Fitch on WAM Trends
A press release entitled, "Fitch: US Prime Money Funds Differing on Views of Fed Rate Hike," says, "US money fund managers have, on average, significantly reduced portfolio maturities in recent months, as the industry positions for rising rates and money fund reform; however, there is evidence of widely differing views within these broad trends, according to Fitch Ratings. Fitch sees some of the significant weighted average maturity (WAM) variations in part reflecting differing expectations on the timing of the Fed's first rate increase. An example of two large prime money fund managers with diverging WAMs can be seen in the chart here. The WAM of Morgan Stanley-managed prime funds has been trending materially lower since the beginning of 2015, dropping to a trough of 12 days seen at the beginning of June, from 31 days recorded in January. On the opposite end, JPMorgan-managed prime funds are trending in a much higher range, with WAM increasing to 53 days from 44 days over the same time period. Across all US prime money market funds, WAMs have declined to 37 days at the beginning of June 2015, from 48 days at the end of October 2014, according to iMoneyNet data. Adjusting maturities is a key strategy for money funds, as portfolios with shorter maturities will generally tend to outperform if the Fed raises rates faster than the market expects, while longer-positioned funds will likely outperform if the Fed moves slower than expected. However, we recognize that a range of factors including credit quality considerations, investor profiles and asset flows can also explain maturity positions. An additional important consideration for prime fund managers is the approaching effective date for the implementation of money fund reform. The Securities and Exchange Commission set October 2016 as the time when certain prime money funds will start floating their share prices and may be subject to redemption restrictions. The industry generally expects these provisions to cause large asset outflows from prime money funds to government funds in the months leading up to the reform implementation date. Therefore, many fund managers have begun building up liquidity positions to withstand redemptions. So far, however, outflows from prime funds have been muted. Institutional government fund assets have increased 9% since reform was enacted in July 2014, but institutional prime funds have also risen by 6%, according to data from Crane. Seasonal factors affect money fund flows, so it is hard to tell whether the data indicate a reform-related preference toward government funds, which will likely intensify closer to the reform implementation date. Anecdotally, Fitch is aware that a small number of institutional money fund clients have switched from prime to government funds in response to reform. The increased demand for government funds may bump against shortages in supply and, consequently, lead to wider spreads between government and prime funds."
