Star-crossed money fund manager The Reserve said in a press release last night entitled, "Reserve Primary Fund Makes Initial Distribution of $26 Billion to Primary Fund Shareholders," that, "The Reserve is pleased to announce that it began the initial $26 billion distribution to Primary Fund shareholders today by mailing checks to retail direct shareholders; payments by wire to all other shareholders will be made tomorrow. See the press release and the "Reserve Primary Fund First Distribution Q&A."
Reserve says, "This represents approximately 50 percent of the total assets of the Fund as of the close of business on September 15, 2008. Approximately $25 billion in total assets remain in the Fund. This first distribution is being paid to all investors remaining in the Fund, including those who submitted redemption orders that had not been funded. The distribution is being made on a pro rata basis to all of those investors. Each investor is receiving approximately 50% of their current account balance."
It quotes Bruce R. Bent, president of Reserve Management Company and co-inventor of the money market mutual fund, "This distribution marks a significant step in the process of liquidating the Primary Fund and distributing money back to shareholders. We are committed to making future distributions when more cash becomes available."
Reserve adds, "The Fund's total assets have been approximately $51 billion since the close of business on September 15. The Fund's net asset value fell below $1.00 per share on September 16. All investors are being treated the same regardless of when or if they tendered redemption orders to the Fund. In the next several days, we expect to be posting a plan for the total liquidation of the Fund on our website. Under that plan, interim distributions will continue as cash accumulates either through the maturing of portfolio holdings or their sale."
The company continues, "Reserve Management Company, Inc. is focused on liquidating the fund's holdings at amortized cost as quickly as possible. You may have read about a new Money Market Investor Funding Facility program devised by the Federal Reserve Bank that will provide liquidity for certain commercial paper and bank certificates of financial institutions held by money market funds. We are carefully analyzing the terms of that program. Preserving the value of the Fund's assets and restoring cash to our investors are our top priorities during this process. We thank all of you for your patience and sincerely regret the inconvenience."
"In calculating each investor's pro rata share, we began with the number of shares each investor held as of the close of business on September 14. The September 14 account balance includes the balance from the end of day September 12 plus the accrued dividends from September 1 through September 14. Then, expressed simply, any funded redemption requests or exchanges were subtracted, any subscriptions from September 15 through September 16 were added, and any service transactions (customer cards, checks and ACH) processed through the last business day before the distribution were calculated. The resulting number, representing each investor's unfunded shares in the Primary Fund at the close of business, was then divided by the aggregated unfunded shares of all investors (approximately 51 billion shares), to arrive at an ownership percentage, which was used to calculate each investor's pro rata distribution. Interest income earned from September 1 through September 14, 2008, has been credited to each shareholder's account. The distribution of income after that date will be addressed in the Fund's Plan of Liquidation," explains the release.
The Investment Company Institute released its weekly money market mutual fund totals yesterday evening, showing assets grew for the 5th week in a row. Though the increase was a mere $1.35 billion this week, to $3.538 trillion, money funds have gained $138.49 billion over the past 4 weeks, recovering the bulk of the $182.35 billion in declines experienced from Sept. 11 through Oct. 1.
General Purpose ("Prime") Institutional money fund assets increased by $6.68 billion, the 3rd consecutive weekly increase for this category. Though the rebound has been modest, last week Prime Institutional funds retook the $1 trillion level. But their asset total remains slightly smaller than Government Institutional funds, which total $1.08 trillion after a $12.09 billion increase this week. Government Institutional funds, including Treasury Inst, broke above $1 trillion and became the single largest money fund category the first week of October.
ICI also released its September monthly asset figures yesterday, which showed money fund assets falling by $137 billion for the calendar month, down 3.9%. Overall mutual fund assets (including stock and bond funds) fell by almost $1 trillion, down a stunning $959.33 billion, or 8.3%. Money funds could take small solace in the fact that their share of the $10.63 trillion in total mutual fund assets thus rose to 31.8%.
ICI's monthly statistics also included their "Month-End Portfolio Holdings of Taxable Money Market Funds" report. Commercial paper remained the largest holding of taxable money funds at $587.05 billion, or 20.1% of assets. But CP holdings declined a stunning $151.25 billion, or 20.5%, in September. Repurchase agreements (repo) were the second largest holding with 20.0%, or $582.10 billion, up $59.00 billion, or 11.3% on the month.
Government agency securities represent the third largest taxable money fund holding with $435.53 billion, or 14.9%, of assets, while Treasury bills and securities rank fourth with $431.25 billion in money funds assets, or 14.8%. Agencies grew by $23.72 billion, or 5.8%, while Treasuries surged $133.57 billion, or 44.8%. Money fund investment in Certificates of Deposits (CDs), which now account for 9.6% of assets, fell by $58.52 billion, or 17.3%, to $280.44 billion, and Eurodollar CD holdings fell $25.49 billion, or 15.4%, to $140.36 billion.
The Average Maturity of money fund portfolios shortened substantially in September to 41 days from 48 days. ICI shows 33.74 million accounts outstanding at month-end September, down a dramatic 425.80 thousand accounts. Over the past year, taxable money fund accounts have declined by 1.37 million accounts.
While tensions continue to slowly ease among money market mutual funds, a new, big batch of "no-action" letters was just disclosed on the SEC's website. These disclosures document steps taken by advisors to protect their funds from the Lehman Brothers bankruptcy and from other tumultuous market events in September. Crane Data counts five new advisors disclosing support actions involving money market funds, bringing our running total of advisors "bailing out" their funds to 25, which is now greater than one-quarter of the 90 money fund advisors tracked by our Money Fund Intelligence.
As we discussed in our Sept. 16 article, "Lehman Support Actions Push Money Fund Bailouts to 20 Total," Columbia, Russell and others took steps to protect investors over their exposure to Lehman Brothers debt. Their "no action" letters have now been made public. (See Russell Investment Company and Columbia Funds Series Trust letters.) Russell's Sept. 15 letter explains, "Under the Capital Support Agreement, RIMCo would be obligated to provide a capital contribution to the Fund if, as a result of losses realized on the notes, the market-based NAV per share of the Fund otherwise would drop below $0.995 or such greater amount as may be specified."
Additional disclosures related to Lehman debt include: Mount Vernon Securities Lending Trust, which is affiliated with U.S. Bancorp and which also holds $557 million stuck in Reserve Primary Fund; RidgeWorth Funds, which filed to replace a $70 million Lehman medium-term note with a SunTrust note; and, finally, Dreyfus Cash Management Plus and Dreyfus Money Funds (Dreyfus Basic Money Market Fund, Dreyfus Liquid Assets, and Dreyfus Worldwide Dollar Money Market Fund) entered into capital support agreements with BNY Mellon over Lehman holdings.
Several additional filings, unrelated to Lehman Brothers, were also just posted. These include Legg Mason Partners Institutional Trust - Western Asset Institutional Money Market Fund, which entered into a capital support agreement to protect a $75 million holding in SIV Orion Financial USA LLC; Touchstone Variable Series Trust - Touchstone Money Market, which entered into capital support agreements to assuage valuation concerns over Morgan Stanley and Wachovia CP; and, Phoenix Opportunities Trust - Phoenix Money Market Fund, which disclosed a request to purchase investments in AIG subsidiary International Lease Financing Corporation.
Advantus Series Fund, Inc.- Advantus Series Money Market Portfolio, also filed for an AIG-related capital support agreement backed by parent Securian Financial Group. It says, "You state that as of September 17, 2008, approximately 1.48 percent of the Portfolio's total assets, or $2 million, consisted of commercial paper issued by American General Finance Corp, a subsidiary of American International Group, and approximately 1.85 percent of the Portfolio's total assets, or $2.5 million, consisted of commercial paper issued by AIG Funding, Inc. You state that as a result of recent market events related to the CP, the CP was determined to no longer present minimal credit risks for purposes of rule 2a-7."
Finally, J.P. Morgan Securities Inc. added a "no-action" letter, though it was unrelated to any money fund support actions. JPM sought clarification on issues involving the new Money Market Investor Funding Facility (MMIFF). The letter says, "[Y]ou request interpretive guidance and no-action relief ... [for] registered open-end investment companies that rely on rule 2a-7 under the Act sell certain commercial paper, bank notes and certificates of deposit having remaining maturities of 90 days or less at a price equal to their amortized cost, to certain special purpose vehicles that have entered into liquidity facilities with the Federal Reserve Bank of New York and for which J.P. Morgan Securities Inc. is the structuring and referral agent and JPMorgan Chase Bank, N.A. is the collateral agent, the depositary and issuing and paying agent, in exchange for cash and asset backed commercial paper of the SPVs for which JPMSI is the placement agent."
Tuesday, the Federal Reserve's Open Market Committee lowered its federal funds target rate by 50 basis points to 1.0%. It also cut its little used discount rate by 1/2 percent to 1.25%. (See the full Fed statement here.) This move marked the Fed's ninth rate cut since September 2007, when the Fed funds target stood at 5.25% (and our Crane 100 Money Fund Index stood at 5.05%) . Money market rates should move lower in coming weeks, though most money funds will not encounter any partial fee waiver issues due to the current much-higher-than-Fed-funds levels of prime money funds and commercial paper. (See yesterday' News "Funds Brace for Ultra-Low Rates; Treasury Funds Avoid Zero Yield".)
