Money market mutual fund assets continued their record-breaking rebound in the latest week, rising above the $3.7 trillion level for the first time ever. Assets increased by $33.1 billion to a record $3.714 trillion in the week ended Nov. 25, says the ICI. Money fund assets have been on an 8-week tear since October 1, growing by $257.9 billion (7.5%), following their Reserve-"breaks-the-buck"-related declines (down $125.2 billion) the week of Sept. 17 and 24. Money fund assets have gained $569.5 billion, or 18.1%, year-to-date in 2008, and have gained $628.9 billion, or 20.4%, over the past 52 weeks.
Money fund assets have increased by $119.1 billion, or 3.3%, in November, driven by a $65.5 billion, or 6.1%, jump in Government (including Treasury) Institutional assets and a $48.4 billion, or 4.6%, jump in General Purpose (or "Prime") Institutional assets. Government Institutional assets gained $25.9 billion in the latest week to a record $1.149 trillion and Prime Institutional assets gained $5.6 billion to $1.104 trillion, still well below their Sept. 10 record of $1.453 trillion. Tax-Exempt Institutional money fund assets declined by $2.1 billion to $185.3 billion.
Retail money fund assets increased by $3.7 billion in the latest week to $1.277 trillion (vs. all institutional assets, which increased by $29.4 to $2.438 trillion). General Purpose Retail assets increased by $4.3 billion -- their second weekly increase following four weeks of declines -- to $711.9 billion. Government Retail funds grew a mere $541 million to $266.5 billion. Tax-Exempt Retail funds declined by $1.1 billion to $298.2 billion.
Institutional money funds now represent 65.6% of money fund assets vs. 34.4% for Retail. This ties Institutional funds' record high level set on Sept. 3, 2008. Government Institutional funds, including Treasury funds, account for the largest pie slice of assets with 30.9% followed closely by Prime Institutional assets with 29.7%. General Purpose Retail are the third largest piece with 19.2%, followed by a Government Retail with 7.2%. Tax-Exempt Retail funds make up 8.0% of total money fund assets and Tax-Exempt Institutional funds make up 5.0%.
The Investment Company Institute's latest "Month-End Portfolio Holdings of Taxable Money Market Funds" shows a continued shift into Treasury Bills and U.S. Government Agency Securities, a rebound in Commercial Paper, and a retreat from Eurodollar CDs, CDs, Corporate Notes and Bank Notes. Overall money fund assets posted their second largest increase on record in October, a gain of $149 billion, to a record $3.59 trillion following their largest drop ever, $137 billion, in September.
According to ICI, commercial paper remains the largest holding in taxable money funds with $639 billion, or 20.6% of assets. (Money funds own approximately 41% of the $1.55 trillion CP market based on the Federal Reserve's Oct. 31 statistics.) Repo, or repurchase agreements rank a close second among holdings with $624 billion, or 20.1% of assets. CP rose by $52 billion, or 8.9%, in October while repo rose by $7 billion, or 1.2%. Over the past year, CP holdings in money funds have declined $65 billion, or 9.2%, while repo holdings have increased $96 billion, or 18.1%.
U.S. Government agency securities are the 3rd largest holding in money funds at $519 billion, or 16.7%, and Treasury bills and securities total $516 billion, or 16.6%. Agency holdings jumped $83 billion in October (up 19.1%) and have surged by $339 billion (188.3%) over the past year. Treasury holdings jumped $85 billion (19.7%) in October and have skyrocketed $383 (286.9%) since October 2007. CDs and corporate notes, representing $375 billion (12.1% of assets) and $182 billion (5.9%), respectively, declined sharply in October.
As we mentioned, money fund assets increased by almost $150 billion in October, a gain of 4.3%, to $3.6 trillion. Taxable assets grew to $3.1 trillion while tax-free money fund assets grew to $487 billion. Total assets have increased by $483 billion, or 15.5%, year-to-date. The average maturities of money fund portfolios lengthened in October from 41 days to 44 days, a heartening sign for money markets, and the number of accounts outstanding grew from 33.78 million to 34.07 million.
Both money market funds and commercial paper have continued their amazing recuperation in November. This week's extension of the Treasury Temporary Guarantee Program for Money Market Funds and launch of the New York Federal Reserve's Money Market Investor Funding Facility this week should help push assets higher in December too. The New York Fed's Andrew Williams tells Crane Data, "[T]he MMIFF is operational and our extension of credit to the program will be disclosed each Thursday at 4:30 in this release: http://federalreserve.gov/releases/h41/Current/."
As expected, the U.S. Treasury extended its Temporary Guaranty Program for Money Market Mutual Funds with premiums going up slightly and asset coverage remaining just about the same. A just-issued press release says, "The U.S. Treasury Department today announced an extension of Treasury's Temporary Guarantee Program for Money Market Funds until April 30, 2009 to support ongoing stability in this market. All money market funds that currently participate in the program and meet the extension requirements are eligible to continue to participate. Funds that currently are not participating in the program are not eligible to enter the program. The temporary guarantee program will continue to provide coverage to shareholders up to amounts that they held in participating money market funds as of the close of business on September 19."
Treasury continues, "Funds must make a program extension payment and submit the extension notice by December 5. The amount of the payment for the extension period will be based on a fund's net asset value as of September 19. For funds that had a market-based net asset value greater than or equal to 99.75 percent of their stable share price, the payment will be 0.015 percent, 1.5 basis points, multiplied by the number of shares outstanding on September 19. For funds that had a market-based net asset value less than 99.75 percent of their stable share price but greater than or equal to 99.50 percent of their stable share price, the payment will be 0.022 percent, 2.2 basis points, multiplied by the number of shares outstanding on September 19."
"While the program protects the accounts of investors, each money market fund makes the decision to sign-up for the program. Investors cannot sign-up for the program individually. The program currently covers over $3 trillion of assets. The Secretary may extend the program until September 18, 2009; however, no decision has been made to extend the program beyond April 30, 2009. `If a fund does not participate in this extension, that fund will not be eligible to participate in any potential further extension of the program," says the release.
For more information on the Treasury's program, click here. For the full Extension Announcement and Pricing, click here.
