Fidelity Investments released a new white paper entitled, "Money Markets 2016 Outlook After Notable 2015." Co-authors Michael Morin and Kerry Pope write, "Investors had to wait until the very end of 2015 to see the Federal Reserve introduce its first interest rate increase in nine years.... The Fed's latest economic projections suggest there will be four additional rate hikes in 2016, consistent with the message in the December statement that this tightening cycle will be "gradual".... The market remains somewhat skeptical, as year-end fed funds futures suggested only two rate hikes are expected next year." It continues, "In the final weeks of 2015, the yield spread between prime and government MMFs widened. Behind this move was a desire by many foreign banks to issue debt in longer maturities for regulatory reasons. As a result, banks were willing to pay higher yields to borrow in the longer term. Prime fund purchases were concentrated in three- to six-month maturities in both fixed and floating-rate instruments. Given the elevated demand, we expect three-month LIBOR to remain high in the coming weeks, potentially causing spreads between prime and government MMFs to widen even further. Over the course of the year, yield spreads may further diverge as demand for government MMFs ramps up in front of the October 14, 2016, regulatory reform implementation." They add, "According to money fund tracker Crane Data, nearly $173 billion of prime MMFs converted to government MMFs in November and December 2015. Crane expects that approximately $262 billion in prime MMF assets will eventually join the government category, suggesting that about $90 billion of prime MMFs are awaiting conversion. Additional demand for government MMFs may come from institutional prime MMF clients seeking a stable net asset value and from depositors being encouraged to withdraw money from banks, which view institutional deposits as increasingly costly from a regulatory perspective. While the increased demand for government MMFs may be substantial, supply should be adequate based on increases to the Fed's RRP from $300 billion to $2 trillion and expected increases in T-bill supply." In other news, the FT writes "China tightens money market regulation", which says, "Regulators in China are planning to impose tighter rules on the rapidly expanding money market fund industry -- an industry that has transformed the way millions of Chinese invest their savings." (See yesterday's "Link of the Day" and our Jan. 20 News, "Ignites: MMF Fee Waivers Drop in 2015; Fitch on MMF Reform in China" for more on China.)