The Fed's statement says, "The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability."
It continues, "Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
We expect our Crane 100 Money Fund Index, the average 7-day annualized yield of the 100 largest taxable money funds, to move lower in coming weeks. The Crane 100 is currently 2.19%. It theoretically should move to 1.69% over the next 39 days (the average maturity of money funds), though abnormally high LIBOR, commercial paper and ABCP rates, and a recent rebound in Treasury yields, should delay or perhaps ignore the impact of this latest cut. Rates should come down slowly too as money funds moving back into higher-yielding options like CP.
Crane Data believes that the Federal Reserve will not cut rates below 1.0%, which we think is effectively the "floor" on the Fed funds target rate. The importance of this barrier was established from June 2003 through June 2004, the last time Fed funds hit 1.0%. Any cuts below this would force many of the highest expense money market funds to waive fees in order to avoid zero or negative yields. But the majority of assets wouldn't be impacted until rates sank below 0.5%. (The average expense ratio of money market mutual funds is currently 0.47%.) We have already seen sporadic fee waivers in selected Treasury funds over the last month, but we don't expect waiving to avoid negative yields to be a major issue for funds overall.
Federated Investors, the third largest manager of money funds with $247 billion, hosted its quarterly earnings conference call on Friday, and, as usual, President & CEO Chris Donahue held forth on a host of issues related to money market mutual funds. He says in the Q&A, "Nothing has changed in terms of people's fundamental need for the convenience that these funds have offered since we brought these out in the mid-1970's. In fact, they need them even more.... The outlook is still very strong."
Donahue says of the money markets, "Conditions have improved here in October and we expect further improvements as confidence returns to the system. Measures taken by the Treasury, the Fed, and the SEC are well designed, in our opinion, to address liquidity and have already helped considerably. The newly announced Fed Money Market Investor Funding Facility, combined with the previously announced asset-backed commercial paper program and the Treasury money market insurance program, are designed to improve market liquidity and promote investor confidence in money market fund investments during a period of unprecedented market stress."
The Federated CEO also says, "Money market funds depend on trust and confidence in the financial system in order to be able to function properly. These programs are designed to be temporary measures for extraordinary market conditions, and we anticipate that they will not be necessary when market conditions improve significantly.... Money market funds are a vital part of our capital markets."
He continues, "We believe the core structure of the money market mutual fund has been, and will remain, essential to their use by investors. Core features, including, of course, dollar in, dollar out, maintenance of $1 NAV as a primary goal, diligent, independent credit work to avoid securities that do not meet the standards of minimal credit risk and other key components of 2a-7 related to quality and duration that are essential to the success of these products."
Finally, Donahue says, "We have played a critical role in the development of this $3.5 trillion industry, including the development of its regulatory and operating framework.... These investment products enable fund shareholders to access the benefits of a large, high quality money market fund, including daily liquidity at par, diversification, credit analysis, competitive yields, and convenience. This is the core value proposition of the money market mutual fund, and we believe it will transcend the difficult market conditions that we've experienced.... The game in the money fund will remain the same -- get the credit right."
Some of the lowest-yielding Treasury money market mutual funds have been forced to waive some fees at the margin to keep their yields positive over the past month. As the market prepares for another potential rate reduction in the benchmark Federal funds target rate, the rest of the money fund universe is preparing for the possibility of a protracted stay at ultra-low rate levels, ala 2003-2004. However, the rebound in Treasury yields and the far-above-Fed-funds levels in Prime money funds make any serious loss of revenues or any threat of negative yields remote for now. (Our Crane 100 is currently at 2.19% vs. a Fed funds target of 1.5%.)
According to our Money Fund Intelligence Daily, Treasury fund yields continued rising over the past week. They also rose yesterday. Our Crane Treasury Institutional Money Fund Index rose 0.08% yesterday to 0.71% (7-day yield), while the Crane Treasury Individual MF Index rose 0.05% to 0.44% (7-day). On Oct. 17 and 20 our daily Inst Treas Index dropped as low as 0.41% while the Indiv Treas Index touched 0.27%. Though the Treasury yields likely won't follow the Fed lower, the threat of near-zero yields and partial fee waivers remains here.
Our latest monthly Money Fund Intelligence listed 14 Treasury funds, out of 106 Treasury Institutional funds and 105 Treasury Individual (retail) funds, yielding 0.05% or lower, normally a sign of partial fee waivers in place. These included (along with assets and 7-day yields as of Sept. 30): American Perform US Treas Adm ($858, 0.01%); Neuberger Berman ILF Treas Prem ($251, 0.01%); Neuberger Berman ILF Treas Serv ($13, 0.01%); State Street Inst Treasury Plus Inv ($495, 0.03%); Goldman Sachs ILA Trs Obl CM ($220, 0.04%); JPMorgan US Trs Plus MM B ($1, 0.04%); JPMorgan US Trs Plus MM C ($131, 0.04%); JPMorgan US Trs Plus MM Res ($2,200, 0.04%); Evergreen Treasury MMF S ($599, 0.05%); Daily Income Treas ST ($175, 0.05%); Dreyfus General Treasury Prime B ($1,541, 0.05%); Dreyfus Tr&Ag Cash Mgmt Select ($38, 0.05%); Goldman Sachs ILA Trs Obl Ser ($368, 0.05%); and, Highmark 100% USTr MMF Swp ($177, 0.05%).
Among $1 billion-plus funds (tracked by our MFI Daily), just five have yields under 0.20% currently (among 94 Treasury funds). They are (along with assets and 7-day yields as of Oct. 27): Dreyfus General Treasury Prime B ($2,021, 0.05%); Federated Treasury Cash Ser ($2,216, 0.07%); Columbia Treasury Reserves Daily ($2,035, 0.13%); JPMorgan US Trs Plus MM Res ($2,340, 0.14%); and, Fidelity Treasury Daily Mon ($4,340, 0.16%).
Money funds will be watching the possibility of negative yields closely, of course, and many have filed prospectus amendments recently to expand their flexibility to voluntarily reimburse or waive fees. (See Strategic Insight's latest Simfund Filing weekly for more; they cite Hartford Money Market, Fidelity Prime, Tax-Exempt and Advisor as some that have amended.) But as we saw in 2003-2004, the vast majority of money fund assets have expense ratios that are under 1%, so a Fed funds target of 1% -- and gross money market yields of 1% -- are not a serious threat to money fund revenues.
The Federal Reserve Board's Commercial Paper Funding Facility, announced October 7 to provide a backstop to CP markets, goes live today. The New York Fed, which administers the program, says, "The purpose of the CPFF is to enhance the liquidity of the commercial paper market by increasing the availability of term commercial paper funding to issuers and by providing greater assurance to both issuers and investors that firms will be able to roll over their maturing commercial paper."
The Commercial Paper Issuers Working Group (CPIWG), a group representing direct issuers of CP, and General Electric, one of the largest issuers of CP, have expressed their intentions to participate. We expect almost all the major market participants to follow, and we expect tensions in the money markets to continue easing this week as the CP program goes live.
The CPIWG says they "applaud the Federal Reserve for their steadfast actions related to the implementation of various programs, including the Commercial Paper Funding Facility (CPFF), designed to help unlock the U.S. credit markets.... [W]e believe the CPFF addresses two fundamental necessities to support a liquid, and functioning, commercial paper market: (1) the facility mitigates maturity 'rollover' risk by providing eligible issuers of commercial paper access to 3-month funding; and (2) in turn, investors in commercial paper should have restored confidence in their ability to obtain liquidity should they need to request an early redemption prior to the original maturity date." CPIWG adds, "[W]e intend to update the CPIWG web site with a list of member issuers of commercial paper that have publicly announced their registration with the CPFF."
GE Deputy Treasurer and spokesman Mark Barber shared a letter sent to CP investors late last week. It says, "We join with commercial paper issuers and investors in applauding the launch of the Commercial Paper Funding Facility by the Federal Reserve. The CPFF adds a liquidity backstop to this $1.5 trillion market, helping to reduce rollover risk for participating issuers and providing support for a more active secondary market. We believe the CPFF will strengthen confidence in the prime commercial paper market and encourage more term buying." He tells Crane Data, "It's all about liquidity in the market.... It's the best back-up there is."
Barber continues, "As of today, all of the U.S. issuers of commercial paper in the GE family are registered and approved to access the facility, which goes live on October 27. Each of these issuers is rated A-1+ by Standard and Poor's and P-1 by Moody's Investors Service." These include: General Electric Company, General Electric Capital Services, Inc., and General Electric Capital Corporation. GE adds, "We plan to use the CPFF primarily to support our CP investors who may need liquidity. To ensure access and operability and to demonstrate our support for the Fed's action, we plan to test the facility on October 27.... We appreciate your continued support."
