After inflation, “real” yields on money-market funds are near 2%, and households kept pouring cash into them. But CDs lost ground.
By Wolf Richter for WOLF STREET.
Balances in money-market funds held by households at the end of Q1 continued their massive surge and rose by another $115 billion from the prior quarter, to $4.62 trillion, and were up by $696 billion year-over-year, according to the Fed’s quarterly Z1 Financial Accounts today. Since Q1 2022, when the Fed started hiking its policy rates, balances have surged by $1.99 trillion.
The three-month Treasury yield is still at 4.36% currently, and has been in this range since the last rate cut in December. Yields of money-market funds (MMFs) closely track the three-month Treasury yield and remain in the 4.2% range, give or take, and are well above the current inflation rates, with CPI inflation at 2.4% in May. This puts the “real” yield on liquid ultra-low-risk cash at just under 2%, which seems to be an attractive proposition, and households keep pouring their extra cash into them.
These MMF balances include retail MMFs that households buy directly from their broker or bank, and institutional MMFs that households hold indirectly through their employers, trustees, and fiduciaries who buy those funds on behalf of their clients, employees, or owners.
MMFs invest in safe short-term instruments, such as Treasury securities with less than one year to run, much of it with less than six months to run, in high-grade commercial paper, in high-grade asset-backed commercial paper, in repos in the repo market, and in repos with the Fed.
Total MMFs (those held by households and institutions) rose by $155 billion in Q1 from Q4, and by $957 billion year-over-year to $7.40 trillion. Since Q1 2022, balances have ballooned by $2.31 trillion.
MMF balances balloon with higher interest rates. When rates were near 0%, balances remained roughly stable for years at about $3 trillion. There is always some need for liquid cash even if it doesn’t yield anything. When the Fed hiked rates in 2017-2018, to ultimately 2.25%, $2 trillion of cash poured into MMFs. When yields started rising again in 2022 after the pandemic-era interest-rate repression by the Fed, MMFs ballooned by another $2.3 trillion. Higher yields bring a tsunami of cash to money-market funds.
Small Time-Deposits (CDs of less than $100,000) have remained essentially unchanged at $1.06 trillion over the three months through April, after dropping from their highs in August 2024 of $1.19 trillion, according to the Fed’s latest Money Stock Measures.
But note the explosion of those balances as the Fed started hiking its policy rates: they went from near-zero in April 2022 to $1.19 trillion in August 2024.
These small CDs reflect regular savers. When the Fed gutted savers’ cash flow from savings in 2008, they began spurning CDs, and by mid-2022, small CDs had nearly vanished.
Banks only pay interest if they have to. For banks, deposits are loans from customers that form the banks’ primary funding. Paying higher interest rates on deposits increases a bank’s cost of funding, and lowers their net interest margin (net interest income minus the interest paid depositors and other sources of funding). So they offer higher rates only if they have to attract new deposits or retain deposits from existing customers. Bank accounts that provide essential services, such as transaction accounts, attract cash at near 0% because customers need those services.
Banks rely on deposits being generally “sticky,” especially in transaction accounts, and they expect when rates rise, that a big portion of deposits stays put even with near-0% rates. But as we can see in the CD charts here, CDs are not sticky, and they include brokered CDs sold through a brokerage firm; they’re like hot money that can leave at the end of the term if rates are too low.
Large Time-Deposits (CDs of $100,000 or more) ticked down a hair over the past two months to $2.36 trillion in April, from the record in February, according to the Fed’s monthly banking data.
Since March 2022, when the rate hikes began, large time-deposits have surged by $943 billion.
But CDs are only a small part of bank deposits. Total deposits at commercial banks are currently at $18.1 trillion, back where they’d been before the rate hikes. But they did drop by about $1 trillion from early 2022 through early 2023 as competing interest rates rose, and customers yanked their cash out. Higher deposits rates by banks then stopped the outflow and brough the cash back in.
