Wells Fargo Advantage Funds writes in its latest "Overview, strategy and outlook," "For several years now, a contracting supply of eligible money market investments has plagued money fund managers. And while the U.S. commercial paper (CP) market does not tell us the whole supply story, it is illustrative of the entire picture.... Total CP outstandings have fallen to just over $1.0 trillion from nearly $1.6 trillion at the end of 2008. And while outstandings have fallen in almost every category, asset-backed commercial paper (ABCP) has been hit the hardest and is now almost half of what it was at the end of 2008. Total financial CP, which does not include ABCP, has also declined significantly, falling more than 25% from $713 billion at the end of 2008 to $534 billion at the end of 2010." Wells' Dave Sylvester also writes, "We are not terribly optimistic about the possibility for an increase in supply in the money markets. In commercial paper, while we might see an increase in the industrials sector, overall it is a small part of the picture, as financial paper and asset-backed paper comprise 87% of all commercial paper. ABCP outstandings are likely to decline again next year as off-balance-sheet financing becomes less attractive under new regulations. Repurchase supply will probably be flat, as the additional collateral that would come from an increase in issuance by the U.S. Treasury is likely to be offset by Federal Reserve purchases under its second quantitative easing (QE2) program. And after the fits and starts in the European bank credit market this year, we suspect that market participants are unlikely to want to add to those names. The decline in supply argues for tighter credit spreads as top-quality names become scarcer. It should be noted that narrowing spreads on supply issues do not mask increased credit concerns."
