Money Market News
Federal Reserve Chairman Ben Bernanke testified on "The Economic Outlook before Congress' Joint Economic Committee. While he didn't give much hope that rates would be rising anytime soon, he did offer hope that the Fed would begin withdrawing its special accommodations soon and again recognized the severe plight of savers. He says, "With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy. Normally, the Committee would provide policy accommodation by reducing its target for the federal funds rate, thus putting downward pressure on interest rates generally. However, the federal funds rate and other short-term money market rates have been close to zero since late 2008, so the Committee has had to use other policy tools."
Fitch Ratings published its latest update on money fund portfolio holdings, "U.S. Money Fund Exposure and European Banks: Eurozone Rebounds," yesterday, along with a press release, entitled, "Fitch: U.S. Money Funds Return to Eurozone Banks." The release tells us, "U.S. prime money market funds (MMFs) increased their exposure to Eurozone banks in April, although asset allocations to these institutions remain well below 2011 levels, according to Fitch Ratings.As of end-April 2013, MMF allocations to eurozone banks represented 15.1% of assets under management within Fitch's sample of the 10 largest U.S. prime money funds, a 14% increase over the prior month. MMFs' eurozone allocations have almost doubled since end-June 2012, a sign of improving investor sentiment toward the region. This resumption in eurozone allocations also suggests that the March decline was a tentative retreat given the brief market uncertainty after the Cyprus banking system failure." (See also: Crane Data's May 13 News, "Repo Regains No. 1 Spot in April 30 Portfolio Holdings, CDs Again 2nd".)
In late April, we excerpted from the Financial Stability Oversight Council's (FSOC's) "2013 Annual Report," which contained a section on "Money Market Funds" (see our April 26 News "FSOC Report Comments on MMF Reform, Will Stand Down if SEC Moves"). Today, we reprint the report's sections on "Wholesale Funding Markets." FSOC writes, "Short-term wholesale funding markets provide financial intermediaries with funds that supplement retail deposits and long-term debt issuance. These funds include large time deposits, certificates of deposit, repurchase agreements (repos), and commercial paper. Sources of funds in these markets are largely wholesale cash pools, including cash on the balance sheets of nonfinancial companies, reinvestments of cash collateral from securities lending, and cash held by long-term mutual funds, money market mutual funds, pension funds, and sovereign wealth funds. These sources of funds have grown markedly as a percentage of GDP over the past two decades, although this percentage has been declining since early 2008 [note: references to charts have been removed in our excerpt, but see pages 64-67]. Cash on nonfinancial corporate balance sheets, in particular, has been growing at an accelerating rate, a pattern that continued through the fourth quarter of 2012."
Below, we excerpt the second half of our May Money Fund Intelligence profile, "Dreyfus Still Roaring at 40 Years; Cardona & Larkin," an interview with Charles Cardona, Chief Executive Officer of BNY Mellon Cash Investment Strategies (CIS) and President of The Dreyfus Corporation, and Patricia Larkin, CIO of the Dreyfus CIS Money Market Mutual Funds.... MFI: What are funds buying now? Larkin: We continue to buy the largest and best-of-class institutions. We have had to adjust to those issuers no longer in the marketplace. Issuance has shifted away from traditional commercial paper borrowers to larger institutional wholesale funding and asset-backed commercial paper programs. We are active in following all 2a-7 eligible securities with a dedicated team of credit research and risk analysts who assist us in maintaining a robust approval list. We remain very disciplined and focused on ample liquidity both in the levels we elect to run and the quality in which we invest.
Federated Investors, the third largest manager of money funds with $233 billion (according to our Money Fund Intelligence XLS), published the brief, "SEC rulemaking: A lengthy process Wednesday. It says, "Recent news articles report that the staff of the Securities and Exchange Commission (SEC) sent the agency's five commissioners a draft release proposing new rules for money market mutual funds (MMFs). While SEC rulemaking generally does not have a typical timeline, Federated thought it helpful to outline the process to illustrate how any potential rule change might be adopted and implemented."
Today, we excerpt from the latest issue of our Money Fund Intelligence newsletter.... For our May issue, MFI interviews Charles Cardona, Chief Executive Officer of BNY Mellon Cash Investment Strategies (CIS) and President of The Dreyfus Corporation, and Patricia Larkin, CIO of the Dreyfus CIS Money Market Mutual Funds. The two joined Dreyfus in the early 1980's. Dreyfus, which launched its flagship retail fund, Dreyfus Liquid Assets, in early 1974, is approaching its 40th birthday in the money fund business. We discuss the company's history, current events, and a number of money fund related issues below.
