Pittsburgh-based Federated Hermes reported Q2'24 earnings and hosted its Q2'24 earnings call late last week. On the call, President & CEO J. Christopher Donahue, comments, "In the second quarter, we reached another record high for money market fund assets of $426 billion and total money markets assets of $587 billion.... Total money market assets increased by $8 billion in the second quarter. Money market strategies continue to benefit from favorable market conditions for cash as an asset class, elevated liquidity levels in the financial system, and attractive yields compared to cash management alternatives like bank deposits and direct investments in money market instruments like T-bills and commercial paper." (Note: Please join us for our European Money Fund Symposium, Sept. 19-20, 2024 in London, England. Registration is $1,000 and our discounted hotel rate expires August 14.)
He explains, "In the upcoming period of declining short-term rates, we believe market conditions for money market strategies will continue to be favorable compared to direct market rates and bank deposit rates. Our estimate of money market mutual fund market share, including sub-advised funds, was about 7.45% at the end of Q2, up from about 7.35% at the end of Q1. Now, looking at recent asset totals as of a few days ago, managed assets were approximately $786 billion, including $589 billion in money markets.... Money market mutual fund assets were at $429 billion."
During the Q&A, Federated was asked about "a pickup in institutional money fund flows when the Fed starts cutting." Donahue comments, "It's very hard to detect that movement when it hasn't happened yet. Debbie will comment on what's going on exactly in the marketplace, but we remain confident about the long-term progress of this event, because of what happened every time they have begun to ease rates. And we've gone through that a number of times before, in Q3'19, when they began to ease rates and how that worked out for us in terms of 22% or so percent increase in assets; the industry also went up 14%. But I'll let Debbie comment on discussions with institutional clients and how they're looking at this."
Money market CIO Debbie Cunningham responds, "All the clients are discussing extending duration, taking maybe some of their core cash or their strategic cash and moving it out the curve a little bit. They're questioning whether we're extending duration within our money market funds themselves for their operating cash, which we have been. But ... until the first rate cut happens, you don't see much of that movement in anticipation. Everybody likes to prepare. Everybody likes to discuss. But the actual movement doesn't generally start to occur until the first cut happens. So we are having those conversations. There is nothing different about them. They are healthy. They are what we would expect. But we're not really seeing that type of movement yet. If the Fed cuts in September or November or December, that's when that should occur in all likelihood."
Another analyst states, "One of the big topics of conversation in the wealth management channel has been the need to pay higher yields on client cash. Obviously, there are several different options that those firms have to do that, but I was just wondering if you see potential opportunity with that move?" Donahue answers, "Yeah, we do.... When you start talking to people about yields ... they say, it's 5% in the money fund that helps the retail trade in my opinion.... What we like about the whole move is that people and the marketplace do a lot better if they're getting marketplace returns for their cash.... If they're going to sell based on higher yields, and then they got to find out the money funds are higher, that's going to work out well for us."
TD Cowen's Bill Katz states, "If rates start to go lower, the expectation for most of your peers is that money that's sitting in money market is going to migrate out and go into longer duration." Donahue says, "What we see in the money market fund side is that money market asset continues to grow. If you ask Debbie or me, or somebody else would say, the whole thing is going to $7 trillion, and we're going to maintain, if not expand, our market share. Even though people will move out the yield curve, is very difficult for us to see the money move ... to fixed income. But there's so much more money coming into the system that you just continue this march up.... `So I would not look for the money market part of our business declining because rates rise, I look [for] the opposite.... So the path forward for organic growth is continued money market funds and continued activity on the fixed income side across the yield curve."
Cunningham states, "The only thing I'd add ... is the flows that we've had since the cycle began into liquidity products have been 80% driven by retail flows [from] deposit products, which will still continue ... in favor of the money market fund. The institutional flows have been minor in comparison. Our expectation would be that when rates start to go lower, you'll see that makeup of flows be about 50% retail, 50% institutional. [T]he retail will continue. It's just the institutional [will] pick up."
Asked again about potentially increasing yields on sweep accounts, Cunningham tells us, "The only thing I'd say ... is that we do have a lot of sweep account products through intermediaries. And when they advertise something like an increase in their deposit sweeps to maybe 2%. As [Chris] mentioned, they then look at where their sweep is [vs.] the money fund and see it coming in at over 5%. It's more of an advertisement as to the realization of where true yields are in the market today and I think beneficial to us."
She explains, "As far as sweep products into our money funds, we have many relationships along those lines. Prior to the reforms that took place in 2016 when institutional prime funds became floating NAV, [some] sweep products went into prime institutional products. For the most part, now the sweep products go into our government products. And those continue to be stable net asset value and very viable.... Even with increased deposit rates [we're] more than double those rates. So I think the benefit of just knowledge that there or higher rates out there is good from our business standpoint."
Commenting on extending duration in MMFs, Cunningham says, "Product by product [it] is a little bit different, but we are probably extended somewhere in the neighborhood of 5 to 8 days over the course of the last month or so. That is a reflection of number one, getting some of what we think was good relative value in the curve early on in that time period, [but] not so much today. It would be more difficult extending today. Today, we're happy to be able to just maintain where we are. Most of our products are in [the] low 40 to low 50-day weighted average maturity target range.... But honestly, with where the yield curve is right now, we think it's overdone with the expectation of rate cuts."
Finally, she adds, "So our current expectation would be for two rate cuts, it really hasn't changed too much. Some in the group expecting a September start with then a December follow-on. My own expectation would be more like November. I don't think there's any reason to do anything ahead of the election. Certainly with the GDP print that we just had the first quarter -- the second quarter continues to be, I think, the type of growth environment that's acceptable to the Fed. And why contemplate or bring about the contemplation of pre-election sort of discussions about the Fed if you don't have to. So that's my reasoning behind why a November start. With two rate cuts in 2024, [it] would take the target rate down to that 4.75% level rather than the 5.25% where it is today."
