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Today, we excerpt from the March issue of Crane Data's new publication, Bond Fund Intelligence, which tracks the bond fund marketplace with a focus on the ultra-short and most conservative segments. Our latest monthly "profile" follows.... This month, Bond Fund Intelligence interviews Managing Director & Portfolio Manager Dave Martucci and Managed Reserves Investment Policy Committee Chairman and Risk Manager Saad Rehman from JPMorgan Asset Management. Martucci runs the $6 billion JPMorgan Managed Income Fund, which is the largest fund we currently track in our Conservative Ultra Short Bond Fund category, and Rehman has been instrumental in the creation of our new "Conservative" category. We discuss risk management, the growing demand for short-term products, and conservative ultra short’s place within a cash segmentation strategy, below.
BFI: How long have you been involved in the conservative ultra short bond space? Martucci: JPMorgan Chase & Co. has been managing money for corporations, governments, endowments, foundations, and individuals worldwide for well over a century. Currently, J.P. Morgan Asset Management has $1.7 trillion in AUM, around 25% of which is in our Global Liquidity business, which we've been in for over 30 years. Within the Global Liquidity business we manage cash and money market fund portfolios, as well as our conservative ultra short bond fund offering, which we call the Managed Reserves strategy.
The strategy dates back to 2004 and currently has $43 billion in AUM. Of that, around $9B is in mutual funds and the remainder is in separately managed accounts. Within the Managed Reserves strategy is the JPMorgan Managed Income Fund (JMGIX), which was launched in 2010 and now has $6B, an all-time high. I'm the lead portfolio manager and head of our Managed Reserves trading desk. I have 15 years of experience running liquidity strategies, and I've also been a portfolio manager for short duration and intermediate portfolios.
Rehman: I am a Risk Manager and Chairman of the Managed Reserves Investment Policy Committee, which formulates and approves investment policies and procedures as they relate to credit, market, and other risks applicable to the investment management of these funds and accounts. I've worked at JPM for 10 years.
BFI: How has the fund been received? Martucci: We've seen a significant amount of interest recently, as clients continue to be challenged by the Fed's zero interest rate policy. Additionally, they now face the prospect of floating NAVs on the short end and rising rates on the long end. These clients are looking for some incremental return over money market funds, but they still want a conservative approach. Rehman: In the wake of the financial crisis, a lot of clients built up large cash positions on their balance sheets. This excess cash, combined with an effective segmentation strategy, has been driving growth in this space. A natural place to put a strategic cash position to work is in a conservative solution that offers an incremental return over money funds.
Martucci: This is where the Managed Reserves strategy comes in, as it was a natural extension of our well-established money market fund platform, leveraging the best practices and procedures that we employ in that platform. For instance, an approved credit list that you typically find in a money market fund has been built upon and expanded, serving as a key piece of our Managed Reserves strategy. Since the strategy launched, these conservative foundations have enabled Managed Reserves to provide a strong track record of consistent returns over money market funds, with very limited volatility. Since inception, the Managed Reserves composite has had no period of rolling three-month losses. Fund assets are at an all-time high.
BFI: What are the biggest challenges for funds in the conservative space? Martucci: The main issue that we see is the variability of funds in this category. The issue comes from trying to define what that conservative ultra short space is. We're happy that industry leaders such as Crane and others are starting to focus on this and trying to establish it as a category of its own. Clearly, the space is somewhere between money market funds and short duration. We believe that the conservative ultra short space is not determined solely by interest rate duration, but also by spread duration, credit selection, the type of securities these funds can and do choose to hold and, most importantly, the volatility of performance. We address all these factors through robust risk management.
Rehman: What clients are looking for in this space is not just returns, but the risk associated with those returns. We have seen a period of low volatility over the past few years, which we think is masking some of the potential downside. We expect to see more volatility, potentially due to diverging central bank actions, regulations for money market funds and banks, as well as geopolitical risk. With volatility, we expect that we'll start to see divergence in performance for these conservative ultra short funds. One of the factors driving that divergence will be credit selection in these funds. For example, some funds in the ultra short space actively participate in below investment grade credit while others, like JPMorgan Managed Income, do not.
There are many ways you can analyze the risk and returns of funds in the ultra short space. For example, when you look at the average monthly returns of these funds they are somewhat clustered tightly around a mean -- whereas there's a much wider range when you look at the volatility of those returns. Another way to get a general sense of how risky a fund's returns are is to compare the percentage of negative monthly returns over a period, such as the past 12 or 36 months. You can see that the percentage for some funds is almost double that of others in the space. (Note: Watch for more excerpts from our latest BFI "profile" in coming days, or contact us to see the full issue of our new Bond Fund Intelligence.)