The Fed said when it announced the program, "The Board authorized the CPFF on October 7, 2008 under Section 13(3) of the Federal Reserve Act to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit for businesses and households. Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of unsecured and asset-backed commercial paper from eligible issuers through its primary dealers. The CPFF will finance only highly rated, U.S. dollar-denominated, three-month commercial paper."
Money market mutual fund assets continued their recovery in the week ended Wednesday, October 22, rising $18.56 billion to $3.536 trillion. ICI's series shows assets growing for the third straight week following increases of $60.80 billion last week and $57.57 billion the week prior. Money fund assets have recovered 75% ($136.92 billion) of their overall asset declines ($182.35 billion) that occurred in the 3 weeks following Sept. 11, which includes the Sept. 16 "breaking of the buck" of The Reserve Fund.
Though Government funds (including Treasury) continue to account for the bulk of the inflows, Prime Institutional assets rose for the second straight week. Prime Inst MMFs increased by $5.94 billion in the latest week to $1.005 trillion, following a $6.95 billion increase last week. Prime (or "General Purpose") Institutional money funds declined by $461.6 billion over the 4-week period starting Sept. 11, with 80% of the declines ($371.79 billion) occurring in the two weeks ended Sept. 24. (These numbers include The Reserve's $65 billion Prime total meltdown.) Two weeks ago Prime Inst assets fell below the $1 trillion level and saw Govt Inst funds surpass them in assets (now at $1.067 trillion).
Tax Exempt money funds increased assets for the third straight week, rising $1.93 billion on the Institutional side (to $188.40 billion) and $2.09 billion on the Retail side (to $301.72 billion). Tax Exempt money funds declined sharply in the 3 weeks including the "break the buck" event, falling $17.49 billion (Retail) and $23.36 billion (Inst), respectively. Over the past 3 weeks, Retail T-E funds have rebounded by $13.01 billion and Institutional T-E MMFs have increased by $9.62 billion.
Year-to-date, money fund assets remain solidly in the black. Assets have grown by $391.5 billion, or 12.4%. Institutions still account for the bulk of the growth ($277.0 billion, or 14%) vs. $114.5 billion (9.9%) for Retail funds. Over 52 weeks, overall money fund totals have increased by $551 billion, or 18.5%. Institutional fund assets have increased by 19.5% over the past year, while Retail assets have grown by 11.9%.
Yields on money market funds continued climbing among Taxable funds and continue falling among Tax-Exempt funds in the latest week. For the week through Wednesday, our Crane Money Fund Average 7-Day Yield rose 0.05% to 1.71% while our Crane Tax-Exempt Index fell 0.76% to 2.36%. Sharply rising Treasury yields driven by the unwinding of the flight to safety have overwhelmed a decline in commercial paper and LIBOR-based rates.
Check back later today for news on the Federal Reserve's Commercial Paper Funding Facility, which goes live on Monday.
The Reserve has posted "Reserve Primary and Government Funds Disbursement Update," which says, "The Reserve is pleased to announce that the Primary Fund's initial distribution will be approximately $25 billion plus cash accumulated through the distribution date, rather than $20 billion as previously announced. The Fund has been accumulating cash for this purpose and will continue doing so for future distributions.... We are making every effort to return investors' money as quickly as possible. Some final trade reconciliations remain. Based on work already completed, it's now our best estimate that the initial distribution will be made at the end of next week. The Government Fund has accumulated approximately $3 billion for its initial distribution. While not set in stone, we currently expect the initial Government Fund distribution will occur relatively soon after the initial Primary Fund distribution.... [T]he initial Government Fund distribution will be made approximately seven to 10 days after the initial Primary Fund distribution.... Once again, we thank all of our investors for their patience."
In other news, the ICI has posted a "Frequently Asked Questions about the Money Market Investor Funding Facility". Its Q&A's include: "Q: What is the Money Market Investor Funding Facility? A: The Federal Reserve Board created the Money Market Investor Funding Facility on October 21 to support a private-sector initiative to provide liquidity to U.S. money markets. The MMIFF and the initiative are designed to help restore confidence and active trading in the money markets, which are vital to the short-term financing needs of American businesses." It also asks, "Q: What problems will the MMIFF address? A: Short-term credit markets have been under considerable strain in recent weeks. Investors, including money market mutual funds, have had difficulty selling assets into the secondary market. As a result, investors have favored extremely short-term commercial paper (CP) or certificates of deposit (CDs) maturing in seven days or less. The tight markets in longer-dated commercial paper have in turn made it difficult for financial institutions and businesses to raise funds to finance inventory, payroll, and other needs."
ICI also says, "The Fed has already announced two facilities to add liquidity to the money markets. How does the MMIFF fit with those?" ICI explains, "The MMIFF complements two previously announced facilities: The Commercial Paper Funding Facility (CPFF), which on October 27 will begin funding purchases of highly rated, U.S.-dollar denominated, three-month, unsecured and asset-backed commercial paper issued by U.S. issuers; and The Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), announced on September 19, 2008, which extends loans to banking organizations to purchase asset backed commercial paper from money market mutual funds. The AMLF focused on asset-backed commercial paper, and the CPFF will purchase CP directly from issuers. Neither covers purchases of existing unsecured money market instruments, which is the focus of the MMIFF. All three facilities are intended to improve liquidity in short-term debt markets and thereby increase the availability of credit."
See also the SEC's recent "no-action" letter on the program.
"Financial professionals believe that government action over the past three weeks have stabilized the credit markets. Over 1,000 attendees at the Annual Conference of the Association for Financial Professionals (AFP) indicated that various government action, including the U.S. Treasury plan to purchase an equity stake in key financial institutions and guarantee money market funds, along with the Federal Reserve's plan to purchase Commercial Paper, has improved the outlook for credit availability."
"While the economy appears to be shaken, credit looks to be stabilizing," said Jim Kaitz, President and CEO of AFP. "More than three weeks ago, we said that the most pressing issue for business is access to credit. Actions by policymakers have in recent days brought some measure of confidence back to the markets."
AFP says that survey respondents "indicate overwhelmingly (97%) they think the U.S. economy is in recession. One-third (34%) believe that the recent turmoil in the credit markets precipitated the recession, while nearly two-thirds (63%) believe that the U.S. was already in recession prior to September's events. Despite belief that access to credit has stabilized in the last two weeks (75%), many companies are still experiencing difficulties. More than one quarter (25%) report that their access to new or additional short-term credit is very limited. A nearly similar percentage of survey respondents (22%) report that the tight credit markets over the past month have stalled growth opportunities."
Overall, financial professionals are more positive about the outlook for short-term credit. 69% indicate that the Treasury's purchase of preferred shares in U.S. financial institutions will improve corporate access to short-term credit. 81% cite the Federal Reserve's plan to purchase Commercial Paper and guarantee money market funds as improving access.
The recent government actions have led some organizations to be more comfortable in investing outside of ultra-safe Treasury securities. Thirty-one percent of survey respondents indicate that they are more comfortable with re-allocating at least some of their short-term investment portfolio into other high-quality investment vehicles that offer higher yields. On Monday, Oct. 21, AFP surveyed attendees at its Annual Conference on the current state of the short-term credit market.
Today, the "Federal Reserve Board on Tuesday announced the creation of the Money Market Investor Funding Facility (MMIFF), which will support a private-sector initiative designed to provide liquidity to U.S. money market investors." The Fed's release says, "Under the MMIFF, authorized by the Board under Section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors."
The Fed continues, "The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs. By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments. Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households."
Investment Company Institute President and CEO Paul Schott Stevens commented in response to the Federal Reserve's announcement of creation of the Money Market Investor Funding Facility, "We commend the Federal Reserve Board for the actions just announced, which will enhance the liquidity of the markets for commercial paper and other short-term financing. This initiative by the Federal Reserve will be of great benefit to all investors in this market, including money market mutual funds. More generally, it will help restore normal functioning to the credit market, an objective of highest importance to assist small and large businesses and financial institutions that depend on this market for financing."
Yesterday, Federal Reserve Chairman Ben S. Bernanke gave an "Economic outlook and financial markets" update before the U.S. House of Representatives Committee on the Budget. The testimony contained several mentions of money market mutual funds and a review of the comprehensive actions taken to date to thaw the temporary freeze in the credit markets, which began when the bankruptcy of Lehman Brothers caused Reserve Primary Fund to "break the buck".
Bernanke says, "The financial turmoil intensified in recent weeks, as investors' confidence in banks and other financial institutions eroded and risk aversion heightened. Conditions in the interbank lending market have worsened, with term funding essentially unavailable. Withdrawals from prime money market mutual funds, which are important suppliers of credit to the commercial paper market, severely disrupted that market; and short-term credit, when available, has become much more costly for virtually all firms."
