The latest issue of Grant's Interest Rate Observer contains a segment entitled, "No yield for you," which discusses the spike in LIBOR rates and recent money fund trends. It says, "Three-month Libor continues to hover at post-crisis highs -- 88.57 basis points on Tuesday, up from 32.3 basis points one year ago. Yet prime institutional money funds, investors in Libor-like instruments, show average seven-day yields of 29 basis points.... In advance of the Oct. 14 deadline for implementing federally mandated money-fund protocols, investors pulled 1.15 trillion from the kinds of funds that hold commercial paper.... Just about all of this vast stash they redirected to U.S. government money funds. The switcheroo must stack up as one of the greatest money migrations of all time." The brief quotes our Peter Crane, "Libor rates are just starting to be reflected in money funds <b:>`_.... Money funds couldn't take advantage of rising Libor because they were causing the Libor spike -- shortening their maturities ahead of the Oct. 14 reform deadline. Now that deadline has passed and they can be relatively comfortable that all the rest of the money in prime funds isn't leaving immediately, they're beginning to extend and you've seen yields start to move out."
Federal Reserve Governor Jerome Powell spoke recently on "Opening Remarks on Government Securities Settlement. He says, "This panel will focus on the settlement infrastructure for U.S. government securities--a vital component of the Treasury market and one that is undergoing an important transition. This segment of the industry has been in a period of slow but steady consolidation for several decades now. Thirty years ago, there were six banks providing a full suite of settlement services for U.S. government securities. Due to mergers and exits, two firms, Bank of New York Mellon (BNYM) and J.P. Morgan Chase (JPMC), have been the two dominant providers of these services since the 1990s. And soon there will be just one, given JPMC's planned exit. Given the importance of these services, the official sector has had a long involvement as the market structure has evolved. After the terrorist attacks of September 11, 2001, the Federal Reserve convened the private-sector Working Group on Government Securities Clearance and Settlement to recommend steps to mitigate risks to the financial system from a disruption to these services. That work led to the "NewBank" proposal. Although the proposal was ultimately put aside, NewBank would have been a dormant financial institution that could spring into action in the event of potential disruptions from an exit from this business by either of the clearing banks. Some of today's panelists were actively involved in that work. Of course, at that time, the business was roughly evenly split between the two providers. Today's situation is very different--BNYM now has over 80 percent market share, due mainly to consolidation among end users. The Federal Reserve has been working closely with the Department of the Treasury to ensure a smooth transition as JPMC prepares to exit.... In the near term, this exit will leave BNYM as the sole provider of U.S. government securities settlement and triparty repo services for broker-dealers. We have been working intensively with BNYM in anticipation of this transition. We have long recognized that any disruptions to these critical market services could have serious consequences for financial stability, and have calibrated our supervisory expectations accordingly. To ensure financial stability, we expect the provision of U.S. government securities settlement services to be robust in nearly all contingencies.... BNYM is unique in that it also plays the dominant--and soon the sole--role in government securities settlement and in the triparty repo market. These activities are comparable in their importance to those of the financial market utilities that have been designated as systemically important by the FSOC. Thus, BNYM will continue to be held to the high standards to which all U.S. bank SIFIs are held. And it will also be expected to operate in a manner that provides confidence that it is as resilient and robust as a systemically important financial market utility (FMU)."
A recent "Short Duration Strategy from Citi entitled, "When will short term funding costs decline? comments, "Money market rates remain elevated after grinding up since summer, and this is a manifestation of the dysfunction in the money markets that was engendered by money market reform. The rise in non-financial CP and ABCP rates has been much more muted. This is attributable to their smaller market sizes and also the fact that non-financial CP and ABCP have much shorter tenors, which has enabled prime funds to hold on to these even while they were witnessing sharp outflows. Higher financial CP, Libor, and SIFMA rates have caused a significant increase in funding costs for short-term issuers in the financial and municipal sectors. So, when will funding costs decline for these issuers? As we discuss, this will depend mostly on the outlook for demand, which in each case, is slightly murky."
