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Crane Data released its August Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of July 31, 2016, shows big increases in Other (Time Deposits), Treasuries and Agencies, and decreases in CD, CP and Repo in July. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $47.9 billion to $2.592 trillion, after decreasing by $59.7 billion in June, increasing by $24.6 billion in May, and decreasing $21.0 billion in April. Repos remained the largest portfolio segment, followed by Agencies and Treasuries. CDs were in fourth place, followed by Commercial Paper, Time Deposits and VRDNs. Money funds' European-affiliated securities rose to 26.7% of holdings, up from the previous month's 19.6%. (U.K.-affiliated holdings increased by $7.5 billion to $88.4 billion, or 3.4% of assets.) Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Repurchase Agreements (repo) fell by $13.3 billion (-2.1%) to $632.9 billion, or 24.4% of holdings, after increasing $71.4 billion in June, $32.6 billion in May and decreasing $65.3 billion in April. Government Agency Debt increased $27.0 billion (5.0%) to $571.9 billion, or 22.1% of all holdings, after increasing $37.4 billion in June, $34.4 billion in May and decreasing $9.0 billion in April. Treasury securities rose $38.8 billion (7.4%) to $561.1 billion, or 21.6% of holdings, after falling $12.8 billion in June, $3.8 billion in May and dropping $36.8 billion in April. `The rise in Agencies is in large part due to a shift of almost $500 billion (since late 2015) of Prime MMF asset into Government MMFs (so far).
Certificates of Deposit (CDs) were down $37.6 billion (-10.6%) to $318.0 billion, or 12.3%, after declining $53.6 billion in June, $4.6 billion in May and falling $17.0 billion in April. Commercial Paper (CP) was down $23.3 billion (-7.8%) to $273.9 billion, or 10.6% of holdings, while Other holdings, primarily Time Deposits, jumped $55.8 billion (37.1%) to $205.9 billion, or 7.9% of holdings. VRDNs held by taxable funds increased by $0.5 billion (1.7%) to $28.6 billion (1.1% of assets).
Prime money fund holdings tracked by Crane Data totaled $1.074 trillion (down from $1.123 trillion last month), or 41.4% (down from 44.1%) of taxable money fund holdings' total of $2.592 trillion. Among Prime money funds, CDs represent under one-third of holdings at 29.6% (down from 31.7% a month ago), followed by Commercial Paper at 25.5% (down from 26.5%). The CP totals are comprised of: Financial Company CP, which makes up 15.2% of total holdings, Asset-Backed CP, which accounts for 6.6%, and Non-Financial Company CP, which makes up 3.7%. Prime funds also hold 3.9% in US Govt Agency Debt (down from 4.7%), 5.3% in US Treasury Debt (up from 4.5%), 4.6% in US Treasury Repo (down from 7.9%), 3.9% in Other Instruments, 16.8% in Non-Negotiable Time Deposits, 5.6% in Other Repo, 4.6% in US Government Agency Repo, and 2.2% in VRDNs.
Government money fund portfolios totaled $962 billion, up from $875 billion in June, while Treasury money fund assets totaled another $556 billion, up from $546 billion the prior month. Government money fund portfolios were made up of 55.1% US Govt Agency Debt, 18.1% US Government Agency Repo, 9.5% US Treasury debt, and 17.0% in US Treasury Repo. Treasury money funds were comprised of 74.3% US Treasury debt, 25.3% in US Treasury Repo, and 0.3% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined total $1.518 trillion, or 58.6% of all taxable money fund assets, up from 55.9%.
European-affiliated holdings increased $191.9 billion in July to $691.2 billion among all taxable funds (and including repos); their share of holdings increased to 26.7% from 19.6% the previous month. Eurozone-affiliated holdings increased $135.9 billion to $424.3 billion in July; they now account for 16.4% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $39.9 billion to $248.5 billion (9.6% of the total). Americas related holdings decreased $129.9 billion to $1.650 trillion and now represent 63.6% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $56.8 billion, or 14.1%, to $347.0 billion, or 13.4% of assets; US Government Agency Repurchase Agreements (up $41.1 billion to $225.3 billion, or 8.7% of total holdings), and Other Repurchase Agreements ($60.6 billion, or 2.3% of holdings, up $2.4 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $9.2 billion to $163.6 billion, or 6.3% of assets), Asset Backed Commercial Paper (down $8.9 billion to $70.6 billion, or 2.7%), and Non-Financial Company Commercial Paper (down $5.2 billion to $39.7 billion, or 1.5%).
