prior quarter as deposit costs increased. [A chart showing] quarter-over-quarter changes in the industry's yield on loans and cost of deposits, which help to explain the industry's increasing net interest margin over the past three quarters. Both loan yields, the interest banks charge on loans, and deposit costs, the interest banks pay on deposits, began to increase in the second quarter of 2022 when market interest rates began to increase rapidly. Loan yields increased significantly more than deposit costs in each of the last three quarters.
Gruenberg adds, "In the fourth quarter, the banking industry reported that yields on loans increased by 73 basis points while the cost of deposits increased by 46 basis points. Competitive pressures to raise interest rates on deposits may bring about some greater balance in future quarters. Historical experience suggests that the gap between changes in loan yields and deposit costs tends to increase early in rate-rising cycles but then decreases when market rates stabilize or decline. This chart shows that deposits declined for a third consecutive quarter. Total deposits were $19.2 trillion, down 0.7 percent from the level reported in the third quarter. While this reduction slightly offsets the unprecedented growth in deposits reported during the pandemic, total deposits are still well above pre-pandemic average levels. A reduction in uninsured deposits was the driver of the quarterly decline since insured deposits increased."
Finally, Federated Hermes writes in its new monthly commentary, "Coming to terms: Investors have begrudgingly capitulated to a still-hawkish Fed." Deborah Cunningham says, "Acceptance is hard, and the financial markets have struggled with it this year. Investors turned relief about moderating inflation and a slowing pace of Federal Reserve rate hikes into the expectation that the conclusion of the tightening cycle is imminent…. The rightsizing of market expectations has given us the confidence that yields offered on government and corporate securities maturing in the second half of 2023 won’t be underwater. We shifted the weighted average maturity (WAM) of our prime money market funds out by five days. Not a big move, but it’s more than symbolic."
She continues, "We'd probably be more aggressive were it not for the debt ceiling fiasco. We haven’t changed our opinion that it will be resolved in some form, most likely with another kick of the proverbial can. But we think the supply of Treasury bills will dwindle as we get close to the X-date this summer, reversing the trend of the last few months, and that securities maturing near it will be cheap. But the big picture is that we expect yields of liquidity products to keep climbing. And so do investors. In money fund land, strong returns are keeping industry assets at record highs. While that is led by retail investors, high-net-worth customers are leaving bank deposit products due to comparably paltry interest rates, according to the Wall Street Journal. The liquidity industry is certainly happy to accept those."
Federated Hermes filed its latest "10-K Annual Report" with the SEC last week, and the 109-page document contains a wealth of information on money market mutual funds, including discussions on "Distribution Channels and Product Markets," "Regulatory Matters" and "Risk Factors." The report tells us, "Federated Hermes ... is a global leader in active, responsible investing with $668.9 billion in assets under management (AUM or managed assets) at December 31, 2022. Federated Hermes has been in the investment management business since 1955 and is one of the largest investment managers in the United States.... Federated Hermes provides investment advisory services to 174 Federated Hermes Funds as of December 31, 2022.... Of the 174 Federated Hermes Funds, Federated Hermes' investment advisory subsidiaries managed 23 money market funds with $335.9 billion in AUM, 45 equity funds with $43.3 billion in AUM, 55 fixed-income funds with $43.2 billion in AUM, 46 alternative/private markets funds with $13.1 billion in AUM and five multi-asset funds with $2.9 billion in AUM. As of Dec. 31, 2022, Federated Hermes provided investment advisory services to $230.5 billion in Separate Account assets. These Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit plans, corporations, trusts, foundations, endowments, sub-advised funds and other accounts or products owned or sponsored by third parties."
It explains, "Federated Hermes, which began selling money market fund products to institutions in 1974, is one of the largest U.S. managers of money market assets, with $476.8 billion in AUM at December 31, 2022. Federated Hermes has developed expertise in managing cash for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and competitive yields. Federated Hermes also manages retail money market products that are typically distributed through broker/dealers. At Dec. 31, 2022, Federated Hermes managed money market assets across a wide range of categories: government ($322.3 billion); prime ($145.6 billion); and municipal (or tax-exempt) ($8.9 billion)."
