Cunningham Asks Will NAVs Fluctuate?
Federated's CIO for Global Money Markets Debbie Cunningham posted a new video entitled, "How much will institutional FNAV funds fluctuate? She comments, "The likelihood of an institutional FNAV money market fund fluctuating at anything other than the 4th digit, which would represent a 100th of a penny or a basis point, is remote, unless that fund is experiencing a negative credit event. Theoretically, an institutional FNAV money market fund that was positioned at its worst configuration at the time of a rate-hike would be most at risk. That most aggressive configuration would consist of having a 60-day weighted average maturity, owning the maximum in individual securities out to 397 days final maturity, and having the least amount allowed in daily and weekly liquid assets, that being 10% and 30%, respectively. In that worst configuration the FNAV fund would move, all things being equal, about 4 basis points with an instantaneous shift of 25 basis points in the yield curve with all other considerations such as fund size being held constant. In actuality, when fund managers begin to anticipate a Fed move, they reposition their portfolio to be shorter, and to have greater liquidity. The market also generally prices in a fed move over a 3-4 month window as oppose to instantaneously. This is exactly what happened in the December 2015 move. During that move the shadow NAV funds moved 0-2 basis points rather than the 4 basis points, so 1 in 4 zeros either stayed there or went to 4 9's or went to 0.9998. This was great to see this play out as such especially when the transactional price over this time period was still at $1 dollar. As far as evaluation and comparisons go, total return calculations must now be used rather than just straight yield comparisons. The total return calculation in the December rate hike scenario, as I said, resulted in shadow NAV declines of about 0-2 basis points. For those funds that theoretically lost 2 basis points in price, was the yield spread over those funds whose NAV's remained stable enough to compensate for those lost basis points in price? This depends how large the spread was being earned. Generally speaking, the larger the spread and the longer the holding period, the more favorable the outcome toward the FNAV institutional money market fund product."
