Most money market mutual funds announced plans to open and operate normally on Wednesday, following an extremely rare, unscheduled shutdown on Tuesday (some retail funds were closed all day Monday too). Even with the closing of the New York Stock Exchange and stock markets Monday, many institutional money funds opened early this week but closed early ahead of Hurricane Sandy. With the Big Board still closed Tuesday, and with SIFMA (formerly the Bond Market Association) recommending that bond markets close Tuesday, the money markets effectively shut down yesterday. While markets should be open, it could get spooky today with month-end following big outflows Monday and a huge spike in overnight repo (repurchase agreement) rates.
The Federal Reserve Bank of New York commented Monday, "The Federal Reserve Bank of New York is open. Cash operations are open and operational. Fedwire is open and operating with normal hours for Fedwire Funds and Fedwire Securities. Due to financial market closures, several changes have been made to System Open Market Account operations previously scheduled to take place on October 30. (See their Statement Regarding Changes to Open Market Operations Due to Hurricane Sandy.)
SIFMA's release late Tuesday says, "The Securities Industry and Financial Markets Association (SIFMA) recommends the market be open on Wednesday, October 31, for the trading of U.S. dollar-denominated fixed-income securities in the United States. This recommendation applies to trading of U.S. dollar-denominated government securities, mortgage- and asset-backed securities, over-the-counter investment-grade and high-yield corporate bonds, municipal bonds and secondary money market trading in bankers' acceptances, commercial paper and Yankee and Euro certificates of deposit. SIFMA's recommended early and full market closes are recommendations only; each member firm should decide for itself whether its fixed-income departments remain open for trading. All SIFMA recommendations are subject to change due to market conditions."
The majority of institutional money funds opened until noon Monday, while some (Dreyfus, as well as many retail money funds) closed completely. All money funds were closed Tuesday. According to our Money Fund Intelligence Daily, money fund assets declined by $20.7 billion on Monday. (MFI Daily subscribers can spot funds that are closed by looking for no change in the 1-day asset change column, Chg1D.) While money fund rates have yet to reflect them, overnight repo rates spiked on Monday, rising to over 0.5%. (See the DTCC's Repo Index.)
J.P. Morgan Securities Alex Roever wrote last night in a piece entitled, "Liquidity markets: the morning after," "US liquidity markets are expected to reopen on Wednesday morning after Hurricane Sandy forced an early close on Monday and a near total close on Tuesday. Of course, Wednesday is also October month-end, a day when calendar effects normally result in modest changes to market flows that influence short-term interest rates. The confluence of storm-related factors and calendar effects probably will make October month-end sloppy, but we don't expect any systemically threatening developments. Much of the expected short-term yield volatility will result from 2-3 days of pent-up funds trying to flow from cash into short-term instruments."
He added, "Because of the storm, most MMFs closed early on Monday, and virtually all were closed Tuesday.... Most likely, these redemptions were pre-emptive and attributable to companies and other institutional shareholders wanting more cash on hand ahead of the storm. Although funds were closed to share transactions Tuesday, there was limited portfolio activity. Most maturing overnight trades were rolled to Wednesday. Some fund managers were able to execute overnight repo, time deposit and CD trades for cash with a limited number of dealers on Tuesday. While the full slate of dealers will probably return on Wednesday, there will a high level of maturities and a constrained amount of supply. Monday's MMF outflows cloud our expectations for Wednesday, as normally we'd expect month-end redemptions, but now it's uncertain what may have already flowed out, or if there's actually additional pent-up redemptions from funds being closed Tuesday."