He continues, "To address ongoing pressures in interbank funding markets, the Federal Reserve significantly increased the quantity of term funds it auctions to banks and accommodated heightened demands for funding from banks and primary dealers.... To address illiquidity and impaired functioning in the market for commercial paper, the Treasury implemented a temporary guarantee program for balances held in money market mutual funds, helping to stem the outflows from these funds. The Federal Reserve put in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds, thus providing some relief for money market funds that have needed to sell their holdings to meet redemptions. Moreover, we soon will be implementing a new Commercial Paper Funding Facility that will provide a backstop to commercial paper markets by purchasing highly rated commercial paper from issuers at a term of three months."
"Taken together, these measures should help rebuild confidence in the financial system, increase the liquidity of financial markets, and improve the ability of financial institutions to raise capital from private sources.... [T]he act also temporarily raised the limit on the deposit insurance coverage provided by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration from $100,000 to $250,000 per account, effective immediately.... [T]he FDIC was able to use its authority `to provide, for a specified period, unlimited insurance coverage of funds held in non-interest-bearing transactions accounts, such as payroll accounts <b:>`_. In addition, the FDIC announced that it would guarantee the senior unsecured debt of FDIC-insured depository institutions and their associated holding companies."
Finally, he says, "These measures were announced less than a week ago, and, although there have been some encouraging signs, it is too early to assess their full effects. However, I am confident that these initiatives, together with other actions by the Treasury, the Federal Reserve, and other regulators, will help restore trust in our financial system and allow the resumption of more-normal flows of credit to households and firms."
In a previous Crane Data News (Oct. 9) article, we said, "Virtually All Money Fund Families Now Covered by Treasury Guaranty." We've since found at least two funds that have declined to apply for the Treasury's Temporary Guarantee Program for Money Market Funds. But both are tiny Treasury funds not tracked by Crane Data. Also, at least two fund complexes have now had their guaranty applications approved by Treasury, and we expect almost all others to be approved within the week.
Of the two funds that declined the coverage, Weiss Treasury Only Money Market Fund is one. Its website says, "On behalf of the Weiss Treasury Only Money Market Fund, Weiss Capital Securities president Sharon Daniels said, 'While many funds may choose to participate in this temporary money market fund guarantee offered by the Treasury, the Weiss Treasury Only Money Market Fund is unique in that it invests almost entirely in U.S. Treasury securities, which benefit from the DIRECT full faith and credit guarantee of the U.S. government.'"
The $133 million Sentinel U.S. Treasury Money Market Fund (SNTXX) also declined coverage (and is not covered by Crane Data). The company says of its decision, "The Sentinel Group Funds' Board of Directors have carefully evaluated the details of the U.S. Treasury program and the portfolio holdings of the Sentinel U.S. Treasury Money Market Fund. Based on this review, they have determined the program's costs outweigh its benefits, particularly in light of the fact that the majority of the funds' assets (listed below) are already backed by the full faith and credit of the U.S. government or its implicit government guarantee."
Regarding acceptance of the Treasury's guaranty program, Oppenheimer Funds said, "On September 19, 2008, the U.S. Treasury Department announced the establishment of a 'Temporary Guarantee Program for Money Market Mutual Funds', to assist participating money market funds that 'break the buck' to pay certain shareholders $1.00 upon the liquidation of the funds. We are pleased to report that the Oppenheimer and Centennial money market funds have been accepted to participate in the Guarantee Program." The guaranty agreements are not effective until funds receive an agreement countersigned by the Treasury Department; Oppenheimer confirmed that its funds received their acceptance notice via email with a "countersigned Guarantee Agreement".
The other fund group we found confirming acceptance is the RidgeWorth Funds, formerly Trusco's STI Classic Funds. Its website says, "On October 6, five of the RidgeWorth Money Market Funds applied to participate in the U.S. Treasury's Temporary Guarantee Program for Money Market Funds. We are pleased to announce that on October 16, the U.S. Treasury notified us that our applications were accepted. The RidgeWorth Funds that will participate in the Program are: Institutional Cash Management Money Market Fund, Institutional Municipal Cash Reserve Money Market Fund, Prime Quality Money Market Fund, Tax-Exempt Money Market Fund, Virginia Tax-Free Money Market Fund."
Following their near-death experience in September after The Reserve's Primary Fund "broke the buck," the $2.2 trillion Institutional money market mutual fund industry has stabilized and will be gathering in Los Angeles this week to lick its wounds at the AFP Annual Conference, produced by the Association of Financial Professionals. Money fund salespeople will be out in force at the world's largest gathering of cash investors to try and talk some of the thousands of coporate treasurers who control hundreds of billions in assets back in "off the ledge". It will be a tough and a long sell, but the "just-happy-to-still-be-here" money funds have been heartended by the market's recent response to the U.S. Government's barrage of support actions.
While actual session content on cash investments, money funds and money markets is sparse, money fund and money market exhibitors will be out in force. And the cash manager, assistant treasurer and CFO crowd will undoubtedly have money markets on their mind. Though the ranks have been thinned somewhat, there will still be over 30 companies promoting money funds and cash investment "portals" in the expansive exhibit hall at the LA Convention Center. Large sponsors of the 4-day event (which starts Sunday) include: Bank of New York Mellon, BlackRock, Citi, Deutsche Bank, Fidelity, HSBC, Northern Trust, PNC, SunTrust, Wachovia, and Wells Fargo.
Alas, there are just two sessions that involve money market mutual funds, and both are money fund "portal" talks. Monday's agenda contains a 10:30 a.m. talk by Institutional Cash Distributors' Tom Knight and Clearwater Analytics' Courtlandt Gates entitled, "Do You Know What Your Cash is Buying? A Glimpse Into Total Fund Transparency and the Future of Money Market Technology." The other is Monday afternoon at 4:00 p.m., the prematurely-titled, "Safeguarding Global Cash: Investing in the Post-Crisis Environment." Barclays Global head of cash Dave Lonergan will join Citi Online Investments' John Carter to discuss "safe harbors for investing global cash." (We hope the AFP includes some money market mutual fund managers next year!)
Crane Data President & Publisher Peter Crane will be roaming the halls reporting on the money market-related news and discussions. Please feel free to call or e-mail Pete if you have any information of interest to the broader money fund community, or if you'd like to arrange an on-site discussion. (You can also e-mail to request Pete's Powerpoint presentation from last week's Treasury Management of New York, or TMANY, lunch meeting entitled, "`Money Market Mutual Funds: What You Need to Know Today ... 'Breaking the Buck' & Aftermath.") We hope to see you in LA!
Money market mutual fund assets rebounded strongly in the latest week, rising $60.83 billion to $3.519 trillion, according to the Investment Company Institute's weekly series. For the week ended Oct. 16, Retail money fund assets increased by $26.83 billion to $1.285 trillion and Institutional assets increased by $34.01 billion to $2.234 billion. ICI tracks 2,029 funds in their weekly survey.
This marks the third week in a row that overall assets have increased and the first week that General Purpose ("Prime") Institutional assets have increased since Reserve Primary "broke the buck". Overall money fund assets have recovered $120.8 billion over the past three weeks, recouping almost two-thirds of the declines suffered in the weeks ended Sept. 17 and Sept. 24. Year-to-date, money fund assets have increased by $250.7 billion, or 11.9%, and over 52 weeks they have increased by $577 billion, or 19.6%.
Prime Institutional assets grew by $6.95 billion to $998.9 billion in the latest week, but they remain down sharply from their Sept. 10 record of $1.453 trillion. Government Institutional funds, including Treasury funds, continue raking in assets, though the rate slowed in the latest week. Govt Inst funds increased by $25.11 billion to $1.048 trillion. (They broke above the $1 trillion level last week.) Prime Retail funds increased by $12.4 billion to $710.81 billion and Government Retail funds increased by $9.41 billion to $274.43 billion.
Tax-Exempt money funds continued their rebound for the second week in a row. T-E Institutional funds increased by $1.95 billion to $186.47 billion and T-E Retail funds increased by $4.99 billion to $299.63 billion. Tax-exempt yields have declined sharply of late, following their surge to unprecedented levels vis-a-vis taxable funds. Our Crane Tax-Exempt Money Fund Index has fallen from a 5.25% yield as of Sept. 30 to a 2.80% yield as of Wednesday.
Yesterday afternoon, Federated Investors, the third largest manager of money funds, published an update on current events entitled, "Plain talk about money market funds in today's markets. The Q&A with Federated money fund guru Debbie Cunningham says, "The money market fund industry has not been immune to the turmoil in the credit markets," and discusses the subprime crisis, liquidity, CP, the muni market and the Treasury Department's insurance program.
Cunningham says, "The Treasury, Federal Reserve and overseas central banks are working furiously to calm global credit markets amid widespread fear and volatility. We saw yields on Treasury bills drop to near zero in mid-September as investors rushed to their relative safety, while rates on normally stable commercial paper and other short-term instruments soared as buyers shunned them. The spreads between Treasurys and other sources of short-term debt have remained high."
She continues, "There have been signs of a turnabout this month, aided by the Fed's landmark decision to buy companies' commercial paper and, in conjunction with moves by other central banks, to lower the Federal Funds rate half a point. The Treasury's extension of its $700 billion rescue package to include direct purchases of stock in banks -- and similar actions by governments in Europe -- also helped boost liquidity. But it remains unclear how long it will take for credit markets to return to more normal behavior."
