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J.P. Morgan Securities' latest "Short-Term Market Outlook & Stragegy includes a brief "Low duration bond fund update." They write, "Consistent with the broader U.S. fixed income markets, total short-term funds (effective duration of 1.5-3.5y) and ultra-short term bond funds (effective duration of 0.5-1.5y) saw significant outflows last year prompted by the Fed's aggressive tightening agenda. Based on the bond funds we track, low duration bond fund AUMs declined by an estimated $150bn (or 15%) YoY, to $841bn as of December-end: short-term fund AUMs declined by $117bn, and ultra-short term fund AUMs declined by $33bn." They add, "Not surprisingly, short-term credit funds saw most of the outflows last year (-$118bn) given their longer duration relative to ultra-short bond funds and money funds. In fact, total returns for short-term bond funds significantly underperformed last year, delivering substantial negative total returns on a 1y basis relative to ultra-short bond funds and MMFs.... In contrast, MMFs meaningfully outperformed as they benefitted from extremely low WAMs and quicker resets in an aggressively rising interest rate environment." (Watch for more coverage in the upcoming February issue of our Bond Fund Intelligence publication.)

ICI's latest weekly "Money Market Fund Assets" report shows money fund assets inching higher to their second record in a row following two weeks of modest declines. Money funds saw their biggest weekly increase since April 29, 2020 during the first week of 2023, and they've risen by $237.1 billion (or 5.2%) over the past 13 weeks. Over the past 52 weeks, money fund assets are up by $194 billion, or 4.2%, with Retail MMFs rising by $280 billion (18.9%) and Inst MMFs falling by $86 billion (-2.7%). ICI shows assets up by $86 billion, or 1.8%, year-to-date in 2023, with Institutional MMFs up $2 billion, or 0.1% and Retail MMFs up $85 billion, or 5.0%. The weekly release says, "Total money market fund assets increased by $2.14 billion to $4.82 trillion for the week ended Wednesday, February 1, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $7.57 billion and prime funds increased by $15.69 billion. Tax-exempt money market funds decreased by $5.98 billion." ICI's stats show Institutional MMFs falling $14.0 billion and Retail MMFs increasing $16.2 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.975 trillion (82.4% of all money funds), while Total Prime MMFs were $735.6 billion (15.3%). Tax Exempt MMFs totaled $110.9 billion (2.3%). ICI explains, "Assets of retail money market funds increased by $16.16 billion to $1.76 trillion. Among retail funds, government money market fund assets increased by $8.30 billion to $1.19 trillion, prime money market fund assets increased by $12.67 billion to $473.34 billion, and tax-exempt fund assets decreased by $4.81 billion to $99.85 billion." Retail assets account for over a third of total assets, or 36.5%, and Government Retail assets make up 67.5% of all Retail MMFs. They add, "Assets of institutional money market funds decreased by $14.02 billion to $3.06 trillion. Among institutional funds, government money market fund assets decreased by $15.87 billion to $2.79 trillion, prime money market fund assets increased by $3.02 billion to $262.29 billion, and tax-exempt fund assets decreased by $1.17 billion to $11.03 billion." Institutional assets accounted for 63.5% of all MMF assets, with Government Institutional assets making up 91.1% of all Institutional MMF totals. For the month of January 2023 (through 1/31/23), money fund assets decreased by $3.3 billion to $5.196 trillion, according to Crane Data's Money Fund Intelligence Daily. (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.)

A release entitled, "Federal Reserve issues FOMC statement" tells us, "Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated. Russia's war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty. The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/2 to 4-3/4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments." Watch for money market fund yields to move higher in coming days as the latest Fed hike gets digested.