Crane Data released its March Money Fund Portfolio Holdings late yesterday, and our latest collection of taxable money market securities, with data as of Feb. 28, 2015, shows a jump in Repo and CP, and drops in VRDNs, Agencies, Treasuries, CDs, and Other. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) decreased by $52.1 billion to $2.473 trillion in February, after increasing by $5.6 billion in January, $68.3 billion in December, $11.5 billion in November, and $4.7 billion in October. CDs remained in the top spot as the largest portfolio segment among taxable money market funds, ahead of Repos. CP moved into third place, jumping ahead of Treasuries. Agencies were fifth, followed by Other (Time Deposits) and VRDNs. Money funds' European-affiliated securities represented 29.1% of holdings, down from 29.3% the previous month, while the Americas' market share fell slightly to 58.5% from 58.8%. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Certificates of Deposit (CDs) were down $7.4 billion (1.3%) to $549.0 billion, or 22.2% of assets, after increasing $28.0 billion in January and dropping $34.8 billion in December. Repurchase agreements (repo) increased $10.8 billion (2.1%) to $531.7 billion, or 21.5% of assets, after dropping $141.5 billion in January and increasing $140.3 billion in December. Commercial Paper (CP) moved up to the third largest segment, jumping $8.2 billion (2.1%) to $397.4 billion, or 16.1% of assets.
Treasury holdings, the fourth largest segment, dropped $8.2 billion (2.0%) to $395.4 billion, or 16% of assets, while Government Agency Debt remained in fifth, decreasing $42.9 billion (11.1%) to $342.3 billion, or 13.8% of assets. Other holdings, which include primarily Time Deposits, dropped $2.4 billion to $236.7 billion, or 9.6% of assets. VRDNs held by taxable funds decreased by $10.3 billion to $20.0 billion (0.8% of assets).
Among Prime money funds, CDs still represent over one-third of holdings with 35.6% (up from 35.3% a month ago), followed by Commercial Paper (25.8%). The CP totals are primarily Financial Company CP (15.7% of holdings) with Asset-Backed CP making up 5.5% and Other CP (non-financial) making up 4.6%. Prime funds also hold 5.1% in Agencies (down from 6.3%), 4.4% in Treasury Debt (up from 4.2%), 4.3% in Other Instruments, and 6.2% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.540 trillion (down from $1.577 trillion last month), or 62.3% of taxable money fund holdings' total of $2.525 trillion.
Government fund portfolio assets totaled $468 billion in February, down from $472 billion in January, while Treasury money fund assets totaled $465 billion in February, down from $476 billion at the end of January. Government money fund portfolios were made up of 55.8% Agency Debt, 22.4% Government Agency Repo, 2.6% Treasury debt, and 18.7% in Treasury Repo. Treasury money funds were comprised of 67.8% Treasury debt, 31.0% Treasury Repo, and 1.2% in Government agency, repo and investment company shares.
European-affiliated holdings fell $19.9 billion in February to $719.0 billion (among all taxable funds and including repos); their share of holdings fell to 29.1% from 29.3% the previous month. Eurozone-affiliated holdings fell $10.8 billion to $399.3 billion in February; they now account for 16.2% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $5.8 billion to $305.8 billion (12.4% of the total). Americas related holdings plunged $38.0 billion to $1.445 trillion, and now represent 58.5% of holdings.
The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (up $19.2 billion to $286.7 billion, or 11.6% of assets), Government Agency Repurchase Agreements (down $5.0 billion to $157.8 billion, or 6.4% of total holdings), and Other Repurchase Agreements (down $3.3 billion to $87.1 billion, or 3.5% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $9.8 billion to $241.2 billion, or 9.8% of assets), Asset Backed Commercial Paper (down $5.7 billion to $85.4 billion, or 3.5%), and Other Commercial Paper (up $4.2 billion to $70.8 billion, or 2.9%).
