As we mentioned in yesterday's "Link of the Day," Sunday's FT wrote a piece called, "Future of money market funds questioned," which reflects the new bearish view on European-centered and denominated money funds. The FT said, "Money market fund managers are likely to question whether they want to continue their involvement in an activity that is becoming increasingly unprofitable, industry commentators say. In a very low interest rate environment, yields on money market funds are being squeezed to a minimum, forcing providers to waive fees and review the structure of their products. If this continues much longer, credit rating agencies believe asset managers would have to consider whether it makes business sense to continue selling money market funds."
The article quotes, Charlotte Quiniou of Fitch Ratings, "This is one of the predictable outcomes. If funds become less and less profitable, managers will ask themselves whether they want to continue or not." The FT added, "Several managers have already closed funds after the European Central Bank dropped its overnight deposit rate to zero in July. At the beginning of October, Legal & General Investment Management closed its Euro Liquidity fund, a E257m vehicle.... According to Moody's, the Western Asset Euro Government Fund, ... which had E35m of assets ... has also been recently liquidated. Meanwhile, it was also reported at the end of August that Bank of America would close its Global Liquidity Euro fund, a Dublin-domiciled Ucits product, and return money to investors."
The FT piece noted, "However, many fund managers are expected to decide to remain in the money market fund business, even if they take a loss on that particular business segment.... Recent merger and acquisition activity in the money market fund sector has included deals from Deutsche Bank, which last year bought funds from Henderson Global Investors and Standard Life Investments. Earlier this year, Federated Investors also completed the acquisition of Prime Rate Capital Management."
Finally, the FT wrote, "Analysts also say that, following the ECB's rate cut, the priority for asset managers is not so much to sell funds but to prepare them for negative yields. Ms Quiniou says that virtually "all" asset managers are preparing their CNAV funds to allow yields to turn negative.... No CNAV fund is believed to currently have negative yields, but Moody's says the industry has identified a number of alternatives that will allow money market funds to operate in a negative or very low interest rate environment."
In other news, yesterday, Wells Fargo Securities Strategist Garret Sloan explains a little understood seasonal factor on cash rates and money fund balances, mortgage pool interest payments in his latest commentary. He wrote, "Repo markets spiked higher on Thursday last week to correspond with the monthly Fannie Mae/Freddie Mac mortgage pool interest payments and pool pay downs. As cash accrues at mortgage servicing companies from mortgagors, the growing cash balance is generally put to work in the repo market until it is required for distribution to MBS investors on the 25th of the month. The growing cash balance places downward pressure on the repo rate (all else equal), and on the 25th of each month there is generally a spike in repo rates as cash (i.e. demand for collateral) leaves the repo market to be paid out to investors."
He explained, "The cycle is repeated each month and last week mortgage repo climbed from 20 basis points earlier in the week to as high as 32 basis points on the 25th, and back down to 26 basis points on Friday. Treasury and agency repo followed suit, though in a more muted way. Treasury repo climbed from 19 basis points to as high as 26 basis points and back down to 22 basis points. However, the mortgage pay down is likely to pale in comparison to the upward pressure on repo rates seen this morning. The weather is again playing into the rates being paid in the repo market, with general collateral surging higher. Dealers and banks in need of funding are paying up significantly to make sure that their balance sheets are financed before the early close today and the potential mandatory close tomorrow."