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of Jan. 27) includes Holdings information from 53 money funds (down 14 from a week ago), which represent $1.727 trillion (down from $2.040 trillion) of the $5.195 trillion (33.2%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.023 trillion (down from $1.227 trillion a week ago), or 59.2%; Treasuries totaling $467.8 billion (down from $508.7 billion a week ago), or 27.1%, and Government Agency securities totaling $108.2 billion (down from $117.7 billion), or 6.3%. Commercial Paper (CP) totaled $55.6 billion (down from a week ago at $73.1 billion), or 3.2%. Certificates of Deposit (CDs) totaled $24.1 billion (down from $32.6 billion a week ago), or 1.4%. The Other category accounted for $34.2 billion or 2.0%, while VRDNs accounted for $14.5 billion, or 0.8%. The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $637.4 billion (36.9%), the US Treasury with $467.7 billion (27.1% of total holdings), Fixed Income Clearing Corp with $111.8B (6.5%), Federal Home Loan Bank with $68.8B (4.0%), JP Morgan with $46.7B (2.7%), Federal Farm Credit Bank with $36.4B (2.1%), Barclays PLC with $29.1B (1.7%), RBC with $26.7B (1.5%), Citi with $18.6B (1.1%), and Mitsubishi UFJ Financial Group Inc with $18.5B (1.1%). The Ten Largest Funds tracked in our latest Weekly include: Dreyfus Govt Cash Mgmt ($153.2B), Fidelity Inv MM: Govt Port ($126.4B), Morgan Stanley Inst Liq Govt ($123.1B), BlackRock Lq FedFund ($120.8B), BlackRock Lq Treas Tr ($105.8B), Allspring Govt MM ($95.8B), Fidelity Inv MM: MM Port ($92.5B), BlackRock Lq T-Fund ($85.1B), Invesco Govt & Agency ($84.7B) and State Street Inst US Govt ($74.5B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)

Money fund yields inched higher again last week, with our Crane 100 Money Fund Index (7-Day Yield) rising two basis points to 4.14% for the week ended Friday, 1/27. Yields rose by 2 basis points the previous week, and they're up from 4.05% on 12/31/22. They're up from 3.59% on Nov. 30, 2.88% on Oct. 31 and 2.66% on Sept. 30. Yields should move higher again following an expected Feb. 1 Fed hike on Wednesday. The top-yielding money market funds have broken above 4.50% and should move towards 4.75% and 5.0% in coming weeks. (See our "Highest-Yielding Money Funds" table above). The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 675), shows a 7-day yield of 4.03%, up 2 bps in the week through Friday. Prime Inst MFs were up 1 bp at 4.27% in the latest week. Government Inst MFs rose by 2 bps to 4.07%. Treasury Inst MFs up 4 bps for the week at 4.06%. Treasury Retail MFs currently yield 3.80%, Government Retail MFs yield 3.77%, and Prime Retail MFs yield 4.08%, Tax-exempt MF 7-day yields were down at 1.82%. According to Monday's Money Fund Intelligence Daily, with data as of Friday (1/27), 38 funds (808 total) have fallen below the 2.0% yield mark this past week, and many continue to rise over 4.0%; 130 funds yield between 0.00% and 1.99% with $114.9 billion, or 2.2%; 8 funds yield between 2.00% and 2.99% with $11.5 billion, or 0.2%; 256 funds yield between 3.00% and 3.99% ($1.147 trillion, or 22.1%), and 414 funds yield 4.0% or more ($3.921 trillion, or 75.5%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged last week at 0.52%. The latest Brokerage Sweep Intelligence, with data as of Jan. 27, 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.

An SEC filing for the UBS Series Funds explains, "The purpose of this supplement to the prospectus and SAI for UBS Select Prime Investor Fund, UBS Select Government Investor Fund, UBS Select Treasury Investor Fund, and UBS Select ESG Prime Investor Fund, each a series of UBS Series Funds, is to notify you that, at the recommendation of UBS Asset Management (Americas) Inc., the funds' administrator, the Board of Trustees of the Trust approved Agreements and Plans of Reorganization providing for the acquisition of the assets and liabilities of each fund by its respective 'Acquiring Fund,' as set out in the below chart, each also a series of the Trust. The Agreements and Plans of Reorganization set forth the terms by which each of the funds will transfer its assets and liabilities in exchange for shares of the respective Acquiring Fund, followed by the distribution of shares of the Acquiring Fund to the shareholders of each respective fund and the complete liquidation of each fund (collectively, the 'Reorganizations'). Each Acquiring Fund has an identical investment objective and investment strategy to that of each respective fund." The filing shows that the UBS Select Prime Investor Fund merged into the UBS Select Prime Institutional Fund, the UBS Select Government Investor Fund merged into the UBS Select Government Institutional Fund, the UBS Select Treasury Investor Fund merged into the UBS Select Treasury Institutional Fund and the UBS Select ESG Prime Investor Fund merged into the UBS Select ESG Prime Institutional Fund. UBS adds, "After the Reorganizations are consummated, shareholders of each of the funds will become shareholders of the respective Acquiring Fund. The Reorganizations are intended to be tax-free, meaning that shareholders of each of the funds will become shareholders of the respective Acquiring Fund without realizing any gain or loss for federal income tax purposes. The Reorganizations do not require shareholder approval, and you are not being asked to vote on the Reorganizations. Shareholders who own shares of a fund as of the record date will receive an Information Statement/Prospectus containing further information regarding the Reorganizations, which are scheduled to take place on or about January 20, 2023."