"Some money market funds have owned problematic securities related to subprime mortgages. The collapse of the subprime mortgage market spilled over into several major financial institutions that either directly held mortgage-backed securities or insured them, causing some of those institutions to fail and others to receive government assistance to stay afloat. This impacted some non-Federated money funds that were invested in these institutions. In this environment, we continue to manage Federated money market funds with an unrelenting focus on credit analysis to minimize risk and we continue to maximize liquidity," says Cunningham.
She adds, "Our money market funds, and all money market funds, always work to maintain a $1 net asset value. But additional liquidity has been what our clients have sought over the past several weeks. We need to comfort and assure our shareholders that they will have a $1 NAV and liquidity at any point that they need it. While yield might suffer slightly, our goal, because of what is happening in the marketplace, is managing for liquidity within the portfolios. Federated's portfolios continue to buy overnight instruments to provide more daily liquidity for shareholders."
On CP, she says, "From a quality perspective and from a diversification perspective, asset-backed commercial paper has always been one of the desired asset classes for Federated's prime money market funds. This is still the case. Across the industry, money market funds are the biggest buyer of commercial paper, but in the first two weeks of September, money market funds shied away from commercial paper due to a greater focus on maintaining liquidity within a portfolio. The Oct. 7 announcement by the Fed that it would begin to purchase commercial paper from U.S. issuers should help to restore more normal behavior toward commercial paper."
For the entire Q&A, visit Federated's website.
The October issue of our Money Fund Intelligence reflected an unprecedented number of changes in the money market mutual fund industry during September. The dramatic moves weren't just reflected in asset flows. Several fund complexes changed their name, a number were merged, and of course some were removed or footnoted to reflect the fact that they either "broke the buck" or were put into liquidation mode.
One large shift involved the BNY Hamilton Funds being shifted into new Dreyfus Institutional Reserves Funds. BNY Hamilton MF - Agency (BMAXX), Classic (BHCXX), Hamilton (BNHXX), Instit (BHIXX), and Premier (BNPXX) are now Dreyfus Institutional Reserves Money Fund - Agency (DRGXX), Classic (DLSXX), Hamilton (DSHXX), Instit (DSVXX), and Premier (DERXX), respectively. BNY Hamilton Treasury MF Classic (BYCXX), Hamilton (BYNXX), Inst (BHRXX), and Premium (BHTXX) are now Dreyfus Institutional Reserves Treasury Fund (DRRXX, DSSXX, DHLXX, and DNSXX). Fitch also recently assigned AAA/V1+ ratings to the new Dreyfus Institutional Reserves Government, Treasury, Treasury Prime and Money Fund.
Among fund families changing their names are: Lehman Brothers, which switch to Neuberger Berman on all its funds, ABN Amro/Aston, which is now Fortis, and Phoenix Insight, which is now Virtus Insight. The Neuberger change reflects the company's separation from Lehman, while the Fortis label reflects the new parentage of the former ABN Amro funds. The symbols on all these families' funds remain unchanged.
In other ratings news, Moody's downgraded a couple more ultra-short funds. The NRSRO dropped RidgeWorth Ultra-Short Bond Fund's rating to A/MR3 from Aa/MR1. The release says, "The fund is a bond fund and as such it is not eligible for the US Treasury's Temporary Guarantee Program for Money Market Funds. The downgrade of the fund rating to A was prompted by the fund's exposure to bonds issued by Lehman Brothers Holdings Inc., which filed for Chapter 11 bankruptcy protection. On a par value basis, the fund's Lehman holdings are approximately 1% of the fund's total par value."
Moody's Investors Service also downgraded the ratings of three very small "enhanced yield funds managed by JP Morgan Asset Management". `The release says that the "credit risk rating of one fund was downgraded to reflect its exposure to a defaulted security, while the market risk ratings of all three funds have been downgraded due to declining valuations in the asset-backed sector, increasing shareholder concentration, and substantial outflows. The following fund ratings were downgraded: US Dollar Enhanced Yield fund, whose asset size is $37 million: to Ba/MR5 from Aa/MR3; Euro Enhanced Yield fund, whose asset size is E40 million: to Aa/MR5 from Aa/MR2; and, Sterling Enhanced Yield fund, whose asset size is GBP53 million: to Aa/MR5 from Aa/MR1." Moody's also put NGA Institutional LIBOR Fund on review for downgrade.
Following actions by Europe over the weekend to support its banking system, the U.S. Treasury and Federal Reserve announced a series of additional support measures aimed at stabilizing the banking system and breaking a credit logjam in the money markets. The Treasury statement says, "Today we are taking decisive actions to protect the U.S. economy, to strengthen public confidence in our financial institutions, and to foster the robust functioning of our credit markets."
Actions include, "First, Treasury is announcing a voluntary capital purchase program ... selling preferred shares to the U.S. government on attractive terms that protect the taxpayer." Next, they've allowed the "FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts." And, third, "to further increase access to funding for businesses in all sectors of our economy, the Federal Reserve has announced further details of its Commercial Paper Funding Facility (CPFF) program."
The Fed's statement on the CPFF says, "The Federal Reserve Board on Tuesday announced additional details regarding the Commercial Paper Funding Facility (CPFF), including that it would begin funding purchases of commercial paper on October 27, 2008. The Board authorized the CPFF on October 7, 2008 under Section 13(3) of the Federal Reserve Act to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit for businesses and households."
It adds, "Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of unsecured and asset-backed commercial paper from eligible issuers through its primary dealers. The CPFF will finance only highly rated, U.S. dollar-denominated, three-month commercial paper."
For more information, see: "Commercial Paper Funding Facility: Frequently Asked Questions" and "Commercial Paper Funding Facility: Program Terms and Conditions". Under the Q&A, the New York Fed says, "The purpose of the CPFF is to enhance the liquidity of the commercial paper market by increasing the availability of term commercial paper funding to issuers and by providing greater assurance to both issuers and investors that firms will be able to roll over their maturing commercial paper. These steps should contribute to an overall improvement of conditions in credit markets."
This month in our flagship Money Fund Intelligence we interviewed Eduardo Prado, President & CEO of Irvine, Calif.-based Finacorp Securities, which launched the proprietary money fund trading portal Tradefunds earlier this year. We asked Ed about competing in the portal marketplace, about the government agency market, and about recent events in the money markets.
First we asked, "What led you to the money fund portal business?" Prado responded, "As a broker/dealer with institutional clients that invest in short term instruments, we saw the fund portal business as a natural extension of what we currently offer. We were also enlightened by many of our state, municipal and larger corporate accounts on the need to invest in money funds through a Minority Owned Broker Dealer. To date we are the only Hispanic Owned Broker Dealer to provide such a portal."
Q: What has been the key to the success of online money fund portals? He says, "The major key to online money fund portals is the efficiency that portals offer to investors in virtually every aspect of fund investing--research, execution, processing and reporting. Portals allow investors to efficiently research funds, for ratings, holdings, yield, etc. They offer the ability to easily diversify ones holdings. Now more than ever this has become a critical need in this very turbulent market. Portal investors typically have one wire, and one consolidated statement. In addition, a sound capable custodian is critical in the deployment of a money fund portal."
Q: What makes your portal different from others? Prado says, "For starters Tradefunds is unique in that it allows our clients' Treasury team to meaningfully contribute to enterprise diversity goals with a value-added, best practice investment solution--and via a product that they are (almost always) already using. By this I mean that our portal is owned and operated by Finacorp Securities, a certified MBE/DBE brokerage firm, as such our clients can gain related credits by using the platform. Our platform also offers a vast amount of funds; 25 different fund families and 80 different funds and is very easy to use. We are also the only portal that offers a short term money fund investment desk so that if you wish to invest in securities you can do so by communicating with our trading desk."
Finally, we asked, "Have portals contributed to the recent market volatility?" He tells us, "No. I believe that the money fund market will continue to evolve and become much more transparent and commoditized; portals are just part of this process. Q: Do you sell things other than money funds? Absolutely. For one thing, we're very active in the 2a-7 space across all taxable markets. Finacorp is the No. 1-ranked minority underwriter of agency securities, and many of our underwritings--both fixed rate and floating--are structured for the funds." See the October issue of MFI for the full interview.
On Friday night, the SEC released a "no action" letter allowing money market mutual funds to "shadow price" certain securities use the "amortized cost" method of accounting valuation rather than market value quotations for securities with less than 60 days to maturity. The SEC responded to a letter from the Investment Company Institute, "Based on these representations and in light of the current conditions in the market for short-term securities, the Division of Investment Management would not recommend enforcement action to the Commission ... if, for purposes of shadow pricing under their monitoring procedures through January 12, 2009, money market mutual funds comply with rule 2a-7 by using the amortized cost method of valuing certain of their portfolio securities ... unless the particular circumstances, i.e. the impairment of the creditworthiness of the issuer, suggest that amortized cost is no longer appropriate."