As we mentioned in yesterday's "Link of the Day," Fitch Ratings released the report, "U.S. Corporate Cash Part I: Growth at an Inflection Point?" earlier this week. Today, we highlight more of the paper. Fitch writes, "Much has been made about the high levels of cash held by corporations, which have risen substantially over the past decade, as illustrated by the chart below [it show U.S. nonfinancial corporate cash holdings rising from under $0.4 trillion in 2000 to just under $1.0 trillion in 2008 and to almost $1.5 trillion in 2012], which shows total cash and short-term marketable securities of our very large sample. However, merely examining cash levels in the aggregate does not tell us much about their nature, distribution and future use."
Moody's Investor Service published a "Special Comment" entitled, "Money Market Funds and Regulatory Reform: A Business Model Hangs in the Balance" yesterday, which says, "Recent changes in market dynamics, and particularly low interest rates, constrained asset supply, regulatory scrutiny and evolving investor preferences have begun to transform the liquidity and investment characteristics of money market funds (MMFs). We expect that additional and more substantial regulatory change will provide further protections to MMF investors and reduce systemic risk, but at the same time lead to a reshaping of the industry, as some funds close or consolidate, and some of the smaller MMF managers either exit the business or reassess their business models. In addition, the potential transformation of the traditional constant net asset value (CNAV) MMF product would have a significant impact on the overall liquidity product landscape, investor preferences and industry composition."
Crane Data released its May Money Fund Portfolio Holdings late last week, and our collection for the month ended April 30, 2013, shows Repurchase Agreements (repos) rebounding sharply to regain their spot as the largest segment of money fund holdings from Certificates of Deposit (CDs). Money market securities held by Taxable U.S. money funds overall decreased by $9.9 billion in April (after falling $34.6 billion in March) to $2.351 trillion. (Note that our Portfolio Holdings collection is a separate series from our monthly Money Fund Intelligence XLS totals and from our MFI Daily universe.) As usually happens during the first month of a new quarter, Repos jumped (by over $50 billion) while Treasuries, CDs and Other (which includes Time Deposits) securities plunged. Repo regained its spot as the largest holding among taxable money funds, followed by CDs, Treasuries, CP, Agencies, Other, and VRDNs. Money funds' European-affiliated holdings (including repo) rebounded to just above the 30% level on the jump in repo and drop in U.S. Treasuries. Below, we review our latest portfolio holdings aggregates.
Federal Reserve Chairman Ben Bernanke spoke today a the Federal Reserve Bank of Chicago on "Monitoring the Financial System" and mentioned money market funds on a couple of occasions. He says, "Shadow banking, a second area we closely monitor, was an important source of instability during the crisis. Shadow banking comprises various markets and institutions that provide financial intermediation outside the traditional, regulated banking system. Shadow banking includes vehicles for credit intermediation, maturity transformation, liquidity provision, and risk sharing. Such vehicles are typically funded on a largely short-term basis from wholesale sources. In the run-up to the crisis, the shadow banking sector involved a high degree of maturity transformation and leverage. Illiquid loans to households and businesses were securitized, and the tranches of the securitizations with the highest credit ratings were funded by very short-term debt, such as asset-backed commercial paper and repurchase agreements (repos). The short-term funding was in turn provided by institutions, such as money market funds, whose investors expected payment in full on demand and had little tolerance for risk to principal."
The Federal Reserve Bank of New York published the research paper, "The Risk of Fire Sales in the Tri-Party Repo Market" earlier this week. The Abstract says, "This paper studies the risk of "fire sales" in the tri-party repo market, a large and important market where securities dealers find short-term funding for a substantial portion of their own and their clients' assets. We distinguish between fire sales of assets by a dealer who, facing a run that could lead to default, sells securities to generate liquidity, and fire sales of assets by repo investors after a dealer's default has occurred. While fire sales do cause damage no matter how they arise, the tools available to lessen the harm from the two types of fire sales are different. We find that limited tools are available to mitigate the risk of pre-default fire sales and that no established tools currently exist to mitigate the risk of post-default sales."
J.P. Morgan Securities released a special "Short-Term Fixed Income Markets Research Note" yesterday, entitled, "Beyond money markets: An overview of short-term bond fund strategies." The update, written by Alex Roever, Teresa Ho, and Chong Sin, says, "Short duration funds have been one of the most popular investment products over the last few years. Demand has been driven by zero rate fatigue from money market fund investors seeking higher yielding products offering principal stability and limited mark-to-market volatility and more recently, from some longer duration investors who are cautious about the potential for rising rates. In this note, we provide an overview of short duration open-end mutual fund and exchange traded fund (ETF) flows, performance, and asset allocation. We note that short duration mutual funds and ETFs are mainly retail products. Institutional investors often utilize separately managed accounts, typically using similar strategies but for which there is extremely limited data currently."
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