The 20 largest Issuers to taxable money market funds as of Feb. 28, 2015, include: the US Treasury ($396.2 billion, or 16.0%), Federal Home Loan Bank ($203.6B, 8.2%), Federal Reserve Bank of New York ($160.9B, 6.5%), BNP Paribas ($69.3B, 2.8%), Wells Fargo ($69.1B, 2.8%), Credit Agricole ($69.0B, 2.8%), JP Morgan ($57.8B, 2.3%), Bank of Tokyo-Mitsubishi UFJ Ltd ($55.5B, 2.2%), RBC ($55.2B, 2.2%), Federal Home Loan Mortgage Co ($54.2B, 2.2%), Bank of Nova Scotia ($53.4B, 2.2%), Bank of America ($47.6B, 1.9%), Natixis ($45.6B, 1.8%), Sumitomo Mitsui Banking Co ($45.1B, 1.8%), Toronto-Dominion Bank ($43.3B, 1.7%), Federal Farm Credit Bank ($42.1B, 1.7%), Barclays PLC ($41.9B, 1.7%), Federal National Mortgage Association ($39.8B, 1.6%), Credit Suisse ($38.9B, 1.6%), and DnB NOR Bank ASA ($38.7B, 1.6%).
In the repo space, Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest program with $160.9B, or 30.3% of the repo market, down fractionally from 30.6% a month ago. Of the $160.9B, $117.7 billion, or 73.2%, was in Overnight Repo, while $43.1 billion, or 26.8% was in Term Repo. The 10 largest Repo issuers (dealers) (with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($160.9B, 30.3%), Bank of America ($38.5B, 7.2%), BNP Paribas ($37.9B, 7.1%), Wells Fargo ($34.1B, 6.4%), Credit Agricole ($30.0B, 5.7%), Societe Generale ($28.1B, 5.3%), JP Morgan ($22.8B, 4.3%), Barclays PLC ($21.1B, 4.0%), Citi ($20.2B, 3.8%), and Credit Suisse ($19.3B, 3.6%).
The 10 largest issuers of CDs, CP and Other securities (including Time Deposits and Notes) combined include: Bank of Tokyo-Mitsubishi UFJ Ltd ($48.9B, 4.6%), Sumitomo Mitsui Banking Co ($45.1B, 4.3%), Credit Agricole ($39.0B, 3.7%), DnB NOR Bank ASA ($38.7B, 3.7%), RBC ($38.6B, 3.7%), Toronto-Dominion Bank ($38.3B, 3.6%), Bank of Nova Scotia ($37.9B, 3.6%), Natixis ($37.6B, 3.6%), Wells Fargo ($34.9B, 3.3%), and JP Morgan ($34.6B, 3.3%).
The 10 largest CD issuers include: Bank of Tokyo-Mitsubishi UFJ Ltd ($38.6B, 7.1%), Toronto-Dominion Bank ($37.4B, 6.9%), Sumitomo Mitsui Banking Co ($37.0B, 6.8%), Bank of Nova Scotia ($31.5B, 5.8%), Mizuho Corporate Bank Ltd ($29.5B, 5.4%), Bank of Montreal ($26.3B, 4.8%), Wells Fargo ($26.1B, 4.8%), Rabobank ($24.9B, 4.6%), Natixis ($20.7B, 3.8%), and Sumitomo Mitsui Trust Bank ($19.5B, 3.6%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: JP Morgan ($23.9B, 7.1%), Commonwealth Bank of Australia ($17.5B, 5.2%), Westpac Banking Co ($16.7B, 5.0%), RBC ($15.9B, 4.8%), Lloyds TSB Bank PLC ($14.3B, 4.3%), National Australia Bank Ltd ($11.9B, 3.5%), Australia & New Zealand Banking Group Ltd ($10.6B, 3.2%), Toyota ($10.1B, 3.0%), BNP Paribas ($9.6B, 2.9%), and Barclays PLC ($9.0B, 2.7%).
The largest increases among Issuers include: Wells Fargo (up $9.6B to $69.1B), Lloyds TSB Bank PLC (up $8.5B to $27.0B), Skandinaviska Enskilden Banken AB (up $3.0B to $31.5B), Goldman Sachs (up $2.9B to $13.4B), Bank of America (up $2.5B to $47.6B), Sumitomo Mitsui Trust Bank (up $2.4B to $21.0B), Norinchukin Bank (up $2.3B to $12.6B), Canadian Imperial Bank of Commerce (up $2.3B to $18.3B), ING Bank (up $2.2B to $28.9B), and Sumitomo Mitsui Banking Co. (up $2.0B to $45.1B).
