Bankerage” Cash Sweep, ABS Arbitrages?
Until 2007, ” bankerage”, or brokerages launching FDIC- insured deposit programs, had been a hot trend in the money markets. However, the sharp climb in money fund yields — the Federal funds target rate rose from a record low of 1% in mid- 2004 to 5. 25% — has been taking market share back from these programs. Money market funds at 5% pay almost double FDIC- insured sweeps, which average rates of 2. 65%. Now comes a potential disaster on the reinvestment side. While extremely profitable for a time, bankerages are now likely facing declining values in mortgage portfolios or major issues with baskets of asset- backed securities. ABS with 2- 3 year maturities, which U. S. money funds can’ t buy buy which European ones sometimes do, were often used to make a ” safe” spread on the reinvestment proceeds of investor sweep cash. See our upcoming September Money Fund Intelligence for more.
