Several asset managers, brokerages and banks reported third-quarter over the past week, and the discussions of money fund and bank deposit trends so far show that "cash sorting," or the shift into money funds from bank deposits, is alive and well. On BlackRock's latest earnings release and earnings call, CFO Martin Small tells us, "Rate hikes over the last 18 months mean that for the first time in nearly 20 years, clients can earn a real return in cash. In the short term, this has benefited many portfolios.... [C]ash management net inflows were $15 billion in the quarter. Money market funds have returned to earning yields not seen in nearly two decades. We're leveraging our scale and integrated cash offerings to engage with clients who are using cash not only to manage liquidity, but also to earn attractive returns."
Larry Fink, Chairman and CEO, states, "Rate hikes over the past year and a half, the fastest in the U.S. since the early 1980s, have made cash not just a safe place, but now a very profitable place for investors to wait for the time being. In short, investors are being paid to wait, something we haven't seen to this degree in years. Investors can earn 5% to 7% from conservative cash and bond portfolios. This dynamic reduces the near-term incentive to implement portfolio changes, resulting in temporarily slower client activity inflows."
He continues, "The degree to which investors have hunkered down in cash is shown by nearly $7 trillion [sic] in money market funds AUM across the industry. Investors will eventually put that money to work. We've seen this dynamic before, as recently as 2016 and 2018, when policy uncertainty and the ability to earn yields and cash resulted in temporarily slowing in activity. Through these times, BlackRock stayed connected with our clients, connected across our businesses, and what immediately followed those periods in the past were new records for BlackRock client flows and organic base fee growth at or above 5% target. `We expect that investors will begin redeploying assets once there's a conviction in a terminal rate and the shape of the yield curve."
During the Q&A, President Rob Kapito comments, "Investors are really getting paid to wait, and money market funds have nearly $7 trillion in assets under management. So that's $7 trillion. And as we approach the peak in interest rates, we expect that there are going to be some very, very large allocations to fixed income. And I'm sure someone will call it the great reallocation. And the reason is, today, there are better opportunities to invest in bonds than have been in the years. Over 80% of the bond market is yielding over 40%, enabling investors to derive a large part of their liability needs from owning bonds and access returns with less risk."
He adds, "In particular, right now, clients are focusing their opportunity in the short end of the curve, and of course, in private credit. So when? Well, we have historically seen a rebound in fixed income following rate stability.... Well, once there's more certainty on a terminal rate and the shape of the yield curve, then we expect more deployment into fixed income. And I'll recap it. A slowdown in short-term issuance and more balanced term structure of interest rates are the indicators we're looking for in anticipation of accelerating demand for immediate and longer-duration fixed income."
In their latest earnings release, Charles Schwab CFO Peter Crawford states, "Our continued success with clients and diversified model helped produce third quarter net revenues of $4.6 billion. This result represents a 16% decline from last year's record period, primarily driven by the temporary utilization of higher cost funding, lower interest-earning assets, and softer trading volumes. Net interest revenue was down 24% year-over-year to $2.2 billion, reflecting the impact of client allocation decisions within a higher interest rate environment. However, cash realignment activity decelerated further during the quarter -- even with the brief uptick in August and an increase in long-term interest rates."
He continues, "September was particularly strong as net outflows from transactional cash were lower than any prior monthly period this cycle and bank sweep deposits increased month-over-month for the first time since March 2022. Additionally, the combination of ongoing interest in Schwab's proprietary fund products, growth in no-transaction fee platform balances, and strong flows into our advised solutions pushed asset management and administration fees to a quarterly record of $1.2 billion, up 17% versus the prior year."
A "Supplement" to Schwab's Q3'23 earnings release, entitled, "The Charles Schwab Corporation Supplemental Monthly Client Metrics for September 2023 shows Bank Deposits totaling $99.5 billion as of Sept. 2023, vs. $139.6 billion a year ago, a decline of $40.1 billion (-28.7%). Total Money Market Funds were listed at $437.3 billion as of Sept. 2023 vs. $214.7 billion a year earlier, a jump of $222.6 billion (103.7%).
For more news on Schwab, see: "Charles Schwab: the fog is lifting on deposit outflows but not on earnings," "Schwab Says Deposit Outflows Slowed; Stock Rises," "Charles Schwab CFO says easing outflows bring greater clarity to earnings power," "Schwab Sees Potential Inflection Point to Cash Outflows and "The Charles Schwab Corporation 2023 Fall Business Update."
In other news, ICI also 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. This release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in September, prime money market funds held 40.8 percent of their portfolios in daily liquid assets and 58.2 percent in weekly liquid assets, while government money market funds held 81.3 percent of their portfolios in daily liquid assets and 89.2 percent in weekly liquid assets." Prime DLA was up from 39.9% in August, and Prime WLA was down from 58.3%. Govt MMFs' DLA was down from 81.8% and Govt WLA increased from 88.4% the previous month.
ICI explains, "At the end of September, prime funds had a weighted average maturity (WAM) of 29 days and a weighted average life (WAL) of 51 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 27 days and a WAL of 68 days." Prime WAMs were 4 days longer and WALs were unchanged from the previous month. Govt WAMs were 3 days longer and WALs were 3 days longer from August.
Regarding Holdings by Region of Issuer, the release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $450.36 billion in August to $489.13 billion in September. Government money market funds’ holdings attributable to the Americas rose from $4,205.05 billion in August to $4,312.52 billion in September."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $489.1 billion, or 55.5%; Asia and Pacific at $139.2 billion, or 15.8%; Europe at $238.2 billion, or 27.0%; and, Other (including Supranational) at $15.1 billion, or 1.8%. The Government Money Market Funds by Region of Issuer table shows Americas at $4.313 trillion, or 91.7%; Asia and Pacific at $116.6 billion, or 2.5%; Europe at $261.4 billion, 5.6%, and Other (Including Supranational) at $14.4 billion, or 0.3%.