The 20 largest Issuers to taxable money market funds as of July 31, 2016, include: the US Treasury ($561.1 billion, or 21.6%), Federal Home Loan Bank ($407.7B, 15.7%),`BNP Paribas <b:>`_ ($89.2B, 3.4%), Federal Reserve Bank of New York ($80.7B, 3.1%),`Credit Agricole <b:>`_ ($79.2B, 3.1%), Wells Fargo ($76.0B, 2.9%), Federal Home Loan Mortgage Co. ($66.9B, 2.6%), Societe Generale ($59.3B, 2.3%), Federal Farm Credit Bank ($53.6B, 2.1%), Mitsubishi UFJ Financial Group Inc. ($52.0B, 2.0%),`RBC <b:>`_ ($51.5B, 2.0%), Federal National Mortgage Association ($40.6B, 1.6%), Natixis ($39.6B, 1.5%), Credit Suisse ($39.6B, 1.5%), Bank of Nova Scotia ($38.9B, 1.5%), Bank of America ($38.7B, 1.5%), Citi ($36.1B, 1.4%), HSBC ($34.8B, 1.3%),`JP Morgan <b:>`_ ($31.0B, 1.2%), and Mizuho Corporate Bank Ltd ($30.7B, 1.2%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($80.7B, 12.8%), BNP Paribas ($63.5B, 10.0%), Wells Fargo ($56.2B, 8.9%), Credit Agricole ($46.2B, 7.3%), Societe Generale ($45.3B, 7.2%), RBC ($34.9B, 5.5%), Bank of America ($30.8B, 4.9%), Credit Suisse ($27.1B, 4.3%), JP Morgan ($22.9B, 3.6%), and HSBC ($22.7B, 3.6%). The `10 largest Fed Repo positions among MMFs on 7/31 include: JP Morgan US Govt ($10.2B), Fidelity Cash Central Fund ($3.9B), Wells Fargo Govt MMkt ($3.9B), Goldman Sachs FS Treas Sol ($3.3B), Dreyfus Cash Mgmt ($3.0B), Northern Trust Trs MMkt ($3.0B), UBS RMA Govt MM ($2.9B), Western Asset Inst Gvt ($2.5B), Schwab Gvt MMkt ($2.4B), and Morgan Stanley Inst Lq Gvt ($2.2B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($38.8B, 5.5%), Credit Agricole ($33.0B, 4.7%), Sumitomo Mitsui Banking Co. ($28.6B, 4.0%), DnB NOR Bank ASA ($27.9B, 3.9%), Svenska Handelsbanken ($27.1B, 3.8%), Natixis ($25.8B, 3.6%), BNP Paribas ($25.6B, 3.6%), Swedbank AB ($24.0B, 3.4%), Skandinaviska Enskilda Banken AB ($23.1B, 3.3%), and Nordean Bank ($23.0B, 3.3%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc. ($23.9B, 7.6%), Sumitomo Mitsui Banking Co ($23.3B, 7.4%), Bank of Montreal ($18.4B, 5.9%), Wells Fargo ($15.5B, 4.9%), Canadian Imperial Bank of Commerce ($13.1B, 4.2%), Sumitomo Mitsui Trust Bank ($13.1B, 4.2%), Mizuho Corporate Bank Ltd ($12.6B, 4.0%), Citi ($11.3B, 3.6%), Toronto-Dominion Bank ($10.9B, 3.5%), and Credit Mutuel ($10.4B, 3.3%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($15.2B, 6.6%), Societe Generale ($11.9B, 5.1%), Mitsubishi UFJ Financial Group Inc. ($11.6B, 5.0%), Credit Agricole ($9.4B, 4.1%), Bank of Nova Scotia ($8.9B, 3.9%), Commonwealth Bank of Australia ($8.4B, 3.6%), Australia and New Zealand Banking Group Ltd. ($8.3B, 3.6%), ING Bank ($7.0B, 3.0%), Natixis ($7.0B, 3.0%), and JP Morgan ($6.8B, 3.0%).
