While the broader markets have focused on the major problems that money markets face this week -- regulatory uncertainty and ultra-low yields -- there has been some good news. J.P. Morgan Securities reports that money fund holdings in the Eurozone did indeed hit bottom in December and have begun to rebound in January, and Barclays Capital writes about the surprising supply and yield relief that has recently appeared in the money markets. Below, we excerpt from Alex Roever's latest Portfolio Holdings Update, as well as a recent piece from Joe Abate.
JPM's latest "Short-Term Fixed Income Markets Research Note: Update on prime money fund holdings for January 2012" says, "The New Year rally has not been lost on the short-term credit markets and has enabled some investors to return to credits they've shunned over the second half of last year. Eurozone bank exposures in prime money funds across all credit products (CP, ABCP, CD, repo, time deposits, and other notes) increased in January (+$27bn) for the first time since April 2011. Although most of this increase was driven by increased exposures to repo (+$21bn), unsecured CP/CD and ABCP exposures also increased by $7bn and $5bn, respectively. Some of this increase was offset by decreases in other credit products (-$6bn), almost all of which are time deposits."
The update from Roever, Teresa Ho and Chong Sin continues, "Non-Eurozone European bank exposures in prime funds decreased slightly by $1bn, driven by declines in ABCP (-$2bn) and other credit exposures (-$6bn), offset by increases in unsecured CP/CD (+$2bn) and repo exposures (+$4bn). Non-European bank exposures also decreased slightly by $3bn, driven by declines in unsecured CP/CD (-$9bn) and other credit exposures (-$21bn), offset by increases in ABCP (+$1bn) and repo (+$26bn). January's month-over-month increase in total bank exposures (+$23bn) was driven, in part, by investors returning to Eurozone credits but more so by increases in repo as some dealers are growing their balance sheets after year-end. Indeed, repo outstandings have quickly risen after year-end."
They explain, "Some large prime funds returned to the long-shunned French banks, modestly increasing their total exposures by $23bn to $55bn. The largest increase was to repo (+$13bn) but January's month-end balance of $28bn isn't much higher than the average balance of $23bn from May to November 2011. Confirming anecdotes we've gathered in January about increased buying of French bank unsecured CP/CD and ABCP by liquidity investors, January prime fund holdings data show increased exposures to French bank unsecured CP/CD and ABCP by $5bn and $2bn, respectively. Although these increases illustrate the improved tone in short-term credit markets as of late, maturities still remain very short."
Finally, the J.P. Morgan Securities note adds, "Repo holdings rebounded in January by $51bn to $252bn from the prior month due to seasonal factors that have led repo rates to rise while time deposit holdings declined by $34bn. Time deposit holdings have generally been elevated since August 2011 as repo holdings have trended downwards. We think, at least partially, prime funds have used time deposits as substitutes for repo for overnight liquidity." (Note: Crane Data's Money Fund Portfolio Holdings dataset with Jan. 31, 2012 information will be sent out on Monday.)
Another recent feel good piece, Barclays Capital's "Money markets: Feast or famine", tells us, "To the relief of money market investors, front-end supply has swung from dearth to excess since the start of the year. However, the supply-driven dynamics behind the back-up in repo bill and repo rates might not extend much past March."
Strategist Joseph Abate says, "The Treasury's projected increase in Q1 net new bill supply is roughly $60bn higher than market estimates for the end of last year. A pile up of Twist collateral on dealer balance sheets seems to be pushing repo rates higher. At the same time, still-high Libor rates coupled with a steady improvement in market sentiment could entice front-end investors back to the deposit and CP markets. We expect bill and repo rates to remain biased toward higher yields through the April 15 tax date. Three-month bill yields could rise to 8-9bp by late February. Overnight Treasury repo could settle in around 11bp. Further ahead, we expect bill and repo supply to decline."
He adds, "Rising risk aversion and a dearth of government-guaranteed supply caused bill yields to head toward 0bp late last year. This was widely expected to abate somewhat in the first quarter -- at least based on normal seasonal tax flows into the Treasury's coffers. Excluding the retirement of the $200bn Supplemental Financing Bill program, net new bill supply rose by $126bn in Q1 2011 after declining by a net $16bn in Q4 2010. Late last year, the Treasury Borrowing Advisory Committee (TBAC) projected net new bill supply in the first quarter this year of nearly the same amount. Under these assumptions, the Treasury could keep the weekly 3m and 6m bill auctions at close to their late Q4 levels (that is, $29 and $27bn respectively)."
Abate writes, "Last week, the Treasury unexpectedly bumped up the size of both of these auctions by $2bn each. Short bill yields immediately began to back up as the market started to sense that additional auction increases lay ahead. Between the beginning of January and last Friday, 1 and 3m yields rose by 4bp each and 6m yields rose by 2bp. The market's 'extra supply perception' proved correct: the Treasury's borrowing announcement on Monday pointed to a $190bn net bill borrowing assumption. This is roughly $60bn more than the TBAC had projected in November.... We think auction sizes over the remaining two months of the quarter will need to raise substantially more money the previously assumed -- even with $50bn of cash management bills penciled in for the end of February and early March."
Finally, he adds, "The back-up in bill yields coincides with a surprising heaviness in overnight collateral rates since mid-January. Overnight Treasury collateral cheapened from an average of 6bp in December to 9bp in January, although 3m term GC was largely unchanged. Since there is little evidence of a shift in demand or a change in asset allocations by money fund managers, we suspect the heaviness has been driven more by the supply-side of the market. Given the timing we also think the Fed's Operation Twist-related sales of short dated paper are pushing collateral rates up, though some aspects of the effect are puzzling."
