Federated Hermes' latest monthly commentary from Money Market CIO Deborah Cunningham is titled, "Here we go again." She explains, "It should be no surprise when the financial markets get ahead of themselves. And we don't need to be an expert at behavioral economics to know rational investors don't exist. But that doesn't make it any less frustrating when traders get over their skis, adding volatility and detracting from liquidity in the market. Just as they did late last year, markets are betting the Federal Reserve cuts rates faster than policymakers have indicated and, importantly, faster than the data is supporting." (Note: Federated's Cunningham will be speaking at our upcoming European Money Fund Symposium, which will be held Sept. 19-20, 2024 in London, England. We're still taking registrations!)
Cunningham says, "Unfortunately for cash managers, the more investors infer, the more they interfere. The yield curve has now completely inverted. `For those of us who expect at most 75 basis-points of cuts in the fed funds target range (now 5.25-5.5%) by year-end, it's hard to rationalize buying securities offering the corresponding deflated yields."
The update also tells us, "The last stage of the SEC's new money fund rules will be implemented Oct. 2. The industry landscape is likely settled, with about a third of the institutional prime products either dissolved or reconstituted as government funds. We continue to think clients will see value in institutional prime and muni products in both the near and long term."
It continues, "The latter could be driven by how, historically, the yield of money funds decline slower than securities tied to overnight rates that should immediately fall when the Fed cuts. We think the amount of industry inflows to money funds in August attests to their attraction. The situation is not guaranteed to repeat that performance, of course. But however that turns out, we think the role that prime and muni liquidity products traditionally play in portfolios will not diminish."
In other news, Yahoo Finance weighs in on brokerage sweep accounts in, "Big banks are taking heat for paying low rates on idle cash." It states, "The scrutiny of how banks and brokerages treated their customers during an era of high interest rates is heating up just as that era draws to a close. Raymond James (RJF) and JPMorgan Chase (JPM) were hit with lawsuits in recent days by customers alleging they were shortchanged on the interest due from idle cash. They are the latest of several such suits against wealth advisory units and brokers centered on the use of so-called cash sweep accounts that typically don't pay much interest. Other cases target Wells Fargo (WFC), Morgan Stanley (MS), UBS (UBS), Ameriprise (AMP), and LPL Financial (LPLA)."
It continues, "It's not just cash sweep accounts that have customers angry. A major credit card lender, Capital One (COF), also faces a class action lawsuit over customer complaints that it paid far below advertised for a high-interest savings account.... Regulators from the Securities and Exchange Commission are separately conducting investigations or inquiries of cash sweep practices at Wells Fargo and Morgan Stanley, according to recent filings from those banks, with Wells Fargo saying it was in 'resolution discussions.' Bank of America also disclosed a regulatory inquiry regarding 'the rates paid on uninvested cash in investment advisory accounts that is swept into interest-paying bank deposits.'"
Yahoo Finance says, "Developed as a way for banks and brokers to put their customers' idle cash to work, sweep programs move excess customer cash balances overnight into a ... bank or affiliate bank. Brokers and banks earn a spread or income on those funds, and in return, the customer who owns the cash is paid a preset rate of interest. It can be far smaller than the yield earned when a customer directly invests in a CD or money market fund."
Finally, money fund yields remain at 5.10% on average in the week ended Aug. 30 (as measured by our Crane 100 Money Fund Index, an average of 7-day yields for the 100 largest taxable money funds) after falling 1 bp the week prior. While yields on money market mutual funds won't drop in earnest until after the Federal Reserve cuts short-term interest rates, they have inched lower ahead of an expected move. Yields were 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. The vast majority of money market fund assets now yield 5.0% or higher.
The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 681), shows a 7-day yield of 5.00%, unchanged in the week through Friday. Brokerage sweep rates also remained unchanged, contrary to the discussions on a number of brokerage earnings calls in recent weeks. Prime Inst money fund yields were up 4 bps at 5.19% in the latest week. Government Inst MFs were unchanged at 5.10%. Treasury Inst MFs were down 1 bp at 5.03%. Treasury Retail MFs currently yield 4.81%, Government Retail MFs yield 4.81%, and Prime Retail MFs yield 5.01%, Tax-exempt MF 7-day yields were down 25 bps to 2.84%.
Assets of money market funds rose by $37.9 billion last week to a record $6.615 trillion according to Crane Data's Money Fund Intelligence Daily. For the month of August, MMF assets increased by $109.7 billion. Weighted average maturities were unchanged at 33 days. According to Monday's Money Fund Intelligence Daily, with data as of Friday (8/30), 84 money funds (out of 801 total) yield under 3.0% with $51.6 billion in assets, or 0.8%; 40 funds yield between 3.00% and 3.99% ($82.3 billion, or 1.2%), 266 funds yield between 4.0% and 4.99% ($1.211 trillion, or 18.3%) and 411 funds now yield 5.0% or more ($5.270 trillion, or 79.7%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged (again) at 0.62%. The latest Brokerage Sweep Intelligence, with data as of Aug. 30, shows that there was no changes over the past week. (We haven't seen many of the changes mentioned on earnings calls, which apparently only apply to a narrow slice of "advisory" accounts. Only a couple of brokerages report these rates, which aren't included on our BSI report.) Fourteen weeks ago, we removed the rates for TD Ameritrade from the listings, which completed its merger with Charles Schwab and which pushed the averages higher (2 bps). 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.
