Most nonfinancial companies will leave deposit accounts once the Federal Deposit Insurance Corporation’s transaction account guarantee program ends in a few days. That’s according to the Federal Reserve’s latest quarterly survey of senior credit officers.
The FDIC’s unlimited guarantee on noninterest-bearing transaction accounts, which insured deposits above the usual $250,000 limit, is set to end on December 31, 2012. As such the Fed fully expects investors “will adjust their cash management strategies.”
While the survey said most financial companies will stay put, nearly two-thirds of respondents said they expected nonfinancial corporations to reduce deposits held at commercial banks. The Fed added that a “couple of dealers” suggested “significant reductions were likely.” The Fed survey showed that most of the money exiting deposit accounts will end up at other commercial banks or by “increasing their use of repurchase agreements, money market funds, Treasury bills, and longer-dated Treasury securities or agency securities.” Therefore, once the program ends, some of the approximately $1.6tn in bank deposits will be hitting the road.
One of the bigger worries and one that has received less attention is the impact on yields at these destination. Since the Fed will likely keep its low-interest-rate policy at least through mid-2015, the market may have limited capacity to absorb that $1.6tn in TAG deposits – particularly at treasury money market funds.
“The expiration of the TAG program may bring a demand shock to money market funds, resulting in even lower yields than the current historical lows, anchored by accommodative monetary policies,” wrote advisory firm Capital Advisors Group in a paper on where to put money when TAG ends.
This means that the flood of cash – even a small percentage of that $1.6tn – could drive interest rates even lower. There are some reports that treasury money market funds may even close their doors to new investment in order to protect the funds’ existing investors. As Josh Siegel, chairman of StoneCastle Cash Management, has noted, even 10 or 20 percent of the total could drive short-term treasuries into negative territory.
With end of TAG nigh, treasurers should already be in the process of seeking out alternatives. This includes separately managed accounts, which can help corporate portfolios to broaden yield opportunities beyond money market securities or stronger banks. Other alternatives exist, including a way to safely spread deposits out at 1000s of community banks across the country from one portal (see related article here).