The largest decreases among Issuers of money market securities (including Repo) in February were shown by: Federal Home Loan Bank (down $24.5B to $203.6B), Federal National Mortgage Association (down $9.1B to $39.8B), Federal Home Loan Mortgage Co. (down $8.2B to $54.2B), Nordea Bank (down $7.9B to $20.6B), US Treasury (down $7.4B to $396.2B), Citi (down $7.3B to $33.8B), Svenska Handelsbanken (down $6.5B to $23.5B), Standard Chartered Bank (down $5.1B to $15.9B), KBC Group NV (down $5.0B to $9.5B), and Natixis (down $4.4B to $45.6B).
The United States remained the largest segment of country-affiliations; it represents 49.3% of holdings, or $1.219 trillion (down $44B). France (10.3%, $255.4B) stayed in second, followed by Canada (9.0%, $222.8B) in third. Japan (7.5%, $186.4B) remained in fourth, while the U.K. (4.9%, $121.5B) was fifth. Sweden (4.3%, $105.6B) was sixth, followed by Australia (3.6%, $89.9B) in seventh. The Netherlands (3.0%, $75.0B), Switzerland (2.2%, $53.8B), and Germany (2.1%, $50.6B) round out the top 10 among country affiliations. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Feb. 28, 2015, Taxable money funds held 25.5% of their assets in securities maturing Overnight, and another 15.1% maturing in 2-7 days (40.6% total matures in 1-7 days). Another 19.9% matures in 8-30 days, while 12.3% matures in 31-60 days. Note that almost three-quarters, or 72.7% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 11.6% of taxable securities, while 12.0% matures in 91-180 days and just 3.7% matures beyond 180 days.
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Tuesday, and our MFI International "offshore" Portfolio Holdings and Tax Exempt MF Holdings will be released later this week. Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports or our new Holdings Reports Issuer Module.
The March issue of Crane Data's Money Fund Intelligence was sent out to subscribers Friday morning. The latest edition of our flagship monthly newsletter features the articles: "Money on the Move? Keeping Up With Pending Changes," which estimates how much money will shift to various fund types and discusses other changes in the money fund world; "JP Morgan Sticks to Program; Announces Lineup Changes," about how JP Morgan is standing pat with its large Prime Institutional fund; and "Max 60-Day Maturity Funds: Federated Goes Its Own Way," a look at how Federated is changing its fund lineup with 60-Day maximum maturity funds. We also updated our Money Fund Wisdom database query system with Feb. 28, 2015, performance statistics, and sent out our MFI XLS spreadsheet shortly. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our March Money Fund Portfolio Holdings are scheduled to go out on Tuesday, March 10, and our March Bond Fund Intelligence is scheduled to ship next Friday, March 13.
The lead article in the latest issued of MFI is "Money on the Move? Keeping Up With Pending Changes." It says, "If the first couple of months of the year are any indication, 2015 will be filled with changes in the money fund world. As we have written about in MFI and on www.cranedata.com, money fund managers are not wasting any time getting ready for SEC reforms, which kick in October 2016. New funds are being announced, old funds are being converted, and that means money will be moving -- some in, some out, and some shuffling within. Let's take a look at the some of the recent changes and possibilities."
On the "Prime to Government Shift," the article comments, "Fidelity announced in late January that it was converting three Prime Retail MMFs to Government MMFs, including the largest money fund, the $112 billion Fidelity Cash Reserves. BlackRock, reports The Wall Street Journal, is also considering turning Prime Retail funds into Government funds. (See our table of the largest money fund managers along with their type of fund assets on p. 7.)"
In our middle column, we look at how JP Morgan Asset Management is responding to MMF reforms. It reads, "Since Fidelity Investments announced that it was revamping its money market fund lineup in response to SEC's reforms and investor demand in late January, two more major MMF managers have announced changes of their own, Federated Investors and J.P. Morgan Asset Management. The latter won't be making any changes to its largest MMF, the $64.9 billion J.P. Morgan Prime MMF, a prime institutional fund that will adopt a Floating NAV. But it did announce other changes."
The article continues, "J.P. Morgan, which is the second largest manager of money market funds globally with $384 billion, became the first money fund manager to designate which of its funds will be "Retail," "Institutional," or "Government," under the pending criteria established by the Securities & Exchange Commission in July 2014. The company also stated that it has no current intention of instituting liquidity fees or gates on any of the MMFs designated as Government MMFs."
The article on "Max 60-Day Maturity Funds: Federated says, "In a recent commentary, Garret Sloan, money market strategist with Wells Fargo Securities, said that he didn't expect a stampede of money managers to follow Fidelity's lead to move from prime to government funds. Rather, he said that money managers would choose to "go their own way." That's indeed been the case over these last few weeks. Case in point: Federated Investors, which is responding to SEC reforms by creating 60-day maximum maturity and under funds -- i.e. floating NAV funds that don't really float. However, the company also plans to have at least one longer duration Prime Institutional fund with a floating NAV."