Discussing "Distribution Channels and Product Markets," the 10-K says, "Federated Hermes' distribution strategy is to provide investment management products and services to more than 11,000 institutions and intermediaries, including, among others, banks, broker/dealers, registered investment advisors, government entities, corporations, insurance companies, foundations and endowments. Federated Hermes uses its trained sales force of more than 200 representatives and managers, backed by an experienced support staff, to offer its products and strategies, add new customer relationships and strengthen and expand existing relationships. Federated Hermes' investment products and strategies are offered and distributed in three markets. These markets, and the relative percentage of managed assets at Dec. 31, 2022 attributable to such markets, are as follows: U.S. financial intermediary (63%); U.S. institutional (28%); and international (9%)."
They write on "Financial Intermediaries," "Federated Hermes offers and distributes its products and strategies in this market through a large, diversified group of over 6,500 national, regional and independent broker/dealers, banks and registered investment advisors. Financial intermediaries use Federated Hermes' products to meet the needs of their customers, who are often retail investors. Federated Hermes offers a full range of products to these customers, including Federated Hermes Funds and Separate Accounts (including private funds). As of Dec. 31, 2022, managed assets in the U.S. financial intermediary market included $317.9 billion in money market assets, $55.1 billion in equity assets, $39.8 billion in fixed-income assets, $2.6 billion in multi-asset and $0.8 billion in alternative/private markets assets."
Under "U.S. Institutional," they tell us, "Federated Hermes offers and distributes its products and strategies to a wide variety of domestic institutional customers including, among others, government entities, not-for-profit entities, corporations, corporate and public pension funds, foundations, endowments and non-Federated Hermes investment companies or other funds. As of Dec. 31, 2022, managed assets in the U.S. institutional market included $144.0 billion in money market assets, $42.5 billion in fixed-income assets, $2.9 billion in equity assets, $0.6 billion in alternative/private markets assets and $0.4 billion in multi-asset."
For "International" channels, "Federated Hermes manages assets from non-U.S. institutional and financial intermediary customers through subsidiaries focused on gathering assets in Europe, the Middle East, Canada, Latin America and the Asia Pacific region. As of Dec. 31, 2022, managed assets in the international market included $23.5 billion in equity assets, $19.4 billion in alternative/private markets assets, $15.0 billion in money market assets and $4.5 billion in fixed-income assets."
On "Regulatory Matters," they comment, "Examples of final rules that are expected to be issued in 2023 include money market fund reform, climate change disclosure, cybersecurity risk governance, investment company names, and loan or borrowing of securities, among other topics.... After nearly three years of analysis and debate, regulators maintain their focus on the market conditions that existed in March 2020, and their impact on open-end funds, including institutional prime and municipal (or tax-exempt) money market funds. For example, like other regulatory or government bodies, in its November 2022 'Financial Stability Report,' the Board of Governors of the Federal Reserve System (Governors) reported that certain money market funds have structural vulnerabilities that make them prone to 'runs,' an apparent reference to the withdrawal of assets and redemption risks. The Financial Stability Oversight Council (FSOC) also discussed money market and other open-end funds at its November 4, 2022 meeting. Chairperson Yellen, in discussing vulnerabilities in money market funds, open-end funds, and hedge funds, stated that these funds continue to pose risks to financial stability and can amplify shocks, transmitting stress to important counterparties and markets. She further stated that member agencies should act to address these concerns. The comment period for the SEC's proposed money market fund reforms ended on November 1, 2022, and as noted above, the SEC indicated in the SEC Fall Reg Flex Agenda that it intended to finalize its proposed money market fund reforms by April 2023."
