Money fund yields moved 24 bps higher on average in February in direct response to the Fed's 25 basis point hike on Feb. 1. Our Crane 100 Money Fund Index (7-Day Yield) rose 24 basis points to 4.39% in the month ended 2/28. Money fund yields have risen from 4.05% on 12/31/22, and they're up from 3.59% on Nov. 30. They were 2.88% on Oct. 31 and 2.66% on Sept. 30 (and of course 0.02% on 12/31/21). Yields should remain flat over the next 3 weeks, but they should jump again following the Fed's next meeting on March 22 (if they hike rates again as expected). The top-yielding money market funds have broken above 4.70% and should move towards 5.0% by the time March is over. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 681), shows a 7-day yield of 4.27%, up 25 bps in February.
Prime Inst MFs were up 21 bps to 4.49% in the latest month. Government Inst MFs rose by 24 bps to 4.32%. Treasury Inst MFs were up 24 bps for the month to 4.31%. At month-end, Treasury Retail MFs yielded 4.09% (up 23 bps), Government Retail MFs yielded 4.04% (up 24 bps), and Prime Retail MFs yielded 4.33% (up 22 bps). Tax-exempt MFs' 7-day yields skyrocketed 149 bps to 2.89%. No money funds yielded below the 2.00% mark in February; just 42 funds yield between 2.00% and 2.99% with $19.3 billion, or 0.4%; 204 funds yield between 3.00% and 3.99% ($184.6 billion, or 3.5%), and the vast majority, 570 funds, now yield 4.00% or more (totaling $5.009 trillion, or 96.1%).
During the month of February (through 2/28/23), money fund assets increased by $67.4 billion to a record $5.252 trillion, according to Crane Data's Money Fund Intelligence Daily. Prime MMF assets again accounted for the lion's share of the increase, rising $56.3 billion in February to $1.156 trillion. Government assets (including Treasury MMFs) increased $11.6 billion in February to $ $3.978 trillion, while Tax Exempt assets decreased $617 million to $118.8 billion.
In other news, the Federal Deposit Insurance Corporation released its latest "FDIC Quarterly Banking Profile," which says "Despite an increase in insured deposits in the fourth quarter, total deposits declined $143.3 billion (0.7 percent) between third quarter 2022 and fourth quarter 2022. This was the third consecutive quarter that the industry reported lower levels of total deposits. A reduction in uninsured deposits was the primary driver of the quarterly decline. A decline in deposit accounts with balances greater than $250,000 (down $226.4 billion, or 2.2 percent) led the quarterly reduction. As of fourth quarter 2022, deposits represented 81.4 percent of total assets, well above the pre-pandemic average of 76.7 percent. The decline in deposits in fourth quarter 2022 was accompanied by a $322.5 billion (7.5 percent) increase in wholesale funding for the industry from the prior quarter."
It explains, "Community banks reported a nominal deposit growth rate of 0.03 percent ($621.6 million) during fourth quarter 2022, lower than the growth rate of 0.8 percent reported in third quarter 2022. However, more than half of all community banks (55.2 percent) reported a decrease in deposit balances from the prior quarter. Growth in deposit accounts with less than $250,000 (up $20.6 billion) drove total deposit growth and was almost entirely offset by a decline in uninsured balances. In the fourth quarter, growth in interest-bearing deposit balances (up $19.5 billion, or 1.2 percent) was largely offset by a decline in noninterest-bearing deposits. Deposit balances rose 3.5 percent ($77.2 billion) from one year ago. Other borrowed money rose $27.9 billion (34.6 percent) from one quarter ago because of an increase in Federal Home Loan Bank advances of $27.0 billion (35.4 percent). The share of wholesale funds to total assets was 19.2 percent in fourth quarter, up from 17.2 percent in third quarter 2022 and above the pre-pandemic average of 17.5 percent."
The press release, entitled, "FDIC-Insured Institutions Reported Net Income of $68.4 Billion in Fourth Quarter 2022," comments, "Reports from 4,706 commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reflect aggregate net income of $68.4 billion in fourth quarter 2022, a decrease of $3.3 billion (4.6 percent) from the third quarter. Lower noninterest income and higher provision expenses offset an increase in net interest income. These and other financial results for fourth quarter 2022 are included in the FDIC’s latest Quarterly Banking Profile.... The net interest margin (NIM) increased 23 basis points from a quarter ago and 82 basis points from the year-ago quarter to 3.37 percent, above the pre–pandemic average of 3.25 percent. The year–over–year growth in the NIM was the largest reported increase in the history of the QBP."
