Repo rates continued their march upwards in August, rising to a 52 week high at month-end. Wells Fargo Securities Strategists Garrett Sloan and Vanessa Hubbard explain in their latest "Daily Short Stuff," "GCF Repo markets over month-end surged higher, but on slightly lower volume in treasury collateral while mortgage repo volume jumped. Treasury repo rates in the GCF market climbed to average 28 basis points, while mortgage repo rose to 30 basis points on the day. In the tri party repo markets, repo rates over month end were 15 basis points." While CD, CP and other money market rates have inched higher ahead of a September Fed move, Repo rates account for the largest percentage of money fund holdings (21.9%). So we should continue to see money funds' gross and net 7-day yields move higher in coming days. In other news, Northern Trust filed recently with the S.E.C. to approve changes to make its Government funds comply with the new regulations.
The DTCC GCF Repo Index shows Treasury repo rates have increased from a low of 0.02% a year ago to 0.27% as of Sept. 1, Agency repo rates have increased from a low of 0.02% a year ago to 0.29%, and MBS repo rates have increased from 0.06% to 0.29%. Repo rates have risen for 4 straight months. DTCC explains, "The DTCC GCF Repo Index is the only index that tracks the average daily interest rate paid for the most-traded GCF Repo contracts for U.S. Treasury, federal agency and mortgage-backed securities issued by Fannie Mae and Freddie Mac.... The index's rates are par-weighted averages of daily activity in the GCF Repo market and reflect actual daily funding costs experienced by banks and investors, per underlying asset class."
Wells' Sloan also says about month-end, "The Fed reverse repo facility also rose, with 57 participants and $150 billion in collateral accepted. The facility rose from an average usage level well below $100 billion for the month of August, and was also above the July usage number of $131 billion and 52 participants." While we won't know how much money funds held in Fed RRP until next week (when our 8/31 Holdings are published), the $150 billion in month-end of Fed repo is up from $132 billion at the end of July. (See Fed RRP numbers here.)
On the repo rate surge, Barclays strategist Joseph Abate looks at possible explanations. One is the G-SIB capital surcharge. He explains, "The Federal Reserve approved a risk-based capital surcharge for the largest, most systemically important US banks. The additional capital buffer is meant to capture the bank's size, interconnectedness, and complexity. But it also creates an incentive for large G-SIB banks to reduce their reliance on short-term wholesale funding. The capital surcharge for 2015 and 2016 will be based on the average short-term funding on three specific days: July 31, 2015, August 24, 2015, and September 30, 2015."
He adds, "Like quarter-ends for the non-US banks, these dates should cause a similar pull-back in repo borrowing on these days. And as these large banks pull away from the GCF repo market, the smaller dealers are forced to pay more to borrow cash to finance their Treasuries. G-SIBs might have only stepped away from the GCF market on those three days -- not the period in between. The futures market seems to imply that this might be a permanent shift. But the G-SIB banks have actually been doing more repo with money funds. Volume data in the GCF market as well as the broader tri-party and bilateral repo markets do not show evidence of a decline in volume." Other possible explanations for the jump in rates, according to Abate, include: 2) lack of specials activity and a smaller short-base in the Treasury market and, 3) Currency-related selling.
Abate comments, "There is plenty of collateral in the repo market. But it is held by banks and brokers whose credit ratings or balance sheet size prevent them from directly engaging (borrowing from) money funds. Rated money funds generally cannot "look through" to the underlying collateral to bypass their counterparty's credit rating -- even for Treasuries. The universe of high quality "money fund" and GSE eligible repo counterparties has shrunk."
In other news, Northern Trust filed to make the necessary changes to its Government money funds to comply with the new SEC rules for those funds, we learned from Strategic Insight's Simfund Filing service. The filing, dated July 24, says, "The Board of Trustees of Northern Institutional Funds recently approved certain changes to the principal investment strategies of the U.S. Government Portfolio, U.S. Government Select Portfolio and Treasury Portfolio. These changes were approved in connection with amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, which is the primary rule governing money market funds, including the Portfolios. The Prospectus is being updated as described below to reflect that the Portfolios will operate as "government money market funds," as defined in the Amendments.”
It continues, "The changes, all of which are effective September 30, 2015, will bring the Portfolios into conformance with the requirements of the Amendments. The first two paragraphs ... on page 6 of the Prospectus are deleted and replaced with the following: The Portfolio seeks to achieve its objective by investing, under normal circumstances, substantially all (and at least 99.5%) of its total assets in cash, securities issued or guaranteed as to principal and interest by the U.S. government or by a person controlled or supervised by and acting as an instrumentality of the U.S. government pursuant to authority granted by the Congress of the United States or any certificate of deposit of any of the foregoing, and repurchase agreements that are fully collateralized by cash or such securities."
With Northern's filing, we have now heard from 19 of the top 20 managers on at least some portion of their plans on how they will adapt to money market reforms. On July 22, we wrote, "Managers Rolling with Reform Changes; Recap of Announcements So Far," which summarized all of the changes up to that point. However, since then we have had announcements from Blackrock ("BlackRock to Liquidate 3 Muni MMFs, Convert Old Merrill Primes to Govt"), Goldman Sachs AM ("Goldman Sachs to Launch New Prime Retail, Treasury Fed RRP Funds"), American Funds ("American Funds Leans Government"), SEI ("SEI Consolidates Classes; Trillion Dollar Shift?"), T. Rowe Price (T Rowe Price to Launch Prime Inst MMF"), and Franklin Templeton ("Franklin Goes Government; $200 Billion To-Date to Convert from Prime"). The only top 20 MMF manager we have not seen any announcements or filings from to date is BofA Funds.