As total deposits dropped by $1 trillion between early 2022 and early 2023, CD balances soared by $2 trillion during that time. What this means is that banks lost about $3 trillion in deposits in saving accounts and transaction accounts during that time.
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Current situations make it really difficult to figure out where to diversify and out fixed income part of portfolio and how much. Are tariff policies stabilized enough, will the One BBB pass as defined, is inflation coming under control, how much will international events create instability, will the Fed cut rates later this year and next? I suppose it has always been like this but as I move closer to retirement the decisions seem more important. Pretty sure if the 10 year got to 5% again I might go for it with a decent chunk.
…broughT the cash back in.
any mm investor who depends on the current EFFR could drop one place in on the class ladder if said rate were halved, for instance. dont want to bore you with the numbers, a million earns 45000 a year, if thats all you have you go from middle to lower class. if you have a bloated pension its a slightly different story, those will take longer to deflate. but one really big rate cut changes the earnings power of a lot of average Americans. and thats TAXABLE income, so government has to make adjustments too.
“It compounds as well”
Benjamin Franklin
You have absolutely no idea what “lower class” is like in America if you think someone with a million dollars would be lower class because of interest income.
My bank was paying decent (ish) rates and then they fell quite a bit over the last year, so as they came out for renewal, I asked them what they could do. Nothing of course “these are our rates”
fine, took it all out, it’s now in treasury bills doing better than their rates before taxes. It wasn’t millions, but it wasn’t trivial. (and it’s a small local/regional bank). So be it, they get nothing.
The banks hate this 1 trick!
The pressure is on to lower rates – renew “financial repression”. Weather its the data or TDS, the FED resists or perhaps is not certain they can get away with it again, but it seems inevitable that they will try again at some point. But, perhaps Powell will hang tough and surprise everyone.
Whats the best index to judging USD strength ?
Lets see to what degree USD is still the safe haven refuge in time of war ?
I would like to know who holds the MM funds. How much is NOT the top 1% or 10%.
Seems like extra spending income if you are retired living on interest. How much of a boost to spending is this.
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Banks are not your friend. I keep only enough money to pay my monthly bills in my banks. Bank CD’s all have draconian early withdrawal penalties, the least draconian is you lose three month interest on CD’s less than one year. They tend to hide these early withdrawal penalties, usually not even mentioning them on their web sites.
I am not sure why people bother with banks (other than to have cash to pay bills) when 1, 2, and 3 month T-bills pay around 4.3%. They are completely liquid, no commissions to buy or sell with most brokers, no early withdrawal penalties, and no state income tax on interest.
I agree 👍
Because banks are FDIC insured is a huge reason. Yes, even thought T-Bills are safer, pay more, are liquid and more tax efficient if you live in a state that has income taxes. People rather get an FDIC account. There will be people that will read these comments. Maybe do their own research after reading this that confirms what we are saying, to then proceed and renew their CD instead of bothering with T-Bills. I work in the industry.
I think the hassle of buying t-bills and other instruments through Treasury Direct, and the perceived risk of not being able to access that money should the government decide to flag your account for some reason, also cannot be ignored.
Having $100k in the bank is one thing, but having $100k in a government account that is accessed through a user-unfriendly website is another. Treasury Direct crashed a couple of times when the i-bond variable interest rate shot through the roof a while back, and people had a rough time getting through.
When Treasury Direct has an issue, its a major hassle getting support. I feel this is a non-trivial barrier to some retail investors.
Do not use Treasury Direct. Treasury Direct sucks. Use a broker like Schwab or Fidelity (no commission for T-bills, buy and sell whenever you want). I use Schwab and can easily contact a representative by phone day or night. I only use Treasury Direct for buying I-bonds, because I have no other choice.
I find TD reasonable to use. Never had an issue over 4 years now. It is not a ‘new and shiny’ interface, but works fine for me. Just have to read and follow the instructions, which are hard for some.
