The latest Barron's magazine features the article, "Money-Market Funds Are Back," which discusses money fund yields moving over 1% and compares them with the dismal yields on brokerage sweep accounts. It says, "It's not much, but as the Federal Reserve edges short-term interest rates higher, money funds are finally starting to offer a yield -- sometimes even more than 1%. With a rate hike probable in December and three more expected in 2018, "money market funds will become more attractive than they've been in a decade," says Peter Crane, president of Crane Data. Consider the Vanguard Prime Money Market fund (ticker: VMMXX), yielding 1.13%, or the Fidelity Money Market fund (SPRXX), yielding 0.99%." We quote from some of the Barron's piece, and we also excerpt from a recent AFP Conversations Podcast featuring SSGA's Todd Bean and Will Goldthwait, below.
Barron's continues, "Ten years ago, on the cusp of a financial crisis, net annual returns on money funds were just under 5%. Afterward, rates dropped so low that fund companies had to lower their fees to prevent investors from actually losing money. Those partial fee waivers began disappearing after the first and second Fed rate hikes in December 2015 and December 2016, Crane says. The June 2017 hike was the "nail in the coffin" for those waivers. Expense ratios are now 0.44%, on average, up from 0.2% in December 2015. At this time, Crane Data's index of the 100 largest money funds showed an average yield of 0.13%; as of the end of September, it was up to 0.87%."
They explain, "Investors should know that near zero-percent rates haven't gone away yet. They are prevalent on many "sweep" accounts associated with brokerages -- FDIC insured bank accounts in which cash from dividend and interest payments and securities sales accumulate. Sweep rates are rising, but for investors with less than $500,000 in household assets, they average 0.1% or less at major brokerages, Crane Data reports."
Finally, Barron's piece adds, "Leaving cash in a fund with a paltry yield didn't matter when money-fund rates were zip, but the gap between sweep rates and money-fund rates today means staying put could be costly. Investors who stand to gain $1,000 more annually in a money fund should probably make the switch, Crane says. Still, investors should first weigh the convenience and safety of a bank sweep account versus the added yield of a money fund, he adds."
In other news, a recent SSGA Cash Market Commentary PodCast discusses the debt ceiling, the Fed and Govt vs. Prime MMFs. (See the transcription here.) Bean tells AFP, "Well the debt ceiling is like that gift that just keeps on giving for the money markets. I mean we've been dealing with this and every other year basis now since 2011 and it just won't seem to go away. But as everyone probably knows by now, Congress and President Trump recently approved a hurricane relief bill that included a short term suspension of the debt limit to December 8th."
He continues, "The good news for investors is that there are no longer any near-term concerns about a possible default or a delayed payment this year. The bad news is that we're probably going to have to relive this all over again at some point in the first half of next year, precisely when that new D-Day [is] could be up for a lot of debate. A lot of the analysts out there have it falling sometime and either late February or early March at this point. But there are certainly a lot of factors that could influence that."
Bean explains, "I would say one thing that we do know, and one thing that's probably one of the biggest direct impacts on our markets is on T-bills supply. Had they gotten a long term deal done, analysts were estimating that we could have seen upwards of $300 to $400 billion in additional Treasury supply by the end of the first quarter of next year. Unfortunately now with the shorter suspension analysts expectations are coming closer to just $150 billion in additional year term bill supply."
He also comments, "I think you're trying to balance the potential rate hikes from the Fed in December.... Trying to get your funds invested over the turn ... is tricky but it certainly isn't new to short [term] investors. This is the third year in a row now that we've had to deal with that exact scenario.... The market has been pretty skeptical that that they'll be able to get that last hike in, which makes this year a little bit trickier versus the last couple of years.... And so the rates were more pricing in the move. But I think in general you know whether you think they're going in December or not you have to respect the risks that they could go."
Bean tells the AFP, "I think fund managers and shareholders both have welcomed the rate hikes we have seen this year, and are enjoying the higher yields [they] are getting on their cash holdings. Liquidity has been good, spreads are reasonably tight, and I'd say we've seen ... very well functioning secondary markets for both government and credit paper on the credit front. You know we've seen spreads widen just a little bit.... Floating rate notes with maturities between six months and a year have been really popular trades. Given the rising rate environment I'd say the majority of the fixed rate trades we have seen in recent months have been kind of in that one of four months."
He says, "On the agency front, you know the Federal Home Loan Bank system is just huge. It continues to kind of dominate that space. Currently they make up over 84 percent of the discount notes outstanding and they are by far the most frequent issuer of floating rate notes as well. So when you look at that market overall, since the end of 2015, just the outstandings are down by almost 200 billion. So generically when you look at those spreads versus treasuries you know that spreads pretty tight. Lastly, for government funds, the Fed's reverse repo facility remains an important source of supply."
Goldthwait comments, "Prime funds continue to grow their AUM from the lows in November of 2016. We've seen Prime fund assets grow by $70 billion. This has been both encouraging and frustrating -- frustrating because I thought based on client conversations that I had and have had that more money would have moved back into prime funds by now. But it's also encouraging because ... the flows back in prime funds have been steady and consistent on a week over week basis, indicating the clients are moving back with purpose and appreciation of the value of prime strategies. And we see that when we look at the breakdown so the majority of the gains in prime fund asset have come from institutional clients so you know those of you listening on this call."
He explains, "Retail prime assets have risen by just $10 billion over the last 11 months. But institutional prime assets have risen by about $60 billion. So that's been encouraging. And this is quoting ICI data. But the gains have been have been good. So we're encouraged also by the yield difference between prime fund strategies and government strategies. You know lots of folks are calling that that yield spread [will] widen ... maybe out to 50 or 75 basis points.... The average spread right now between a government fund and prime fund stands a 27 basis points. And so this continues to support the thesis the prime funds provide good relative value it should also be noted that overall liquidity."
Finally, he adds, "And that weekly liquidity number that we know is a key focus for investors remains elevated and well above the required amount. So the average liquidity in prime funds is right around 44 percent. And this has been this number has been over 40 percent for the past two years on average. So [this is] very reassuring to investors that portfolio managers you know are keenly aware of that liquidity number and want to keep them well above the 30 percent required. I think lastly it should be noted that the variable net asset value or the price of the funds has not varied that much."