Supply-side economics reseach firm Laffer Associates has released a study entitled, "Rock Bottom, Fed Options in a Low Interest Rate Environment, written by Arthur Laffer and Kenneth Petersen. The white paper analyzes money market funds and examines Fed options in an ultra-low environment. It argues, "[T]he Fed will at most reduce the target Fed funds rate by another 25 basis points."
The introduction says, "Monetary policy is back to the level witnessed between mid 2003 and mid 2004, at 1%. This is the lowest target Fed funds rate ever recorded in the modern era of monetary policy, 1982 to the present, and you have to go back to 1958 to find a lower number in the all time historical record book. There is now talk about the Fed potentially lowering the target Fed funds rate all the way down to zero to entice skittish U.S. consumers to spend and firms to invest. Such a drastic move, however, would crush money market mutual funds as they would not be able to meet operating costs.
Laffer explains in a section entitled, "Pushing Money Market Mutual Funds Over the Edge, "Money market mutual funds generate returns by investing in high quality money market securities, mainly commercial paper (CP) and repos. Thus, the return on a typical money market mutual fund depends to a large degree on the returns on commercial paper and repos, which again are priced relative to the target Fed funds rate and the U.S. London Interbank Offered Rate (LIBOR). Yields on commercial paper have been greatly elevated relative to the target Fed funds rate during the last couple of months, but are currently heading south. A combination of buyers leaving the commercial paper market -- money market mutual funds faced massive redemptions and were forced to sell commercial paper -- and banks becoming reluctant to lend to each other, caused risk premiums associated with commercial paper and U.S. LIBOR to take off."
"The Fed's Commercial Paper Funding Facility (CPFF) and its Money Market Investor Funding Facility (MMIFF) programs defused the depression like risk premiums observed in the commercial paper market during September and most of October. Furthermore, the effect of the U.S. and Europe beginning to guarantee newly issued senior unsecured debt manifested itself in lower risk premiums in interbank markets around the globe, especially the London interbank market, which again very recently has reduced money market risk premiums," Laffer says.
The piece continues, "Historically the spreads between the target Fed funds rate and the yields on commercial paper, repos, and U.S. LIBOR have been fairly tight, and we, therefore, expect current money market yields to move closer to the target Fed funds rate. Falling yields on commercial paper will translate to lower yields on money market mutual funds.... The average annualized seven-day simple net yield on retail money funds in the U.S. is 1.26% on taxable money funds and 1.04% on tax exempt money funds. Going forward these yields will decline as the risk premiums in the commercial paper and the London interbank markets decline and converge to their historical means."
Laffer continues, "Money market experts, like Pete Crane from Cranedata.com, inform us that the spread between the target Fed funds rate and the average seven-day simple net yield during time periods when the target Fed funds rate remains constant, is approximately negative 25 basis points. Hence, a very low target Fed funds rate would cause a gigantic consolidation in the money market mutual fund industry, potentially destroying the industry."
They explain, "A target Fed funds rate of 0.75% would force a number of money market funds (especially Treasury-only money funds) to waive fees in order to avoid zero or negative yields. Almost all money market funds would be severely impacted should the target Fed funds rate drop to 0.5%, and the $3.6 trillion money market mutual fund industry would be virtually wiped out with a target Fed funds rate below 0.5%.... [A] devastated money market mutual fund industry would have grave ramifications for the commercial paper market. Firms would be forced to seek short term debt financing from banks, which charge more and currently operate with tight lending standards. Pushing the target Fed funds rate below 0.50% could, therefore, cause firms to face higher financing costs, not lower."
Finally, Laffer says, "Thus, it's unlikely that the Fed will go much below 1% and we believe that the Fed will at most do one last 25 basis point cut. This doesn't mean that the Fed has run out of ammunition and is incapable of influencing short-term economic activity. Several alternative policy strategies are available to the Fed, including printing money, swaying interest rate expectations, and targeting the yields on longer term Treasury (or private sector) securities." To request the full paper, e-mail firstname.lastname@example.org.
The SEC just posted a Final Rule, "Temporary Exemption for Liquidation of Certain Money Market Funds," which codifies recent actions the Treasury and SEC took to support Reserve Government Money Fund (see the story below). The summary says, "The Securities and Exchange Commission is adopting an interim final temporary rule under the Investment Company Act of 1940 to provide relief from certain provisions of the Act for those money market funds that have elected to participate in a temporary guaranty program established by the U.S. Department of Treasury. The Guaranty Program includes a procedure for the orderly liquidation of money market fund assets in certain circumstances, and the interim final temporary rule will permit money market funds that commence liquidation under the Guaranty Program to temporarily suspend redemptions of their outstanding shares and postpone the payment of redemption proceeds." The rule is effective until October 18, 2009, "unless the Commission publishes a notice in the Federal Register announcing an earlier termination date in connection with termination of the Guaranty Program."
The Commission explains, "The risk-limiting conditions built into rule 2a-7, together with the management skill and, in some cases, the financial commitment of the advisers that sponsor money market funds, have contributed to the stability of money market funds for more than 30 years. Until recently, only one money market fund, a small institutional fund, had ever broken the buck. On September 16, 2008, The Reserve Primary Fund became the first large money market fund to break the buck when it announced that it would re-price its securities at $0.97 per share. The fund sought and obtained from us an order permitting it to suspend redemptions and postpone the payment of redemption proceeds. These events, and the turmoil in the credit markets in general, have placed pressure on money market funds, particularly those that offer their shares primarily to institutional shareholders and have experienced substantial redemptions."
They continue, "To bolster investor confidence in money market funds and protect the stability of the global financial system, on September 19, 2008, the Treasury Department announced the establishment of the Guaranty Program. Under the Guaranty Program, the Treasury Department will guarantee the share price of participating money market funds that seek to maintain a stable net asset value of $1.00 per share, or some other fixed amount, subject to certain conditions and limitations. The Guaranty Program provides coverage only to shareholders of record as of September 19, 2008, and the coverage is limited to the number of shares they held as of the close of business on that day. The Commission is assisting the Treasury Department in administering the Guaranty Program."