The largest increases among Issuers include: Credit Agricole (up $45.0B to $79.2B), US Treasury (up $38.8B to $561.1B), Societe Generale (up $28.4B to $59.3B), DnB NOR Bank ASA (up $22.2B to $27.9B), Credit Suisse (up $19.9B to $39.6B), Natixis (up $17.6B to $39.6B), BNP Paribas (up $15.0B to $89.2B), Skandinaviska Enskilda Banken AB (up $13.2B to $23.1B), Federal Home Loan Bank (up $12.5B to $407.7B), and Barclays PLC (up $11.7B to $28.9B).
The largest decreases among Issuers of money market securities (including Repo) in July were shown by: Federal Reserve Bank of New York (down $145.0B to $80.7B), RBC (down $9.7B to $51.5B), Toronto-Dominion Bank (down $7.9B to $23.8B), Wells Fargo (down $7.6B to $76.0B), Svenska Handelsbanken (down $6.5B to $27.1B), Canadian Imperial Bank of Commerce (down $6.0B to $15.2B), Bank of Nova Scotio (down $5.9B to $38.9B), Sumitomo Mitsui Banking Co (down $5.5B to $28.6B), Bank of Montreal (down $5.3B to $26.4B), and Sumitomo Mitsui Trust Bank (down $4.1B to $17.7B).
The United States remained the largest segment of country-affiliations; it represents 57.1% of holdings, or $1.480 trillion (down 92.0BB). France (11.6%, $300.0B) moved to second while Canada (6.5%, $168.1B) dropped one spot to 3rd. Japan (6.3%, $163.6B) stayed in fourth, while Sweden (3.8%, $97.8B) held fifth. The United Kingdom (3.4%, $88.4B) remained sixth, while Germany (2.3%, $59.2B) jumped two spots to seventh, while Australia (2.2%, $57.3B) fell one spot to eighth and The Netherlands (2.0%, $50.7B) fell to ninth, lastly Switzerland (1.9%, $48.9B) held tenth place 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 July 31, 2016, Taxable money funds held 31.1% (up from 30.9%) of their assets in securities maturing Overnight, and another 15.2% maturing in 2-7 days (up from 13.1%). Thus, 46.3% in total matures in 1-7 days. Another 20.0% matures in 8-30 days, while 13.8% matures in 31-60 days. Note that more than three-quarters, or 80.1% of securities, mature in 60 days or less (same as last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 9.0% (down from 10.9%) of taxable securities, while 8.7% matures in 91-180 days (down from 9.4%), and just 2.2% matures beyond 180 days (down from 2.3%).
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Tuesday, and our Tax Exempt MF Holdings and MFI International "offshore" Portfolio 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.
The August issue of our flagship Money Fund Intelligence newsletter, was sent to subscribers Tuesday morning, features the articles: "The Big Shrink: Prime Assets, Spreads; Latest Changes," which looks at Prime fund asset, yield and maturity declines; "New Lion King: Santero In at Dreyfus; Cardona Retiring," which profiles Mark Santero and Charlie Cardona of Dreyfus; and "AFP Liquidity Survey Shows Deposits Peaked, MMFs Up," which reviews last month's survey of corporate treasurers. We have updated our Money Fund Wisdom database query system with July 31, 2016, performance statistics, and also sent out our MFI XLS spreadsheet Friday morning. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our August Money Fund Portfolio Holdings are scheduled to ship Tuesday, August 9, and our August Bond Fund Intelligence is scheduled to go out Friday, August 12.
MFI's lead "Big Shrink" article says, "Money funds jumped back into the mainstream press over the past week as Prime assets fell below $1 trillion for the first time in almost 20 years, and as a spike in LIBOR rates caught the attention of the broader financial markets. (See the recent News on www.cranedata.com for links to the host of articles.) Liquidations, Prime to Government conversions and tweaks, changes and filings continued in July and show no signs of abating. We review these below, and we discuss the continued flight from Prime and shortening of portfolios, building of liquidity and shrinkage of spreads."
