Money market funds, large CDs, and small CDs rose: Americans figured it out

Money market funds, large CDs, and small CDs rose: Americans figured it out

The banks, forced by competition from money market funds, got the memo.

Written by Wolf Richter for WOLF STREET.

Money market funds have been paying more than 5% since about April 2023, up from about 0% in April 2022, and Americans like that. a lot. This has forced banks to compete for deposits by offering attractive interest rates on CDs. Americans flocked to those too.

Money market funds for individual investors It rose by 0.6% in the last weekly report from the previous week, by 2.5% over the past four weeks, and by 8.9% over the past three months, to $2.24 trillion, the Investment Company Institute reported on November 22. This includes funds that invest in government instruments, such as Treasury bills; Funds that invest in tax-exempt securities; and major funds that invest in non-treasury assets.

This is just money sold to retail investors. Money market funds (MMFs) are divided into two main categories in terms of target entity, based on the language in their prospectus; We look at them separately:

  • Funds are sold directly to individual investors (chart above)
  • Money sold to organizations such as a business owner, trustee, or agent on behalf of its clients, employees, or owners (chart below)

MMFs are mutual funds that invest in relatively safe, short-term securities, such as Treasury bonds, repos, including what the Fed offers called “overnight reverse repos” (ON RRPs), and commercial paper High quality, high quality assets. – Supported commercial papers.

MMFs for enterprises It rose 0.5% last week, 2.2% over the past four weeks, but only 1.4% over the past three months, after falling in October, to $3.52 trillion.

Individuals are indirectly among the owners of these funds because institutions include employers, trustees or fiduciaries who purchase those funds on behalf of their clients, employees or owners.

Total MMF Balances It rose by 2.3% over the past four weeks, and by 4.2% over the past three months, to $5.76 trillion.

ICI only provides data for the past 20 weeks and excludes ETFs and funds that invest primarily in other mutual funds.

The Fed releases a slightly different measure on a quarterly basis as part of its cash stock series, currently through the second quarter, and it’s been the same song. You can see how balances swell when the Fed raises rates, first in 2017-2019, and then again dramatically this year (data through Q2 only).

Money printing and money market funds. But notice in the chart above how the massive money-printing spree that began in March 2020 created so much liquidity that it also went into money market funds, even as it returned close to 0%, raising its own set of problems for such funds. They had to buy T-bills, and their demand for T-bills drove the yield on T-bills down to 0% and even below 0%.

This causes all sorts of concerns that some MMFs may “lose money” because their 0% or even passive income does not cover fees and expenses and can cause the NAV of the fund to fall below $1, which could lead to The scramble for the fund, which could then lead to forced selling by those funds, the panic, the contagion, the whole thing.

That’s why the Fed has offered overnight repurchase agreements (ON RRPs) to MMFs. ON RRPs paid interest, and the Fed raised the RRP with each rate hike. We’ve discussed RRPs and now-lower balances here.

Banks now have to compete with multilateral funds.

Deposits are loans from bank customers to banks and form the backbone of banks’ financing. When those deposits flee, while depositors withdraw their money because they don’t like what they see or the interest they get, banks can collapse, as we saw in great detail with Silvergate Capital, Silicon Valley Bank, Signature Bank, and First. Republic.

So the banks got the memo, offered CDs yielding 5% or more, and savers flocked to them. CDs, which have a maturity date, provide more stable financing than savings or checking accounts whose funds can be withdrawn immediately via electronic funds transfer.

Large term deposits Certificates of deposit worth $100,000 or more have risen 60% since the Fed began raising interest rates, to $2.1 trillion at the end of October, from about $1.4 trillion in March 2022, according to Fed data.

The Fed’s suppression of interest rates during the financial crisis – which sacrificed cash flow to return investors, such as savers, on the altar of asset price inflation – led banks to cut the interest rates they were paying on CDs to nearly 0%, Certificate of deposit balances declined, as deposits mostly returned to other types of bank accounts that paid nothing and whose balances continued to swell.

You can see the rhythm. Shy increases in interest rates from December 2015 through December 2018 caused these term deposits to rise. The Fed’s interest rate suppression since March 2020 has caused certificate of deposit balances to decline. Since interest rates began to rise in March 2022, certificates of deposit have become attractive again, and investors have flocked to them:

Banks offered “brokered CDs” Through brokers for investors with brokerage accounts who were not necessarily clients of the banks in order to attract new deposits as their existing deposits began to escape the 0.1% interest rates that the banks were still paying. They then reluctantly stopped trying to endlessly spoil their existing customers and started offering 5%+ CDs to their existing customers to hold on to the deposits they still had.

Small term deposits Certificates of deposit worth more than $100,000 rose from just $36 billion in May 2022 to nearly $1 trillion by the end of September, the latest data available from the Fed’s H.6 money stock measures. It is likely to continue rising in October.

These little CDs reflect what ordinary people are doing with their savings, and now they’re also finally getting some income from their investments – which is encouraging people to save a little more:

CDs are not the only bank savings products that have become attractive because of strong competition with money market funds. Banks also offer higher interest rates on savings accounts, some up to 5% and beyond, but the bank can change these rates without notice, and customers can withdraw their money, unlike CDs whose rates and funds are locked until the maturity date. date.

All deposits are made by all commercial banks – CDs, savings accounts, checking accounts, transaction accounts such as corporate payroll accounts, etc. – have fallen by $890 billion since the peak in March 2022, to $17.3 trillion, after the massive money printing wave that began in March 2020 caused them to soar.

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