I use Lending Club bank savings account but only as an in and out to treasuries plus ensuring have a little extra liquidity. Currently 4.4% which is pretty solid rate. Still hang with treasuries to avoid giving California a cut of the action.
I think they are liquid because the fed demands they are.
If you sell you do prob lose any interest.
It’s not like if a treasury matures in a year and you sell 1 day after buying, that you will gain. And perhaps if rates just increased they may be worth even less than on the day you bought them.
Curious how it works when say a large company like Berkshire ever needed to sell billions of them to purchase a large stake in a Corp. or do they just do a trade? Treasuries for stock.
You don’t lose any interest if you sell. T-bills do not suffer the volatility of longer term bonds. Many consider them to be almost cash, cash which earns 4.3% free of state income tax.
Well I just opened a 100k CD 4.5 percent after selling MIL estate house at my bank. Why? the process took 2 min at a grocery store kiosk local bank I use. Monthly deposits into my checking there . The number of seniors that are internet impaired is very high . If one did not work (my wife) while we moved 20 times in my working career the internet passwords resets registering 2 levels of security constant reboots and lack of financial knowledge all play a part. Having a local bank is very valuable in my opinion. Even if the bank is a Major bank the local branches have to take care of the elderly. I consider myself to be pretty decent on old technology but my skills are deteriorating rapidly with age. Dementia Parkinson’s cancer diabetes physically impaired taking care of a spouse etc all play a part . I have had grandchildren for the last week with no time to myself . As I type this my 3 year old granddaughter is complaining lots of reasons to not be perfect on rates. Go MMFs and Wolf thanks
All I can say is, it’s about time. Savers should be rewarded. Real money has been transferred from savers to borrowers for way too long. A dollar earned through labor today should have the same value 10 years from now or 100 years from now.
In my world, the yield that matters is the after-tax, after inflation yield on my savings.
4.2% on a T-Bill or MMF only looks ok if I forget about the taxes.
Sadky, my after-tax savings are not gaining on my after-inflation cost of living.
Everyone wants lower rates, but hoping and wishing will not bring them down. Given our ever expanding debt that is now becoming hard to afford, rates are more likely in my opinion to go up for a couple of reasons.
First the president is ticking off a lot of our allies, and it’s no secret that some are selling US assets and repatriating their proceeds to deploy elsewhere. Let’s not forget all of the drama over the budget fights which are coming to a head.
Even if it passes with little drama, a lot of bond investors are not going to like what it does to our finances. Then there is the old axiom that greater risk demands greater reward. Clearly both political and financial risk are increasing. Meanwhile, commercial real estate is under a lot of pressure to include retail, office, and even multifamily. Lastly, supply is about to go up significantly, and supply and demand have not gone out of style. I think the 10-year will be priced to yield around 5% by the end of the year, and perhaps sooner.
All Treasuries of all durations were over 5% for a few days less than a year ago. 20 year bonds are very close to 5% now.
Do MMF include High Yield Savings Accounts?
No, they’re included in total deposits, last chart.
I am in the lower and then higher by year end. Powel is in a very problematic spot at the moment. Stagflation is the most likely scenario.
These are big numbers. Is it to early to ask, what comes after Trillions?
Am I reading the article correctly by thinking that there is a total of around $29 trillion of cash in all of the savings?
Too bad the government can’t use a wealth tax to help pay off some treasury debt. Do people really need all that money in their CD’s and MMF’s? Maybe they are saving it for retirement or to give to their kids. But if the government can’t handle it’s debt what kind of country are they leaving their kids?
I live of on my MMF and CD so what do you consider wealthy and why do people tout wealth redistribution? The key is to boost GDP and have federal state and local governments support all businesses without stuffs that Wolf points out like the tech industry subsides for chips . And I doubt the rich have enough to tax to make a dent they can just donate all into their charitable trusts or get their trusts to buy more tax free . I doubt their money sits in MMFs many businesses keep their cash there also