The Rule also says, "The Treasury Department opened the Guaranty Program on Monday, September 29, 2008. Most of the nation's money market funds elected to participate in the Program by the October 8, 2008 deadline by executing an agreement with the Treasury Department and paying the required participation fee. Under the terms of the Guaranty Program, the Treasury Department guarantees that, upon the liquidation of a participating money market fund, the fund's shareholders will receive the fund's stable share price of $1.00 for each fund share owned as of September 19, 2008. Pursuant to the Agreement, a participating money market fund that breaks the buck, i.e., experiences a 'Guarantee Event,' is required to commence liquidation within five business days (with an exception under a curing provision). The Agreement further requires the fund board to promptly suspend the redemption of its outstanding shares 'in accordance with applicable Commission rules, orders and no-action letters.' The fund must be liquidated within thirty days after a Guarantee Event unless the Treasury Department, in its discretion, consents in writing to a later date. These provisions are intended to ensure that the money market fund liquidates in an orderly manner and maximizes the proceeds realized from the disposition of the fund's portfolio securities."
The SEC explains the Reason for the Exemption, "Section 22(e) of the Investment Company Act prohibits funds, including money market funds, from suspending the right of redemption, or postponing the date of payment or satisfaction upon redemption of any redeemable security for more than seven days, except for certain periods specified in that section. Although section 22(e) permits funds to postpone the date of payment or satisfaction upon redemption for up to seven days, it does not permit funds to suspend the right of redemption, absent certain specified circumstances or a Commission order. However, in order for the Guaranty Program to operate as intended, a participating money market fund that experiences a Guarantee Event and must liquidate may need to suspend redemptions and postpone the payment of proceeds beyond the seven-day limit (specifically, until the Liquidation Date provided by the Agreement)."
It adds, "The temporary rule we are adopting today provides the necessary exemption to permit participating money market funds to take full advantage of the Program and initiate the steps necessary to protect the interests of all shareholders during liquidations, including those shareholders not covered by the Guaranty Program. Specifically, the rule is designed to facilitate orderly liquidations and help prevent the sale of fund assets at 'fire sale' prices. Such a result could lead to substantial losses for the liquidating fund and further depress prices for short-term securities that may be held in the portfolios of other money market funds. We are adopting the rule on an interim final basis because the Program is already in place and participating money market funds are currently subject to its liquidation provisions."
"The U.S. Treasury Department announced yesterday that it agreed to assist with the liquidation of The Reserve Fund's U.S. Government Fund, due to unique and extraordinary circumstances," said a press release issued by the Treasury. It says, "The fund, which Treasury accepted into its temporary guarantee program for money market funds, has not made a claim to Treasury under the program. In a separate agreement with the fund, the Treasury has agreed to serve as a buyer of last resort for the fund's securities, which consist of short-term U.S. government and government sponsored enterprise securities. This action is being taken to ensure that the fund is liquidated in an orderly and timely fashion."
The Treasury continues, "The agreement grants the fund a 45-day period where it will continue to sell assets at or above their amortized cost. At the conclusion of this period, Treasury's Exchange Stabilization Fund will purchase any remaining securities at amortized cost, up to an amount required to ensure that each shareholder receives $1 for every share they own. This extraordinary action is in response to the unique situation of the money market fund. This fund was permitted to suspend share redemptions as of September 17, in accordance with an order issued by the Securities and Exchange Commission."
"No other funds participating in Treasury's temporary guarantee program received a similar order from the SEC. Because of this, Treasury does not foresee a need to take similar actions with regard to any other funds participating in Treasury's temporary guarantee program. Treasury's agreement with the fund requires the fund's adviser and its trustees to waive their fees accrued after November 19 to the extent that fund shareholders do not receive distributions of $1 per share," adds the Treasury release.
The Reserve's press release quotes President Bruce R. Bent, "Because of this agreement the Government Fund will be able to return all of the Fund's money to investors early next year. This agreement allows us to achieve our goal of preservation of capital but enables investors to get their money back sooner. I want to thank our investors for their patience and understanding during these past few months."
The company's release adds, "Currently the Fund's assets are approximately $6.3 billion, including $231 million in cash. From now until January 3, the Fund will continue to accumulate cash as securities mature or are sold at or above amortized cost. As part of the agreement with the U.S. Department of the Treasury, the Fund will make an interim distribution to Fund shareholders when $1 billion in cash has been accumulated, although the timing of this distribution may be deferred by the Board of Trustees until the accounts of the Fund shareholders have been reconciled to the extent necessary for a distribution."
BlackRock recently posted a commentary entitled, "The Credit Crisis: U.S. Government Actions and Implications for Cash Investors. The 4th largest money fund manager's "Re-Cap of Market Events and Government Response" includes a timeline of events over the past two months and a review of the various steps taken by the Treasury, the Federal Reserve and the U.S. Government to stabilize money markets and to protect money market funds.
BlackRock writes, "From the first headlines in early 2007 regarding the burgeoning subprime crisis in the United States to the near collapse of global financial markets, cash investing has undergone extreme change. What was once taken for granted is now a source of considerable anxiety, and governments around the world have been compelled to introduce programs designed to promote liquidity and stability in the fear-frozen short-term debt markets."
The piece briefly reviews the tumultuous events of the past, and discusses the government support actions taken to date. These include: the Treasury's Temporary Guarantee Program for Money Market Funds, the Fed's Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Congress's Troubled Asset Relief Program (TARP), Federal Deposit Insurance Corporation Activity, the Commercial Paper Funding Facility (CPFF), and the pending Money Market Investor Funding Facility (MMIFF).
The publication asks, "What Should Cash Investors Do? BlackRock says, "One clear lesson from recent credit market events is that despite investors' historical experience, cash investing is not a low-risk activity, particularly in the context of the absolute requirements of capital preservation and liquidity. Now is a good time to examine your approach to cash management to ensure that it is meeting your needs and risk tolerance." They also suggest, "Review cash flows and liquidity needs. In an environment of higher volatility and less secondary liquidity, investors should make every effort to ensure the accuracy of their cash flow expectations."
