News Archives: October, 2024
Bloomberg published an article titled, "Money-Market Funds Stay in Vogue Even as Reforms Go Into Effect," which recapped the latest changes to the Prime Institutional money fund space. They write, "Money-market funds are attracting record amounts of cash, even as a regulatory overhaul pins the industry with costly mandatory fees. The US Securities and Exchange Commission approved measures last year designed to make the $6.42 trillion industry more transparent and prevent investors from yanking money from such funds during market volatility or financial stress like in March 2020. The final piece of the reform requiring fund managers to impose mandatory liquidity fees went into effect on Wednesday."
The piece explains, "While such a charge threatened to scare off investments, high yields have continued to lure money -- leaving most of the largest institutional prime funds intact. There were, however, at least a dozen institutional prime funds that shut down or converted to government vehicles this year." (Note: The article includes a table with the changes, which looks suspiciously like our "bigsort2" file, though they don't list a source. Let us know if you'd like to see our table though!)
They quote Bank of America's Mark Cabana, "The most striking to me is how smooth it appears to have gone. The total size of prime institutional funds decreased but it's quite remarkable how little market impact it had, especially if you compare this to 2016. This is essentially a whimper, not even leaving as much of a mark."
Bloomberg also quotes John Donohue, head of global liquidity at JPMorgan Asset Management, "This time it's been much much more settled. We see clients in prime funds willing to stay through reform and changes."
They tell us, "Ahead of the new mandate, JPMorgan Asset Management on Aug. 1 adjusted the parameters of its institutional prime fund to a one-strike net asset value, that is, pricing shares once a day and earlier so they have more time to calculate any potential fees to meet the new rule. Other operational changes were instituted to track redemptions throughout the day, according to Donohue. JPMorgan's prime money-market fund is one of the largest in the industry growing to nearly $86 billion of assets under management as of Sept. 30, from just roughly $19 billion in October 2016."
The piece adds, "Money-market funds have seen nearly $1.87 trillion of inflows since the Fed started its aggressive interest-rate hiking cycle in March 2022, eventually pushing rates well over 5% and making cash an attractive asset class. Although the central bank has begun reducing rates ... investors continue piling into money-market funds given that they tend to be slower to pass the lower rates on to investors."
Mutual fund news source ignites also writes about shift in, "Prime Institutional Funds: 'Juice Isn't Worth the Squeeze'." They comment, "Asset managers of all sizes have dissolved their prime institutional funds ahead of Wednesday's implementation date of the Securities and Exchange Commission's new liquidity and fee requirements, compliance professionals said. Just a handful of firms have opted to continue to offer the funds, with most deciding that the compliance challenges, such as daily portfolio pricing and redemption fee calculations, are too burdensome."
They explain, "The December 2021 proposal was a response to the stress that money market funds faced at the start of the Covid-19 pandemic, when investors rapidly pulled more than $130 billion from those funds in the month of March 2020, Ignites previously reported. The proposal ultimately passed with a 3-2 vote by the SEC commissioners, with commissioner Hester Peirce asking if the agency was 'trying to kill' the product before that vote. The reforms going into effect on Wednesday include a requirement for funds to charge a liquidity fee when daily net redemptions exceed 5% of net assets [and when prices move noticeably]."
Amy Lynch of FrontLine Compliance tells ignites, "It's not a cost-effective product to really offer unless you have made a huge presence in the market and have a certain amount of market share. It's going to be one of those scenarios where the bigger players are going to benefit as the smaller players get out of the market."
They state, "American Funds, which at one point had the largest prime fund on the market, filed to convert its $144 billion central cash fund to a government money market fund in February 2024.... Vanguard also liquidated its prime funds, converting its last prime institutional fund into a money market fund this past March. Other firms, such as Allspring, BlackRock, Schwab and UBS, have also converted their prime institutional funds, according to Peter Crane, president of Crane Data."
The article says, "More than $355 billion in prime institutional funds assets had exited the market as of Aug. 31, according to Crane Data. At least 19 prime funds, which constituted 42.8% of all available products in the category, have been liquidated or converted in 2024, the data showed. Despite the exodus, total money fund assets are at an all-time high, and the products remain attractive to both investors and the providers willing to take on the compliance challenges."
They too quote JPMAM's John Donohue, "Prime money market funds are already floating NAV funds, unlike a government or a Treasury market fund, so the clients in these funds are already comfortable with floating NAV. They understand the product, and they are happy to look at a product that has a higher yield."
Fred Teufel, a director at Vigilant Compliance, says to ignites, "The juice just isn't worth the squeeze. The rules and requirements basically outweigh the benefits from using hourly pricing in the marketplace."
They also quote Dechert's Stephen Cohen, "Maintaining the products under the new rules is 'time consuming and costly' ... There's never been a system where you have to measure your net redemptions at the end of the day and then run in the background a calculation to determine liquidity costs for liquidating a pro rata share of your portfolio."
