JPM on MM "Floaters"
JP Morgan Securities says demand for "Money market floaters" has "surged" recently in its latest "Short Term Fixed Income." It explains, "Over the past several months in the 2a-7 space, demand for floating rate CP/CDs has surged. Short-term floaters are a means for MMF managers to participate in a potential rise in rates. Furthermore, floaters have also offered a slight yield pickup over their matched maturity fixed rate counterparts, and have not substantially impacted portfolio WAMs. These factors combined have made floaters an attractive option for money market investors. That said, we thought that it would be worth providing some color around the current state of the market below. Year to date, the primary issuers of money market floaters have been high credit quality banks. Indeed, nearly 50% of the $319bn printed in floating rate CP/CDs this year has come from Canadian, Australian, and Japanese banks. With heavy investor demand for high quality credits, these issuers have been able to price floaters at reactively tight spreads to 1m Libor. In contrast, lower tier banks have not been large issuers in the floater market, as MMFs have generally kept their exposures to these banks short for credit purposes. From a maturity perspective, issuance in floating rate CP and CDs has predominantly been concentrated in 6m paper. This has become even more so the case in recent months, with issuance in 6's growing in tandem with Fed expectations. Conversely, issuance in 1yr paper has fallen this year, while 9m paper has not seen significant interest so far. We suspect that poor liquidity in the 9m-1y space is due in large part to money market reform coming into play -- investors are avoiding going out too long in order to maintain ample liquidity, whether it be for meeting potential redemptions or due to plans of converting from prime to government fund status." JPM continues, "Looking forward, with a Fed tightening cycle on the horizon, we expect demand for floaters to remain strong throughout the remainder of the year. Regardless of when the first rate hike actually occurs, it is likely that money funds continue to prefer the rate protection and WAM benefits received from buying floaters. Furthermore, we suspect that the sweet spot for issuance could creep in from the 6m space as the effects of money fund reform take greater hold during late 2015/early 2016. As this occurs, pricing in the 6m-1yr sectors will likely cheapen up relative to respective fair values, within spread compression in shorter tenors."