Dreyfus published a new "Meet The Manager" Q&A with Senior Portfolio Manager Peter Henshaw. They ask, "Why liquidity solutions?" Henshaw responds, "I wanted to be more involved in investment management and trading, and so I pursued internal opportunities across BNY Mellon. In 2004, I jumped at the opportunity to join the Dreyfus taxable money market desk. I was aware of the strong history of Dreyfus' money market funds dating back to 1974, as well as Dreyfus' formidable industry presence. I joined a talented team of seasoned professionals and was excited by the scope of front-end investing. Daily, we make portfolio decisions based on our expectations for Federal Reserve (Fed) policy, upcoming economic data, issuer credit quality, regulatory constraints, and technicals like future supply of government securities. It's a much more dynamic environment than many appreciate." When asked, "Why are money market funds such an important tool for investors and what could potentially change about the tools available?" He comments, "Money market funds are important for many reasons. The sheer volume of assets in domestic money market funds, $4.8 trillion (as of December 2022), speaks to its role in the broader economy. Corporates look to money market funds for sources of funding at low interest rates. The U.S. Treasury and U.S. government-sponsored agencies all borrow significantly from money market funds. Both institutional and retail investors entrust their cash managers with considerable responsibility. They employ us to be stewards of a very critical portion of their assets --- assets they utilize for short-term operational liquidity as well as for capital preservation.... Investors are happy to see yield on their cash. They are also concerned about when interest rates will peak, how persistent this excessive inflation will be, and the possibility of an upcoming recession." Henshaw adds, "Forthcoming regulatory changes are also at the forefront of investors' minds and how institutional prime funds are managed is likely to change. The Securities Exchange Commission (SEC) modified 2a-7 rules after the Great Financial Crisis (GFC), and the COVID-19 pandemic is the impetus for another round of reforms. It will be well-received if the SEC decouples money market fund liquidity thresholds from fee and gate thresholds. However, 'swing pricing,' where a fund's net asset value (NAV) is adjusted by a swing factor representing certain trading and portfolio costs during periods of significant redemptions, will be more challenging for investors and fund managers to accept and implement. Increases to required daily and weekly liquidity thresholds should have little impact on government money market funds, if mandated."

A Prospectus Supplement filing for the $335 million Invesco Tax-Free Cash Reserve Portfolio says, "On January 19, 2023, the Board of Trustees of Short-Term Investments Trust approved a Plan of Liquidation and Dissolution, which authorizes the termination, liquidation and dissolution of the Fund. In order to effect such liquidation, the Fund will close to investments by new accounts after the close of business on February 24, 2023. Existing shareholders will continue to be able to invest in the Fund until the close of business on or about April 10, 2023 when no further purchases or exchanges into the Fund will be accepted as the Fund prepares for liquidation on or about April 24, 2023 as described below. The liquidation may occur sooner if at any time before the Liquidation Date there are no shares outstanding in the Fund. The liquidation may also be delayed or occur sooner if unforeseen circumstances arise. Shareholders of the Fund may redeem their shares at any time prior to the Liquidation Date. The Fund reserves the right, in its discretion, to modify the extent to which sales of shares are limited prior to the Liquidation Date." It adds, "To prepare for the closing and liquidation of the Fund, the Fund's portfolio managers may increase the Fund's assets held in cash and similar instruments in order to pay for Fund expenses and meet redemption requests. As a result, the Fund may deviate from its stated investment strategies and policies and may no longer be managed to meet its investment objective.... At any time prior to the Liquidation Date, shareholders may redeem their shares of the Fund pursuant to the procedures set forth in the prospectus." For more on recent liquidations, see our Sept. 19, 2022 News, "SSGA to Liquidate State Street ESG Liquid Reserves," and our July 7, 2022 News, "DWS Liquidating Govt Cash Mgmt Fund."