The article adds, "Of course, one of the biggest variables influencing the amount of additional money (beyond the $450 billion already gone) that will leave Prime funds in the next 2-3 months is the spread between Prime and Government (or Treasury) money funds. While money funds had been seeing stable spreads of about 15 basis points between Prime Institutional MMFs on average and Treasury Inst MMFs, these have quietly started shrinking."
Our latest fund interview reads, "This month, MFI interviews Mark Santero, C.E.O of the Dreyfus Corporation, and Charlie Cardona, President of Dreyfus Corporation and C.E.O of BNY Mellon's Cash Investment Strategies division. Cardona will be retiring at the end of the year, and Santero recently became the leader of the cash business at Dreyfus. We wanted to discuss their transition, their latest plans and strategies and some lessons learned from Cardona's extensive history in the money fund business. Our interview follows."
MFI asks about the latest changes. Santero says, "My role as the C.E.O of Dreyfus is really to run the Dreyfus mutual fund family, which includes the cash funds.... Dreyfus is a great brand; it's been in existence for 60-plus years. It's something which in a former life was a formidable competitor of mine when I spent over 11 years at AIM Management Group.... When we look at Dreyfus, we look at the cash business as a true growth opportunity, given the resources that we have within the bank to support it and the types of clients we have at the bank. The synergies [with the bank] are very strong.... We have some very distinct and unique boutiques, and we're looking to grow that business."
The article on the "AFP's Survey" explains, "The Association for Financial Professionals released its "2016 Liquidity Survey" last month, and the new report showed a tiny decrease in bank deposits and increase in money fund holdings. It also shows that a majority of respondents will make changes to how they invest in Prime money market funds. Specifically, it says 62% plan to make changes in how they invest in prime funds and that 37% of that number will move to Govt funds or Bank products. However, safety of principal remains the top priority among investment objectives, increasing to 68% in 2016 from 65% last year."
In a sidebar, we discuss, "Worldwide MMF Assets." This brief says, "The Investment Company Institute's latest "Worldwide Mutual Fund Assets and Flows" data shows that total global money fund assets inched lower by $9 billion, or 0.2%, to $5.063 trillion in Q1 2016. China, Ireland, and Luxembourg suffered the biggest declines, while France, Korea, Brazil, and the U.S. saw gains." We also do a sidebar on "MMF Earnings Up," which says, "Charles Schwab & Co. and Federated Investors both reported higher profits due to lower fee waivers and increased money market fund revenues." Finally, as we do every month, we review all the important "Money Fund News."
Our August MFI XLS, with July 31, 2016, data, shows total assets increased $7.8 billion in July to $2.620 trillion after decreasing $13.8 billion in June, $9.9 billon in May, and $42.0 billion in April. Our broad Crane Money Fund Average 7-Day Yield decreased one basis point to 0.12% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) also decreased 1 basis point to 0.23% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA was unchanged at 0.44% and the Crane 100 was down 1 bps to 0.48%. Charged Expenses averaged 0.33% and 0.25% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 31 days (down 1 day from last month) and for the Crane 100 was 31 days (down 3 days). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
In other news, The Wall Street Journal wrote again about money market funds in "A $500 Billion Stampede in Money Markets Even Before New Rules Hit." The article says, "The last big post-Lehman regulatory change is reverberating across the financial system, potentially squeezing short-term lending for businesses and local governments. The rules haven't taken effect yet but are already upending the $2.7 trillion money-market industry, causing nearly $500 billion to move into, out of and among these funds, which are used by investors to stash their cash and by borrowers for short-term liquidity."
It continues, "Already, more than $420 billion has left prime money-market funds in the past year, pulling assets below $1 trillion for the first time since 1999, according to the Investment Company Institute, the industry's trade association. The money has flowed into government money-market funds, which have grown from $991 billion to $1.5 trillion. Funds holding federal government debt are the big winners because under the new rules they can still promise that investments won’t lose money. More money chasing government bonds isn't what the world needs right now."