They also advice, "Don't take liquidity for granted. A renewed appreciation for liquidity should be one of the most valuable takeaways from this crisis. Investors can sometimes mistake a first-tier rating for a guarantee of liquidity. The rating agencies' A1/P1 ratings indicate their belief that these issues are 'money good', meaning that investors can expect to receive the face value of the security at maturity. However, that doesn't ensure that the instruments trade at par value day in day out -- or, in fact, that they trade at all -- which can make it difficult or impossible for investors to address their immediate cash needs."
Finally, they say, "Risk aversion is not risk management. While a flight to quality is understandable in this volatile environment, it is possible to overreact and miss attractive investment opportunities. There is little reason other than fear to have core or strategic cash in overnight Treasuries. Your manager should help you find an appropriate course of action given the advantages certain securities now offer due to the government's intervention. For example, debt issued by Fannie Mae and Freddie Mac, while now offering 100% commitment from the U.S. government, can provide better yields than short-term Treasuries, as can the guaranteed bank debt described earlier. Ginnie Mae also continues to offer yields above Treasuries with no issuer risk."
BlackRock adds, "The events of recent months have not inspired a reevaluation of our methods for managing this vital asset class; rather, they have reinforced our commitment to the approach we have employed for more than 30 years. The markets may change, as may our tactics or strategies, but our core values will not."
Federal Reserve Chairman `Ben S. Bernanke testified yesterday before the U.S. House of Representatives' Committee on Financial Services on the "Troubled Asset Relief Program and the Federal Reserve's liquidity facilities." Bernanke detailed the Fed's major support programs in the money market and cited a marked improvement in money market funds and the commercial paper market.
He said, "As I noted earlier, the Federal Reserve has taken a range of policy actions to provide liquidity to the financial system and thus promote the extension of credit to households and businesses. Our recent actions have focused on the market for commercial paper, which is an important source of short-term financing for many financial and nonfinancial firms."
Bernanke continued, "Normally, money market mutual funds are major lenders in the commercial paper markets. However, in mid-September, a large fund suffered losses and heavy redemptions, causing it to suspend further redemptions and then close. In the next few weeks, investors withdrew almost $500 billion from prime money market funds. The funds, concerned about their ability to meet further redemptions, began to reduce their purchases of commercial paper and limit the maturity of such paper to only overnight or other very short maturities. As a result, interest rate spreads paid by issuers on longer-maturity commercial paper widened significantly, and issuers were exposed to the costs and risks of having to roll over increasingly large amounts of paper each day."
"The Federal Reserve has developed three programs to address these problems. The first allows money market mutual funds to sell asset-backed commercial paper to banking organizations, which are then permitted to borrow against the paper on a non-recourse basis from the Federal Reserve Bank of Boston. Usage of that facility peaked at around $150 billion. The facility contributed importantly to the ability of money funds to meet redemption pressures when they were most intense and remains available as a backstop should such pressures reemerge," he explained to Congress.
He continued, "The second program involves the funding of a special-purpose vehicle that purchases highly rated commercial paper issued by financial and nonfinancial businesses at a term of three months. This facility has purchased about $250 billion of commercial paper, allowing many firms to extend significant amounts of funding into next year."
"A third facility, expected to be operational next week, will provide a liquidity backstop directly to money market mutual funds. This facility is intended to give funds confidence to extend significantly the maturities of their investments and reduce over time the reliance of issuers on sales to the Federal Reserve's special-purpose vehicle. All of these programs, which were created under section 13(3) of the Federal Reserve Act, must be terminated when conditions in financial markets are determined by the Federal Reserve to no longer be unusual and exigent," said the Chairman.
Finally, Bernanke said, "The primary objective of these and other actions we have taken is to stabilize credit markets and to improve the access to credit of businesses and households. There are some signs that credit markets, while still quite strained, are improving. Interbank short-term funding rates have fallen notably since mid-October, and we are seeing greater stability in money market mutual funds and in the commercial paper market."
Last Monday, the Federal Reserve Bank of New York announced that "it would begin funding purchases of eligible money market instruments on or about November 24, 2008 through the previously announced Money Market Investor Funding Facility (MMIFF)." It also posted the document "Money Market Investor Funding Facility: Frequently Asked Questions," which "is intended to address operational questions about the Money Market Investor Funding Facility (MMIFF)." (It also posted the program's "Terms and Conditions.) Below we excerpt from the Q&A.
The FRBNY writes, "Why is the Federal Reserve establishing the MMIFF? The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have been increasing their liquidity positions by investing in shorter-term -- frequently overnight -- assets. By facilitating sales of money market instruments in the secondary market, the MMIFF should give money market mutual funds and other money market investors confidence that they can extend the terms of their investments and still maintain appropriate liquidity positions. Greater access to term financing from money market investors will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households."
It asks, "How will the MMIFF work?" and answers, "The Federal Reserve Bank of New York will provide senior secured funding to a series of special purpose vehicles established by the private sector (PSPVs) to finance the purchase of certain money market instruments from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit, bank notes and commercial paper issued by highly rated financial institutions. Assets must be eligible for settlement at the Depository Trust Company and have remaining maturities of at least 7 days and no more than 90 days. Eligible investors will include U.S. 2a-7 money market mutual funds and over time may include other U.S. money market investors."
The Q&A continues, "When will the MMIFF become operational? The New York Fed will begin funding PSPV purchases of eligible money market instruments in connection with the MMIFF on or about November 24, 2008." It also asks, "How big will the MMIFF be? and answers, "The PSPVs [private special purpose vehicles] will be authorized, in total, to purchase a maximum amount of $600 billion in eligible assets. Since the New York Fed will provide 90 percent of the financing of the PSPVs, Federal Reserve lending could total $540 billion."
"Why are only 2a-7 money market mutual funds eligible to sell assets to the PSPVs?" asks another Q&A. It answers, "The MMIFF is designed in large part to provide liquidity to money market mutual funds. The Federal Reserve's decision to establish the MMIFF hinges importantly on the key role money market mutual funds play as a source of short-term credit for financial and nonfinancial corporations. Other types of U.S. money market investors may become eligible investors over time."
