The Money Market ‘Feast’ is Over

Certainly everyone knows by now that the money market feast (feast is relative to zero interest rates received a few years ago) is over. While one could take comfort in their cash holdings receiving 1.5-2% or so last year those days are gone.

I noticed my Fidelity Ready Reserves (FDRXX) is now tossing off just .02%–essentially nothing. My Gabelli US Treasury AAA (GABXX) is paying .47%–their portfolio has longer maturities and so has not hit bottom yet–probably will just keep drifting lower.

According to a Bloomberg article Money Market funds hold $4.8 trillion in assets–quite a chunk of ‘dry powder’–seems to me the money is poised to move into investment grade assets–maybe some utility and closed end fund preferreds and baby bonds (my favorites)–at current yields in the 5% area it is a damned site better than nothing–or potentially negative rates in the future.

I have always hated being forced into a corner with my investments–meaning taking more and more risk to earn the same meager return–but this is where we are going eventually.

So as we move thru this turmoil in the next year I will likely be carefully picking up more risk–as we all will if we want to maintain a reasonable return. A 7% target worked for a few years—then a 6% target for a few more, but maybe I will be looking to maintain a 5% return in the future–honestly I will be happy if I can get to 3% for this year.

My 3 main equity market account are currently overall down about 3% for the year–1 of them just got to the black today, while one is off 2% while the 3rd account is off 6%. I just reviewed the last 3 years and quite by accident I am running 6% annually or so overall–2019 was great, while in 2018 most income investors took a hammering in 2018 which took nice gains all the way down to a small loss–this year I need to get 2-3% to get back to my longer term average.

42 thoughts on “The Money Market ‘Feast’ is Over”

  1. In the good old days (last fall) you could get 3.5% on your sideline cash from monthly payer Kanye Anderson Series F Preferred…plus maybe a little capital gain depending on how you timed your purchases. Nowadays you’ll be lucky to get half that rate.

  2. Tim, you do realize that Fidelity is losing their A** managing FDRXX? Same for all of the other large money market funds. FDRXX has about $200 billion and has ~ .4% management fee, which is $800 million a year. It does take quite an effort and staff to run a $200 billion fund. And basically every asset it can hold yields ~ 0% which makes it impossible to be profitable when offering a positive return to investors. I assure you Fido and all of the other firms would love to NOT offer MMF’s in the ZIRP area. They do it because they think their customers demand it.

    1. I can assure you, Fidelity is making a TON of money off FDRXX. It is the investors who aren’t making any money.
      Fund costs for this type of fund are mostly fixed, as most of the activity is automated because of the broad trading market for these bonds. If I had to guess, the staff that runs that fund is a dozen people, tops and while sec lending transaction costs can be high, not that high.
      Most government money market funds have expense ratios 1/3rd of this fund, and still rake in money hand over fist at this fund size. e.g. Vanguards is .0016
      And notice their portfolio is 50% repurchase agreements and 26% in Agency debt, so like most “government” funds, they are buying long dated treasuries and lending them out on a short term basis to cover redemption’s. I put government in parenthesis, because investors invest in government funds for two reasons.
      1. Lowers the chance of default
      2. Exemption from state income tax
      Notice that this fund fails the 2nd test by and large because over 50% of their fund income isn’t derived from treasury income but repurchase agreements and non-treasuries, which are not exempt from state income tax, and I can’t tell how risky #1 is, because of the annoying feature of lumping true agency debt like Federal Home Loan Banks with non-US agency GSE debt like Farmer Mac.
      And the size and of the fund and yield has soared since they changed the fund managers in 2017 (though this may not be the fund manager, it may be a change in bylaws to allow the heavy use of securities lending and repurchase agreements to boost returns). Some funds are close to 100% Repurchase agreements now.
      https://fundresearch.fidelity.com/mutual-funds/performance-and-risk/316067107

  3. Wouldn’t you love to see the Treasury offer $250 to $500 Billion of 20 year notes on the market? That would surely reinforce the yield curve. What would it take for a sizable offering? 150 to 200 basis points?

    Ever since Obama was elected and started his much smaller deficits, the Treasury has failed to balance bond offerings by maturity. Obviously, it was to save on interest. Now we are compounding our deficits with short term financing. A 200 basis point rise in rates would wipe out our discretionary budget, including defense.

    Treasury needs to face up to the real cost of borrowing by selling a fair share of long bonds.

    1. Deficits and debt are 2 different animals, however, is this one of those tongue in cheek moments? You’re kidding, right? Let’s talk debt.