Finally, the Journal says, "The flip side is that $420 billion that used to be loaned to companies, mostly in the form of commercial paper, has disappeared from the system. That has forced companies to find other ways to borrow -- either by taking loans from banks or selling longer-term bonds—both of which can be more costly. Peter Crane of Crane Data, which tracks money-market funds, says another $500 billion could leave prime funds."
The IRS and the US Treasury Department issued a Final Rule on their proposal to simplify accounting and rules to accompany pending Money Fund Reforms. (See our July 30, 2014 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal.") The rule, "Method of Accounting for Gains and Losses on Shares in Money Market Funds," says, "This document contains final regulations that provide a simplified method of accounting for gains and losses on shares in money market funds (MMFs). The final regulations also provide guidance regarding information reporting requirements for shares in MMFs. The final regulations respond to [SEC] rules that change the amount for which certain MMF shares are distributed, redeemed, and repurchased. The final regulations affect MMFs and their shareholders." We discuss this last remaining piece of reforms below, and we also review the July issue of our flagship Money Fund Intelligence, which was sent to subscribers Friday morning.
The IRS/Treasury rule states, "This document contains amendments to 26 CFR part 1 (Income Tax Regulations) under sections 446 and 6045 of the Internal Revenue Code (Code). The regulations provide a method of accounting for gain or loss on shares in MMFs and are intended to simplify tax compliance for holders of shares in MMFs affected by SEC regulations that impose liquidity fees or change how certain MMF shares are priced. See Money Market Fund Reform; Amendments to Form PF ... (August 14, 2014) (SEC MMF Reform Rules)." (See also the IRS's new Revenue Procedure 206-39.)
It continues, "The Treasury Department and the IRS published a notice of proposed rulemaking and notice of public hearing (REG-107012-14) in the Federal Register on July 28, 2014 (79 FR 43694). The proposed regulations described a simplified method of accounting for gain or loss on shares in a floating-NAV MMF (the net asset value method, or NAV method). Under the NAV method, a taxpayer's gain or loss on shares in an MMF is based on the change in the aggregate value of the taxpayer's shares during a computation period selected by the taxpayer and on the net amount of the purchases and redemptions during the computation period. The proposed regulations also provided guidance regarding information reporting requirements for shares in MMFs."
Finally, the IRS rule adds, "After considering the comments, the Treasury Department and the IRS adopt the proposed regulations regarding the method of accounting as final regulations with the modifications described in this Treasury decision." (Note: Thanks to Stradley Ronon's Joan Swirsky and John Baker for pointing out the IRS notice.)
Our latest MFI newsletter features the articles: "Prime Outflows Turn Ugly: Totaling the Damage to Date," which charts the massive outflows from Prime funds YTD, and looks ahead to more; "BlackRock's Novick Keynotes Money Fund Symposium," which covers Barbara Novick's address at our recent Money Fund Symposium; and "Home-Stretch for Reforms; Gates & Outstanding Issues," which reviews a panel from Symposium on reform FAQs and operational obstacles. We have also updated our Money Fund Wisdom database query system with June 30, 2016, performance statistics, and sent out our MFI XLS spreadsheet Friday morning. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our June Money Fund Portfolio Holdings are scheduled to ship Tuesday, July 12, and our June Bond Fund Intelligence is scheduled to go out Friday, July 15.
MFI's lead "MMF Reform" article says, "The exodus from Prime and Tax Exempt money funds and flood into Govt MMFs picked up steam in June, as another $119.3 billion moved out of Prime and $14.7B moved out of Tax Exempt. Govt MMFs gained $120.3B, but overall assets were down $13.8B. Year-to-date, Prime funds are down by $259.3B, or -21.0%, and Tax Exempt MMFs are down by $60.0B, or -23.9%. Govt MMFs are up by $244.5B, or 20.5%. (See our June 30 News, "Prime Outflows, Spreads, and Liquidity Major Issues at MF Symposium.")
The article adds, "Over the past 12 months, Prime assets have fallen by a massive $378.2 billion, or 27.9%. Govt MMFs have increased by $509.1 billion during this same time while Tax Exempt MMFs have fallen by $47.3 billion. Government fund assets began surging in November 2015 as Fidelity Cash Reserves converted to Fidelity Govt Cash Reserves. Govt MMFs moved ahead of Prime assets in February 2016 for the first time ever, and haven't looked back. The shift has been fueled by over $300 billion in fund conversions, but we're now seeing the start of investor moves. (There have also been conversions of Prime into Ultra-Short Bond Funds and Tax-Exempt MMF liquidations.) We discuss this "Phase II" of asset movements below."