Finally, the NY Fed says, "What steps can eligible investors take to participate in the MMIFF? Any eligible investor that seeks to participate in the MMIFF should contact JPMorgan Chase at 212-834-5389 to obtain MMIFF program information, including the list of assets eligible for purchase, required documentation and operating procedures. The documentation will include the Fund Representation Letter and an Asset Allocation Spreadsheet."
With the Federal funds target rate now at 1.0 percent and possibly poised to go lower, many are asking how badly money market mutual fund revenues would be hurt by an additional 1/4-point or 1/2-point rate cut. The answer is not very much by a quarter. But waivers would begin causing pain at one-half of a percent. While we don't believe the Fed will reduce rates below 1.0% for reasons beyond the impact on money funds, we don't believe that another 1/4-point, or even 1/2-percent move, would cause critical damage to money funds' revenue streams.
Using October 31 data from our November Money Fund Intelligence XLS spreadsheet, we ranked the 1,331 money funds tracked by Crane Data from lowest to highest yield. Approximately 79 funds, with $74.7 billion in assets had yields of 0.00% to 0.25%, and 92 funds, with $221.4 billion in assets had yields of 0.26% to 0.50%. These presumably would be the funds impacted by additional rate cuts, though the majority of these funds are Treasury funds. Treasury yields have been abnormally low due to the flight-to-safety, and its unclear whether additional rate cuts would, or could, force Treasury and repurchase agreement rates lower.
Twenty two of the lowest-yielding funds are yielding 0.05% and under. Most of these are likely already waiving some fees, and several funds have even been showing a yield of zero, and one is even showing negative yields. However, these funds represent a miniscule portion of the overall fund universe, and note that funds only must waive the portion of fund expenses in order to keep the yield at zero or just above.
Money funds with yields of 0.25% or lower represent just 2.2% of money fund assets, and funds with yields of 0.26% to 0.50% represent just 6.6% of assets. Crane Data estimates that this 8.8% of money fund assets brings in revenues of $1.3 billion annually, approximately 10.8% of total money fund revenues. A waiver of a full 0.25% on this segment would cost funds about $330 million on an annual basis, just 2.7% of total revenues. Note too that almost all of these highest-expense funds 12b-1 fees, shareholder service fees, or other revenue sharing agreements, and that the intermediaries distributing these 'B', 'C' or 'Service' shares would be expected to share the pain of any fee waivers, and that any waivers would be expected to be temporary and partial.
The bulk of money fund yields remain comfortably above the 1.00% Federal funds target rate. Premiums have been built into the commercial paper markets and LIBOR-related and floating rate products, so money fund yields have much more breather room over Fed funds than they have had historically. So though cuts would be uncomfortable, they would likely not cause critical damage to funds' revenue streams. (To request our most recent Money Fund Intelligence XLS or to request our lowest-yielding funds ranking and analysis, e-mail Pete.)
Consulting firm Treasury Strategies just released a white paper entitled, "Treasury in Transformation: Results of Treasury Strategies' 2008 Global Corporate Treasury and Liquidity Research Program," which, among other things, discusses the liquidity policies and practices of large corporations. TSI's study says, "In response to market turmoil, Treasury is rebalancing its cash portfolios and restructuring its banking relationships. Market turmoil has led Treasurers to reduce portfolio risk, often by moving money out of active investments and into lower risk, passive investments such as money market funds."
The white paper's section on "Liquidity" says, "As noted earlier, liquidity management is a top concern for Treasurers across most regions and turnover segments. In both our consulting work and our research, we've seen that Treasurers have not only rebalanced their portfolios in response to market conditions, but they have also continued to develop their internal liquidity practices to better monitor, aggregate and manage liquidity. Going forward, Treasurers note they will further rebalance their portfolios, which presents opportunities and threats to financial services providers."
It continues, "Corporations in Asia-Pacific proportionally invest the greatest amount in bank deposits, reflecting strong relationships with their banks, less developed secondary markets for fixed income instruments, and the lack of penetration in money market funds.... While the Canadian market has seemed to be a natural fit for money market funds -- which offer efficiency, convenience and risk minimization -- Canadian Treasurers do not heavily invest in funds. We suspect this is due to the focus of the fund companies on the larger market opportunity in the US."
TSI says, "Money market funds represent a growing and significant percentage of Treasury portfolios, as these instruments offer an attractive yield while diversifying or minimizing credit risk exposures. Long a mainstay of cash portfolios of French corporations, money market funds have gained an increasing share of corporate cash throughout the US and Europe, particularly in the UK. In most cases, where money funds have been adopted they displaced direct instruments. The reasons for this are multiple."
"First, money market funds, due to their scale, can aggregate multiple investments into a large portfolio and thus diversify credit and other risk. Secondly, the largest and most competitive money funds can offer attractive yields. Lastly, money funds are a convenient investment option -- many are now easily accessible through both proprietary and non-proprietary online portals and most offer corporations the ability to make purchases and redemptions later in the day, when they have greater certainty as to their cash position." The study adds, "Treasurers select money market funds based on risk, value-added services, advice and convenience.
This month Crane Data's flagship Money Fund Intelligence publication interviewed Calamos Investments' Senior Portfolio Manager and money fund industry veteran Frank Rachwalski, who has been managing money funds for over three decades and oversees the Calamos Government Money Market Fund. Below, we excerpt from Rachwalski's comments about recent market turmoil, events in the government investment space, and the past and future of money market mutual funds.
He first told MFI, "We are glad we made the decision to go with a government fund. It gave an added layer of protection.... If you go back to 2007, you were not getting paid to be in non-government funds. The yield relationship between an institutional government fund and an institutional prime fund was only three to five basis points. Forget it, it is not worth it. You are better off in a government fund. It is the flight to quality instrument."
We asked, "How is the government agency market doing?" Rachwalski says, "The biggest thing is that all markets suffered dislocation. There are wider spreads between bid and ask. It even affected the short government market. What's been very helpful to providing a bid to government securities is that every other money fund has been emphasizing agencies, because they are safe."
Are you buying Treasuries in the fund? "I love the government but not that much, especially if they essentially guarantee Fannie, Freddie and Home Loan." Did they guaranty Home Loan too? "They're part of the same barrel.... They didn't place them in receivership, but there is essentially a U.S. Government backstop." Are there any agencies that people are avoiding? "The one that comes to mind is Federal Agriculture Mortgage Corp. It's an unusual one. You're not quite sure how to treat that one, and it trades a little worse than Home Loan."
