First the good news. Money market mutual fund assets rose on Thursday for the fourth day in a row, increasing $16.61 billion following gains of $1.5 billion on Monday, $26.2 billion on Tuesday, and $19.64 billion on Wednesday (according to our Money Fund Intelligence Daily, which tracks funds over $1 billion in assets). Flows have stabilized after losing approximately $200 billion, or about 6%, of assets, primarily in the two days following Sept. 16, when just the second fund in history -- The Reserve Primary Fund -- "broke the buck." Money fund assets fell $15.65 billion in the latest week (through Wednesday) to $3.398 trillion according to the ICI's more comprehensive weekly series). But fund asset totals remain up by $178 billion, or 8.1% year-to-date and still show a huge increase -- $529 billion, or 18.4% -- over the past 52 weeks.
Now the bad. This relatively minor looking dent, however, masks huge outflows from "Prime" or general purpose money funds. The shift from Prime Insitutional funds into Treasury and Government money funds has been astonishing. Through Wednesday, ICI's weekly series shows General Purpose Taxable Institutional money funds losing 10.8% of assets this past week (-$128.0 billion) and losing 16.7% (-$239.9 billion) the prior week. Government Institional funds (including Treasury funds) gained $130.0 billion this week and gained $70.9 billion last. Keep in mind, however, that the implosion of The Reserve accounts for almost 1/3 -- over $70 billion -- of the total outflows. (This money has been removed from fund assets but has yet to be released.)
Prime money fund assets have continued to decline this week, though the decreases slowed substantially following the Treasury's announcement last Friday that it would provide a $1.00 guaranty to money fund asset levels as of Sept. 19. Nonetheless, the erosion of prime assets coupled with funds moving towards safer and more liquid investments continues to place high levels of stress on the commercial paper and corporate funding markets. (See WSJ's "Debt Market Distress Spreads" and Financial Week's "Cost of Commercial Paper Spikes".)
Going forward, however, we expect money fund assets, including Prime Institutional funds, to slowly claw their way back. The marketplace should realize that nobody else has "broken the buck" and that everyone but Reserve was able to survive this unprecedented shock and run. Skepticism over the Government's guaranty program should also fade in coming days, as the realization dawns that even new money will benefit from the plan's guaranty of a "floor" for money fund assets. The current base of prime and municipal money fund assets can, at least temporarily, assuage their customers by pointing to the backing of the deepest pockets of all, Uncle Sam's. This government protection of most of their funds should easily enable advisors -- almost all now deep-pocketed -- to protect the layers of new assets that comes into funds should something else "blow up" in the funds themselves.