Our coverage of Novick's keynote at Symposium reads, "Crane's Money Fund Symposium, which took place last week in Philadelphia, attracted 575 attendees -- shattering our record of 505 set last year in Minneapolis. One of the highlights of the 3-day conference was the keynote speech by `BlackRock Vice Chair Barbara Novick, who discussed "The New Look of Money Market Funds" and focused on adapting to money market fund reforms. We excerpt from her speech below. Novick, who delivered the keynote at our last Philadelphia Money Fund Symposium in 2011, began by discussing the history and evolution of money fund reforms. She then turned her focus to the two major aspects of the 2014 reforms -- the floating NAV, and fees and gates. On the floating NAV requirement she said, "Based on historical data, we would expect the NAV to wiggle around the dollar. We're not talking about big changes where you see it go up and down, it will wiggle -- very tight bands around that dollar."
It continues, "On the fees and gates rule, Novick added, "That's probably the most controversial ... because it's unknown and untested." She explained, "We don't really know what that will look like, and history does compel us to say we want to make sure we have access to our capital at all points in time. I tend to think about these a little bit differently. First, by having these triggers, the portfolio manager is incented to manage that fund very conservatively, and I think that's good. If there's anything we’ve learned, people taking risks in money market fund portfolios isn't the best idea for any of us. Second, if we had some extreme environment ... wouldn't you want boards to have the best toolkit available industry-wide to deal with a stress event?"
The article on the "Home Stretch for Reforms" explains, " Our recent Money Fund Symposium in Philadelphia also featured the sessions, "Money Fund Reform: Outstanding Issues," and "Reform Issues: Credit Ratings, Operations." The former, moderated by Joan Swirsky of Stradley Ronon, included panelists `Jack Murphy of Dechert; Sarah ten Siethoff of the Securities & Exchange Commission; and Jane Heinrichs of the Investment Company Institute. The latter, moderated by Pete Crane of Crane Data, featured Charles Hawkins of BNY Mellon Asset Servicing on operational challenges; Jimmie Irby of JP Morgan on credit ratings; and Sharon Pichler of the SEC.
It continues, "In the Outstanding Issues session, the panel addressed several issues with fees and gates. Swirsky said, "There are only two triggers in the rule -- if weekly liquid assets (WLA) fall below 30% then the board can impose a discretionary fee or gate, and if the WLA falls even lower to less than 10% there will be a mandatory fee unless the board decides otherwise. But funds can consider other triggers besides the two in the rule."
In a sidebar, we discuss, "UBS Sweeps; Changes." This brief says, "UBS Asset Management liquidated its entire lineup of RMA Money Market Funds and launched a new RMA Government Money Market Fund to hold its brokerage sweep cash." It also recaps other fund liquidations and changes. We also do a sidebar on "European MMF Regs," which says, "On June 17, the European Council adopted a Dutch compromise proposal on Money Market Fund Regulations. This now enables the European Council, European Parliament, and European Commission to "commence trilogue negotiations to finalize the regulations." Finally, as we do every month, we review all the important "Money Fund News."
Our July MFI XLS, with June 30, 2016, data, shows total assets decreased $13.8 billion in June to $2.612 trillion after decreasing $9.7 billion in May, $42.0 billion in April, and $20.3 billion in March. Our broad Crane Money Fund Average 7-Day Yield moved up 2 basis points to 0.13% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) increased 2 basis points to 0.24% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA ticked up 2 basis points to 0.44% and the Crane 100 was also up 2 bps to 0.48%. Charged Expenses averaged 0.32% (unchanged) and 0.25% (down one bps) for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 32 days (down 1 day from last month) and for the Crane 100 was 34 days (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages. Note: We made some changes to our Crane 100 Money Fund Index to replace recently liquidated funds. See our MFI XLS for the latest components.)