The SEC letter says, "You have requested that the staff provide assurances that it would not recommend enforcement action to the Commission under section 2(a)(41) of the Investment Company Act of 1940 and rules 2a-4 and 22c-l thereunder, if a money market fund complies with rule 2a-7 by "shadow pricing" certain ofits portfolio securities by reference to their amortized cost value rather than using available market quotations (or an appropriate substitute that reflects current market conditions)."
It explains, "Open-end management investment companies (mutual funds) must calculate their current net asset value by reference to (i) the market values of their securities or (ii) in the absence of readily available quotations for their securities, their fair value as determined in good faith by the board of directors. The Commission has stated its view, however, that it would not object if a mutual fund board of directors determined, in good faith, that the value of debt securities with remaining maturities of 60 days or less is their amortized cost, unless the particular circumstances warrant otherwise. The Commission concluded that the difference between the amortized cost value and the value ofportfolio securities with short maturities is unlikely to be of significant magnitude to affect the share price of the fund. It noted, however, that the amortized cost value may not always accurately reflect the fair value ofthe securities due to the impairment of the creditworthiness of an issuer or other factors."
"Since 1983, this interpretive position has had relevance only with respect to the valuation ofportfolio securities of other types of mutual funds. This is because in 1983 the Commission adopted rule 2a-7, which permits money market funds to use the amortized cost method ofvaluing their securities for securities with remaining maturities of 397 days (thirteen months) or less. Use of the amortized cost method is important to money market funds because it facilitates their ability to maintain a stable net asset value, typically $1.00 per share."
It continues, "Rule 2a-7 ... requires money market funds to adopt written procedures (monitoring procedures) requiring the fund to periodically calculate 'the extent of deviation, if any, of the current net asset value per share calculated using available market quotations (or an appropriate substitute that reflects current market conditions) from the money market fund's amortized cost price per share.' This process is referred to in the rule as 'shadow pricing.'"
"When it adopted rule 2a-7, the Commission stated that when shadow pricing a money market fund portfolio, the fund should value 'all portfolio instruments, regardless of the time to maturity ... based upon market factors and not their amortized cost value.' Therefore, in shadow pricing their portfolios under their monitoring procedures, money market funds relying on rule 2a-7 cannot take advantage of the 1977 interpretive position permitting use of amortized cost for debt securities with remaining maturities of 60 days or less."
"You state that under current market conditions, the shadow pricing provisions of rule 2a-7 are not working as intended. You believe that the markets for short-term securities, including commercial paper, may not necessarily result in discovery of prices that reflect the fair value of securities the issuers of which are reasonably likely to be in a position to pay upon maturity. You further assert that pricing vendors customarily used by money market funds are at times not able to provide meaningful prices because inputs used to derive those prices have become less reliable indicators of price."
Assets of money market mutual funds increased by $58.54 billion to $3.458 trillion in the week ended Wednesday, says the ICI's latest weekly "Money Market Mutual Fund Assets" report. Money fund assets have rebounded over the past two weeks, following a three week drop of approximately $187 billion, or 5.2%, in the weeks after The Reserve Primary Fund "broke the buck".
As we noted in a chart in the October Money Fund Intelligence, these relatively modest monthly declines and recent rebound masks a deep decline in Prime Institutional money funds, which fell by $455 billion, or 31.8% over the past 4 weeks to $974 billion. Government Institutional funds (including Treasury funds) were the main beneficiary, rising $275 billion, or 38.3% over the 4-week period (since Sept. 10, the week prior to the "buck-breaking").
Government Institutional funds broke above the $1 trillion level for the first time ever this week, rising $49.54 billion to $1.041 trillion the past week. Tax-Exempt Institutional money funds fell $18 billion, or 8.7%, to $184.5 billion over the past four weeks. But assets showed a jump of $5.74 billion, or 3.2% in the latest week. Overall Institutional money fund assets fell by $146 billion net, or 6.2%, the past 4 weeks.
Retail assets actually rose over the period, though barely. Prime Retail funds have seen a relatively modest $39 billion, or 5.4%, decline to $686 billion, while Government Retail money fund assets rose $73 billion, or 35.5%, to $278 billion. Tax-Exempt Retail assets also rebounded the past week, rising $5.93 billion, or 2.1%, to $294.6 billion. Even with this gain, though, Tax-Free MMFs have fallen $12 billion, or 3.8%, over the past 4 weeks.
Crane Data's Money Fund Intelligence Daily shows the recovery continuing yesterday. Our daily series, which tracks 85% of the money fund universe, shows assets rising $13 billion yesterday. For a sample copy of MFI Daily, Crane Index, or Money Fund Intelligence, or for more information on the various asset measures, e-mail Pete. Have a great long weekend!
Crane Data's monthly Money Fund Intelligence shows assets declining by $160 billion, or 4.8% in September. (ICI's monthly data series won't be released for a couple more weeks.) Our broadest benchmark Crane Money Fund Average, an index of 895 taxable money funds, yielded 1.69% (7-day simple) and 1.88% (30-day) as of Sept. 30, 2008. The Crane 100 yielded 2.17% (7-day) and 2.24% (30-day) at month-end, and returned 0.18% (1-mo), 0.56% (3-mo), 2.05% (YTD), 3.23 (1-year), 4.25% (3-yr, annualized), 3.20% (5-yr), and 3.45% (10-yr) in the month ended Sept. 30. The Crane Tax-Exempt Index yielded 5.25% (7-day) and 2.89% (30-day) at month-end.
Every single one of the 90 money market mutual fund managers tracked by Crane Data's Money Fund Intelligence XLS has now applied for the U.S. Treasury Department's new Money Market Fund Temporary Guaranty Program. The Reserve is the most recent to announce its application, though its acceptance in the program remains uncertain. Crane Data `estimates that 95% of the $3.4 trillion in money fund assets are now covered by the program. (The number would be higher, but we're not counting Reserve yet, and some families chose not to insure their Treasury funds.)
For the running list of fund company announcements, see below. For more on the details, click on the following links: Treasury Announces Guaranty Program for Money Market Funds, Treasury Provides Clarity For Money Market Funds Guaranty Program, Treasury Opens Money Market Funds Guarantee Program, FAQ: Treasury's Money Market Funds Guarantee Program, ICI's "Frequently Asked Questions about the Treasury's Guarantee Plan for Money Market Mutual Funds", and ICI and IDC Webinar regarding the Treasury's Temporary Guarantee Program for Money Market Funds. For the application and details for signing up, visit the "Treasury's Temporary Guarantee Program for Money Market Funds" page. Of course, see also Crane Data's previous News and Link of the Day pages, and see the upcoming October issue of Money Fund Intelligence for more details.
Here is an updated list of money fund families that have applied for the Treasury's Temporary Money Fund Guarantee Program. AIM (Invesco), Allegiant, Alpine, American Beacon, American Century, American Funds, American Performance, Barclays, BlackRock, Calvert, CNI Charter, Columbia, Credit Suisse, Deutsche (DB/DWS) Asset Management, Dreyfus, Evergreen, Federated, Fidelity, First American, Flex-Funds, Fortis (Aston/ABN Amro), Franklin, Goldman Sachs, HighMark (UBOC), HSBC, Huntington, Janus, JPMorgan, Legg Mason (Western Asset), Marshall, MFS, Morgan Stanley, Munder, Nationwide (pending), Neuberger Berman (Lehman Brothers), Northern, PNC, Oppenheimer (Centennial), Prudential, Putnam, Reich & Tang, Russell, Schwab, SSgA, State Street Inst, Tamarack, TIAA-CREF, TCW, Touchstone, UBS, Vanguard, Victory, Virtus (Phoenix Insight), Wells Fargo, and Wilmington Trust.
The following is reprinted from the October issue of Money Fund Intelligence, which excerpts Investment Company Institute President & CEO Paul Schott Stevens' address from ICI's "Equity, Fixed-Income & Derivatives Markets Conference" earlier this week. His talk was entitled, "Of Black Swans and Money Funds."
Stevens says, "Today, I want to talk about the impact on money market mutual funds, which for so many years have been a steady, predictable mainstay of finance for both corporate and household America. Let me describe for you what has happened and share some insights about ICI's efforts to protect shareholders and others who have such a large stake in the success of money market funds. And then I'll conclude with some thoughts, some very preliminary thoughts, on how the aftermath may alter our industry."
"But first, let me set the historical and economic backdrop for these recent events. Money market funds themselves were born of a Black Swan moment--the explosive inflation of the 1970s. Rapidly rising interest rates laid waste to a banking world governed by Reg Q and its precise limits on what banks and thrifts could pay on deposit accounts. Higher rates were available in the money markets--but the price of entry was steep, because those securities traded in increments of $100,000."
Stevens continues, "The SEC's adoption of Rule 2a-7 in 1983 assured that these funds would follow strict guidelines on credit quality, maturity, diversification, and liquidity. Within these guidelines, money market funds could seek to maintain a steady $1.00-per-share net asset value. Current yields and this stable NAV became key selling points for money funds, positioning them as an excellent cash-management vehicle."
