Fitch Ratings published brief entitled, "Fed Reverse Repo Facility Offsets Low Quarter-End Supply. It says, "The Federal Reserve's new reverse repo program (RRP) was well received by money market funds (MMFs) as a potential source of supply at the end of the third quarter, according to Fitch Ratings. Banks typically reduce repo and other borrowings at the end of each quarter, limiting the availability of investment options for MMFs. The July Fed minutes discussed establishing a fixed-rate, overnight repo facility wherein market participants, including certain MMFs, would be eligible to lend cash to the Fed on an overnight basis, collateralized by securities held by the Fed. The repo facility is an additional tool for the Fed to manage a reversal of its quantitative easing program and money market interest rates by lending securities for a set period of time to withdraw cash from the banking system. The Fed began testing the RRP in late September."
Fitch writes, "Many money fund managers indicated to Fitch that they intend to participate in the RRP, and indeed, bids submitted to the Fed spiked at the end of the third quarter, reaching $58 billion from 87 bidders. However, the total dropped in the beginning of the fourth quarter, as investors opted for higher repo rates elsewhere. The total of bids submitted was as low as $1 billion on Nov. 7, with 6 counterparties participating."
Finally, they add, "Fitch believes lower market repo rates or a higher rate paid by the Fed may lead to more participation. To encourage greater participation, the Fed recently increased the maximum allotment per counterparty from $500 million to $1 billion and hiked the interest rate paid on the overnight facility from 1 basis point to 2 basis points, and then to 3 basis points. The program would expand MMFs' investment opportunities in light of constrained asset supply and offer a high quality, liquid investment option. However, participation in the RRP is limited to MMFs with at least $5 billion in assets. There are 139 approved counterparties for the program, including 94 MMFs."
Fitch also released a brief entitled, "Money Funds Face Pressure in Navigating Changes in Bank Support." It comments, "Money market fund managers will be under pressure to proactively manage exposures to financial institutions if changes to bank support assumptions lead to downgrades of banks that are active issuers to money market funds, according to Fitch Ratings. Given rated money funds' sizable exposures to banks, Fitch Ratings examined exposures to entities whose Support Rating Floors underpin their 'F1' short-term rating. Overall, the magnitude and duration of the exposures appear to be manageable -- on average at 13.9% of funds' assets and with an average maturity of 31 days. For certain funds, though, the exposures to some 'at risk' institutions are relatively high and/or long-dated -- as high as 31% of a fund's assets and certain individual exposures as long as 360 days."
It adds, "Under the agency's criteria, rated money funds would not necessarily be forced sellers of any bank exposures downgraded below 'F1', provided the risks to shareholders were judged to be low and a credible, near-term remediation plan was in place. However, managers' contingency plans for proactively managing their exposures and exiting positions would be critical."
In other news, Wells Fargo Advantage Funds' most recent Portfolio Manager Commentary comments, "To many, October will be remembered as the month Congress narrowly averted a U.S. Treasury default by temporarily suspending the cap on the amount of debt the government could issue. Now that several weeks have passed, we hope to look back at this episode and try to answer the question: Was a default on Treasury securities ever a real threat? In our view, it was not. Clearly this is not a unanimous opinion, and some major investors were quite vocal at the time about selling Treasury holdings that matured in the latter part of October. Our view is different for several reasons."
Wells writes, "First, we do not subscribe to the belief that the partial government shutdown and near collision with the debt ceiling were symptomatic of a dysfunctional government. We acknowledge a wide range of legitimate views on this topic, and there are differences on our own investment team, but no matter what your view on government spending and debt, a substantial portion of the American people disagree with you -- so is it any wonder Congress is also split on this topic? Rather than a symptom of dysfunctional polarization, we see this as a healthy sign that Congress is reflecting the views of the people, albeit in a rather messy fashion in terms of process."
They add, "Second, it is correct that on October 17, the so-called drop dead date, the Treasury was forecast to run out of headroom under the debt ceiling, but this only curtailed its ability to issue incrementally more debt; it did not prevent them from rolling over maturing debt issues by selling new debt to replace maturing issues, as long as the total outstanding remained under the debt ceiling. October 17 was the date on which the Treasury expected it would be unable to use additional extraordinary measures to remain under the debt ceiling, but there was never any danger that the Treasury bills (T-bills) maturing that day would not be paid once sufficient new issues had been sold to refund them."