Two of the most popular sessions at our 2016 Money Fund Symposium in Philadelphia last week were "Major Money Fund Issues 2016" and "Senior Portfolio Manager Perspectives," which featured some of the leading authorities from some of the largest players in the money fund industry. During the first session, panelists were asked about the questions they're getting most frequently of late. Fitch Ratings' Ian Rasmussen replied, "The questions usually fall within 3 main categories: They want to know about liquidity, they want to know about asset flows, and they want to know about yield." Indeed, these three topics dominated not just the conversations in these sessions, but the entire conference. (Note: Next year's Money Fund Symposium is scheduled for June 21-23 in Atlanta. Mark your calendars and watch for details late this fall. Also, see our "Money Fund Symposium 2016 Download Center" page for recordings and Powerpoints from the show.)
In the "Major Issues" session, Crane Data's Peter Crane asked, "How much is going to flow out of Prime?" Federated Investors' Deborah Cunningham said that, to date, there hasn't been a lot of movement by investors -- but she expects that to pick up over the next few months. She explained, "As we flipped the calendar into June we started to see some customers start to take action -- not many, but a few. We saw a few customers choose to leave prime and go into Govies. Government funds are actually picking up a lot of assets that are not necessarily coming from our prime funds, or others' Prime funds. I think they are coming from other market vehicles that are no longer as attractive or no longer open to them in the form they were before.... I would expect that in July we'll see a little pick up, then a lull in August, and then September [is] where everybody is making sure they're positioned properly."
Cunningham added, "Customers want to see what other customers are doing, and there is some herd mentality, if you will, to this industry. I think that will, to some degree, at least initially, solidify in people's mind where they want to be on October 14. It doesn't necessarily solidify where they want to be on October 17. `But on October 14 when the change occurs, they often want to be with others that are similar to themselves."
Panelist John Donohue of JP Morgan Asset Management concurs with the estimates floated by others that between $400 and $500 billion will move out of Prime by reform implementation. He stated, "But as long as we get through day one, the real thing is what happens on days 2, 3, and beyond. The opportunity for us is to work with them [clients] to segment their cash ... do an asset allocation around that liquidity, and hopefully they can decide what levers they want to pull to put the cash across a full spectrum of liquidity type solutions -- everything from a Govie fund to a Short Duration bond fund."
Regarding flows into Government funds, Cunningham said, "There are 4 main categories of Government funds -- Treasury only, Treasury with Repo, Government only, and Government with Repo. The Government with repo product is the one that's gaining the most." She also said it helps to have some yield now in Government funds, after having been near zero or 1 basis point for so long. "No more zero. That happened pretty much immediately with Fed lift off."
As for the trend of sweep funds going Government, she said it's an easy choice right now because Government funds have no fees and gates and they are actually earning a little yield. "But if we start to see spreads between Prime and Govie -- now about 20 basis points -- go to 30, 40, 50 basis points, there will be some solutions to figure out how to deal with the gates and fees side of that equation for even the sweep options."
On the yield differential between Prime and Government funds, Donohue explained, "The conundrum right now is, we keep talking about that yield differential between Prime and Govie being more attractive than ever at between 20-40 basis points. But over the next couple of months, that yield is going to compress. If you look at maturity profiles right now, all of the large players have anywhere from 95-100% of their fund maturing at the end of September in anticipation of large outflows. And given that the Fed is in the market giving a natural floor on Govie funds, that spread is going to collapse right on top of each other."
He added, "Some clients are going to look at that yield differential and say, 'Let me take a wait and see approach and just go into Govie <b:>`_.' So, we're going to spend a lot of time working with clients, telling them, 'If you're comfortable in Prime, stay in it, because that yield differential is going to snap back very quickly.' But that's the risk to the overall industry and the challenge we're all going to be facing."
That led to a discussion of liquidity. Said Cunningham, "For our institutional Prime funds, weekly liquid assets at this point are about 50%, and our WAMs are 35 days or less depending on the products." Rasmussen said that is on par with the trends across the industry. (Note: Our MFI Daily currently shows Prime Inst MMFs with 49.4% in WLA, or weekly liquid assets.) Added Rasmussen, "What we're concerned about are the outliers. There are certain funds that aren't building the same type of liquidity that we have seen across the industry.... Investors want to see a higher cushion." Donohue added, "Everyone is going to err on the side of having more than enough liquidity to meet even their worst case redemption analysis."