What's the portfolio look like in general? "It's rated triple-A by Standard Poor's and Moody's, which places some restrictions on exposures per issuer. You can't go any higher than one-third of assets in any one issuer. But we've been typically running about 25 to 30 percent in most of the agencies, and the rest is repo," says Rachwalski. Does 2a-7 limit diversity to agencies? "It does not. It's the rating agencies that require you to have diversification by issuer in government money funds.... 2a-7 will let you hold an unlimited quantity of any agency."
On his history, Rachwalski, tells us, "I started with Kemper in 1973. We were about a year after Reserve Fund.... We realized that it was a good vehicle to offer, it had a lot of attributes. After we started we were up to $40 billion at one point. It was called Kemper Money Market Fund originally.... Money funds all started out at a buck per share, and we did amortized cost. If my recollection is right, prior to that [the first money fund], in a mutual fund if you kept what they called 'cash investments' of 60 days or under, you could carry them at book value. So there was some precedent for allowing money funds to do that technique."
To request a copy of the full interview, e-mail us at email@example.com.
Moody's Investors Service has issued a new "Special Comment" entitled "Parental Support in Money Market Funds", which indicates that the ratings agency will require complete coverage of impaired assets in the future. The publication says, "Moody's has long considered the ability and willingness of a fund sponsor to provide support to its money market funds to be a key rating factor."
It continues, "Accordingly, prior to a credit event affecting one or more securities held in a money market fund, Moody's assesses both the ability and the willingness of a fund sponsor to support its funds in the event of need, incorporating a range of qualitative and quantitative measures to do so." But, Moody's says, "However, in light of the continued deterioration in the money and capital markets, Moody's has revised some of its views regarding the adequacy of parental support provided by sponsors to their money market funds following a credit event."
Moody's explains, "If a security held by an investment-grade money market fund experiences a credit event, such as a default or rating downgrade, the fund sponsor may need to put in place a mechanism to immunise the fund from the impact of this event and thus maintain the fund's rating. While fund sponsors can achieve this in a number of different ways, two common approaches are: (i) purchasing the security from the fund portfolio at par, or (ii) providing the fund with a letter of credit or guarantee from a highly-rated counterparty (typically rated A2 or above) covering the full par amount of the relevant security. In the latter case, Moody's will review the provisions of the letter of credit or guarantee and compare them with our guidelines to determine the rating impact of such instruments."
The NRSRO explains, "Historical experience has shown the importance of parental support to the achievement of money market fund objectives. Even a well-managed money market fund may experience a drop in mark-to-market NAV as a result of an unexpected credit event or shift in interest rates.... Before the present crisis, there have been many instances when U.S.-domiciled money market funds would have 'broken the buck' or suffered mark-to-market losses of more than 50 bps but for the intervention of their sponsor. In Moody's view, a strong and engaged sponsor is essential to the long-term viability of a money market fund."
The Special Comment says of recent support actions, "When these CSAs [credit support agreements] were put in place, Moody's judged these arrangements to be adequate to preserve fund ratings at investment-grade levels, given our then current assumptions about the likely duration and severity of the credit crisis, the liquidity of fund assets, likely recovery rates of impaired securities and the ability and willingness of fund sponsors to provide additional support if required. However, over the ensuing months the credit crisis has clearly worsened and liquidity remains extremely limited.... As Moody's assumptions about the impact of the crisis on funds have evolved, so has our view of the adequacy of some forms of sponsor support for funds with investment grade ratings." Future credit support will require "suitable credit quality," be "legally binding," and "cover the full par amount of the impaired security" among other criteria.
Finally, Moody's says, "In recent weeks, authorities across the globe have taken steps to improve investor confidence in the financial markets. The U.S. Treasury, for example, has instituted the U.S. Treasury Temporary Guarantee Program, which may reimburse certain shareholders of participating money market funds for losses. In Moody's view, the Program has substantially improved investor confidence in some money market funds, particularly those domiciled in the U.S. However, as the Program is limited in scope and as it takes effect only after a fund experiences a material decline in net asset value or suspends redemptions, Moody's expects its direct impact on money market fund ratings to be limited."
The November issue of our monthly Money Fund Intelligence went out to subscribers earlier today, featuring the stories, "Brighter Outlook Could Forestall MMF Changes," "Calamos Veteran Frank Rachwalski Talks Funds," and "New Support Disclosures, New Type of CSA," as well as our traditional news coverage, performance rankings and tables, and index and benchmarking information. What a difference a month makes!
Crane Data believes that the stabilization and gradual recovery of the money markets and money fund industry makes it less likely there will be any earth-shattering changes to the money fund business, like moving away from the $1.00 share price, or NAV. MFI says, "Of course, the danger hasn't fully abated, and there likely will be changes to the regulations and structure of money market funds. But the biggest changes should come from advisors, who will undoubtedly seek to prevent a repeat of the massive bailout tab run up by their host of credit support actions.
The issue also discusses how some funds are now protecting their portfolios via "blanket" credit support agreements (CSAs), some of which began appearing in the latest batch of SEC "no-action" letters released to advisors. MFI quotes Joan Ohlbaum Swirsky of Stradley Ronon Stevens & Young, "The new variety of Capital Support Agreement can help support the market-based NAV of a fund if the market-based NAV drops to a specified trigger value and the decline results (at least in part) from a decline in the value of the specified holding due to market conditions, rather than due to any impairment of creditworthiness."
Finally, the distribution of performance information in Money Fund Intelligence has never been wider. Some funds experienced zero, and even negative yields in October, while others experienced yields of well over 3.0 percent. To request a sample copy of MFI, MFI XLS, MFI Daily or any of our other products, e-mail firstname.lastname@example.org.
Money market mutual fund assets increased by $21.79 billion to a record $3.608 trillion in the week ended Nov. 5. This marks the first time ICI's money fund asset series has ever broken above the $3.6 trillion mark. Retail assets decreased by $1.45 billion to $1.263 trillion while institutional assets increased by $23.24 billion to $2.345 trillion. Over the past 5 weeks, money fund assets have increased by $160.11 billion, or 4.6%.