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 Sept. 27) includes Holdings information from 61 money funds (up 1 from a week ago), or $3.361 trillion (up from $3.091 trillion) of the $6.791 trillion in total money fund assets (or 49.5%) 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 and our Sept. 12 News, "September Money Fund Portfolio Holdings: Treasuries Jump; Repo Slides.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Treasuries totaling $1.494 trillion (up from $1.342 trillion a week ago), or 44.4%; Repurchase Agreements (Repo) totaling $1.312 trillion (up from $1.169 trillion a week ago), or 39.0%, and Government Agency securities totaling $280.1 billion (up from $259.5 billion), or 8.3%. Commercial Paper (CP) totaled $104.9 billion (down from a week ago at $109.5 billion), or 3.1%. Certificates of Deposit (CDs) totaled $62.6 billion (down from $68.6 billion a week ago), or 1.9%. The Other category accounted for $76.4 billion or 2.3%, while VRDNs accounted for $31.7 billion, or 0.9%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.494 trillion (44.4% of total holdings), Fixed Income Clearing Corp with $389.9B (11.6%), the Federal Home Loan Bank with $197.4 billion (5.9%), the Federal Reserve Bank of New York with $130.1B (3.9%), JP Morgan with $98.7B (2.9%), BNP Paribas with $81.9B (2.4%), Citi with $73.0B (2.2%), Federal Farm Credit Bank with $65.7B (2.0%), RBC with $55.0B (1.6%) and Goldman Sachs with $52.1B (1.6%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($259.2B), Goldman Sachs FS Govt ($242.0B), Fidelity Inv MM: Govt Port ($234.1B), JPMorgan 100% US Treas MMkt ($223.6B), BlackRock Lq FedFund ($169.0B), State Street Inst US Govt ($155.9B), Morgan Stanley Inst Liq Govt ($145.4B), Fidelity Inv MM: MM Port ($137.3B), BlackRock Lq Treas Tr ($131.1B) and Dreyfus Govt Cash Mgmt ($129.4B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
In other news, The Wall Street Journal writes "That 5% CD Is a Great Deal -- Until the Bank Calls It Back," which tells us, "The era of 5% cash returns is ending early for some investors. Before the Federal Reserve began cutting rates in September, banks offered certificates of deposit promising high yields for locking up cash years into the future. The highest-yielding ones, with returns in excess of 5%, had features allowing the bank to 'call' them before they mature, handing back the cash and accrued interest. Those features got little attention when rates were rising because banks weren't about to call their CDs and borrow money at even higher rates."
The piece explains, "Now, banks including JPMorgan Chase and U.S. Bank are calling back more high-yielding CDs before they mature to save on interest as rates begin to fall, according to people familiar with the matter. In the rush to lock in easy returns, many everyday investors likely purchased callable CDs without understanding what they were signing up for, according to Kathy Jones, chief fixed-income strategist at Charles Schwab."
It states, "Most CDs aren't callable, but the ones that are typically offer the highest rates. Advertised yields on callable CDs tend to be about 0.4% higher than noncallable CDs with the same duration, according to deposit research firm Curinos. They are generally sold through brokerages such as Fidelity and Charles Schwab, which offer them on behalf of banks. About 18% of CDs bought and sold through Fidelity this year were callable, according to the brokerage."
The Journal says, "Savers poured more than $650 billion into brokered CDs since rates started rising in 2022, hoping to lock in risk-free returns, which peaked above 5%. The amount of brokered deposits in the banking system more than doubled in the past two years, according to FDIC data. Many regional banks loaded up on high-cost brokered deposits to ride out the banking crisis of 2023. Unlike traditional CDs sold directly by retail banks to customers, brokered deposits are usually managed by bookkeeping teams at the bank that are more focused on keeping costs low than fostering long-term relationships."
It adds, "What happens to your money after a CD gets called depends on your brokerage and its default settings. One option is to set up your account so that deposits go into a money-market account, which can still offer a competitive return on uninvested cash. With interest rates falling, it pays to quickly decide where to reinvest your funds. Look for other investments, such as noncallable CDs, Treasurys or high-yield savings accounts. You'll likely need to reinvest at a lower rate unless you're willing to explore riskier investments like corporate bonds or municipal bonds. As Jones said: '5% money with no risk is gone.'"
Finally, the Federal Reserve Bank of New York published a Liberty Street Economics blog titled, "Are Nonbank Financial Institutions Systemic?" It states, "Recent events have heightened awareness of systemic risk stemming from nonbank financial sectors. For example, during the COVID-19 pandemic, liquidity demand from nonbank financial entities caused a 'dash for cash' in financial markets that required government support. In this post, we provide a quantitative assessment of systemic risk in the nonbank sectors."
The post explains, "Even though these sectors have heterogeneous business models, ranging from insurance to trading and asset management, we find that their systemic risk has common variation, and this commonality has increased over time. Moreover, nonbank sectors tend to become more systemic when banking sector systemic risk increases."
It adds, "The systemic risk of diverse nonbank sectors has common variation that increases when banking sector systemic risk increases, consistent with recent crisis episodes where both bank and nonbank sectors have become stressed. In future work, we plan to explore the robustness of these findings to other measures of systemic risk."