"On that foundation, money market funds grew rapidly. Assets quadrupled from 1984 to 1997, when they first topped $1 trillion. And they tripled again, to $3 trillion, by 2007. As they grew, money funds became a premier cash-management product for both the corporate boardroom and that kitchen table that we hear so much about on the campaign trail. This year, America's households entrusted money funds with almost one fifth of their short-term assets, and corporate treasurers logged almost a third of corporate assets in those funds."
"But for the economy, money funds' role on the other side of the balance sheet is even more important: For Corporate America--as of June, money market funds held more than 40 percent of outstanding U.S. commercial paper, the vital short-term borrowings through which companies finance payrolls, inventories, and trade. For state and local governments--money funds held almost one-fifth of outstanding municipal securities. For the U.S. Treasury--money funds held one-fifth of marketable Treasury bills. For brokers and bankers throughout the land--money funds held at least one-quarter of the repurchase agreements that these institutions use to maintain their liquidity. And for consumers, whose credit-card, home-equity, and auto loans are substantially financed by asset-backed commercial paper held by money market funds. In sum--the $3.4 trillion in assets held by money market funds is vital fuel for the financial engines that drive the American economy."
For the entire text of Stevens' excellent speech, see ICI's website, see the October issue of Money Fund Intelligence, or stay tuned for Part II.
The Federal Reserve Board of Governors lowered its benchmark Federal funds target rate by one-half a percent to 1.50%. The `Fed's statement says, "Througout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.
It continues, "Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions."
On the Federal Reserve's action, the statement says, "The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures."
"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability," said the Fed.
It added, "In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-3/4 percent. In taking this action, the Board approved the request submitted by the Board of Directors of the Federal Reserve Bank of Boston." Money fund rates should move lower in the coming weeks, as they digest the new lower levels, and this move should have the effect of pushing cash into money market funds.
Special Note: See our "Link of the Day" for news of Fidelity's and Vanguard's announcements that they've joined the Treasury's Money Fund Guaranty Program. This means effectively that every money fund manager has signed up. Note also that our monthly Money Fund Intelligence will be published Wednesday a.m. It was delayed one day due to missing data and breaking news. Also, click here for Fed Chairman Bernanke's speech.
As expected, this morning the Federal Reserve took an important step to attempt to ease pressures in the $1.6 trillion commercial paper market. The Fed's release may be seen here. It says, "The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve's existing credit facilities to help provide liquidity to term funding markets. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers."
"The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility," says the Fed.
It continues, "The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities. As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day. A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper have made it more difficult for those intermediaries to play their vital role in meeting the credit needs of businesses and households."
"By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. Added investor demand should lower commercial paper rates from their current elevated levels and foster issuance of longer-term commercial paper. An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households," says the release.
The President's Working Group on Financial Markets issued a statement this morning saying, "Conditions in U.S. and global financial markets remain extremely strained. The President's Working Group on Financial Markets (PWG) is working with market participants and regulators globally to address the current challenges and restore confidence and stability to financial markets around the world. With the passage of the Emergency Economic Stabilization Act of 2008 (EESA), Congress has granted important new authorities to the Treasury, Federal Reserve, and the FDIC. These new authorities will be employed in conjunction with existing authorities to restore market confidence by strengthening the balance sheets of financial intermediaries and improving overall market functioning."
Addressing the "cash" or money markets, the statement says, "Bank deposits and money markets funds play an important role in the savings and investing of Americans. These savings and investment vehicles are critical to investor confidence. They also provide funds for financing activity that is so critically important to our credit markets. Last month, the Treasury Department announced a temporary guarantee program for money market mutual funds. That program began operations last Monday. [See story below for the list of funds participating.] This action was complemented by the Federal Reserve providing additional liquidity to money market mutual funds with their Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF) program, which has brought liquidity to the ABCP market."
It continues, "Today, the Federal Reserve is taking additional actions to enhance the flexibility of bank holding companies to provide support to their bank sponsored funds. In addition, the Securities and Exchange Commission and the FASB issued a clarification regarding the valuation of assets, including commercial paper, during such periods of market stress. In addition, the recent legislation temporarily increases the amount that the FDIC insures in bank and thrift deposits from $100,000 to $250,000. The legislation also increases the FDIC's ability to borrow from the Treasury if needed. Collectively these actions should enhance market stability and investor confidence in such funds."
The statement also says, under "Increasing Liquidity to Financial Markets," "With regard to liquidity, the Federal Reserve has introduced a series of innovative facilities and policies to enhance liquidity in our markets. These include the Term Auction Facility, Primary Dealer Credit Facility, Term Securities Lending Facility, and Currency swaps. The Federal Reserve will continue to take a leadership role with respect to liquidity in our markets. It is committed to using all of the tools at its disposal to provide the increased liquidity that is now required for the effective functioning of financial markets. In this regard, the authority to pay interest on reserves that was provided by EESA is essential, because it allows the Federal Reserve to expand its balance sheet as necessary to support financial stability while conducting a monetary policy that promotes the Federal Reserve's macroeconomic objectives of maximum employment and stable prices."
Finally, it says, "The Federal Reserve and the Treasury Department are consulting with market participants on ways to provide additional support for term unsecured funding markets."
The vast majority money market mutual fund managers have now applied for the U.S. Treasury Department's new Money Market Fund Temporary Guaranty Program. Crane Data estimates that 70% of the $3.4 trillion in money fund assets are now covered by the program. (The numbers would be higher, but some are choosing not to insure their Government or Treasury funds.) For more on the details, click on the following links (and see the fund list below): Treasury Announces Guaranty Program for Money Market Funds, Treasury Provides Clarity For Money Market Funds Guaranty Program, Treasury Opens Money Market Funds Guarantee Program, FAQ: Treasury's Money Market Funds Guarantee Program, ICI's "Frequently Asked Questions about the Treasury's Guarantee Plan for Money Market Mutual Funds", and ICI and IDC Webinar regarding the Treasury's Temporary Guarantee Program for Money Market Funds. For the application and details for signing up, visit the "Treasury's Temporary Guarantee Program for Money Market Funds" page. Of course, see also Crane Data's previous News and Link of the Day pages, and see the upcoming October issue of Money Fund Intelligence for more details.
Here is the latest list of money fund families that have applied for the Treasury's Temporary Money Fund Guarantee Program:: Allegiant, Alpine, American Beacon, American Performance, Barclays, BlackRock, Calvert, CNI Charter, Columbia, Deutsche Asset Management, Dreyfus, Evergreen, Federated, First American, Flex-Funds, Fortis (Aston/ABN Amro), Goldman Sachs, Invesco AIM, Janus, JPMorgan, Legg Mason (Western Asset), Morgan Stanley, Munder, Neuberger Berman (Lehman Brothers), Northern, PNC, Putnam, Reich & Tang, Schwab, SSgA, State Street Inst, TCW, UBS, Victory, Virtus (formerly Phoenix Insight), and Wilmington Trust. Fund companies planning on joining with pending announcements include: HSBC and Wells Fargo. Fund families still considering but not signed up so far include Credit Suisse, Fidelity, Nationwide, and Vanguard.
Prime Institutional money market mutual fund assets rose yesterday for the first time since Sept. 9, according to our Money Fund Intelligence Daily, which tracks the 450 largest funds (those over $1 billion), representing 86% of all money fund assets. The Crane Prime Institutional Money Fund Index increased by $2.96 billion to $652.6 billion. While overall money fund assets have been rebounding since the Treasury announced its Temporary Guarantee Program for Money Market Funds, a continued gradual erosion in the "Prime" sector had been a growing and serious concern. With even a modest rebound in this sector though, we should see the pressures on the commercial paper market begin to ease.
The Investment Company Institute's weekly money fund figures show the overall stabilization of the asset base. (View the ICI and IDC webinar regarding the Treasury's Temporary Guarantee Program for Money Market Funds here.) ICI shows money fund assets increasing by $1.34 billion in the week through October 1 to $3.399 trillion. Through Wednesday, retail money fund assets rose $2.05 billion to $1.239 billion while institutional assets fell $714 million to $2.160 billion.
ICI's underlying numbers show a huge shift from General Purpose (or "Prime") money funds into Government funds. Over the past 3 weeks, $439 billion moved out of prime institutional funds, $23 billion moved out of tax-exempt institutional funds, and $277 billion moved into government institutional funds (including Treasury). Overall institutional money fund assets fell by $185 billion in the 3 weeks through Oct. 1.
Retail assets actually rose over the past 3 weeks, though these too show a shift from general purpose into government. Retail prime funds lost $40 billion, tax-exempt retail lost $17 billion, and government retail gained $60 billion since Sept. 10, the week prior to The Reserve Primary Fund's "breaking the buck."
Year-to-date and over the past 52 weeks, however, money market mutual fund assets remain up substantially. Money fund assets in total have increased by $177 billion, or 8.1%, YTD, and they've increased by $492 billion, or 16.9% over the past 52 weeks (through 10/1). At their current $3.4 trillion level, assets remain more than twice as large as their level of 10 years ago ($1.352 trillion at year-end 1998).