It continues, "The average yield on earning assets increased 76 basis points from third quarter 2022 to 4.54 percent due to strong loan growth and higher market interest rates. Average funding costs increased 53 basis points from the prior quarter to 1.17 percent. The average community bank quarterly NIM rose 7 basis points from the prior quarter and 48 basis points from the year–ago quarter to 3.71 percent. The community bank NIM is now above its pre–pandemic average of 3.63 percent. The average yield on earning assets rose 44 basis points quarter over quarter and 104 basis points year over year, while average funding costs rose 37 basis points quarter over quarter and 56 basis points year over year."
FDIC Chairman Martin Gruenberg comments, "Rising short-term interest rates and continued loan growth supported a quarter-over-quarter increase in the net interest margin for the industry as a whole and community banks. The change in deposit rates paid by banks continued to lag the change in rates charged on loans. Additional short-term interest rate increases combined with longer asset maturities may also affect bank balance sheets in coming quarters. Unrealized losses on available-for-sale and held-to-maturity securities remained elevated at $620 billion. Higher market interest rates may also erode real estate and other asset values as well as weaken borrowers' loan repayment ability. These will be matters of ongoing supervisory attention by the FDIC."
He tells us, "The net interest margin for the banking industry as a whole widened for the third consecutive quarter, increasing 23 basis points from last quarter to 3.37 percent, and is now above the pre-pandemic average of 3.25 percent. Despite the improvement, the net interest margin improved at a slower pace than the prior quarter as deposit costs increased. [A chart showing] quarter-over-quarter changes in the industry's yield on loans and cost of deposits, which help to explain the industry's increasing net interest margin over the past three quarters. Both loan yields, the interest banks charge on loans, and deposit costs, the interest banks pay on deposits, began to increase in the second quarter of 2022 when market interest rates began to increase rapidly. Loan yields increased significantly more than deposit costs in each of the last three quarters.
Gruenberg adds, "In the fourth quarter, the banking industry reported that yields on loans increased by 73 basis points while the cost of deposits increased by 46 basis points. Competitive pressures to raise interest rates on deposits may bring about some greater balance in future quarters. Historical experience suggests that the gap between changes in loan yields and deposit costs tends to increase early in rate-rising cycles but then decreases when market rates stabilize or decline. This chart shows that deposits declined for a third consecutive quarter. Total deposits were $19.2 trillion, down 0.7 percent from the level reported in the third quarter. While this reduction slightly offsets the unprecedented growth in deposits reported during the pandemic, total deposits are still well above pre-pandemic average levels. A reduction in uninsured deposits was the driver of the quarterly decline since insured deposits increased."
Finally, Federated Hermes writes in its new monthly commentary, "Coming to terms: Investors have begrudgingly capitulated to a still-hawkish Fed." Deborah Cunningham says, "Acceptance is hard, and the financial markets have struggled with it this year. Investors turned relief about moderating inflation and a slowing pace of Federal Reserve rate hikes into the expectation that the conclusion of the tightening cycle is imminent…. The rightsizing of market expectations has given us the confidence that yields offered on government and corporate securities maturing in the second half of 2023 won’t be underwater. We shifted the weighted average maturity (WAM) of our prime money market funds out by five days. Not a big move, but it’s more than symbolic."
She continues, "We'd probably be more aggressive were it not for the debt ceiling fiasco. We haven’t changed our opinion that it will be resolved in some form, most likely with another kick of the proverbial can. But we think the supply of Treasury bills will dwindle as we get close to the X-date this summer, reversing the trend of the last few months, and that securities maturing near it will be cheap. But the big picture is that we expect yields of liquidity products to keep climbing. And so do investors. In money fund land, strong returns are keeping industry assets at record highs. While that is led by retail investors, high-net-worth customers are leaving bank deposit products due to comparably paltry interest rates, according to the Wall Street Journal. The liquidity industry is certainly happy to accept those."