General purpose (or "prime") Institutional assets declined for the first time in 4 weeks, by $2.14 billion to $1.053 trillion, though these numbers were distorted downwards by Reserve Primary's huge payment this week. Government (including Treasury) Institutional funds increased for the eighth week in a row, rising $23.86 billion to $1.103 trillion. Govt Inst funds have increased by $409.57 billion over the past 10 weeks. Tax Exempt Institutional assets increased by $1.52 billion to $188.57 billion.
General purpose Retail assets declined by $409 million to $700.08 billion, while Government Retail assets declined by $3.27 billion to $262.34 billion. Tax Exempt Retail assets increased by $2.23 billion to $300.66 billion in the week ended Wednesday. Year-to-date, total money fund assets have increased by $463 billion, or 14.7%. Over 52 weeks, money fund assets have increased by $594 billion, or 19.7%.
Over the past week (through Wednesday), the average yield on money market funds, as measured by our Crane Money Fund Average, fell by 18 basis points to 1.58%. Our Crane 100 Money Fund Index fell by 19 bps to 1.97%. Our Crane Tax-Exempt Money Fund Index fell 30 bps to 1.40%.
The spread between Treasury, Government and Prime funds remains at historic highs with approximately a full percentage point of yield separating each category. Prime Institutional funds yield 2.38%, Government Institutional funds yield 1.41%, and Treasury Inst funds yield 0.45% (7-day simple yield as of Wednesday according to Money Fund Intelligence Daily). Prime Individual funds yield 2.08% vs. 1.24% for Govt Individual and 0.27% for Treas Individual funds.
Note: The November issues of Money Fund Intelligence, MFI XLS, and Crane Index will be sent out to subscribers Monday morning, Nov. 10.
In a recent release from London entitled, "Moody's highlights regulatory action on 'shadow pricing' of money funds," the ratings agency said, "The US Securities and Exchange Commission and the Irish Financial Services Regulatory Authority have separately announced modifications to their regulation of the money market funds that would permit funds, on an interim basis, to apply amortized cost accounting for calculating prices of underlying securities, subject to important conditions. Specifically, the two authorities have reiterated the continuing obligations on the funds' boards of directors or fund directors, as the case may be, to first assess and then decide on the calculation method, amortized value or marked-to-market, used by the fund in determining the shadow prices of certain eligible securities. Eligible securities are defined as those with short term maturities (60 days or fewer and 90 days or fewer for the US and Irish based funds, respectively); and which the fund expects to hold in its portfolio until maturity."
It adds, "Moody's recognizes that boards of directors have a legitimate concern in assessing the economic value of assets that the fund intends to hold until maturity. In the case that amortized-cost accounting is being used by a fund, Moody's would expect to receive such valuations, and the rationale for using such method, and will include these in its analysis. However, while the economic value is an important consideration, in times of stress the liquidation price may be more relevant. This is especially true given the risk that disruptive market conditions may lead simultaneously to accelerated redemptions and realized losses on forced sales of securities. In order to dimension these risks, Moody's will continue to request from rated funds information on the marked-to-market value of all securities held in their portfolios and will use that information in its analysis."
Moody's also recently assigned a Aaa rating to Tamarack Prime Money Market Fund. Its release says, "The fund, managed by Voyageur Asset Management Inc., commenced operations in 1991, and as of October 15 has $10.2 billion in assets. The Aaa rating reflects not only the fund portfolio's high quality of investments, but also Voyageur's conservative risk-controlled investment approach and effective liquidity management. In addition, the adviser benefits from very experienced portfolio management and research teams. Voyageur has avoided all credit and liquidity issues over the last year.... Tamarack Prime is a retail fund with a very diversified client base, sourced primarily from RBC's wealth management and corporate trust clients, and fund net assets have been stable-to-growing."
The Investment Company Institute, the trade association representing mutual funds, announced that it has formed a "Money Market Working Group," a panel of "fund industry leaders with a broad mandate to develop recommendations to improve the functioning of the money market and the operation and regulation of funds investing in that market."
ICI's press release says, "The Money Market Working Group will make recommendations to minimize risks and help assure the orderly functioning of this vitally important market. The group will identify needed improvements in market and industry practices; regulatory reforms, including improvements to SEC rules governing money market mutual funds; and possibly legislative proposals. The Working Group expects to report its recommendations in the first quarter of 2009."
The new group will be chaired by John J. Brennan, Chairman of the Vanguard Group. The "Working Group intends to consult with a wide range of constituencies, including issuers of and dealers in money market instruments; sponsors of pooled funds that invest in the money market, including managers and independent directors of money market mutual funds regulated by the Securities and Exchange Commission under the Investment Company Act; institutional investors in money funds, as well as financial advisers to individuals who rely on them for cash management; current and former federal regulators; and other experts."
"Events in September and October underscore the vital role that the money market plays in the nation's economy as a source of financing for U.S. businesses, financial institutions, consumers, and municipalities," said Brennan. "Unprecedented actions by the Federal Reserve and the Department of the Treasury have been required to keep this market liquid and functioning. It is important that we learn from our recent experience. We hope to offer concrete, positive suggestions to improve the way the money market functions and the way money market funds operate."
ICI's release continues, "In recent months, Brennan has headed an informal group of fund industry executives that has worked with the Federal Reserve, Treasury, and SEC to address conditions in the money market affecting money market mutual funds and their shareholders. With approximately $3.4 trillion in assets, money market mutual funds finance more than 40 percent of commercial paper, one-fifth of marketable Treasury bills, and almost one-fifth of municipal securities."
"I am grateful to Jack Brennan for leading this effort," said John V. Murphy, Chairman of ICI and Chairman and CEO of Oppenheimer Funds. "Money market mutual funds have served investors successfully for thirty years. I look forward to the Working Group's recommendations about what steps should be taken, in light of recent events, to assure that they continue to do so."
