Joseph Adinolfi
Assets held by money market mutual funds surged to a record $5.4 trillion last week as the inflows surged at the fastest pace since the start of the COVID-19 pandemic following the collapse of Silicon Valley banks.
This latest milestone is the culmination of what has been an iconic year for the money fund. What started as a modest inflow in March last year after the Federal Reserve raised its first interest rate since 2018, has seen a surge in money funds since mid-March 2022 as the Fed raises its policy rate. More than $460 billion flowed in, leading to floods. Nearly five percentage points, according to Crane.
Almost half of that amount, $228 billion, has arrived since the beginning of 2023, and the rapid inflows seen in the two weeks to Friday are consistent with deposit outflows from regional lenders. The trend of shrinking bank deposits is starting to worsen. 2022.
cash is king
When interest rates were rock bottom, holding cash was seen as a drag on portfolio returns. But now, even Wall Street celebrities like Ray Dalio, founder of Bridgewater Associates, once advised investors to keep their money in stocks and bonds by declaring that “cash is garbage.” but changed his attitude.
In an interview last month, Mr. Dalio said cash is now more attractive than stocks and bonds. Others, including Neuberger Berman portfolio manager Steve Eisman, agree with that claim.
See also: Stocks are plummeting. Why ‘cash’ yields will be king after 2007
In the week ending Friday, investors put $129.3 billion into money market funds. SVB’s collapse was due to what his manager described as an “awakening” among investors in one money fund’s portfolio. In the previous week, investors added more than $20 billion to him, bringing his two-week total to over $150 billion.
All of the inflows came to funds that invested exclusively in government or municipal bonds, Crane data showed. According to Peter Crane, president of Crane Data, so-called “prime” funds that buy short-term corporate and bank debt are actually leaving money in favor of government money, which is considered safer. ing.
Crane, who has overseen more than half of the money market mutual fund’s 50-year existence, said concerns over the stability of US lenders in the region sparked by the collapse of Silicon Valley helped the pace of inflows pick up. Said he was thinking. Bank.
According to the latest data available from the Federal Deposit Insurance Corporation, banks suffered $620 billion in unrealized losses in their bond portfolios as of the end of 2022. On Tuesday, Treasury Secretary Janet Yellen promised more government support for banks struggling with deposit crackdowns.
‘Maturity is shorter than ever’
Money market funds are now offering annualized returns of over 4% on average, as portfolio managers aim to keep funds’ duration at very short-term levels, Crane said.
Money fund interest rates are typically much more attractive than the interest rates investors receive on checking and savings accounts. According to Bankrate.com data, the average interest rate for bank savings accounts is just 0.2%.
But Crane said investors are also reacting to the perceived safety of money market funds that invest in short-term bonds that are easier to hold to maturity.
The SVB was forced to sell part of its bond portfolio holding seemingly safe Treasuries and mortgage bonds at a loss of about $2 billion after rising interest rates spurred losses in longer-term bonds. After that, it collapsed.
The accumulation of deposits accelerated shortly after the banks announced they needed to raise funds to offset this loss.
Reference: Why Silicon Valley Bank went bankrupt
“High rates are part of the problem, but safety is also a factor,” Crane said in a phone interview. “Banks he’s buying 3-year bonds. Money funds he’s buying 3-week bonds.”
A longtime money fund portfolio manager said the influx of money funds following the collapse of the SVB reflects a growing awareness of this disparity among investors.
“Part of the reason deposits left was simply SVB news,” said Deborah Cunningham, a longtime money fund portfolio manager and chief investment officer for global liquid markets at Federated Hermès. The market has woken up,” he said. .
Money funds currently hold 40% of their assets in the Fed’s overnight reverse repo facility, which could yield more than 4.5% annualized yields, Crane said, according to New York Fed data.
“Right now, almost everyone in the money market is running overnight repos,” said Cunningham. “That’s the strategy.”
“Maturity is shorter than ever,” Crane added.
When money funds shine
The new investor preference for cash and cash-equivalent investments is due to the fact that short-term Treasury yields have exceeded long-term Treasury yields since last summer. said another.
Yields on 6-month government bonds topped 5% in February for the first time since 2007. Rising Treasury prices in recent weeks have narrowed the gap between short-term and long-term yields, but the 6-month yield remains high, according to FactSet data, while the 10-year Treasury yield is currently at 3.548%. The monthly interest rate remains 4.890%.
Since March last year, $468 billion has flowed into money market funds. According to Crane, his $228 billion, nearly half of that amount, has already arrived since the beginning of the year.
At the same time, deposits in the banking system are slowly draining as most banks have not materially increased the interest rates they offer to their customers.
Cash and cash equivalent deposits in the banking system stood at about $17.4 trillion, and will grow to $1 trillion from January 2022, according to data released late by the Federal Reserve, the latest data available as of January. dollar is declining.
This is no coincidence, Crane et al. say an inverted yield curve, uncertainty about how far the Fed will hike interest rates, and concerns about banking sector stability all play very well for money market funds. said to have produced
Crane and others expect deposit flight to worsen in March as banks borrow money from the Fed’s discount window at a record pace.
One sign of potential stress is that banks have borrowed $165 billion from the Fed’s discount window and the new Bank Term Funding Program combined.
Judith Raneri, who manages the Gabelli US Treasury Money Market Fund, said her fund has experienced “huge inflows” over the past two weeks in response to the failures of SVB and two other US banks. She told MarketWatch that she expects the inflow to continue, albeit at a slightly slower pace.
Some bank deposits offer interest rates as high as 5%
Data from Bankrate.com shows that investors willing to keep their money with smaller online financial institutions and local financial institutions earn higher cash returns than those offered in the money market fund space. can be obtained with
UFB Direct, a division of Axos Bank, offers annual yields of just over 5% on bank deposits, according to Bankrate. This is the most attractive interest rate among US banks.
By comparison, the JPMorgan Chase Liquid Asset Money Market Fund, a prime fund, has a 7-day yield of 4.6%.
Nevertheless, as MarketWatch reports, deposits have been moving from regional lenders to large money-center banks like Bank of America Corporation (BAC) in recent weeks.
Greg McBride, chief financial analyst at Bankrate.com, said in a telephone interview that this shows investors are prioritizing the safety of money center banks.
“The big banks tend to be fairly non-competitive with deposit payments because they don’t require deposit payments,” McBride said. “If you want better interest rates, you have to shop around,” he said.
The Dow Jones Industrial Average was up about 163 points, or 0.5%, the S&P 500 was up 0.8% and the Nasdaq Composite was up 1.1%.
-Joseph Adinolfi
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03-22-23 1107ET
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