The Wall Street Journal says, "Rich Customers Pull Money From Banks Offering Paltry Interest Rates." The article tells us, "Wealthy savers are starting to take their cash out of bank accounts in search of higher yields. Big banks are still paying paltry interest on checking and savings accounts despite the Federal Reserve's steepest rate increases in decades. Their wealth-management customers are done waiting: They are moving the extra savings they accumulated during the pandemic into products whose rates have more closely tracked the Fed. The typical savings account is paying a 0.33% interest rate, according to the Federal Deposit Insurance Corp. Treasury notes, money-market funds and brokered certificates of deposit, meanwhile, are all paying between 4% and 5%." They quote Jason Goldberg of Barclays PLC, "Every time the Fed hikes, the opportunity cost of leaving idle cash in low-yielding accounts increases. You're seeing consumers who have extra cash being proactive with it." The Journal piece explains, "The divergence was on display in Bank of America Corp.'s fourth-quarter earnings earlier this month. Deposits at the bank's wealth unit, which includes Merrill Lynch Wealth Management, fell 17% in 2022 to $324 billion. Deposits in the consumer unit fell 0.6% to $1 trillion. Affluent customers moved money into money-market funds and Treasurys, Chief Executive Brian Moynihan said on a call with analysts, while the typical consumer-banking customer simply had less extra money to make such investments. The bank paid just 0.06% on consumer deposits in the fourth quarter and 0.88% on U.S. interest-bearing deposits across all businesses." It adds, "The flight of wealth deposits poses a big business issue for firms such as Charles Schwab Corp., which relies on the extra cash that investors leave in their accounts for a large part of its revenue. The biggest U.S. banks have a wider range of businesses. They also accumulated so many extra deposits at the start of the pandemic that losing some isn't a huge problem. Still, they are starting to try to stem outflows by offering higher interest rates to their wealthy clientele. Wells Fargo & Co.'s wealth-management deposits dropped by 28% to $139 billion in 2022 from a year earlier. The bank's consumer deposits were down 3%. At JPMorgan Chase & Co., deposits fell 17% in its asset- and wealth-management unit and 1% in consumer banking."

Allspring Money Market Funds latest "Overview, Strategy, and Outlook" comments on the "U.S. Government sector," "Without a doubt, the aforementioned dynamics between the Fed, inflation, and the markets were the leading story of the year, resulting as they did in interest rates about 3.50% higher now than projected by the Fed and the markets a year ago. If the Fed's battle with inflation was the headliner, though, there was another smaller story playing out -- one about government security supply, the changes in which pushed yields around even as they generally rose with the Fed's moves. The two largest components of supply in the government money markets are Treasury bills (T-bills) and the Fed's reverse repurchase (repo) program (RRP), which together are always (as currently constructed) sufficient to meet demand. That's because the Fed built the RRP to be functionally unlimited, not as an altruistic gesture, but necessarily to transmit monetary policy to the economy by having rates go up when the Fed says they're going up." They write, "T-bills are another story, as they're the perceived gold standard for safe assets worldwide (using the term loosely, as they're arguably better than gold), and for folks without access to the RRP they're the easy choice for parking short-term money. The pretty solid rate floor the RRP has placed under markets such as the repo and federal funds markets gets spongy when it comes to T-bills, and we particularly see that when T-bill supply is contracting. Looking back a year, total T-bills outstanding had declined about $1.2 trillion during 2021, so the market began 2022 fairly desperately seeking the perceived safe assets it so coveted. In 2022, although supply ended the year just $70 billion lower, it waxed and waned throughout the year and so, too, did investors' prospects and patience." Allspring adds, "During periods of expanding supply, T-bill yields began to approach fair value as determined by the RRP rate adjusted for expected Fed interest rate moves. In contrast, during contractions, T-bills got considerably more expensive than the RRP, which is also an essentially risk-free rate, as it's an obligation of the Fed and is also secured by U.S. Treasury securities. That richness reached a crescendo at the end of the year, when short supply teamed up with year-end window-dressing demand to drive 4-week T-bill yields 69 bps lower than the RRP. To clarify, the 4-week T-bill auction near year-end yielded 3.61% while the RRP rate for the entirety of that T-bill’s existence is expected to be 4.30%. If you have a choice, one perceived safe asset is definitely preferable."

