J.P. Morgan published an update titled, "MMF reform spotlight," which discusses how the latest round of money fund reforms might impact the short-term credit funding markets. Authors Teresa Ho, Pankaj Vohra and Holly Cunningham write, "With the deadline to implement mandatory liquidity fees for institutional prime MMFs rapidly approaching (in October), the potential impact this change could have on the CP/CD market has come into greater focus. Recall that the last time institutional prime funds went through a structural change was in 2016 (on the back of the 2014 MMF reforms), when they had to convert from a stable NAV to a floating NAV. In the months leading up to the effective date, numerous funds announced they were converting their prime funds to government funds." (Note: Register soon for our Money Fund Symposium next month in Pittsburgh, June 12-14. We hope you'll join us!)
They explain, "Ultimately, ~$1tn left the institutional prime fund market, and 3m bank CP/CD spreads to OIS widened by as much as 32bp.... Certainly, we can draw parallels in terms of how this upcoming round of MMF reforms could unfold. However, a closer look at the market structure today reveals there are more differences than similarities that we believe will ultimately translate to a much more benign impact on the CP/CD market, all else equal."
The piece tells us, "Current total prime fund AUMs register about $1400bn, roughly the same level before the last round of reforms came into effect. However, the underlying composition of the prime market is substantially different today versus that in 2016. Notably, balances in institutional prime funds (i.e., the funds that are subject to the structural reforms) currently register around $600-$650bn, meaningfully LOWER than the ~$1.0tn in balances in early 2016."
It continues, "Meanwhile, balances at retail prime fund AUMs are much HIGHER today, increasing from ~$500bn in early 2016 to nearly $800bn currently, with expectations that balances could continue to grow as the Fed delays rate cuts. In other words, institutional prime funds make up only 45% of the prime MMF market today, versus over 70% in 2016. Given their significantly smaller size, this should meaningfully reduce the impact of this round of reforms on the CP/CD market."
JPM says, "Prior to 2016, MMFs dominated the CP market, buying 42% of the short-term credit supply.... However, as of 4Q23, their share of the CP market has fallen drastically to 24%, despite overall growth in prime fund AUMs over the past year, particularly in retail prime funds. Meanwhile, other buyers, such as corporates, state and local governments, and securities lenders, have stepped in and played a much larger role in buying front-end credit, supporting the growth of the CP market from a low in 2016. As such, even if prime fund exposure to the CP market were to decrease slightly, the buyer base is now much more diverse and could step in to absorb some of the lost capacity from institutional prime funds as a result of reforms."
They add, "Taken together, we see a much more benign impact on CP/CD spreads as a result of MMF reform, all else equal. That's not to say the risk of wider spreads could not transpire in the coming months, but we believe they will be driven by other factors. To be sure, 6m SOFR FRN spreads have widened 5-10bp from their local tights in early March as liquidity investors turned more defensive heading into quarter-end and tax season.... There might be room to widen further as Fed policy uncertainty remains elevated and as the deadline for MMF reform approaches. But the scale of the impact as a result of reforms will not be anywhere close to what we saw in 2016, for reasons noted above. Moreover, the technical backdrop continues to be very supportive of spreads, with liquidity remaining ample in the front end."
In other news, Federated Hermes' Deborah Cunningham writes on, "Extra innings" in her latest "Month in Cash." She says, "In our view, the U.S. economy isn't moving backward or running in place, but simply in overtime in a game in which cash remains king. Two cuts are likely the most we will get this year. This makes investing tricky. Moving out of liquidity vehicles too soon might mean losing out on yield if the contest stretches on; but waiting to extend the duration of a portfolio until the first cut can lead to the same. We are sticking to our game plan of keeping our weighted average maturities long as we seek higher-yielding securities and paper further out the yield curve. This is no time to let up."
She also comments on reforms, stating, "The second of four phases of the new SEC money market rules went into effect last month with no notable bumps across the industry. Money market funds now must maintain at least 25% in daily liquid assets (previously 10%) and at least 50% in weekly liquid assets (previously 30%). Tax-exempt money funds are not subject to the daily requirement."
Cunningham adds, "The third phase, which arrives next month, is entirely administrative. Its changes primarily concern mandatory reporting, such as if a money fund invested less than 25% of its total assets in weekly liquid assets or less than 12.5% of its total assets in daily liquid assets. Phase four, which imposes mandatory fees on institutional prime and institutional municipal funds if net redemptions exceed 5% of fund's net assets, comes in October. None of the so-called reforms change our conviction that liquidity vehicles are an important and viable option for investors."
Finally, WSJ's "Buy Side" posted, "The Real Fed News: You Should Be Earning 5% or More on Your Cash," which says, "Americans are still feeling the sting of inflation, with goods and services costing 3.5% more than they did a year ago. But with the Federal Reserve holding rates steady this week, there's good news for savers: High-yield savings accounts make it easy to beat inflation, and it's starting to look as though that won't change anytime soon."
They quote DepositAccounts' Ken Tumin, "Today, there's no reason to accept anything less than 5% on savings accounts and CDs." The article adds, "That leaves savers with an unusually potent weapon against inflation, says Tumin. 'It's rare for risk-free savings products to yield significantly more than the CPI [Consumer Price Index] rate."
