The New York Times comments on cash in, "Why Money Market Funds Are Now Leading the Pack." The piece explains, "The markets have been rocky ever since the Federal Reserve started raising interest rates to combat inflation last year.... But it's been a glorious time for one part of the financial world: money market mutual funds. The biggest money funds tracked by Crane Data are paying more than 4.6 percent interest, and a handful have yields around 5 percent." (Note: With less than two months to go until our big Money Fund Symposium show, June 21-23, 2023 in Atlanta, Ga, we wanted to remind readers to register soon and make hotel reservations ASAP! We hope to see you in June!)
It tells us, "Their gaudy interest rates closely follow the Fed funds rate, set by the central bank. The effective Fed funds rate is now about 4.83 percent. That's onerous for people who need to borrow money, and deliberately so: The Fed is raising rates because it is trying to squelch inflation by slowing the economy. What's painful for borrowers is great for people who need a place to park money they have put aside to pay the bills. In a bid to hold onto customers, some banks have begun raising rates in savings accounts and for certificates of deposit, though most bank deposits remain in accounts that pay close to nothing."
The Times says, "That's given money market funds magnetic appeal. Their assets have swollen to more than $5.6 trillion, from $5.2 trillion in December 2021, when the Fed began talking about impending interest rate increases. Money market funds are likely to keep growing if the Fed holds rates at their current level, or raises them further."
Author Jeff Sommer comments, "I've used money market funds on and off for decades with no problems, and consider them to be fairly -- though not entirely -- safe. I think it's reasonable to put some of your cash in them, as long as you are careful and keep your eyes wide open. The days of being consigned to receiving nothing for the privilege of keeping your money in a financial institution were over, if you were willing to make a move. When interest rates started to rise, money market rates started levitating immediately, opening up a wide gap with bank deposit rates."
He continues, "By now, that gap has widened to its greatest level in decades. The advantages of money market funds are increasingly obvious, not just for the corporate financial officers who have always used them as an efficient and high-yielding place to hold money, but for thousands of ordinary people, who are at last receiving something for their cash."
The article also says, "Investors have never had major losses in money market funds in the United States, and I find that record comforting. But it doesn't mean that the funds are without risk. For one thing, there are already indications that their growing popularity comes partly at the expense of banks, especially smaller ones that have lost deposits. Such losses -- which contributed to the collapses of Silicon Valley Bank and Signature Bank last month -- have created stress in the entire financial system."
It adds, "More than $560 billion in deposits exited the commercial banking system this year through April 5, according to government figures. At the same time, more than $442 billion flowed into money market funds, according to Crane Data. That's been great for the income of the fund investors, but it's not an unalloyed good for financial institutions. You can see this in individual companies. At Charles Schwab, for example, which has just reported its quarterly earnings, the firm's banking arm lost $41 billion in deposits in the first three months of the year. At the same time, Schwab's money market funds gained $80 billion."
In other news, the Financial Times published an article on the miniscule ($24.6 billion) retail U.K. money fund market." The update, "Investors swell money market funds," says, "UK-based money market funds saw a swell in inflows ahead of the tax year end on April 5, as rising rates boosted their appeal to retail investors. Investment platforms, headed by market leaders Hargreaves Lansdown and Interactive Investor, said they had seen customers turn to money market funds in the first quarter of the year as yields increased. Hargreaves reported a 'huge increase' in net flows into money market funds in the first quarter year-on-year, while Interactive Investor experienced a 300 per cent increase in the same period. Analysts said this was from a low base, but showed funds were coming back into play for some investors after years of near-zero interest rates."
It quotes BlackRock's Beccy Milchem, "Uncertainty is causing investors to pause a bit longer before making investment decisions, though, from a longer outlook perspective, investors will need to get back into other asset classes," and adds, "Changing patterns of behaviour signal a tentativeness among retail investors whose confidence has been dented by volatility, with improved offers on cash providing a safe haven for savers seeking to top up tax wrappers. Money market funds invest in what are considered safe liquid assets, such as short-term government debt, which are due to mature soon. Investments are considered low risk, though, unlike bank deposits, they are not covered by any deposit protection scheme."
The FT adds, "Despite growing demand, funds flows have remained lower proportionally than in the US, where retail investors flocked to money market funds late last year after major banks such as JPMorgan Chase and Bank of America offered low returns on deposits despite increases in the Federal Reserve rate. Unlike their US counterparts, most UK banks and building societies have moved swiftly to increase rates on savings accounts in the wake of monetary tightening. Easy access accounts have circled around 3 per cent, while Barclays offers Reward customers 5 per cent on up to £5,000."
Finally, The Wall Street Journal writes on Morgan Stanley's Q1'23 earnings, in "Managing Rich People's Money Isn't Always Easy." They state, "Morgan Stanley's wealth management net interest income, which is generated by interest earned on the bank's assets minus the interest expense of funding them, rose 40% year-over-year in the first quarter.... But unlike a megabank such as Bank of America that funds much of its lending with customers' superlow or zero-interest day-to-day checking accounts, Morgan Stanley gets its deposits through its network of wealthy and affluent clients. And those customers appear to increasingly want that money to work harder for them."
The piece tells us, "Its cheapest source of deposits -- the money swept into bank accounts from uninvested cash balances -- was down more than 40% from a year earlier in the first quarter. Meanwhile other deposits, which include higher-yielding accounts, have about quadrupled. Likewise, the fact that many customers can earn yields of around 4% on plain cash might be decreasing the appeal of paying an adviser to help them invest.... A lot of this might be a temporary phenomenon, reflecting this highly strange moment. Right now, adviser-led assets at Morgan Stanley are at a peak level of about 23% invested in cash and cash equivalents. That is well above the historical average of 18%, the firm said."
Morgan Stanley CEO James Gorman comments, "We've had a pretty significant shock to the system in the last few months, which thankfully the financial world got through.... So it's entirely rational that people would take advantage of higher rates and increased uncertainty by pocketing cash.... [But] they're not going to stay in cash at 4% forever. That's not going to happen."