It adds, "On Feb. 19, Federated Investors, the 4th largest money fund manager with $211 billion in assets, announced "phase one" of its post-MMF reform changes. The big change, which CEO Christopher Donahue has discussed in recent earnings calls, is to convert some of its Institutional Prime funds to 60-day maximum maturity funds, which are allowed to continue using amortized cost pricing, decreasing the likelihood that any floating NAV fund would actually float."
Crane Data's February MFI XLS, with Feb. 28, 2015, data shows total assets decreasing in February, the second month in a row, down $1.6 billion to $2.598 trillion, after falling $44.6 billion in January. Prior to January, assets had gone up each of the last 5 months of 2014. Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield remained at 0.02%, while our Crane 100 Money Fund Index (the 100 largest taxable funds) stayed at 0.03% (7-day and 30-day). On a Gross Yield Basis (before expenses were taken out), funds averaged 0.14% (Crane MFA, same as last month) and 0.17% (Crane 100, unchanged) on an annualized basis for both the 7-day and 30-day yield averages. Charged Expenses averaged 0.13% (up from 0.12%) and 0.14% (same as last month) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 41 and 44 days, respectively. The Crane MFA WAM was the same as last month while the Crane 100 WAM is down 1 day from the prior month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Crane's 5th Annual Money Fund University, a two-day crash course in money market mutual funds, attracted nearly 100 attendees to the Stamford Marriott in Stamford, Conn., late last week. Our Day 1 recap features coverage of the History of Money Funds, the Federal Reserve, Interest Rates and Money Fund Math, and Fund Ratings, as well as sessions explaining the various Instruments of the Money Markets (including Repurchase Agreements, Commercial Paper, CDs, Tax-Exempt/VRDNs, CDs, Treasurys, and Time Deposits). Day 2, which we will report on in coming days (and in our February MFI), focused exclusively on Money Fund Regulations. "A day and a half is really not enough time to learn about a space as big as the money fund sector, but we're going to give you a crash course and try," said Peter Crane, President, Crane Data, as well as host and MC for the event. He opened the conference leading a session called "History and Current State of Money Funds. (Note: Crane Data's next conference will be our flagship Money Fund Symposium, June 24-26 in Minneapolis. The next European Money Fund Symposium will be Sept. 17-18 in Dublin and our next MF University will be Jan. 21-22, 2016, in Boston.)
"In 1994, when I started writing about money funds and when the Community Bankers Fund 'broke the buck,' the space was only about $500 billion. Money market funds were not this behemoth that they were when the Reserve Fund broke the buck in 2008 and almost took down the world economy with it. Money funds peaked at $3.9 trillion in January 2009 after Reserve broke the buck; money was still pouring in because money funds lagged the money markets." Since that time, money fund assets declined precipitously over the next few years, dropping by about 15% per year in 2010 and 2011, he explained. But then the last 3 years in a row, money fund assets have clawed higher despite a near zero interest rate environment. "The fact that money fund assets have gone up fractionally the last 3 years in a row is just mind boggling," he said, testament to the safety and stability of the funds, which were made even safer by recent reforms.
On the other hand, there is the question of how recent reforms will impact money funds going forward, particularly Prime Institutional, which will be subject to a floating NAV in October 2016. "Institutional investors say they are going to leave, but as Churchill said about America, institutional investors will do the right thing, and stay in prime institutional money funds, after they've exhausted every other possibility," quipped Crane. He believes that any outflows we do see from Prime Institutional MMFs will be "dwarfed by inflows from bank deposits and perhaps from bond funds as well."
In the session that followed, two of the leading strategists in the space discussed "The Federal Reserve and US Money Markets." Brian Smedley, US Rates Strategist at BofA Merrill Lynch Global Research, shared his thoughts on when interest rates will rise. "Our expectation is that the Fed will start to shift up the Fed Funds target range starting in September of this year and from there we see hikes proceeding every other meeting, so half as fast as what they pursued last time." He expects it will go up to the 0.25-0.50% range in September, then to 0.50-0.75% in December 2015. By December 2016, rates will reach the 1.50-1.75% range, he said.