      When Obama was sworn in on Jan. 20, 2009, the debt was $10.626 trillion. When he left office on Jan. 20, 2017, it was $19.947 trillion.1 It explains why some would say Obama added $9 trillion to the debt—more than any other president.

      According to the Treasury and CBO facts and future projections (prior to Covid-19):

      – The national debt grew by 15% through February 11 of Clinton’s first term and ended up growing by 36% by the end of the 2000 fiscal year, the final full fiscal year of his presidency.
      – The debt grew by 12% during Bush’s first 752 days and grew by 75% when the 2008 fiscal year came to a close.
      – Under Obama’s first two years and change, the national debt grew by 33%, and it grew by 84% by the end of the 2016 fiscal year.
      – The debt grew 10% in Trump’s first 752 days and is projected to grow by 44% by the end of the 2024 fiscal year.

      1. My point is that the overhang of excessive national debt is compounded by the maturity structure of our debt. It would be one thing if most of debt were in the form of long term debt because then a sudden increase in rates wouldn’t increase total interest cost by a similar percentage. Since about 80 to 90 percent of national debt is short term , less than a year, spikes in short term rates will be fully reflected in the cost of carrying the debt.

        Obama ran around saying that debt is cheap but only because we financed all the debt at short term rates. Now even long term rates are cheap but we are still issuing predominantly short term notes. The Treasury is proposing some 20 year notes but only for $20 Billion. If Treasury offered $500 Billion of 20 year notes, do you believe the current rate structure would survive? I don’t, I suspect 20 year rates would jump a lot.

        So now our country endures an overhang of excessive debt at unrealistically low rates. Why is the Treasury able to get away with cheap short term debt? Probably because the Fed is buying them to accommodate or otherwise monetize the debt.

        No it’s not a Friday joke.

        1. George Roach the percentage of Treasury issuance bought by the FRB has been remarkably steady for decades (at about 15%). We get away with cheap debt because not only is our currency fiat, but we are the peg currency standard – and so far T.I.N.A. for the rest of the world. That’s why you see a strong dollar with ZIRP. That’s why you see mild YoY loss of buying power rather than hyperinflation.

          1. May be true in the past but not this year. Who is going to buy $5 trillion of new debt this year? The Chinese are hurting and wouldn’t if they could because of American threats to offset Chinese holdings with virus liability.

            Where in the world is there any excess trillions to fund the US? Other countries are operating at deficits also.

            1. Your concern over US debt is well noted but in relative comparison against the Europe, Japan, China, etc. US has its house in order. Not saying this is a plate spinning contest.

            2. Still. Pick a random Fed’s balance sheet from the early aughts (say, July 11, 2001). The Fed’s net holdings of US Treasury bills and bonds equaled 16.1% of total US Treasury debt held by the public.
              Look at a recent balance sheet (May 6, 2020), the Fed’s net holdings of US Treasury debt equal 15.0% of total US Treasury debt held by the public. Anyway, that is not what matters.

            3. The music will stop when anybody, anywhere decides to STOP buying US Treasury debt at low rates. To date the most accurate forecaster has been that famed macroeconomist Dick Cheney who in 2002 said: “deficits do NOT matter.” So far every forecaster in the last 18 years that has predicted rising interest rates and/or rising inflation has been dead wrong. We can all postulate that some day the bond buyers will demand very high rates, but none of us might still be alive before it occurs. Nobody, nowhere knows. We all get to make our own investment decisions which implicitly include a forecast of interest rates.

              Most around here, including me, are assuming low inflation, low interest rates for many years. The way you know that is how we all buy these fixed coupon preferreds. If inflation/rates materially rose the principal value of fixed coupon preferreds would be sunk. You can argue that fixed to floating give you some protection against rising rates, but they are certainly a lower percentage of the preferred offerings. Even if you do NOT think you are forecasting interest rates, your actually are by virtue of what you hold.

              1. Agreed that our forecasts are explicit or implicit. I figure we’ll have some good recovery for about 12 to 18 months but inflation will start to appear. I will need to start to transition from dividend common stocks and preferred to floating or ff starting in about 12 months. Like a lot of you say, I have to assume the risk that the trap door may suddenly drop out and Congress starts to suffer the interest rates that our profligacy deserves.

                I also pray that we never get negative rates. Imagine Washington being able to claim that Congress borrowing money would improve the deficit!

