Bloomberg published, "Barclays Strategist Joe Abate Sees A 'Second Wave' of Deposit Outflows Coming for Banks," which cites a new research piece on money moving out of deposits and into money market mutual funds. (Money fund assets continue to surge to new records; they rose $41.8 billion on Tuesday, 3/28, to a record $5.592 trillion and have increased by a stunning $339.7 billion month-to-date.) The article explains, "Another wave of deposit outflows is coming for the banking system as customers wake up to the existence of higher interest rates available to them in money-market funds, according to Barclays strategist Joseph Abate. In a new note, Abate says he sees two distinct waves of outflows putting pressure bank balance sheets. The first wave was related to bank solvency fears, in the immediate wake of the collapse of Silicon Valley Bank. That wave, says Abate, 'may be nearly over.'"
It states, "However, SVB may have jolted into public awareness the low rates that savers are currently getting on their deposits, he says: '(The) recent tumult regarding deposit safety may have awakened 'sleepy' depositors and started what we believe will be a second wave of deposit departures, with balances moving into money market funds. Until this week, depositors appear to have paid little attention to the unsecured risk they faced with balances above the insurance cap. And they seem to have largely ignored the low interest rate paid on their deposits.'"
Bloomberg says, "The low interest rates paid on deposits was something that Abate talked about in a February episode of the Odd Lots podcast, prior to the SVB blowup. As he noted then, so-called deposit betas (the sensitivity of rates paid to depositors relative to Fed policy rates) historically tend to be low in the early stages of a rate-hiking cycle. In the beginning, depositors don't take the initiative to seek out higher rates, and banks take advantage of the power of their franchise to earn larger net interest margins."
They continue, "Over time, however, as the cycle drags on, banks eventually start passing on higher rates in order to compete for deposits. A New York Fed study from last November showed this to be the case across recent cycles. The deeper you get into the cycle, the more bank deposit rates follow along with the federal funds rate. This time around, banks may face a double whammy. Their depositors may be able to get both higher rates and higher perceived safety in money markets."
The piece quotes Abate, "Regardless of the precise reasons for lingering in low-yielding deposits thus far, we think that depositors have just awoken to their ability to earn more yield in a money market fund with potentially less risk. After all, and unlike banks, money funds' assets are very short, so they are subject to far less interest rate risk in a Fed tightening cycle."
Bloomberg adds, "Right now, the gap between the federal funds rate and that on bank deposits is at the wide end of historical norms, and has widened at a rapid pace during this cycle, creating a strong incentive to pull money out. [L]ooked at another way, the cycle may just be warming up. As Abate sees it, 'the inattentiveness threshold has been reached and the second wave of deposit outflows has begun, and we expect banks to compete more aggressively for deposits.'"
In related news, Yahoo Finance features a column by Allan Sloan, entitled, "Investing: How I really screwed up playing the interest rate game." He writes, "If you want an example of how someone can get carried away by what seem to be high interest rates, you don't need to look at huge financial failures like Silicon Valley Bank, R.I.P. Instead, you can look at me. After watching my cash reserves earn almost no interest for years, I got so carried away last May when yields on one-year Treasury bills hit 2% that I bought a batch of one-year bills at the Treasury's May 19 debt auction."
Sloan comments, "Oops. The Federal Reserve kept pushing rates higher and higher. And higher. Far more quickly than I'd expected, despite my 50-plus years of covering financial markets. As things turn out, I'd have made considerably more interest income -- about 50% more, according to money market fund maven Pete Crane of Crane Data -- had I left the T-bill purchase money in my Vanguard Federal Money Market Fund account. (I'm using Vanguard in this article because that’s where much of my wife’s and my money is invested.)"
He continues, "Let me take you through the numbers, which I've rounded a bit to keep things relatively simple. If you'd taken part in the Treasury's debt auction last May 19, as I did, you'd have paid $9,788 for a T-bill that the Treasury will redeem for $10,000 this coming May 18. Do the arithmetic by dividing $10,000 by the purchase price, and you see that my yield on that one-year T-bill was 2.17%. At the time, Vanguard's Federal money fund was yielding less than 1%, so earning 2%-plus was very attractive. However, the yield on the money fund began rising rapidly as the Fed kept jacking up rates. When last I looked, the seven-day yield on the fund was 4.72%."
Sloan then says, "At my request, Pete Crane estimated what he thinks the Vanguard money fund will have yielded for the year that ends this coming May 18. His estimate: 3.12%. A spokesman for Vanguard, who did his estimate a bit differently, came up with a similar number: 3.26%. Either way, it's about 50% more than I'll have earned on my T-bills. Oh, well."
Finally, he states, "News of SVB's big loss was a major factor in a massive deposit run-off that caused the Federal Deposit Insurance Corp. and California banking regulators to seize the bank and wipe out SVB's stockholders and bondholders. SVB's sad fate helps put things in perspective for me.... [But] I'm sure glad that I stuck to buying one-year T-bills last May rather than reaching for an extra 0.65% or so of annual interest by buying 10-year T-notes. What will I do with the proceeds when my T-bills mature on May 18? I don't know. But you can be sure that I won't be putting all of it into one-year T-bills again."
