Crane's 5th Annual Money Fund University, a two-day crash course in money market mutual funds, attracted nearly 100 attendees to the Stamford Marriott in Stamford, Conn., late last week. Our Day 1 recap features coverage of the History of Money Funds, the Federal Reserve, Interest Rates and Money Fund Math, and Fund Ratings, as well as sessions explaining the various Instruments of the Money Markets (including Repurchase Agreements, Commercial Paper, CDs, Tax-Exempt/VRDNs, CDs, Treasurys, and Time Deposits). Day 2, which we will report on in coming days (and in our February MFI), focused exclusively on Money Fund Regulations. "A day and a half is really not enough time to learn about a space as big as the money fund sector, but we're going to give you a crash course and try," said Peter Crane, President, Crane Data, as well as host and MC for the event. He opened the conference leading a session called "History and Current State of Money Funds. (Note: Crane Data's next conference will be our flagship Money Fund Symposium, June 24-26 in Minneapolis. The next European Money Fund Symposium will be Sept. 17-18 in Dublin and our next MF University will be Jan. 21-22, 2016, in Boston.)
"In 1994, when I started writing about money funds and when the Community Bankers Fund 'broke the buck,' the space was only about $500 billion. Money market funds were not this behemoth that they were when the Reserve Fund broke the buck in 2008 and almost took down the world economy with it. Money funds peaked at $3.9 trillion in January 2009 after Reserve broke the buck; money was still pouring in because money funds lagged the money markets." Since that time, money fund assets declined precipitously over the next few years, dropping by about 15% per year in 2010 and 2011, he explained. But then the last 3 years in a row, money fund assets have clawed higher despite a near zero interest rate environment. "The fact that money fund assets have gone up fractionally the last 3 years in a row is just mind boggling," he said, testament to the safety and stability of the funds, which were made even safer by recent reforms.
On the other hand, there is the question of how recent reforms will impact money funds going forward, particularly Prime Institutional, which will be subject to a floating NAV in October 2016. "Institutional investors say they are going to leave, but as Churchill said about America, institutional investors will do the right thing, and stay in prime institutional money funds, after they've exhausted every other possibility," quipped Crane. He believes that any outflows we do see from Prime Institutional MMFs will be "dwarfed by inflows from bank deposits and perhaps from bond funds as well."
In the session that followed, two of the leading strategists in the space discussed "The Federal Reserve and US Money Markets." Brian Smedley, US Rates Strategist at BofA Merrill Lynch Global Research, shared his thoughts on when interest rates will rise. "Our expectation is that the Fed will start to shift up the Fed Funds target range starting in September of this year and from there we see hikes proceeding every other meeting, so half as fast as what they pursued last time." He expects it will go up to the 0.25-0.50% range in September, then to 0.50-0.75% in December 2015. By December 2016, rates will reach the 1.50-1.75% range, he said.
"There's an old proverb that says, "May you live in interesting times," and I think that's a fairly accurate description of financial market conditions, certainly in money markets at the moment," said Joseph Abate, Senior Vice President, Liquid Market Research at Barclays Capital. He focused on 4 topics; 1) the ongoing shortage of government safe assets in the financial sector and how that effects behavior in money markets, 2) how the repo market is changing largely because of dynamics related to the Fed and regulation, 3) the Federal Reserves arsenal of tools, namely reverse repo and term deposits, and 4) market liquidity, especially in prime assets. Going forward, he said, "The next battle, if you will, is not going to show up on this front, it's going to come from somewhere else, and I think it's going to be liquidity."
In her overview of the "Instruments of the Money Markets," J.P. Morgan Securities' Teresa Ho, Vice President, Short Duration Strategy, talked about challenges related to supply. "At its peak (in 2007) total money market supply was around $11.5 trillion. If you exclude Treasurys, the peak was about $9.5 trillion" she said. "Fast forward to today, and that has fallen to $5.5 trillion (excluding Treasurys) so we've seen a drop of about $4 trillion in the sector. As you might expect, a lot of it was driven by banks.
Case in point, the commercial paper market peaked at about $2 trillion at the end of 2006; half of that was in ABCP, or asset-backed commercial paper. This was a very popular way back in the day for banks to fund on a short-term basis on behalf of their clients. This particular product has really fallen by the wayside. The economics for banks to participate in this market has really waned. So right now the ABCP market is at its all-time low, at $230 billion, and it is our expectation that this sector will continue to decline going forward because of other regulatory headwinds." Another sector that has declined is the repo sector. "This is a market that has also suffered from the liquidity crisis. It has shrunk almost by half since 2007 and will continue to shrink if you look at all the regulations out there.
On the other hand, investors still see money market funds as a good way to invest their cash on a short-term basis, so demand is strong. "When you think about what has happened with supply over the last couple of years and factor that in to what's happened with demand -- you have a situation where there's too much cash chasing too few assets. There's a huge gap between supply and demand, and it's the reason why we see the competition for assets right now.... [It's] so intense that's its driving rates very, very low in the front end market. There's a real concern that a lot of money will move out of bank deposits into money market funds because of regulations.... If indeed that is the case and cash moves from bank deposits to money market funds, then this supply/demand imbalance becomes even more acute in the absence of additional supply."
There are some bright spots, however. One is Collateralized CP, which is a small but growing sector of the market at about $30-$35 billion. "Investors have been very attracted to this product." (Rob Crowe, Director, Institutional Clients Group, and Jean Luc Sinniger, Director, Money Markets, both of Citi Global Markets, took a deeper dive into CP in their session later in the day on "Instruments: Commercial Paper and ABCP.") Another glimmer of hope is in the Treasury Bill market.
Ho commented, "We have heard from the U.S. Department of the Treasury that they intend to increase their operating cash balances. Right now they run an average of about $60 billion; the expectation is that that they want to raise it to $500 billion. I suspect if they do that, a lot of it would be funded in the bill [market]. If that is the case, we'll see about $400-$450B in T-Bill supply." She said in closing, "Regulations are going to alter and fundamentally change the landscape, but the markets will adapt and they will evolve and meet whatever needs are out there."
Finally, Day 1 ended with a session led by Adam Ackerman, Vice President and Portfolio Manager at J.P. Morgan Asset Management on "Portfolio Management & Credit Analysis." Ackerman said, "My presentation is about taking everything you've seen today and bringing it all together to give you some insight into how portfolio managers think -- how we assess risk and model a portfolio for our fundamental goal, which is to provide liquidity." He said his primary goal is the preservation of capital. After that, his goals are to provide adequate liquidity and competitive yield, in that order. "Yield is important but it doesn't drive our decision making as portfolio managers, primarily."
He added, "We are in the business of providing liquidity; cash right now. We need to provide any type of liquidity that's demanded, whether it's billions or millions. We need to manage well enough so that we can manage any type of flow risk at any time." In terms of credit analysis, "Generally, the way we think about it is, the higher the credit rating, the higher the liquidity. The better the credit quality, the more concentration I'm comfortable with. Conversely, with lower credit quality, you want to lower your risk through lower concentrations." J.P. Morgan employs a rigorous credit selection process that includes their own internal analysis, he explained. Finally, he said, the ultimate measure of success is how well you meet investors' demands of preservation of capital, liquidity, managing risk, and yield. Do that well, and the assets will come.... Stay tuned for coverage of Day 2 in coming days.