Donohue discussed the two major elements of the October reforms: fees & gates, and the floating NAV. "The gates and fees are something clients are very concerned about. It's important for everyone to educate our clients, our collective client base, on what that actually means. I believe there's a very little probability of that, but when and if it does happen, maybe it's not the worst thing that could happen. If there were gates and fees back in 2008, maybe Reserve would have survived it, and we wouldn't all be here right now."
On FNAVs, he added, "Once clients get comfortable with the FNAV concept, I personally believe they are going to look at the Ultra-Short bond fund space." Donohue continued, "If you accept the floating NAV, you go a step out of money market funds, and maybe the NAV is a little more volatile, but still very low, and you get a very attractive return, historically, versus what you have gotten. And prime funds are going to hold a ton of liquidity, so that will cause yields to not be as high as they otherwise may be. This is why I think the Ultra-Short space is the opportunity coming out of reform."
Many of the same themes were explored in the "Senior Portfolio Manager" session, moderated by Barclays' Stewart Cutler and featuring Kevin Gaffney of Fidelity Investments; Laurie Brignac of Invesco; and Peter Yi of Northern Trust Asset Management. Cutler began the conversation with the overarching trend in the industry the past two years. "Since the beginning of 2015, Prime portfolios, which had been a little over $1.4 trillion, have slid down towards about $1.1 trillion and Government funds have increased from approximately $1 trillion to $1.4 trillion."
As the reform deadline approaches, panelists discussed how they are positioning their portfolios for the likelihood of Prime outflows. All three said they were being cautious and conservative with their Prime funds, bringing in their durations, shortening WAMs, shortening WALs, and running higher weekly liquid assets. Brignac said the WLA of her funds is in the mid-40% range, which is on par with the industry average for institutional prime funds." Later in the session, Brignac said she expects those weekly liquid asset averages to go even higher. "I would think it would be closer to 60% to 70% in September."
An audience member asked, "If WLA is at 70% in September, what does that mean for the yield differential?" Answered Yi, "That's the predicament we're in. We're going to be part of this unilateral liquidity in these next few months, and it's going to destroy where yields potentially could be. We, like many in this room, believe there will be a meaningful spread between credit strategy and Government strategy. But the next 3 months, it's going to be hard to see."
Fidelity's Gaffney was asked about communicating with clients. "They know the deadline is in October, and they know they have until then to make a decision. One of the reasons why it's difficult to pin down the number of how much is going to be moving out of institutional Prime is a lot of these institutional investors have not made that decision yet. They are still thinking about their alternatives: What other options are out there? What the funds are going to look like in October? [And, what will be] the spreads between Prime and Government funds? So there are a lot of variables to think about."
On the floating NAV, Yi said, "I don't think a variable NAV is going to move very often -- when it does, it's going to be pretty small. Interest rate movements, movements from the Fed, getting caught off-sides from the Fed. You'll see some movement in the NAV, but we don't think it's going to be meaningful. Now, if there's a credit event -- an impaired asset, a distressed asset, that’s where you're going to see movements that are meaningful -- even in a constant NAV. We need to step a step back sometimes and say, 'What are the big factors that are going to move an NAV?' ... It always ends up being a credit event."
On new product launches, Brignac said one of the outcomes of reforms is that it has "changed the cash discussion that we're having with clients. We're talking about bucketing different types of cash, what is the right vehicle -- and it's going to be different for different clients. The panel yesterday was talking about ultra-short bond funds, and this is a strategy that's gaining a lot of traction and a lot of attention. Initially, a lot of clients will hit that 'easy' button and probably just move into Government funds. But I think we'll see a lot more pickup in some of these other products going into next year."
Finally, Yi added, "Ultra-Short is the real opportunity here. We have the full product suite within the money market fund space. But outside of that, we think there will be a lot of new flavors, depending on where there is investor need. We have an ultra-short fixed income business that's really been growing exponentially in this low interest rate environment... It's a great opportunity to talk about cash segmentation strategies, and we think that's resonated very well."