  4. No FOMO, folks. Personally I believe that even those who did not buy in late March – early April will still have opportunities to buy in this year relatively reliable (IG rated) securities with a yield of 6-7% and maybe higher. Just have to wait and not panic. And do not spend cash in a pumped-up market.
    JMO

    1. @yurly
      Disagree. The time to have bought was in mid-March actually, imo.

      All the great bargains have been bought, what’s left are the weak sisters…travel/leisure, etc. They are still tanked, and their recovery is pretty long term.

      1. Wall Street has a conflicted message. It depends on where you look. The Money Center bank common stocks (JPM, C, WFC, and BAC) are trading at 2011/2012/2013 levels. Why? All the loan write-offs due to the recession.

        The rest of the market is trading as if we will go back to 2019 earnings levels in 12-18 months.

        If you don’t believe the recession scenario, money center banks are a roaring bargain. Plus, they are currently paying huge dividends (WFC common stock is 8% dividend right now).

        1. Right now wouldn’t you expect more loan losses on credit cards, mortgage payments and small business loans. I am concerned that there is a sense of “jubilee” to this depression, however temporary, that relieves guilt of not paying debts. Retail and consumer losses may be the real problem from those that are legitimately unable to pay and those looking for a deal.

          1. I absolutely agree with everything you said. That’s why I am 68% in cash and not buying this stock rally.

            I am pointing out that one side of the SP500 says 12-18 months recovery. The other side says severe recession. Both will not be right.

            Did I buy WFC down 50% (which means potential 100% gain) paying 8% dividend? Yes, it is now a full position for me. I reduced from oversized after the ex-dividend. Do I expect it to go lower? It might and I will buy more. Long term I should do fine given a pullback to 2011 levels with the willingness to add to the position.

          2. Great reference to “jubilee.” For those who don’t know, the concept of jubilee was in the Mosaic law. Every 7 years was a (fallow) year of rest for the land, and every 7th cycle of 7 years had a cancellation of all debt, contracts, and reversion of land ownership to original title. Israel’s theocratic system ensured that there would be no familial concentration of wealth.

      2. I just think that there will be a second wave in the next 6-9 months. There are still many overleveraged CEFs and another Funds who managed to avoid margin calls during the March events, but the second wave will certainly bear them and their holdings will go to the market to close the margins. Then I will be a buyer again…

    2. I agree – this market will try to retest the lows once reality sets back in. The reopened economy will be reopening a smaller economy not the economy of 2019. Jobs market has been damaged not for 6 months but for years. High tech will do well. Utilities will continue to operate as normal. But consumerism and discretionary spending will take years to recover.

  5. Goldman Sachs is paying 1.55% on money market. Of the brokerages Schwab is close to .50% but only because they are waiving their fee for now.

  6. Yeah, money market funds with easy brokerage access are quite low now.

    That said, you can still park money outside of a brokerage at 1.5% in online money market accounts. Ally, Discover, Citizens Access are paying 1.5%, 1.4%, 1.5% respectively in good old FDIC insured online savings/money market accounts. But can’t easily use those funds for trading

  7. I had a nice long talk with my Schwab Guru (LOL on the Guru part) this morning and asked him his opinion on a few things. He told me that the reason things in general are going so much higher is now there are alot of foreign entities coming into the U S markets and they are chasing yield. I have a “watch list” probably like most of you. It is made up of alot of preferreds but also many commons that I would like to own if the price falls to where I think it should be. Let me give you just a few names that have ran up like CRAZY over the last few weeks: Bill, BYND, AAPL, XPO, VEEV, AMZN, and actually many many others. My point is with Tims comments of over $4.8 TRILLION sitting in money market accounts earning next to NOTHING there is more than plenty of money on the sidelines to keep driving this stuff Higher, Higher, and Higher. An absolute perfect example of people “chasing” stuff is AAPL. Go back to mid march and then look at it today. Up over 36% in less than 8 weeks. I own 5,000 shares of one of my all time favorites “EPD” and am thinking very seriously of buying more for whatever that may be worth to you. Lastly, in my crystal ball I do see rates in general staying quite low for quite a long time. Going to be rough on many of us when all those “CALLS” start coming up.

    1. Chuck,
      I think that at Schwab, YOU are on a watchlist….hehehehahahaha

      Seriously, I agree and that’s what I’ve been saying. There is a lot of foreign $$ propping up our markets.

  8. Today I was looking at the Duke Energy Premier Notes and noticed the rate was down to 1.50% for account balances between $10,000 – $49,999. Clearly not a MM account, but a “short-term corporate bond account” with check writing ability. The Dominion Energy Reliability Notes in the same dollar range were paying 1.85%, but this was effective on April 13 and will likely go lower in the future. Also, the credit rating for Dominion is a notch or two below Duke.

