The Wall Street Journal wrote Monday, "Bond Funds Load Up on Cash." (Note: Crane Data recently began tracking bond funds via its new publication, Bond Fund Intelligence.) The article explains, "Large bond funds are holding the most cash since the financial crisis as portfolio managers brace for potential price swings and unruly trading ahead of an expected Federal Reserve rate increase in 2015. The top 10 U.S. bond funds by assets held an average 6.6% of their portfolios in cash at their latest reporting date, said fund tracker Morningstar Inc. That is double the sum they set aside last year and the most since 2007. The growing cash cushion highlights concern among some investors in the $24.6 trillion bond market about declines in liquidity, or the capacity to buy or sell securities quickly at or near a given price." The article continues, "Adding cash can hurt fund performance but is just one strategy bond managers are using to shore up their funds' defenses in preparation for a turn in investor sentiment. Others are stepping up their use of derivatives -- financial contracts that draw their value from the performance of an underlying asset, index or interest rate—experimenting with new ways of trading on electronic platforms, or becoming choosier about the investors they take on.... The Securities and Exchange Commission recently requested information from large mutual-fund managers about their contingency planning for a drop in liquidity, said a person familiar with the matter. In other news, the NY Fed released a "Statement Regarding Term Reverse Repurchase Agreements," which says, "As noted in the October 29, 2014, Statement Regarding Reverse Repurchase Agreements, the Federal Open Market Committee (FOMC) instructed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) to examine how term RRP operations might work as a supplementary tool to help control the federal funds rate, particularly when there are significant and transitory shifts in money market activity. In support of this goal, and to reduce potential volatility in money market rates, the FOMC instructed the Desk to conduct up to $300 billion in term RRP operations that cross year-end. This statement provides further detail on these operations. These operations are planned to be held each Monday from December 8 through December 29 [and will offer $50 billion or $100 billion]. Each of these operations will be conducted from 9:30 a.m. to 10:00 a.m. (ET).... The maximum bid rate will be set at 0.10 percent (ten basis points), and undersubscribed auctions will be awarded at the highest rate submitted by any bidder."