JPMorgan Asset Management has become the 9th complex among the largest 11 to apply for the Treasury's Money Fund Guaranty program. JPMorgan, BlackRock, Federated, Dreyfus, Schwab, Goldman, Columbia, Morgan Stanley, and Western have all said yes, while no decision has been made by Fidelity and Vanguard as of yet. UBS also announced late Thursday that its directors have approved the participation of all but its Treasury funds in the U.S. Treasury's Temporary Guarantee Program.
Here is the most recent list of links to statements from fund companies: Allegiant, Alpine, BlackRock, Calvert, Columbia, Deutsche Asset Management, Dreyfus, Evergreen, Federated, First American, Flex-Funds, Fortis (Aston/ABN Amro), Goldman Sachs, Invesco AIM, JPMorgan, Legg Mason (Western Asset), Morgan Stanley, Neuberger Berman (Lehman Brothers), PNC, Putnam, Schwab, TCW, UBS, Virtus (formerly Phoenix Insight), and Wilmington Trust. Fund families not signing up so far include Credit Suisse, Fidelity and Vanguard (not signed up; considering).
JPMorgan's release says, "Earlier today, the JPMorgan Funds board approved the participation by each of the JPMorgan Money Market Funds (except for the JPMorgan 100% U.S. Treasury Securities Money Market Fund) in the U.S. Department of Treasury's Temporary Guarantee Program for Money Market Funds. The Funds are proceeding with the necessary application process. Shareholders in participating JPMorgan Money Market Funds will be insured under the Program on their balances up to the amount held by them in such funds as of the close of business September 19, 2008."
It continues, "All of JPMorgan's money market funds continue to be invested in the highest quality short-term securities with strong liquidity positions and have maintained a $1.00 net asset value. The funds have experienced positive flows in excess of $25 billion since September 15th, 2008. JPMorgan's approach to risk management, along with a stringent focus on credit standards and extensive experience in managing liquidity investments, have allowed our money market funds to maintain liquidity and provide current income to our shareholders throughout all market conditions."
"Despite the strength of JPMorgan's money market complex, we are participating in the U.S. Treasury's Temporary Guarantee Program in an effort to maintain investor confidence given current adverse market conditions. This temporary program should help sustain investor confidence and promote U.S. financial stability. To read Frequently Asked Questions about the U.S. Treasury program, visit: http://www.ustreas.gov/press/releases/hp1163.htm. JPMorgan manages over $290 billion in 12 U.S. Money Market Funds, including tax exempt, prime funds, government and treasury money market funds, says the company.
"While money market funds have weathered rapidly escalating redemption increases fairly well, these events raise questions as to whether long-term changes are coming for money market funds, and more specifically, the way money fund portfolios are managed to ensure same-day liquidity and stable NAV," says Fitch Ratings in an update released yesterday.
The ratings agency says, "Money market funds - primarily 'prime' funds - have faced unprecedented redemption activity over the last two weeks primarily due to the default of Lehman Brothers Holdings, Inc., the net asset value (NAV) impairment of the Reserve Primary Fund (which had significant Lehman exposure) and the temporary closure of Putnam Prime Money Market Fund (Institutional). Fitch has been in close contact with Fitch-rated fund sponsors during this market upheaval, requesting daily updates of portfolio composition and redemption activity, with particular focus on prime and off-shore U.S. dollar funds."
Fitch explains, "Redemption activity among Fitch-rated funds has been driven largely by reduced investor confidence, as opposed to observable credit deterioration, with 'AAA/V1+' rated funds maintaining high credit quality. However, market-based liquidity for many fund assets proved to be unreliable in the current stress. While redemption activity has stabilized following recent actions by the Federal Reserve and U.S. Treasury, certain prime funds experienced exceptionally high cash outflows during the last two weeks reflecting fund-specific concerns or the effects of the approaching quarter-end. Redemption activity was high for a number of prime and U.S. dollar off-shore funds, while other rated funds, particularly government funds experienced positive net cash flow, evidencing a pronounced flight to quality."
"To date, most prime money market funds have been able to meet redemptions through holdings of cash and short-term assets. In a few instances, support from a well-capitalized parent/sponsor has been an additional source of support. That said, the unusually high redemption activity has put pressure on the remaining liquidity resources of some funds and led to an extension of the funds weighted average maturity (WAM) - one measure of liquidity. A limited number of funds saw WAM extend to beyond 60 days, which typically is the outer WAM band for AAA/V1+ rated funds. However, in these instances the combination of supportive actions from fund sponsors and the U.S. Treasury mitigated liquidity concerns," says the release.
Finally, "Fitch views the actions taken by fund sponsors to preserve liquidity and support fund NAV as reasonable in response to unprecedented challenges. In the case of Putnam Prime Money Market Fund (Institutional) and other funds not rated by Fitch, these actions included closure of the fund given the magnitude of redemption requests. While not consistent with money funds' stated redemption policy of same day liquidity, Fitch recognizes that such suspensions allow for a more orderly liquidation of fund assets, and ensure equitable distribution of proceeds."
Standard & Poor's published two reports involving money market mutual funds yesterday produced by Analyst Peter Rizzo. The first, "Credit FAQ: How Are Events In The Financial Markets Affecting Money Market Funds?," addresses questions over fund support actions, "breaking the buck", the new Treasury guarantee plan, recent ratings actions, and offshore AAA-rated funds. The second, "Money Market Funds Tackle 'Exuberant Irrationality'," discusses asset flows, mark-to-market issues, and recent U.S. Government support actions. Click here to see all of S&P's recent money fund news.
S&P writes, "In light of recent actions taken by some money market funds to freeze redemptions and implement payments in kind in lieu of cash distributions--and some funds' failure to maintain a stable $1.00 per share net asset value (NAV; "break the buck"), Standard & Poor's Rating Services has taken several rating actions on money market funds during the past two weeks. Questions remain as to fund managers' reaction to the current market crisis, as well as future repercussions for investors globally."
On support and defensive actions by funds, the NRSRO says, "During the past year, several financial institutions that sponsor money market funds have done one or more of the following: purchase distressed assets at amortized cost, obtain or provide credit support agreements from highly rated institutions (i.e. A-1 or better), make cash infusions into the fund, suspend redemptions, or distribute redemptions-in-kind.... The recent events included a dramatic increase in shareholder redemption requests at many money market funds. As a result, many managers have taken at least one of the following defensive steps to weather the current storm: continued to closely monitor and reevaluate investments in commercial paper; decreased weighted average maturity (WAM) of their funds by investing in short-term, overnight paper as securities mature; increased their funds' allocations to government-guaranteed instruments; increased diversification among sectors and issuers; or increased communication to shareholders."
S&P asks, "Are other 'AAAm' rated money funds in jeopardy of breaking the buck??" They answer, "Although some funds are currently under market pressure, all rated money market funds are within 'AAAm' parameters. The only funds currently on CreditWatch are the Reserve funds listed below." Regarding the Treasury Guarantee Plan and Federal Reserve Board's Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, S&P says, "We believe the U.S. Treasury's plan to provide a guaranty program for money market funds will help restore investor confidence and liquidity. For money market funds (taxable and nontaxable) that sign up for the program by Oct. 8, 2008, the Treasury Temporary Guarantee Program for Money Market Funds will protect the shares of all money market fund investors as of Sept. 19, 2008. We will review each rated money market fund that signs up for the program on a case-by-case basis to determine if the amount of support provided by the U.S. Treasury is sufficient to protect against fund rating actions due to deteriorating market conditions."
"We also believe the Federal Reserve Board's creation of the Asset-Backed Commercial Paper (ABCP) Money Market Mutual Fund Liquidity Facility (AMLF) will help improve liquidity and pricing for ABCP held in money market funds <b:>`_. The Federal Reserve Bank of Boston (FRBB) administers the AMLF. Because advances under the program are nonrecourse to the FRBB once an eligible borrower has borrowed under this facility, it is at no risk of loss on the eligible ABCP unless the ABCP is deemed to be nonconforming. We believe that rated money market funds that use this structure will have a greater liquidity cushion and will be more able to meet increased redemptions by selling their ABCP exposures at amortized cost," says S&P.
Finally, S&P says 'AAAm' rated European and Offshore money market funds are not guaranteed. "Unlike U.S. domestic 2a-7 money market funds, European and offshore funds will not benefit from the U.S. Treasury's guarantee program. Nevertheless, portfolios of 'AAAm' rated European and offshore money market funds adhere to extremely strict investment guidelines in terms of credit quality, interest rate risk exposure, diversification, and liquidity of instruments. Although investments in these funds are not guaranteed, the funds' investment philosophy and portfolio structure allow them to exhibit extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit, market, and liquidity risks.... There have been only a very few occasions where fund managers have been required to sell securities to meet client redemptions. To date, there have not been any rating actions on any of the more than 120 European and offshore managed 'AAAm' rated funds as a result of the recent market turmoil."