The 10-K states, "Federated Hermes has continued, and will continue, to actively participate in the debate surrounding money market fund reforms. Consistent with prior comment letters and meetings with SEC Commissioners and SEC staff, Federated Hermes maintains its position that: (1) swing pricing will regulate institutional prime money market funds out of existence; (2) discretionary fees and gates administered by fund boards through the exercise of their fiduciary duty are the best alternatives for money market funds; (3) eliminating the link between mandatory fees and gates and a 30% liquid asset requirement is most appropriate; and (4) a four-digit Net Asset Value (NAV) for government money market funds to deal with the possibility of negative interest rates is not a better solution than allowing the use of a reverse distribution mechanism (RDM). Federated Hermes expressed these views in its letters to the SEC and to SEC Commissioners, including those letters dated June 9, 2022, June 14, 2022, August 10, 2022, and September 22, 2022, which were submitted to SEC Commissioners Peirce, Crenshaw, Uyeda, and Lizárraga after meetings with them on June 3, 2022, June 7, 2022, August 2, 2022, and September 20, 2022, respectively. In a November 1, 2022 comment letter, among other comments, Federated Hermes reiterated its concerns that: (1) the SEC's proposed amendments to Form N-MFP, stress testing requirements, and four-digit NAV will further harm money market funds and their investors and intermediaries without corresponding benefits; (2) the SEC has not developed and put forward data to support the more radical aspects of its proposal, in particular swing pricing; and (3) swing pricing tied to a specific metric could itself trigger mass redemptions or serve as an opening for market timers to game the rule."
It continues, "Federated Hermes believes that, once unencumbered from the perils of an inappropriate linkage between liquidity levels and liquidity fees and redemption gates, money market funds have sufficient liquidity levels currently to protect investors from dilution. Federated Hermes supports the use of a RDM in a negative rate environment. Federated Hermes has opposed the SEC's prohibition on the use of a RDM to maintain the stable NAVs of government money market funds because, among other reasons, the SEC's prohibition on the use of a RDM: (1) does not reflect any formal investment management industry feedback; and (2) will eliminate the use of government money market funds as sweep investments. Federated Hermes also has asserted that, due to the significant technology investments that would be necessary for market participants to modify transaction systems to process transactions in a hypothetical negative yield scenario without using a RDM, the absence of a RDM could lead to material outflows in U.S. government money market funds to bank deposits or non-regulated investment products, consistent with the notion of regulating government money market funds out of existence. Federated Hermes has argued that the use of a RDM is the clear investor preference and would preserve money market funds as an investment product for all stakeholders, and that the SEC's concerns over investor confusion regarding the operation of a RDM can be adequately addressed through disclosure. In a letter dated November 4, 2022, Federated Hermes commented that providing fund boards with the option to utilize either a RDM or a four-digit NAV is the right solution. In a letter to SEC Commissioner Crenshaw dated Dec. 16, 2022, Federated Hermes also expressed its concern that the SEC's proposal to mandate U.S. government money market funds move to a four-digit NAV in a negative rate environment did not properly consider the use of a RDM and could lead to a loss of at least $1 trillion in U.S. government money market assets that are invested via traditional sweep accounts and up to an additional $1 trillion in assets invested into U.S. government money market funds which are made as position trades entered into the cash sweep system manually at the end of the day."
They write, "Management believes money market funds provide a more attractive investment opportunity compared to other competing products, such as insured deposit account alternatives. Management also believes that money market funds are resilient investment products that have proven their resiliency. While Federated Hermes agrees that certain regulations could be improved such improvements should be measured and appropriate, preserving investors' ability to invest in all types of money market funds. Federated Hermes also supports efforts to permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements imposed under the money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations on July 23, 2014, and related guidance, for institutional and municipal (or tax-exempt) money market funds. Legislation is being re-introduced in both the Senate and the House of Representatives in a continuing effort to get these money market fund reform revisions regarding the use of amortized cost passed and signed into law."
Federated also states, "The SEC's aggressive rulemaking, particularly regarding money market fund reform and climate/ESG disclosure, could be challenged by legislators and in the courts by investment management industry participants and other industry groups. Particularly in the context of climate/ESG disclosures, the likely success of any challenge could be bolstered in light of the U.S. Supreme Court's recent decision in West Virginia vs. Environmental Protection Agency, in which the Supreme Court weakened the deference given to an administrative agency's regulatory authority by applying the 'Major Questions Doctrine,' which the Supreme Court has used to require courts to defer to Congress rather than administrative agencies regarding matters that it concludes have significant economic and/or political impact if it believes that Congress did not specifically grant such powers to an agency." (Watch for more coverage of Federated's 10-K in coming days.)