      1. Tim, I’ve not opened an account there yet, but may do so in the future. Back when I wrote my article in November the rates on the Duke account was 2.20% and the rate on the Dominion account was 2.70% – so the rates have clearly come down a long way in the past few months, but still may be a decent option as the account does have check writing ability (no charge for checks over $250).

  9. You might look at the Credit Unions for better rates. Our AA credit union is paying 1.46% on savings. I also own PSA & PSB preferreds that I consider as good as most banks. A lot less debt for sure but without FDIC. We have resistance here in Spx from 2920 – 2955. I’m expecting a pullback that should be bought as I don’t believe the lows will be retested.

    1. TimH–one of our largest accounts is actually an account with Farmers Insurance and we get 4.5% on it–of course not FDIC insured. I like to have a broad range of different types of accounts etc. Maybe will have to add a credit union to the list.

      1. Tim – do you have a link or a ticker or such that folks could look at the Farmers account, or is it a policy thing?

        Thanks in advance.

  10. When I look at MM rates near zero, the massive amount of Fed printing, and the possibility of negative rates, I find myself for the first time seriously thinking about a more than token allocation to gold, and wondering if I am nuts.

    1. Mike D–don’t think you are crazy, but only God can forecast this future with any degree of certainty. An old economic book of mine had drawings of the Germans using wheelbarrows in the 1920’s for all the money it took to buy a loaf of bread–not so funny anymore.

      1. I have a billion dollar note in my wallet. Unfortunately, it’s from Zimbabwe, circa 2000. Just goes to show what good public and economic policies can do for a country!

      2. Tim; I think thats the Weimar Republic that existed in Germany from 1918 to 1933. Hope and Pray that we never have a money problem like they did. We won’t be worried about our preferreds and common stocks if that happens as they will be worthless.

      3. I think that huge amount of “dry powder” is a result of the Fed buying Treasury bonds by the oil tanker full. The expansion to the money supply is through the roof. The Fed has to be super careful, the only reason inflation is so low (outside of food) is that economic activity has ground to a halt and velocity is in the toilet.
        If the economy gains traction, you could see velocity move up and inflation spike out of control unless the fed slams on the brakes and removes money from the system quickly. the problem is the reverse mechanism to remove money from the system doesn’t work as well as the injection mechanism.

        1. Justin, That is such a hugely important point. Appears short period of demand gap deflation coupling with supply destruction is underway – right now. When those two intersect at a level well-below full demand just as velocity is increasing… I mean this one is right out of the textbooks. And the $1M question: How does the fed Houdini it’s inflation mandate at that point – with debt everywhere? Going to be interesting.

          1. He may raise rates, may raise reserve requirements … he has many tools to absorb the money supply, but in any case it will crash the markets for some time. But this will happen after the election, so no one will care. All they care about now is surviving until elections with the fewest problems.
            Anyway I believe that they will be able to stop the train before rolling into hyperinflation. It is unlikely that Jay wish to go down in history as the man who turned the United States into Zimbabwe.

            1. Until we arent the worlds reserve currency and can continue to issue our own debt with our own currency (and also get away with monetizing debt like Bank of Japan which has done it considerably more without pain), Im not holding my breath for much concern. Every time I have guessed higher rates, my performance has suffered. Every time I (which has been most of the time) have went with lower for longer, I make good money. Near term I see nothing to change my style.

    2. Mike, Ag & Au are funny animals. be aware if your not familiar with buying and selling of the physical holdings you will go negative on your capitol and no dividend’s to replace lost value.
      Take the past 2 months as a example. Both the price of Au and Ag fell ! funny isn’t it ? right along with the stock market. People ( myself ) looked into buying and found it wasn’t available for purchase or if it was it was at prices before it fell. Would you buy a oz of Au for 18.00 when it was listed at market for 14.00 ?
      First off, you think traders like JM and Kitco, who bought inventory and signed delivery contracts from miners and refiners are going to sell inventory at a loss ? Second, those same miners and refiners, shut down. Said it was due to the pandemic. I think it was more they didn’t want to sell at the lower price, I am in a similar business doing Pb and this is what is happening with us.
      My advice, find a coin dealer or jeweler who deals in Bullion and like a good barber, build a relationship so you get the best price.
      Then expect to hold it with no capitol gain to leave to your kids and grandkids and hope you never see a time that you actually need it.

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