Wells Fargo Money Market Funds' most recent "Portfolio Manager Commentary" discusses money fund yields, the Fed's repo program, and the Treasury debt ceiling. It tells us, "With the FOMC firmly on hold and the market awash in excess cash from monetary and fiscal stimulus, prime money market yields continued to tread water in August. The one-month versus three-month LIBOR spread entered the month of August +3.41 basis points ... and ended the month at +3.71 bps. This backdrop is favorable for risk assets as front-end rates continue to be predictable and maintained at an advantageous level for economic growth."
Wells explains, "Government yields across the curve have been near zero, or now 0.05%, for quite some time (see government sector commentary below). Except for the maturities around the debt ceiling time frame that have seen yields spike a couple of basis points, in general, prime assets continue to marginally out-yield government assets.... The current pickup from extending maturities from one month to three months is roughly 4 bps and yields about 7 bps more than the government floor. In addition, the pickup from extending maturities from one month to six months has narrowed to 7 bps this month and yields approximately 10 bps more than the government floor."
Authors Jeff Weaver, Laurie White, et. al., write, "While we are keeping excess liquidity over the stated regulatory requirements and running shorter weighted average maturities, we are actively seeking opportunities to extend if the opportunity offers a favorable risk/reward proposition. In addition to allowing us to selectively add securities to lock in higher yields when the opportunity arises, this higher liquidity buffer also enhances our ability to meet the liquidity needs of our investors and helps stabilize net asset value (NAV) volatility."
Wells piece continues, "With the recent resolution of some structural uncertainties, the rough outlines of the government money markets are now in place for this current zero-interest-rate-policy episode. Wrinkles may pop up from time to time, such as the debt ceiling (more on that below), but generally speaking, the Fed's reverse repo program (RRP) rate of 0.05% exerts an immense gravitational pull on all short-term government rates, keeping them from straying too far in either direction. The RRP is a giant sponge sopping up the excess of cash over investable assets in the short-term space, and it has recently rather routinely taken in more than $1 trillion per day, a huge change from six or even three months ago."
It adds, "The structural clarity mentioned above concerned three main developments. First, the Fed adjusted its RRP rate from 0.00% to 0.05% in June, buying itself a little breathing room above its interest rate floor at zero. Second, the extra cash the Treasury carried throughout the pandemic has been wound down, with the Treasury's General Account (TGA) completing a round trip from $400 billion to $1.8 trillion and back. The Treasury has necessarily overshot the drawdown and intends to eventually, once the debt ceiling has been addressed, carry a cash balance closer to $800 billion. And third, Treasury bill (T-bill) supply has declined by $901 billion this year, which has helped bring the TGA down and also shifted the government's funding burden from T-bills to Treasury coupons further out the curve."
On the debt ceiling, Wells comments, "Every few years, the front end of the yield curve gets to do the debt ceiling dance, and the band is currently warming up. For details on the debt ceiling's history and potential impacts on the money markets, please see our Debt Ceiling FAQs.... Markets have begun to show a bit of unease, as T-bills maturing near the area of the calendar where the Treasury may run out of money -- the perceived drop-dead date -- have backed up in yield slightly.... One way or another, whether it is raised or suspended again, the debt ceiling issue is likely to be resolved in the next few months, and the market can settle back into its 0.05% straightjacket. There may be a brief period of indigestion while the Treasury ramps its cash balance back up via T-bill issuance, but it seems like nothing the extra trillion dollars sitting in the RRP can't handle."
In other news, the Federal Deposit Insurance Corporation released its latest "FDIC Quarterly Banking Profile," which says, "The average net interest margin contracted 31 basis points from a year ago to 2.50 percent -- the lowest level on record. The contraction is due to the year-over-year reduction in earning asset yields (down 53 basis points to 2.68 percent) outpacing the decline in average funding costs (down 22 basis points to 0.18 percent). Both ratios declined from first quarter 2021 to record lows. Aggregate net interest income declined $2.2 billion (1.7 percent) from second quarter 2020. Reductions in net interest income at the largest institutions drove the aggregate decline in net interest income, as more than three fifths of all banks (64.1 percent) reported higher net interest income compared with a year ago."
The update continues, "Deposits grew $271.9 billion (1.5 percent) in second quarter, down from the growth rate of 3.6 percent reported in first quarter 2021. The deposit growth rate in second quarter is near the long-run average growth rate of 1.2 percent. Deposits above $250,000 continued to drive the quarterly increase (up $297.8 billion, or 3.1 percent) and offset a decline in deposits below $250,000 (down $53.6 billion, or 0.7 percent). Noninterest-bearing deposit growth (up $175 billion, or 3.5 percent) continued to outpace that of interest-bearing deposits (up $53.3 billion, or 0.4 percent), with more than half of banks (57.3 percent) reporting higher noninterest-bearing deposit balances compared with the previous quarter."
A press release entitled, "FDIC-Insured Institutions Reported Net Income of $70.4 Billion in Second Quarter 2021" explains, "Reports from the 4,951 commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reflect aggregate net income of $70.4 billion in second quarter 2021, an increase of $51.9 billion (281 percent) from a year ago. This increase was driven by further economic growth and improved credit conditions, which led to a second consecutive quarter of aggregate negative provision expense. These and other financial results for second quarter 2021 are included in the FDIC's latest Quarterly Banking Profile released today."
It quotes FDIC Chairman, Jelena McWilliams, "Overall, the banking industry remains strong. Revenue has increased along with stronger economic growth and improved credit conditions. The banking industry remains well positioned to support the country's lending needs as the economy continues to recover from the pandemic, with record deposits, favorable credit quality, and strong capital levels. However, low interest rates and modest loan demand will likely continue to present challenges for the banking industry in the near term. Further, the banking industry may face additional challenges as pandemic support programs for borrowers wind down and loan forbearance periods end."