This weekend's Wall Street Journal features, "Investors Sense Opportunity in One Corner of the Money Markets." The article explains, "A reform-driven rise in short-term borrowing costs is focusing attention on an often-overlooked corner of the market: municipal debt. Three-month AAA munis are offering the equivalent of about 1.3% in taxable yield when adjusting for those who would ordinarily pay the top income tax rate, according to Ned Davis Research Group. By comparison, buying U.S. Treasury debt for five years would offer a lower annual yield of 1.24%. Municipal borrowers, who typically issue tax exempt debt to finance state and local projects, are paying higher rates to borrow thanks to new money market reforms that went into effect last week. Prime money market funds now have the ability to charge redemption fees or stop withdrawals during times of market turbulence." The piece adds, "The new buyers include taxable money funds, separately managed accounts, hedge funds, and longer-term bond funds, according to Colleen Meehan, the director of municipal money market fund strategies for BNY Mellon Cash Investment Strategies. "The beauty of that product is that they can move up rates to entice non-traditional buyers," she said. "And that's exactly what has happened." The yields look attractive to those investors in an otherwise low-rate world. The yield on three-month Treasury notes, for example, was recently at 0.33% Friday. Another benchmark for municipal yields, the SIFMA Municipal Swap Index, was recently at its highest since the financial crisis, according to Pimco. Variable rate demand notes, which have rates that float, are typically reset based on the swap index rate, making them and other floating-rate instruments attractive buys, Pimco said in research this week."
A press release entitled, "New Capital Advisors Group Insured Liquidity Accounts Provide Alternative to Money Market Funds" says, "Today, Capital Advisors Group, Inc. announced the availability of its new Capital Advisors Group Insured Liquidity Accounts. Capital Advisors Group Insured Liquidity Accounts provide each account holder with up to $100 million in deposit insurance backed by the full faith and credit of the U.S. Government via one convenient account, and present institutional investors with an alternative to money market funds and traditional bank deposit accounts. Depositing cash throughout a network of more than 600 FDIC-insured banks, Capital Advisors Group Insured Liquidity Accounts offer a competitive yield relative to money market funds, U.S. Treasuries, commercial paper and traditional bank deposit accounts, as well as next-day liquidity with no withdrawal penalties, transaction fees, or liquidity gates. "Money market fund reform and the floating NAVs, redemption fees, and liquidity gates now associated with institutional prime money market funds have caused treasurers to search for new short-term investment solutions, but comparable alternatives can be hard to find," said Ben Campbell, founder and CEO of Capital Advisors Group. "We are offering our clients a new product that offers convenience that is similar to that of institutional prime money market funds." The new Capital Advisors Group Insured Liquidity Accounts expand the firm's commitment to separately managed account solutions that are designed to provide safety of principal, liquidity, and yield." (See our previous "Link of the Day," "ICD Adds StoneCastle's FICA to MMF Portal.")
BlackRock CEO Laurence Fink mentioned money market funds a couple of times during the company's recent Q3 2016 Earnings Call. He commented, "While we continue to deliver strong growth, base fee growth has recently lagged growth and average assets under management as client appetite and portfolio construction decisions impact our business mix. In the current environment, client mixed shift has favored index over active, fixed income and cash over equities and government funds over prime funds in the money market space." He added, "Cash management inflows demonstrate the breath of our platform and strength of our client relationships in the lead up to U.S. money market reform. Since the beginning of the year, our platform has experienced a remarkable shift from prime to government funds. BlackRock is now the second largest 2a-7 money fund provider in the United States and our diverse capabilities across separate accounts, collective trusts and short duration products, positions us well for continued future growth." In other earnings news, Northern Trust also briefly mentioned money market funds in its latest earnings release. Northern says, "Trust, investment and other servicing fees increased primarily due to lower money market mutual fund fee waivers and new business, partially offset by the unfavorable impact of movements in foreign exchange rates.... C&IS investment management fees increased primarily due to lower money market mutual fund fee waivers."