Other members of the Money Market Working Group include: James H. Bodurtha, Independent Director, BlackRock Funds; Richard S. Davis, Managing Director, BlackRock; Mark R. Fetting, CEO & President, Legg Mason; Martin L. Flanagan, President & CEO, `Invesco; George C.W. Gatch, President & CEO, J.P. Morgan Funds; John W. McGonigle, Vice Chairman and Chief Legal Officer, Federated Investors; James A. McNamara, President & CEO, Goldman Sachs Mutual Funds; Randall W. Merk, Executive Vice President, Charles Schwab & Co.; Paul Schott Stevens, President & CEO, Investment Company Institute; and Michael Wilens, Head of Asset Management, Fidelity Investments.
Advisers to the MMWG include: Deborah Cunningham, CFA, Senior Vice President, Senior Portfolio Manager, Federated Inv.; John T. Donohue, Managing Director and Chief Investment Officer for Global Liquidity, JPMorgan Asset Management; Karen Dunn Kelley, CEO, Invesco Worldwide Fixed Income; Kevin Kennedy, Portfolio Manager, Western Asset Management; Mary J. Miller, Managing Director. T. Rowe Price Associates; and Charles Morrison, Head of Fixed Income Money Markets, Fidelity Inv..
Below, we list the 20 largest money market mutual funds, as of Sept. 30, 2008, and their asset changes over 1-month, 3-months, YTD, and 12-months. This table is compliments of our quarterly Money Fund Intelligence Distribution Survey. It includes: Name (Symbol), Assets as of 9/30/08 (in $ millions), 1-Mo Change, 3-Mo Change, YTD Change, and 12-Mo Change (in millions).
The 20 largest money market mutual funds are:
|Fidelity Cash Reserves||FDRXX||128,080||460||4,730||16,980||23,170|
|Vanguard Prime MMF||VMMXX||89,627||-2,856||-2,236||-500||4,668|
|JPMorgan Prime MM Cap||CJPXX||50,124||-11,159||-2,843||2,139||-496|
|Schwab Value Adv MF Inv||SWVXX||39,883||-5,396||-5,337||-2,196||1,465|
|BlackRock Lq TempFund In||TMPXX||35,961||-20,701||-20,234||-6,476||-5,928|
|Wells Fargo Adv Govt MM I||GVIXX||32,610||11,516||13,372||14,126||19,870|
|JPMorgan US Govt MM Cap||OGVXX||31,114||17,009||16,288||19,428||23,039|
|Schwab US Treasury Money||SWUXX||30,266||15,604||17,246||20,336||22,746|
|Schwab Cash Reserves Fund||SWSXX||29,150||-385||850||3,630||7,510|
|Fidelity Instit MM Port I||FMPXX||28,290||-2,740||60||-2,410||-3,310|
|Citi Inst Treasury Res A||CIIXX||27,514||15,058||17,284||21,744||23,392|
|Goldman Sachs FS Prm Ob I||FPOXX||27,391||-20,379||-19,223||-8,782||-4,197|
|Vanguard Admiral Treasury||VUSXX||27,227||3,938||5,676||6,792||7,548|
|Fidelity Inst MM: Govt I||FIGXX||26,870||8,190||7,790||12,660||18,280|
|Goldman Sachs FS Trs In I||FTIXX||26,345||10,526||14,290||17,077||21,515|
|Federated Governmnt Ob IS||GOIXX||25,474||4,968||4,713||7,272||13,617|
|Goldman Sachs FS Govt In||FGTXX||25,321||8,027||7,964||15,399||16,234|
|Fidelity Municipal MM Fnd||FTEXX||24,130||390||1,650||2,200||5,540|
|Western Asset Money Mkt A||SBCXX||23,405||-4,438||-8,958||-5,995||-5,496|
|Vanguard Tax Exempt MMF||VMSXX||23,395||-570||4||455||1,951|
As institutional investors return to prime money market funds and as advisors ponder the future, and the damage done to money fund reputations by The Reserve's breaking-of-the-buck, new money market mutual fund filings and launches continue unabated. Using Stategic Insight's SimFundFiling, a program for searching the SEC's EDGAR database, Crane Data has located 20 new filings for money market funds over the past 60 days. Over half of the new filings are for Treasury and Government money market funds.
The latest three, filed Oct. 29, 2008, are: American Performance US Treasury - Premier, American Perf Cash Mgmt - Premier, and American Perf TxFr MM - Premier. These new funds are managed by Bank of Oklahoma subsidiary Cavanal Hill Investment Management and carry an expense ratio of 0.95% (which includes a 0.75% 12b-1 fee).
JPMorgan Asset Management filed (on Oct. 16) to launch new Service classes for four funds -- JPMorgan 100% US Treasury MM Service, JPMorgan CA Muni MM Service, JPMorgan NY Muni MM Service, and JPMorgan US Treas Plus MM Service. These funds have $10 million minimums and 1.05% expense ratios. And Charles Schwab Investment Management filed for new "Purchase" classes of its Schwab Government Money and Schwab US Treasury Money on Oct. 3. The Schwab funds have minimums of $2,500 and expense ratios of 0.60%.
Recent Government and Treasury new money fund filings include: ING US Government MMF, run by ING Investments (Classes A, C, O, I, filed 10/15/2008); Gabelli US Treas MM - Class A (with what appears to be a 0.08% expense ratio) and Class C, run by Gabelli Asset Management Co (10/14/2008), RVS US Government MMF, run by RiverSource Investments (10/8/2008), and PIMCO Government MMF and PIMCO Treasury MMF, run by PIMCO LLC (10/3/2008). The PIMCO funds will offer Class M, Adm, and P shares with $5 million minimums, a Class D with a $5,000 minimum, and a Class R with no minimum. The Adm, D, and R class will charge 0.25%, while the M and P classes appear to be internal with no expenses.
Other filings include: Tamarack Prime Money Market, Tamarack US Govt MM, and Tamarack Tax-Free MM - Instl 2, Select, Reserve, and Investor classes, managed by Voyageur Asset Management (9/22/2008); AIM Money Market and Tax-Exempt Cash - Class Y, managed by Invesco Aim Advisors (9/22/2008), and DWS TaxFree Money Mkt - Institutional, managed by Deutsche Investment Mgmt (9/12/2008).