"There's an old proverb that says, "May you live in interesting times," and I think that's a fairly accurate description of financial market conditions, certainly in money markets at the moment," said Joseph Abate, Senior Vice President, Liquid Market Research at Barclays Capital. He focused on 4 topics; 1) the ongoing shortage of government safe assets in the financial sector and how that effects behavior in money markets, 2) how the repo market is changing largely because of dynamics related to the Fed and regulation, 3) the Federal Reserves arsenal of tools, namely reverse repo and term deposits, and 4) market liquidity, especially in prime assets. Going forward, he said, "The next battle, if you will, is not going to show up on this front, it's going to come from somewhere else, and I think it's going to be liquidity."
In her overview of the "Instruments of the Money Markets," J.P. Morgan Securities' Teresa Ho, Vice President, Short Duration Strategy, talked about challenges related to supply. "At its peak (in 2007) total money market supply was around $11.5 trillion. If you exclude Treasurys, the peak was about $9.5 trillion" she said. "Fast forward to today, and that has fallen to $5.5 trillion (excluding Treasurys) so we've seen a drop of about $4 trillion in the sector. As you might expect, a lot of it was driven by banks.
Case in point, the commercial paper market peaked at about $2 trillion at the end of 2006; half of that was in ABCP, or asset-backed commercial paper. This was a very popular way back in the day for banks to fund on a short-term basis on behalf of their clients. This particular product has really fallen by the wayside. The economics for banks to participate in this market has really waned. So right now the ABCP market is at its all-time low, at $230 billion, and it is our expectation that this sector will continue to decline going forward because of other regulatory headwinds." Another sector that has declined is the repo sector. "This is a market that has also suffered from the liquidity crisis. It has shrunk almost by half since 2007 and will continue to shrink if you look at all the regulations out there.
On the other hand, investors still see money market funds as a good way to invest their cash on a short-term basis, so demand is strong. "When you think about what has happened with supply over the last couple of years and factor that in to what's happened with demand -- you have a situation where there's too much cash chasing too few assets. There's a huge gap between supply and demand, and it's the reason why we see the competition for assets right now.... [It's] so intense that's its driving rates very, very low in the front end market. There's a real concern that a lot of money will move out of bank deposits into money market funds because of regulations.... If indeed that is the case and cash moves from bank deposits to money market funds, then this supply/demand imbalance becomes even more acute in the absence of additional supply."
There are some bright spots, however. One is Collateralized CP, which is a small but growing sector of the market at about $30-$35 billion. "Investors have been very attracted to this product." (Rob Crowe, Director, Institutional Clients Group, and Jean Luc Sinniger, Director, Money Markets, both of Citi Global Markets, took a deeper dive into CP in their session later in the day on "Instruments: Commercial Paper and ABCP.") Another glimmer of hope is in the Treasury Bill market.
Ho commented, "We have heard from the U.S. Department of the Treasury that they intend to increase their operating cash balances. Right now they run an average of about $60 billion; the expectation is that that they want to raise it to $500 billion. I suspect if they do that, a lot of it would be funded in the bill [market]. If that is the case, we'll see about $400-$450B in T-Bill supply." She said in closing, "Regulations are going to alter and fundamentally change the landscape, but the markets will adapt and they will evolve and meet whatever needs are out there."
Finally, Day 1 ended with a session led by Adam Ackerman, Vice President and Portfolio Manager at J.P. Morgan Asset Management on "Portfolio Management & Credit Analysis." Ackerman said, "My presentation is about taking everything you've seen today and bringing it all together to give you some insight into how portfolio managers think -- how we assess risk and model a portfolio for our fundamental goal, which is to provide liquidity." He said his primary goal is the preservation of capital. After that, his goals are to provide adequate liquidity and competitive yield, in that order. "Yield is important but it doesn't drive our decision making as portfolio managers, primarily."
He added, "We are in the business of providing liquidity; cash right now. We need to provide any type of liquidity that's demanded, whether it's billions or millions. We need to manage well enough so that we can manage any type of flow risk at any time." In terms of credit analysis, "Generally, the way we think about it is, the higher the credit rating, the higher the liquidity. The better the credit quality, the more concentration I'm comfortable with. Conversely, with lower credit quality, you want to lower your risk through lower concentrations." J.P. Morgan employs a rigorous credit selection process that includes their own internal analysis, he explained. Finally, he said, the ultimate measure of success is how well you meet investors' demands of preservation of capital, liquidity, managing risk, and yield. Do that well, and the assets will come.... Stay tuned for coverage of Day 2 in coming days.