Almost $50 billion poured into money market funds in the week to April 5, data released on Thursday afternoon showed.
The weekly update on money fund assets has become one of the most important “macro” data points over the past month, as market participants assess the extent to which very attractive yields on short-dated government paper and repos are effectively draining deposits from banks.
With the latest haul, money market funds have taken in a net $427 billion over six weeks.
Do let that sink in: In less than two months, money market funds have seen nearly half a trillion in inflows.
Total money market fund assets are now $5.25 trillion. Suffice to say every week is a new record these days.
Not surprisingly, inflows were once again concentrated in government funds, which accounted for more than $34 billion of the weekly haul. Prime funds managed to snap a three-week streak of outflows, taking in $8 billion.
As a reminder that no one needs, money market fund assets have risen steadily, but the recent surge is the direct result of depositors rethinking the relative merits of uninsured balances in bank accounts in the wake of SVB’s failure.
Even insured depositors would be forgiven for fleeing to government money market funds. After all, those funds carry no credit risk, no duration risk and yield three or four times as much as a typical CD, never mind a bank account still yielding next to nothing.
As discussed here at length on multiple occasions of late, including on Wednesday+, much of this cash is parked in the Fed’s RRP facility. To some, Jerome Powell’s 4.8%-yielding garage has become a risk to banking sector stability. But, as JPMorgan’s Nikolaos Panigirtzoglou noted, there’s not a lot the Fed can do.
“Cash that is parked in the Fed’s ON RRP… represents lost liquidity for the banking system,” Panigirtzoglou wrote this week, adding that although the Fed “could stop or reverse QT if banking sector liquidity drainage becomes a more problematic issue, dealing with the flow from bank deposits to MMFs via restrictions to the ON RRP is less straightforward.”
Just for fun, I pulled the 2022 asset, liability, interest income yield, interest expense rate, and income statement for a high quality, well regarded, conservatively managed, not much HFM, not much CRE, solid T1 capital, healthy NIM, etc sort of regional bank – the kind that would normally be a go-to name for regional bank exposure, and indeed is making onto some brokers’ short-lists of “buy now” regionals – into a back-of-envelope model and played with 2023 scenarios.
Assume high-single-digit pct deposit loss, increase interest expense rate on average deposit to only 2%, slow the loan growth, increase interest income yield on loan and security portfolios as fast as is realistic given maturities, sell just enough AFS and borrow just enough from FHLB to maintain a prudent cash level, cut comp and other expenses, etc.
The conclusion I reached was that solvency and liquidity are not a problem, but earnings should get cut in half or worse, even pro forma’ing out the realized loss on securities sold. However, consensus 2023 EPS has only come down <10% since SIVB. In my admittedly non-expert opinion, company analysts are not pessimistic enough here.
So, will this name trade on P/B or P/E? Mulling that over.
Memo to Fed. If you want to fix disintermediation and loss of deposits to banking system stop raising rates and stop rolling off assets off your balance sheets. This isn’t rocket science. You are fighting the last war. Disinflation is well on its way.
I wonder, though, if the Fed cares – or should care – if banks’ EPS get cut and/or banks’ stock prices go down. As I said, I didn’t see solvency or liquidity problems in my shallow dive into this bank. If banks have to start paying depositors a competitive rate, that will hurt earnings until they can turnover and reprice the asset side, but they will eventually manage to do that. Lending rates will go up and cause pain to borrowers, slow the economy, etc, but is that avoidable or even a bad thing in the big picture?
With respect, where are you seeing disinflation? Not in rents, not in groceries, not in car prices, not in air fares, not in ticket prices, not in credit card fees, etc. Maybe in home prices, which are coming off ridiculously juiced prices propelled by the Fed’s wanton buying of MBS. There’s been a little softening, but I’m not really seeing what you’ve been predicting, at least not here in NYC.
One thing consumers need to come to terms with is that for some services, prices aren’t going to come back down no matter what happens. Haircuts aren’t like gas prices. If your barber raised his price 25% during 2021/2022, he’s not going to reduce it — not after people are used to paying it. Why would he? The same is true for a lot of other services.
Sure, in a depression-like scenario you’d see barbers (etc.) cutting prices just so they could put food on the table. In a depression, everything besides the necessities becomes discretionary because nobody has any money. But outside of a total catastrophe, there isn’t going to be outright deflation for a lot of services.
Disinflation is slowing inflation NOT deflation, falling prices. But if the Fed is not careful, disinflation can tip into deflation. It’s an unlikely event, but is a tail risk.
Yes, I’m aware of the distinction. This is, after all, what I do. 🙂
But to a family of four which needs two haircuts and two hair stylings per month, that 25% difference, along with all the other similar services for which prices aren’t going to deflate, is a killer. Particularly when you consider that your disinflation actually means those haircuts and stylings are likely to get even more expensive as time goes on, just at a less harrowing pace.
You haven’t been right about monetary policy or inflation. You’ve left hundreds of comments over the past two years about policy and inflation, and they just haven’t panned out. So when people (e.g., the commenter above, and me) notice, you shouldn’t be surprised.
You habitually malign the folks who show up on business television without mentioning the fact that those folks have been far more right than you have. As the reader above noted, there’s scant evidence to suggest that’s about to change, and even if it does, that’s not going to make you “right” (or Summers and El-Erian wrong). They were right. You were wrong. Period. Nothing can change that because it’s already happened.
In addition to many services prices never coming down or “nomalizing” again, shrunken package sizes are usually permanent. I thought we’d stop with the 13 oz “pound,” but now feel a pound in the single digits of ounces is within the grasp of my lifetime.
Someday, we should start talking about the debt ceiling again . . . it’s only a few months off but seems like everyone’s forgotten about it, not least the $0.5TR that’s piled into risk-free government MMF.