Fitch Ratings published, "Stablecoin Risks Extend Beyond Reserving Practices," which tells us, "Reserve practices for major stablecoins have become more conservative, but stablecoin holders continue to face other sources of risk, some of which have been spotlighted in the failure of major cryptocurrency entities, says Fitch Ratings. These include incomplete attestations, weaknesses in the legal rights of stablecoin holders, and contagion risks linked to the cryptocurrency ecosystem. The overall capitalisation of the stablecoin sector has shrunk significantly since the collapse of Terra in May 2022, falling from around USD189 billion at end-April to around USD144 billion at end-December. The bankruptcy of the second-largest crypto exchange, FTX, amid a fraud scandal in November, followed by Binance's pause in withdrawals in December, led to heightened stablecoin redemption activity and episodic unmooring of Tether's USDT and Binance's BUSD stablecoins from par. Both tokens were only unmoored by slight amounts and stablecoin trading velocity has recovered somewhat, but these events have negatively affected sentiment towards stablecoins." They continue, "We believe market concerns and pressure from regulators have driven a trend towards more conservative reserving and some improvement in transparency, although significant variation between stablecoins remains. Reserves for the dominant stablecoins increasingly comprise short-term US Treasuries and cash. For example, Tether has said it reduced its commercial paper exposure by USD24 billion in 2022. Nonetheless, the price volatility of USDT and BUSD is still high compared with money market funds. This reflects lingering risks around reserving practices and transparency, as well as other factors such as contagion risk, counterparty risk, the legal rights of stablecoin holders (notably around redemption rights) and operational risks, including cyber risks." Fitch adds, "We expect the close linkages between major stablecoins and the broader crypto sector to remain a focus for regulators." See also, an earlier piece, "BlackRock's Stablecoin Money Fund Draws Bank Lobby Warning," by ignites, which tells us, "The Bank Policy Institute, whose board members include the chief executives of JPMorgan Chase and Bank of America, has sounded the alarm on BlackRock's $28 billion Circle Reserve Fund. The government money fund, which launched in November, stores a portion of the reserves for Circle Internet Financial's USDC stablecoin. Circle is the only entity allowed to purchase shares of the money fund, and the financial technology firm has said it expects those reserve assets to be 'fully transitioned' to the fund by the end of March 2023. The root of the ... institute's concerns is that BlackRock plans to apply for the money fund to access the Federal Reserve's overnight reverse repurchase agreement facility.... If the Fed grants such access to the money fund, it would render the stablecoin a 'back-door' central bank digital currency, the Bank Policy Institute wrote in a Jan. 4 post on its website."

The Wall Street Journal's CFO Journal posted a piece entitled, "The Morning Ledger: Big Banks' Corporate Deposits Surge Amid Higher Interest Rates." They write, "Finance executives boosted their deposits at big banks in the fourth quarter in expectation of a potential economic downturn and as the Federal Reserve continued to increase interest rates. JPMorgan Chase & Co. late last week said its corporate deposits totaled $14.2 billion for the quarter ended Dec. 31, up from $396 million in the prior-year period. Citigroup Inc. recorded $31.8 billion in corporate deposits, up from $5.8 billion, and Wells Fargo & Co. booked $54.37 billion, up from $32.22 billion, financial documents show. Unlike its peers, Bank of America Corp. saw corporate deposits, listed under its 'All Other' business line, fall 6% to $19.9 billion as of Dec. 31 from $21.18 billion a year earlier." The article explains, "Overall deposit accounts at banks declined over the course of 2022 after a runup during the height of the pandemic. Total deposits were down 5% at JPMorgan, 6% at Bank of America and 7% at Wells Fargo in the fourth quarter compared with the prior-year period. Companies are shifting more of their cash into money-market funds because they consider them nearly as safe as cash and value that invested amounts remain highly liquid and accessible. Yields on money-market funds on average climbed to 4.05% in December from 0.02% a year earlier amid higher interest rates, according to Crane Data, which tracks money funds." CFO Journal adds, "Money-market yields will likely rise after the Fed raises rates again in early February, said Peter Crane, president of Crane Data. Money-market funds and corporate deposits typically see big seasonal jumps in assets at the end of the year, he added."

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