Money fund yields moved lower following the Federal Reserve's Sept. 18 50 basis point rate cut, while money market mutual fund assets jumped to all-time records last week (though they eased off Friday). Money fund yields slid 18 basis points to 4.75% on average in the week ended Sept. 27 (as measured by our Crane 100 Money Fund Index, an average of 7-day yields for the 100 largest taxable money funds), after falling 12 bps the week prior. Yields were 5.10% on 8/31, 5.13% on 7/31 and 6/28, 5.14% on 5/31, 5.13% on 4/30, 5.14% on 3/31 and 2/29/24, 5.17% on 1/31/24, 5.20% on 12/31/23, 4.94% on 6/30/23, 4.61% on 3/31/23 and 4.05% on 12/31/22. Yields should continue to inch lower as they digest the final remnants of the Fed cut, then they should stabilize until the next cut.
The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 655), shows a 7-day yield of 4.66%, down 18 bps in the week through Friday. (Three weeks prior was the first time our Crane MFA fell below 5.0% since July 2023.) Prime Inst money fund yields were down 20 bps at 4.83% in the latest week. Government Inst MFs were down 20 bps at 4.75%. Treasury Inst MFs were down 14 bps at 4.74%. Treasury Retail MFs currently yield 4.51%, Government Retail MFs yield 4.46%, and Prime Retail MFs yield 4.62%, Tax-exempt MF 7-day yields were down 30 bps to 2.96%.
Assets of money market funds rose by $73.9 billion last week to $6.791 trillion according to Crane Data's Money Fund Intelligence Daily. Assets reached its record high Thursday Sept. 26 at $6.799 trillion. For the month of September, MMF assets increased by $175.8 billion, after increasing by $109.7 billion in August. Weighted average maturities were unchanged at 32 days for the Crane MFA and down 1 day at 31 days for the Crane 100 Money Fund Index.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (9/27), 55 money funds (out of 774 total) yield under 3.0% with $23.9 billion in assets, or 0.4%; 84 funds yield between 3.00% and 3.99% ($119.7 billion, or 1.8%), 614 funds yield between 4.0% and 4.99% ($6.126 trillion, or 90.2%) and just 21 funds now yield 5.0% or more ($521.1 billion, or 7.7%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was down (3 bps) at 0.54%. The latest Brokerage Sweep Intelligence, with data as of Sept. 27, shows that there was two changes over the past week. Merrill Lynch lowered rates to 0.05% for accounts between $1 million and $9.9 million, and lowered rates to 0.15% for accounts of $10 million and greater. Merrill Lynch also lowered rates to 4.82% for all advisory accounts. RW Baird lowered rates to 1.66% for all accounts up to $999K and lowered rates to 2.62% for accounts between $1 million and $1.9 million, they also lowered rates to 3.40% for accounts of $5 million and greater. Three of the 10 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley. (Note: This past week we added advisory rates to Brokerage Sweep Intelligence for Merrill Lynch and Morgan Stanley.)
Federated Hermes Deborah Cunningham's latest monthly commentary is titled, "Sky high." She explains, "The Chicken Little predictions that the Federal Reserve easing cycle would lead to an exodus of assets from liquidity products have been proven wrong. Money market funds across the industry alone have experienced inflows of around $150 billion since the Fed cut rates by 50 basis points in mid-September to a range of 4.75-5%."
Cunningham continues, "It's another case of the disconnect between some media pundits and investors. The former want their opinions heard, and bad news gets more attention. The latter simply want the highest possible return across their portfolio, whether they invest in liquidity products to offset riskier holdings or for future deployment to other investment opportunities."
She says, "Historically, in a falling-rate environment, yields of cash management products lag the direct security market. Why? Because some of their holdings have locked in higher rates, and most of those won't mature until later, at some point in the next 12 months -- referred to as a laddered strategy. In contrast, some securities in the direct market -- especially overnight securities and those with floating rates -- trace Fed moves immediately, as does the Reverse Repurchase Facility, which now sits at 4.80%. History is only a guide, of course, but we think this will be the case as the easing continues."
Cunningham tells us, "Some cynics channeling Henny Penny -- the original name of that apocalyptic-minded chicken in the European folk tale -- characterize the magnitude of the half-point reduction as a mortal blow. We think that actually helps cash-like vehicles because the decline in their yields traditionally has been proportional to the cut. Had the Fed trimmed the target range by a quarter-point, liquidity yields likely would have a spread of around 12 basis points initially. As it stands, that difference is closer to 25 basis points due to the oversized cut, and gets more attractive out the inverted yield curve. No wonder the inflows."
Finally, she adds, "The implementation of the SEC's money fund rules is finally upon us. On Oct. 2, we get the last phase, which imposes mandatory liquidity fees on institutional prime and institutional municipal money market funds. A fee would only be charged only if net redemptions exceed 5% of a fund's net assets and the cost of liquidity (including, transaction costs and market impact costs) exceeds 0.01% of the value of the total shares redeemed on that day. Despite our lasting opinion that the 'reforms' were not necessary, it is good to finally close the chapter. The liquidity industry has risen to the occasion despite the operational challenges, and we believe the inflows this year show that the efficacy of these products remains intact."
