Money market strategists examine the debt ceiling battle brewing in Congress and the potential impact on Treasury Bills and money funds in their recent commentaries. Barclays' Joseph Abate writes in his "US Weekly Money Market Update," "The Treasury has ratcheted up the pressure on Congress to lift the debt limit quickly. Despite growing Treasury concern, there has as yet been no noticeable back-up in bill yields. Is the bill market too complacent?" We review commentary from Abate as well as from Citi's Andrew Hollenhorst and JP Morgan's Alex Roever. Also, we cover a new report on Private Funds, including Liquidity Funds, from the SEC's Division of Investment Management. The report, "Private Funds Statistics, Fourth Calendar Quarter 2014," examines statistics and trends, as reported by private fund advisers on Form ADV and Form PF. (Note: We look forward to seeing those of you attending this week's AFP conference in Denver! Visit Crane Data at Booth #300 and see Pete Crane speak on "Floating NAV MMFs and Cash Alternatives" Monday at 10:30am.)
Abate writes, "The Treasury willingly sacrificed its "financing" (bill) instruments this summer to keep its "funding" (coupon) auctions as regular and predictable (with respect to size and timing) as possible. But to accomplish this with its dwindling borrowing capacity under the extraordinary measure has required very sharp reductions in bill supply. Since August, the supply of bills has shrunk by nearly 15% (or $200bn). This has created a scramble among investors looking to roll their existing holdings into 1m, 3m, and 6m bills that have been cut to $8bn, $20bn and $20bn (October 15) from $40bn, $24bn, and $24bn, respectively in early August. Short-dated coupons with November 15 maturities briefly cheapened this week with their yields rising to between 10 and 13bp. This suggests that the supply scarcity in the bill market might be subtracting about 10bp from the debt ceiling 4w bill."
He explains, "Separately, the Treasury's deadline of November 3, is the day before it is set to announce the mid-quarter refunding. If Congress has not increased the debt ceiling by then, the Treasury might have to postpone or make its auction of 3, 10, and 30y securities conditional on an increase in borrowing authority.... We are confident the debt limit will be increased as it has been since it was first introduced in 1917. We are hopeful that the increase (or, more accurately, the suspension) will extend beyond the 2016 election and well into 2017. But, as noted above, the politics are still fluid and it is possible that the Treasury is granted a temporary debt ceiling suspension -- say, until December 11, when the current continuing resolution authorizing spending for FY 2017 expires."
Abate adds, "Assuming the ceiling is raised at the last minute (consistent with the 2011 and 2013 episodes), and for the full two years, the Treasury might need to issue as much as $250bn in bills between November 3 and year-end just to reach its year-end target cash buffer of $275bn. We expect this to significantly cheapen bill yields and it could push 3m bill yields toward 10bp -- even with the Fed on hold into 2016. But it would also simultaneously create a fair bit of dealer indigestion that, in turn, could amplify the cheapening in bill yields and put upward pressure on GCF repo rates. For the Treasury to raise as much as $250bn in bills in such a short time, it will need to rapidly ramp up the auction sizes -- pushing 1m bill offerings to $40bn, and the 3m and 6m bill auctions to $30bn each."
In his "Short-End Notes" last week, Citi Research Strategist Hollenhorst explains, "Demand for T-bills continues to outstrip supply with the last four 1m T-bill auctions clearing at 0bp. This week's 3m T-bill auction cleared at 0bp for the first time in recent history as downward pressure on bill yields moves further out the curve.... Following last week's guidance from Treasury, most private sector forecasts (including our own) for the "hard" debt ceiling, when Treasury will no longer be able to meet its obligations, have moved to mid-November."
He adds, "The uncertainty around Republican leadership and negotiating tactics increases the risk of a nail-biter resolution to the debt ceiling. Consequently, the risk of cheapening of Treasury securities with maturities or coupon payments in November has risen."
In its latest "Prime Money Market Fund Holdings" report, JP Morgan Securities' Roever writes, "Generally, money market funds are not heavily exposed to potential debt ceiling risks in the bill market. During the last debt ceiling debacle in 2013, 1m bills sharply sold off in mid-October as investors feared a technical default by the US Treasury. After Congress reached an agreement to lift the ceiling, bills quickly rallied back to normal levels. This time around, a similar episode could play out should Treasury exhaust its available funds, which we project to happen no later than 11/12. Should this occur, we do not believe that MMFs are in too much risk. In total, Treasury security holdings represent less than 3% of total prime fund assets. While government funds allocate about a third of their assets to bills, floaters, and short coupons."
Crane Data's latest Money Fund Portfolio Holdings data shows that money funds hold $414.5 billion in U.S. Treasuries as of Sept. 30, or 16.2% of total holdings in taxable funds. Looking at the maturity distribution on 9/30, 23.0% of Treasuries were in overnights, 3.0% in 2-7 days, 17.9% in 8-30 days, 14.5% in 31-60 days, 23.3% in 91-180 days, and 7.5% in over 181 days. (See also, The Wall Street Journal's "Debt Ceiling Standoff Hits Bond Market".)
In other news, the SEC released a report, "Private Funds Statistics, Fourth Calendar Quarter 2014," which (among other things) examines data Liquidity Funds, which are similar to 2a-7 money market funds. The SEC's press release quotes Chair Mary Jo White, "We believe that investors evaluating investments in private funds will benefit from access to this additional information about the private funds and their advisers. These statistics also should facilitate constructive feedback and additional analysis that could be used by the Commission and others."
The release adds, "Advisers must report on Form ADV general information about private funds that they manage, such as basic organizational and operational information, fund size and ownership. Form PF is filed by SEC-registered investment advisers with at least $150 million in private funds assets under management to report information about the private funds that they manage. The staff intends to update the private fund statistics report periodically."
The report shows that there are a total of 69 Liquidity funds and 35 Advisers offering Liquidity funds. Further, there was $272 billion in Liquidity funds and another $349 billion in Parallel Managed Accounts at the end of 2014. It also states that 51.1% of Liquidity Funds are fully compliant with Rule 2a-7 and 60% are compliant from a Credit Quality standpoint.
In July, we reported on the US Treasury's Office of Financial Research paper, "Private Fund Data Shed Light on Liquidity Funds," and covered it in our story, "OFR Sheds Light on Liquidity Funds, STIFs, Managed Accts in Form PF." The OFR's paper stated, "This brief analyzes for the first time a new confidential dataset collected by the Securities and Exchange Commission (SEC), the Form PF filings of liquidity funds. Like money market funds and banks' short-term investment funds, liquidity funds generally invest in short-term assets and have portfolios structured to meet investors' near-term liquidity needs." `The OFR paper had data as of March 31, 2015, and showed `Liquidity Funds with $288 billion in assets and an additional $359 billion in parallel managed accounts.