The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Sept. 30, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See our Sept. 13 News, "Sept. Portfolio Holdings: CDs, CP Plunge in Aug., Repo, T-Bills Jump.") ICI's release explains, "The Investment Company Institute (ICI) reports that, as of the final Friday in September, prime money market funds held 42.1 percent of their portfolios in daily liquid assets and 62.2 percent in weekly liquid assets, while government money market funds held 61.2 percent of their portfolios in daily liquid assets and 75.3 percent in weekly liquid assets." It says, "At the end of September, prime funds had a weighted-average maturity of 26 days and a weighted-average life of 42 days. Average WAMs and WALs are asset-weighted. Government money market funds had a weighted-average maturity of 42 days and a weighted-average life of 95 days." On Holdings By Region of Issuer, it adds, "Prime money market funds' holdings attributable to the Americas declined from $318.04 billion in August to $256.53 billion in September. Government money market funds' holdings attributable to the Americas rose from $1,476.63 billion in August to $1,759.69 billion in September." The Prime Money Market Funds by Region of Issuer table shows Americas at $256.5 billion, or 49.9%; Asia and Pacific at $79.7 billion, or 15.5%; Europe at $174.3 billion, or 33.9%; and Other (including Supranational) at $3.4 billion, or 0.7%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.760 trillion, or 87.9%; Asia and Pacific at $53.6 billion, or 2.6%; and Europe at $186.7 billion, or 9.3%. The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data. The report includes all money market funds registered under the Securities Act of 1933 and the Investment Company Act of 1940, that are publicly offered. All master funds are excluded, but feeders are apportioned from the corresponding master and included in the report." In other news, the Office of Financial Research has updated its Money Market Fund Monitor with September 2016 data.
MarketWatch writes "Treasury shows openness to increasing issuance in wake of money-market fund reform". The piece says, "The Treasury Department is looking at changing its issuance of short-term bills in the wake of money-market fund reform that has increased demand for government-issued securities. In questions to primary dealers released on Friday, the department asked what the optimum level of bills should be, as well whether the conversion from prime to government-only money market funds in line with expectations. A Treasury official said the agency is satisfied with the way liquidity has held up in the wake of the rules, which went into effect on Friday. The Securities and Exchange Commission is forcing institutional prime money market funds to move from a fixed $1 per share net asset value to a floating NAV. That's had the effect of shifting demand toward funds that only invest in government securities."
Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary comments on the U.S. Government sector, "These are historic times in the money markets, without a doubt, the kind of thing you'll tell your grandkids about one day, if they would have any idea what you’d be talking about. Aggregate government and Treasury fund assets have ballooned since the beginning of the year, increasing from $1.2 trillion to almost $2 trillion, with about a quarter of that growth -- $231 billion -- coming in September alone. Almost certainly, October will see additional inflows." (Note: Government assets have increased by an additional $108 billion through Thursday, Oct. 13, according to our Money Fund Intelligence Daily.) Wells' update continues, "But while the upheaval in the prime and municipal spaces has had dramatic effects on borrowers, both private and public, and interest rates, as seen in the rapid rises in LIBOR and SIFMA discussed in the other sections, the robust inflows into the government space have been handled without much of a fuss, at least so far. While demand has been relentless, the dramatic market dislocations seen in the other sectors have yet to materialize. Probably the biggest effect so far has been the contraction in yield spreads between government-sponsored enterprise (GSE) discount notes and U.S. Treasuries. Investors typically demand a higher return from discount notes, as they are considered to be not quite as pristine from a credit-quality perspective as direct U.S. Treasury instruments.... GSE discount notes yielded about 7 bps more than Treasury bills (T-bills) on average in 2015, and that spread has steadily fallen in 2016, nearing zero recently.... With all the new demand, investors have essentially viewed any spread over Treasuries as attractive, flocking to those investments whenever they pop up."
