J.P. Morgan's last "Short-Term Market Outlook And Strategy discusses, "A deep dive into weekly MMF holdings and Treasury repo clearing." It a section entitled, "MMF holdings update special edition: tax season flows," they write, "In a departure from our usual monthly MMF holdings update, we took a look at Crane's weekly MMF holdings data to see how their portfolios evolved around tax season -- a time period when MMFs tend to see larger outflows. [A table] shows the composition of their portfolios as of March month-end, 4/11 or 4/12, and 4/18 or 4/19. This is based on 42 taxable MMFs with reported holdings data as of at least 4/18, representing close to 40% of the entire MMF universe." (Note: Let us know if you'd like to see our latest Weekly Money Fund Portfolio Holdings data set, which is a shifting subset of our monthly Money Fund Portfolio Holdings collection.)
The piece explains, "Not surprisingly, the weekly holdings data reveal that MMFs shifted away from T-bills during the first two weeks of April, declining by $11bn MTD through April 12 and by another $22bn on and in the days following April 15. This observed drop in T-bill holdings makes sense -- at the same time that net bill issuance had fallen MTD by a full $134bn as of a week ago, MMFs were in many cases seeing tax-related outflows and/or shortening portfolios in response to growing hawkishness."
It states, "On average, taxable MMFs have reduced WAMs by 2-3 days MTD. To the degree that MMFs were shedding T-bills to fund potential outflows, this might have also contributed to elevated primary dealer T-bill inventories and the resilience of T-bill/SOFR spreads. As our Treasury strategists noted, the negative T-bill issuance heading into tax season did not result in a richening in T-bill/SOFR spreads, as the higher-than-expected primary dealer T-bill inventories might have counterbalanced the impact of reduced issuance."
They then say, "Meanwhile, the weekly holdings data also reveal a notable pickup in non-Fed repo. It appears that numerous MMFs eagerly sought funding away from the Fed in the days just before April 15, with the above-mentioned subset of funds increasing non-Fed repo holdings by $53bn from March-end. This suggests funds found non-Fed repo attractive relative to RRP, a fact that could partly explain the meaningful drop in ON RRP on April 12. This appears to be supported by the data: on a weighted-average basis, many funds (at least 21) secured overnight Treasury funding at a coupon rate of 5.31% or above on 4/11 or 4/12, versus RRP's 5.30%."
JPM then states, "Looking ahead, by the end of April, we're likely to see a significant month-over-month drop in MMFs' total T-bill holdings, especially considering that we've now seen T-bill outstandings fall by a total of $180bn MTD. Aside from bills, we also expect MMF flows to return to positive and ON RRP balances to remain fairly sticky in the near term."
Their section, "Get in the clear: more details on Treasury repo clearing," tells us, "Last December, the SEC finalized the Treasury clearing mandate, which would require covered clearing agencies to have direct participants submit all eligible repo and cash trades for central clearing. All repo and reverse repo trades done with a direct participant, other than those facing certain public sector entities, are scoped in under the rule, with an implementation date of June 30, 2026. This is a big deal, as only about 30% of the Treasury repo market is currently cleared ..., and most of the remaining $3.2tn would need to be moved over to central clearing."
It continues, "In order to access clearing at FICC, scoped-in market participants (MMFs, hedge funds, banks, insurance companies, asset managers, retirement funds, pension funds, etc.) must be/become one of the following: 1) a GSD netting member, 2) a Sponsored Member of a Sponsoring Member, 3) an Indirect Participant of an Agent Clearer, or 4) a direct limited member of FICC's Centrally Cleared Institutional Tri-Party Service. Importantly, last month, FICC submitted an NPR change to the SEC in terms of how it plans on modifying GSD rules with respect to the separation, collection, and holding of margin for proprietary transactions and that of indirect participant transactions. Margin collection/posting varies depending on how a market participant accesses clearing and whether the repos are being transacted in a 'done-with' or 'done-away' model."
JPM writes, "For the most part, market participants have gravitated towards becoming a sponsored member and engaging in sponsored repo, which is transacted in a 'done-with' model. Notably, the SEC provided a 5-year exemption for registered funds, including MMFs, to place margin at FICC to support their sponsored repo transactions, but because FICC's current infrastructure prohibits end users from posting directly to FICC, dealers will likely continue to post margin on behalf of MMFs. While sponsored repo is currently the primary form of clearing for many market participants, there are still challenges with this access, particularly with respect to hedge funds and their inability to engage in portfolio margining or engage in repo with a 'done-away' model."
They conclude, "In general, clearing repos should increase dealer repo capacity given balance-sheet netting benefits and capital efficiencies gained. However, there are meaningful operational and regulatory considerations that could limit the benefits gained from moving into clearing. At this time, it's unclear whether FICC's Agent Clearing Model is a commercially-viable one that will incentivize firms to become agent clearers to facilitate 'done-away' Treasury repo transactions, which is uncommon in the current Treasury repo ecosystem. Even if they get Rule 15c3-3a relief by posting customer margin on a gross basis, the economics of running an agent clearing business could change meaningfully."
In other news, Fitch Ratings recently published "U.S. Money Market Funds: 1Q24," which says, "Total taxable money market fund (MMF) assets increased by $100.1 billion to $6.3 trillion from December 31, 2023 to March 31, 2024, according to Crane Data. Government MMFs lost $22.2 billion in assets during this period, prime MMFs gained $94.6 billion, and treasury MMFs gained $27.6 billion."
They also write, "Taxable MMFs increased their exposure to Treasury securities from December to March. Treasury holdings increased by $291 billion from December 31, 2023 to March 31, 2024 while Repo holdings decreased by $287 billion over the same period, according to Crane Data. In February, Treasury securities overtook Repo as Taxable MMFs' top asset allocation.... As of March 31, 2024, institutional government and prime MMF net yields were 5.12% and 5.24%, respectively, per Crane Data. Yields increased significantly in 2023 but have remained stable since the last Fed rate hike in July."
Finally, an article titled, "Franklin Templeton Launches Money Market Fund on Polygon" states, "Franklin Templeton has revealed that the Franklin OnChain U.S. Government Money Fund (FOBXX) will be integrated into the Polygon (MATIC) blockchain. This is a significant step for the first-ever U.S.-registered mutual fund, which now uses public blockchains to perform transactions." (Another brief was just posted by this a.m. by Axios, "BlackRock tokenized fund overtakes Franklin Templeton.")
For more, see these Crane Data News stories: "European Money Fund Symposium London, Sept. 19-20; Tokenized MMFs" (4/25/24), "CoinDesk on Tether Stablecoin; Paxos" (2/5/24), "Forbes: SEC Targets PayPal Stablecoin" (11/13/23), "J.P. Morgan on Stablecoin Shrinkage, Risks; Bloomberg, WSJ and NY Fed" (9/28/23), "CNBC on PayPal, Paxos' Stablecoin" (8/10/23) and "NY Fed on 'Runs on Stablecoins'" (7/19/23).
