Money fund assets continue rising and hitting record levels daily; they broke the $5.8 trillion level for the first time ever on Monday and inched higher again on Tuesday. Crane Data's Money Fund Intelligence Daily shows assets increasing by 9.6 billion on Tuesday, increasing by $59.7 billion over the week through 5/23 and increasing by $152.2 billion in May month-to-date to a record $5.818 trillion. Retail MMFs have increased by $80.8 billion MTD, while Inst MMFs have increased by $66.7 billion. Tax Exempt MMFs are up $4.7 billion. Prime MMFs are up $24.5 billion on the month so far, and Government MMFs are up $123.0 billion. Treasury MMFs are up $16.5 billion, though Treasury Inst MMFs are off a slight $3.9 billion MTD. (Note: Register and make hotel reservations ASAP for our Money Fund Symposium show, which will be held June 21-23, 2023 in Atlanta, Ga!)
Reuters writes on the news in an article entitled, "US money market fund assets hit record highs despite debt-ceiling fears." It says, "U.S. money market fund assets hit a new record of $5.8 trillion this week as yield-hungry investors continued to turn to the short-term debt securities -- a stark contrast to the 2011 debt-ceiling standoff when there were large outflows from the funds. Money market mutual funds -- a key source of short-term corporate and municipal funding -- have enjoyed $614.8 billion in net inflows so far this year, with $48 billion of those in the past week as of Monday, according to Crane Data."
The article continues, "The influx comes despite growing concerns that the White House and Republican lawmakers may not reach a compromise to raise the $31.4 trillion debt ceiling ahead of a June 1 deadline, pushing the country into a devastating default. Although money market funds are considered safe havens, they have experienced runs during previous crises and government officials and ratings agencies have warned they may continue to be vulnerable to rapid redemptions in times of stress. In 2008, the collapse of Lehman Brothers sparked a run on money market funds, which also experienced severe stress in March 2020 as COVID-19 shut down the economy. Both episodes led the government to backstop the sector and to review its rules."
It explains, "And in the week leading up to the 11th-hour 2011 debt-ceiling deal, which caused Standard & Poor's to downgrade the U.S. credit rating for the first time, investors pulled $66 billion out of money market funds, which at the time held around $2.6 trillion, according to the Investment Company Institute. Investors moved much of the cash into bank deposits."
Reuters adds, "But this time there are several key differences buoying the sector. Those include higher interest rates, with money market funds today offering yields of as much as 5% compared with bank products which generally yield less than 1%. Recent bank failures have also prompted investors to move cash from bank accounts to money funds, said Crane Data President Peter Crane. 'In 2011 you had weakness in money funds anyhow, whereas now you have assets hitting record levels,' he said. 'The tide was going out then and now the cash tide is rising, or is high, and it would take a lot more to reverse that.'"
Finally, they tell us, "Money market funds that invest in Treasuries -- money funds invest in high-quality, liquid, short-term debt, including Treasuries, government agency debt and corporate securities -- are also avoiding exposure to Treasury bills that mature in June, said Crane. 'That's the sort of kryptonite that people are staying away from,' he said."
In other news, the Board of Governors of the Federal Reserve System released its "Minutes of the Federal Open Market Committee, May 2–3, 2023." The Minutes state, "Deposit outflows from small and mid-sized banks largely stopped in late March and April. Although equity prices for regional banks fell further over the period, for the vast majority of banks these declines appeared primarily to reflect expectations for lower profitability rather than solvency concerns. Market participants remained alert to the possibility of another intensification of banking stress."
They also comment, "Regarding the balance sheet and money markets, balance sheet runoff continued to proceed smoothly and overnight secured and unsecured rates continued to trade well within the target range for the federal funds rate. Respondents to the Desk's surveys generally expected that overnight reverse repurchase agreement (ON RRP) balances will remain elevated in the near-term before declining later this year. The ON RRP facility continued to support effective policy implementation and control over the federal funds rate, providing a strong floor for money market rates. Balances at the ON RRP facility remained within their recent range, indicating that use of the facility was not an important factor driving outflows of deposits from the banking system. Use of the ON RRP facility declined at times over the intermeeting period in response to increases in rates on overnight secured money market instruments and on short-term Federal Home Loan Bank debt."
The Fed writes, "U.S. markets for commercial paper (CP) and negotiable certificates of deposit (NCDs) stabilized over the intermeeting period. Spreads for lower-rated nonfinancial CP, which spiked following Silicon Valley Bank's closure, narrowed significantly. Outstanding levels of CP and NCDs increased modestly over the intermeeting period, while the share of short-maturity unsecured issuance of CP and NCDs fell to normal levels, reflecting a net easing of stress associated with regional banks."
They discuss, "Conditions in overnight bank funding and repurchase agreement markets remained stable over the intermeeting period, and the increase of 25 basis points in the Federal Reserve's administered rates following the March FOMC meeting fully passed through to overnight money market rates. The effective federal funds rate printed at 4.83 percent every day during the period, while the Secured Overnight Financing Rate averaged 4.81 percent -- slightly above the offering rate at the ON RRP facility. Daily take-up in the ON RRP facility remained elevated, reflecting continued significant usage by money market mutual funds, ongoing uncertainty around the policy path, and limited supply of alternative investments such as Treasury bills."
The Minutes also say, "With regard to vulnerabilities associated with funding risks, the staff assessed that although funding strains had been notable for some banks, such strains remained low for the banking system as a whole, especially in light of official interventions by the Federal Reserve, the Federal Deposit Insurance Corporation, and the U.S. Department of Treasury to support bank depositors. Outflows of funds from bank deposits in mid-March, which were concentrated at a limited number of banks, had slowed."
They write, "In their discussion of financial stability, various participants commented on recent developments in the banking sector. These participants noted that the banking system was sound and resilient, that actions taken by the Federal Reserve in coordination with other government agencies had served to calm conditions in that sector, but that stresses remained. A number of participants noted that the banking sector was well capitalized overall, and that the most significant issues in the banking system appeared to be limited to a small number of banks with poor risk-management practices or substantial exposure to specific vulnerabilities. These vulnerabilities included significant unrealized losses on assets resulting from rising interest rates, heavy reliance on uninsured deposits, or strained profitability amid higher funding costs."
The Fed adds, "Participants also commented on the susceptibility of some nonbank financial institutions to runs or instability. These included money market funds, which had recently experienced large cash inflows; hedge funds, which tend to use substantial leverage and may hold concentrated positions in some assets with low or zero margin; thinly capitalized nonbank mortgage servicers; and digital asset entities. Many participants mentioned that it is essential that the debt limit be raised in a timely manner to avoid the risk of severely adverse dislocations in the financial system and the broader economy. A few participants noted the importance of orderly functioning of the market for U.S. Treasury securities or stressed the importance of the appropriate authorities continuing to address issues related to the resilience of the market. A number of participants emphasized that the Federal Reserve should maintain readiness to use its liquidity tools, as well as its microprudential and macroprudential regulatory and supervisory tools, to mitigate future financial stability risks."