ICI's latest "Money Market Fund Assets" report shows MMFs overall decreasing $6 billion in the latest week, but Prime funds fell by $56 billion, half their drop the previous week (they fell $110 billion last week, $85 billion the week before and $60 billion 3 weeks ago). Prime has declined in 19 out of the past 20 weeks (-$740B). Since Oct. 29, 2015, Prime assets have fallen by a massive $1.045 trillion, or 72%, and Tax Exempt funds have declined by another $117 billion, or 48%. Combined these two non-Government sectors (which will be subject to the possibility of emergency gates and fees starting today) have fallen by $1,163 billion (-68%) since this giant migration started. Government funds (including Treasury funds) gained $51 billion in the past week (after gaining $88 billion last week and $102 billion the prior week). They've increased by $1,095 billion since last October (more than doubling, up 108%) and by $888 billion, or 73%, YTD. (YTD in 2016, Prime MMFs are down by $871 billion, or 68%.) ICI's latest release says, "Total money market fund assets decreased by $6.22 billion to $2.65 trillion for the week ended Wednesday, October 12, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $51.24 billion and prime funds decreased by $56.10 billion. Tax-exempt money market funds decreased by $1.36 billion." It continues, "Assets of retail money market funds decreased by $3.41 billion to $938.05 billion. Among retail funds, government money market fund assets increased by $6.28 billion to $556.42 billion, prime money market fund assets decreased by $8.74 billion to $261.34 billion, and tax-exempt fund assets decreased by $950 million to $120.28 billion." The update adds, "Assets of institutional money market funds decreased by $2.81 billion to $1.71 trillion. Among institutional funds, government money market fund assets increased by $44.96 billion to $1.55 trillion, prime money market fund assets decreased by $47.36 billion to $151.73 billion, and tax-exempt fund assets decreased by $410 million to $7.26 billion."
Federated's CIO for Global Money Markets Debbie Cunningham posted a new video entitled, "How much will institutional FNAV funds fluctuate? She comments, "The likelihood of an institutional FNAV money market fund fluctuating at anything other than the 4th digit, which would represent a 100th of a penny or a basis point, is remote, unless that fund is experiencing a negative credit event. Theoretically, an institutional FNAV money market fund that was positioned at its worst configuration at the time of a rate-hike would be most at risk. That most aggressive configuration would consist of having a 60-day weighted average maturity, owning the maximum in individual securities out to 397 days final maturity, and having the least amount allowed in daily and weekly liquid assets, that being 10% and 30%, respectively. In that worst configuration the FNAV fund would move, all things being equal, about 4 basis points with an instantaneous shift of 25 basis points in the yield curve with all other considerations such as fund size being held constant. In actuality, when fund managers begin to anticipate a Fed move, they reposition their portfolio to be shorter, and to have greater liquidity. The market also generally prices in a fed move over a 3-4 month window as oppose to instantaneously. This is exactly what happened in the December 2015 move. During that move the shadow NAV funds moved 0-2 basis points rather than the 4 basis points, so 1 in 4 zeros either stayed there or went to 4 9's or went to 0.9998. This was great to see this play out as such especially when the transactional price over this time period was still at $1 dollar. As far as evaluation and comparisons go, total return calculations must now be used rather than just straight yield comparisons. The total return calculation in the December rate hike scenario, as I said, resulted in shadow NAV declines of about 0-2 basis points. For those funds that theoretically lost 2 basis points in price, was the yield spread over those funds whose NAV's remained stable enough to compensate for those lost basis points in price? This depends how large the spread was being earned. Generally speaking, the larger the spread and the longer the holding period, the more favorable the outcome toward the FNAV institutional money market fund product."
Bloomberg writes "A $1 Trillion Paradigm Shift Changes Funding Markets Forever." The piece says, "It's the most sweeping change for U.S. money market funds in over three decades and the biggest operators say it'll have a permanent effect on the way investors allocate their capital. After years of wrangling with regulators, the $2.7 trillion industry will give up its rock-solid, dollar-for-dollar guarantee for institutional funds that invest mainly in riskier, non-government debt. The impending change has been a boon for the U.S. government and comes at the expense of banks and other corporate borrowers. Already, investors have shifted more than $1 trillion away from so-called prime funds that buy certificates of deposit and company IOUs and flooded into government-only funds, which invest in T-bills and other short-term U.S. debt and are exempt from the change. Assets in those funds, which never exceeded 40 percent before December, now account for 77 percent of all money-market assets, according to Investment Company Institute data going back to 2007." The article adds, "The reforms have triggered an exodus from prime funds. Assets in that category have plunged by $974 billion in the past year to $473 billion. Almost all of it has flowed into government-only funds, which have doubled to $2.05 trillion over the same span. "There is a lot of uncertainty around prime funds," said `Tom Callahan, head of global cash management at BlackRock, the second biggest money-market fund company with about $250 billion of such assets. "For some, it's the floating NAVs. For some, it's the gates and for some, it's the fees. For some it's all of the above."" See also, the WSJ blog "M&A Deals Feel Ripples of Money Market Reform".Archives »