Money-market funds own around 15% of the Treasury-bill market, according to one estimate.<\/p>\n
Money-market funds have been luring savers with yields that can beat many bank deposit account rates, and the resolution of the debt-ceiling drama might increase the appeal of these mutual funds, experts say.<\/p>\n
These multi-trillion dollar mutual funds \u2014 which had an estimated $1.467 trillion in U.S. Treasury securities at the end of April \u2014 could buy at least some of the Treasury debt waiting to be issued after a raise to the borrowing limit. If the yields on those Treasurys are high, that may translate to yield increases for the funds.<\/p>\n
T-bills are U.S. government debt that matures between four and 52 weeks. Money-market funds own about 15% of the T-bill market, while foreign investors and other investors own more, according to Goldman Sachs The question is <\/strong>whether <\/strong>that <\/strong>share will increase in the coming months, analysts say.<\/p>\n \u201cMoney-market funds are definitely giving competition to the online savings accounts,\u201d said Ken Tumin, founder of DepositAccounts.com. For one thing, the funds \u201chave been doing a lot better at keeping up with the federal funds rate,\u201d which is the Fed\u2019s benchmark interest rate.<\/p>\n The federal funds rate is now at a range of 5%-5.25%.<\/p>\n Bond prices and yields move in opposite directions. The yield on a one-month Treasury bill That was an \u201cabnormal spike,\u201d said John Sheehan, portfolio manager of Osterweis Total Return Fund, a mutual fund at Osterweis Capital Management. Sheehan is skeptical the upcoming batch of T-bills will push money-market fund yields higher.<\/p>\n For T-bill yields, \u201cthe level is priced-in in the market already in anticipation of that supply,\u201d he said.<\/p>\n Related: <\/strong>Treasury yields higher as investors assess interest rate outlook<\/p>\n Last week, the House of Representatives and the Senate passed legislation raising the debt ceiling for two years while capping and cutting other costs. President Joe Biden signed a bill that temporarily <\/strong>suspends the U.S. government\u2019s $31.4 trillion debt ceiling.<\/p>\n Shelly Antoniewicsz, senior director of industry and financial investment at the Investment Company Institute, said the Treasury is expected to issue T-bills now that the debt-ceiling crisis is averted \u201calthough how quickly [that happens] will depend on the Treasury.\u201d<\/p>\n \u201cIn order to place all this debt, yields on Treasury bills may need to rise. If money-market funds buy the newly issued T-bills, their investors will receive potentially higher yields because money-market funds pass through interest income to their shareholders,\u201d she said.<\/p>\n But if that does happen, don\u2019t expect a sharp surge, said Peter Crane, president of Crane Data, which follows the money-market fund industry. Right now, the annualized 7-day yield is an average of 4.91% for the market\u2019s biggest funds, Crane\u2019s numbers show.\u00a0<\/p>\n More high-yielding T-bills in the mix might push up fund yields by \u201ca few basis points,\u201d he estimated. (A basis point is 1\/100 of a single percentage point.)<\/p>\n The Federal Reserve \u201cdominates the returns on money-market funds. Everything else is window dressing,\u201d Crane said, explaining that returns are tied to the Fed\u2019s own short-term policy rate, which it has been increasing sharply to fight inflation.<\/p>\n The Fed will meet in several weeks to decide if it should pause or push ahead with more interest rate increases to fight inflation.<\/p>\n Money market funds had $5.42 trillion in assets through the end of May, up from $5.34 trillion in mid-May and $4.8 trillion in mid-January, according to data from the Investment Company Institute. Of that amount, $1.97 trillion is retail investor money, and $3.44 trillion comes from institutional investors.\u00a0<\/p>\n In the wake of the debt-ceiling increase, the Treasury Department needs to replenish its accounts. It is expected to do <\/strong>that by issuing a wave of short-term debt that could <\/strong>total <\/strong>around $1.4 trillion through the end of the year, according to estimates from BofA Global strategists Given the chance to buy up a mountain of Treasury debt, Crane said money market fund managers would likely do so. \u201cThe question is \u2014 at what yield?\u201d he said. And it\u2019s also a question what other big-time buyers would also want to buy the debt, Crane added.<\/p>\n \u201cEven if T-bill yields don\u2019t rise from where they are now,\u201d Antoniewicsz said \u201cyields on money market funds are still significantly higher than those on money market deposit accounts at banks.\u201d<\/p>\n Last month, the average rate on a savings account was 0.4% while a one-year CD averaged 1.59%, according to the Federal Deposit Insurance Corporation.<\/p>\n But high-yield accounts offer more interest. An online high-yield savings account currently averages 3.98% and a one-year CD averages 4.86%, Tumin said.<\/p>\n Money-market funds and other cash investments have been catching more attention \u2013 and more money \u2013 for several reasons. The Fed\u2019s rising interest rates since last March have pushed up related rates and yields. Steady yields have also provided solid ground for investors looking to avoid stock-market volatility. Then banking sector wobbles earlier this year flushed many deposits into money market funds.<\/p>\n Money-market funds have conservative risk profiles, but do not have $250,000 FDIC deposit insurance.<\/p>\n At 3.98%, the average annual percentage yield for an online savings account is now over one full percentage point behind the federal funds rate, Tumin noted. \u201cThis year, they\u2019ve been lagging a lot.\u201d\u00a0<\/p>\n
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\n was about 5.2% on Monday. Ahead of the debt-ceiling deal, there was a point when some Treasury bill yields were hitting 7% with <\/strong>maturities coming due around the time when the government was projected to run out of enough money to pay all of its bills.<\/p>\nHow the debt-ceiling deal could impact yields<\/strong><\/h4>\n
Fed dominates the returns on money-market funds<\/strong><\/h4>\n
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\n Some $1 trillion of the debt from Treasury bills could be issued before the end of August, the analysts said.<\/p>\nHow far could Treasury bill yields go?<\/strong><\/h4>\n
Why money market funds are looking more attractive\u00a0<\/strong><\/h4>\n