Mutual fund trade association, the Investment Company Institute (ICI) recently posted a "Viewpoint" entitled, "Three Myths and Facts about Bank Deposits, Bank Lending, and Money Market Funds," which argues against the media's misperception that the shift from bank deposits to money market funds is harming the real economy by reducing lending. Chief Economist Sean Collins writes, "Following the difficulties at Silicon Valley Bank (SVB), Signature Bank, and Credit Suisse in early March 2023, a number of media reports cited analysts who suggested that money market funds (MMFs) are drawing deposits away from banks, adding to stresses at banks and preventing them from lending more to businesses and consumers. The reports claim that this process has been abetted by MMFs being able to invest at favorable rates with the Federal Reserve's (Fed's) reverse repo (RRP) facility, something the Fed created almost a decade ago to absorb excess cash in funding markets. Since May 2021, the facility has grown by about $2.2 trillion and MMFs are the biggest investors in the facility. This, it is suggested, is a concern the Fed could address by making the terms of the RRP facility less attractive to MMFs. This narrative, though colorful and attention-grabbing, needs fact-checking."
He cites "Myth #1: In March 2023, $422 billion flowed into government MMFs, which became 'dead money' in the Fed's RRP facility that banks could otherwise have lent to businesses and households." Collins responds with, "Fact #1: Government MMFs recycled over 70 percent of the $422 billion back into the banking system, either directly or indirectly. As assets in government MMFs climbed in March, those funds invested an additional $190.5 billion in debt issued by Federal Home Loan Banks, which in turn lent the proceeds to banks. Government MMFs also raised by $112.4 billion their investments in repo, providing additional funding to banks or their broker subsidiaries. Only $68.5 billion of the increase was invested in the Fed's RRP facility."
The update says, "Myth #2: Banks could lend a lot more to businesses and consumers if the Fed made terms of the RRP facility less attractive to MMFs." It continues, "Fact #2: Bank deposits, which have grown substantially since 2010, totaled about $18 trillion by February 2023 but bank loans totaled only a fraction of that. Because of banking regulations, banks often must hold deposits in US government securities or in their accounts with the Fed, preventing them from lending the deposits to businesses and consumers. Thus, an extra dollar of bank deposits will not necessarily result in more lending to the real economy."
Collins tells us, "Myth #3: MMFs increased their investments in the Fed's RRP facility over the past two years, drawing deposits from banks. Fact #3: Government MMFs did increase their investments in the Fed's RRP facility substantially over the past two years, but this was not because their assets grew. Instead, they exchanged one type of federal government liability (Treasury bills) for another (investments in the Federal Reserve's RRP facility), leaving their assets virtually unchanged."
He explains, "From March 31, 2021, to February 28, 2023 -- right before the difficulties at SVB surfaced publicly -- government MMFs' investments in the RRP facility rose by nearly $1.7 trillion.... However, their holdings of Treasury bills fell $1.4 trillion, in large measure because the US Treasury pared issuance of Treasury bills (which, given their short maturities, MMFs can hold) in favor of greater issuance of Treasury bonds (which, given their longer maturities, MMFs generally cannot hold). On balance, the assets of government MMFs were virtually unchanged over this period."
ICI's piece adds, "In light of the facts, the colorful narrative that MMFs are preventing increased lending to the real economy is strained at best and incorrect at worst. Sufficient financing to the real economy depends primarily on adroit monetary policy: sufficient financing will be forthcoming if the Fed can thread the needle of reducing inflation while avoiding a recession. Impugning MMFs as culpable in regional bank difficulties won't help thread that needle."
In other news, money fund yields were relatively flat again last week, unchanged after inching higher by just one basis point the week prior. They've now digested the Fed's March 22nd 25 basis point rate hike but should jump again after the Fed hikes rates on May 2 (if they hike as expected). Our Crane 100 Money Fund Index (7-Day Yield) was unchanged at 4.64% in the week ended Friday, 4/28. Yields are up from 4.61% on March 31, 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. They've increased from 3.59% on Nov. 30, from 2.88% on Oct. 31 and from 2.66% on Sept. 30. Just a handful of the top-yielding money market funds yield above the 5.0% level, but more should move above this level after the next hike.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 687), shows a 7-day yield of 4.53%, unchanged in the week through Friday. Prime Inst MFs were unchanged at 4.74% in the latest week. Government Inst MFs rose by 1 bp to 4.64%. Treasury Inst MFs down 2 bps for the week at 4.50%. Treasury Retail MFs currently yield 4.29%, Government Retail MFs yield 4.33%, and Prime Retail MFs yield 4.58%, Tax-exempt MF 7-day yields were up 79 bps at 2.98%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (4/28), zero money funds (out of 816 total) yield under 2.0%; 61 funds yield between 2.00% and 2.99% with $20.4 billion, or 0.4%; 112 funds yield between 3.00% and 3.99% ($118.8 billion, or 2.1%), and 643 funds yield 4.0% or more ($5.528 trillion, or 97.5%). Eleven funds have now officially surpassed the 5.0% mark (though many are private and not listed in our "Highest-Yielding Funds" table above) but we expect a lot more to follow in coming weeks.
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.56% after increasing one basis point 2 weeks ago. The latest Brokerage Sweep Intelligence, with data as of April 28, shows that there were no changes over the past week. Just 3 of 11 major brokerages still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
Finally, an article on the website, Cointelegraph, "Circle's Fed payment rail goal could be crushed by NY Fed's policy change," states, "The New York Federal Reserve has published new rules for counterparties looking to use its money market balancer, casting uncertainty over intentions by stablecoin issuer Circle to use the Fed's systems. In an April 25 statement, the New York Fed announced adjustments to its guidelines to determine which parties are eligible to participate in its reverse repurchase agreements (RRP)."
It states, "The updated guidelines could potentially hinder Circle's chances of gaining access to the Fed's reverse-repurchase program -- a process where the Fed sells securities to eligible counterparties with an agreement to repurchase them at the maturity date. According to the New York Fed, accessing such a system 'should be a natural extension of an existing business model, and the counterparty should not be organized for the purpose of accessing RPP operations.'" (For more, see our April 27 News, "Financial Planning Mag Criticizes Brokerage Sweeps; NYFed Tightens RRP.")
