How much cash will shift out of Prime money funds into Government money funds? The question has been asked ever since Money Market Fund Reforms were passed in July 2014. While it was pure speculation last year, the reclassification of more than $264 billion in Prime funds to Government funds in late 2015 and early 2016 ($172 billion has moved to date) has already partially answered the question. Now the approach of the October floating NAV and gates and fees deadline are bringing the question of investor behavior to the fore. The fund conversions were the first wave of money market reform-driven flows; the second wave will come from investors potentially moving assets. The big question we're getting now is: How much will investors move out of Prime and into Government funds, or other vehicles, in 2016? The answer, of course, is that no one knows for sure. But we'll examine the question, recap some of the estimates out there, and give you our own best guess below.
First, how much money is in each type of money fund currently? According to the Investment Company Institute's latest "Money Market Fund Assets" report (as of Jan. 27, 2016), total Government money fund assets are almost equal to Prime MMF assets -- $1.267 trillion is in Prime vs. $1.241 trillion in Government. Among Prime assets, $797.8 billion is Institutional and $469.6 billion is Retail. Over the past year, Government assets have gained $255.8 billion, or 26%, primarily due to the "going Government" conversions. Meanwhile, Prime assets dropped $188 billion, or 12.9%. So with almost $1.3 trillion still in Prime, the range of outflows is anywhere from zero to $1.3 trillion.
What are the projections for outflows in 2016? Estimates range from $250 billion to $1 trillion, but the major variables include rate levels, spreads between Prime and Government funds, and investor acceptance and behavior. We continue to take the "under" and are now projecting additional outflows of around $250 billion, or 20% of the remaining Prime assets. We base this estimate on at least another Fed hike (to widen spreads further) and on inflows from bank deposits and bond funds "back-filling" much of the money that shifts due to convenience and investment restrictions. We also believe that the shifts will not occur until the last minute -- late September or October of 2016.
Discussions about the size of potential outflows were prevalent at our recent Money Fund University. Barclays Joseph Abate said, "It's anybody's guess as to how much will move from Prime to Govie in 2016." His projections fall in the mainstream, estimating that about $300 billion will shift from Prime to Government. Abate added, "If the [prime] fund generates a high enough yield, it may overcome the institutional investors' displeasure with an emergency fee and gate structure, especially since fee and gates don't apply unless there is a major catastrophe."
J.P. Morgan Securities reiterated in its latest "Short-Term Market Outlook and Strategy" that it expects an additional $400 billion to leave Prime funds via investor outflows with a portion potentially finding its way into government MMFs. JPM's Teresa Ho also stated this at MFU as well, saying she expects about $400 billion in investor flows on top of the Prime funds that have already, or are in the process of, converted.
In our Oct. 19, 2015 Link of the Day, entitled, "Goldman Sachs AM Sees Almost $1 Trillion Leaving Prime Money Market Funds," we cited commentary from GSAM that projected large outflows from Prime. They wrote then, "We expect that the switch to a floating NAV and the imposition of fees and gates will result in a large migration of assets out of Prime funds. The global money market industry is roughly $3.3tn in size, $2.7tn of which is in the US. Prime funds account for just over half the US total, about $1.4tn. We estimate as much as 70% of the $1.4tn [$980 billion] in Prime funds will migrate elsewhere due to uncertainty around how the transitional period will play out, along with the fact that several institutions, governments and agencies have investment policies that only allow cash to be invested in stable value instruments."
Last year, we wrote also about an estimate from Capital Advisors, which predicted total prime outflows of $615 billion, which includes both investor outflows and fund conversions. (See our April 10, 2015 News, "Capital Advisors' Pan, Campbell on Recent MMF Moves; $615B Outflow?.")
Surveys of corporate treasurers also shed some light on the potential for Prime outflows, though this information has given mixed signals. JP Morgan's 2015 Global Liquidity Survey found that 70% of institutional investor who are currently invested in Prime funds will stay in them. (See our Nov. 16 News, "JP Morgan Global Liquidity Survey Shows 70 Percent Will Stick w/Prime.") Sungard also released a survey indicating light prime outflows. (See our Nov. 9 News, "Sungard Survey Shows Majority of Corps Will Stick w/Prime; Portals"). This article says, "Sixty percent of treasurers in the U.S. anticipate that they will continue to invest in prime MMFs at a similar level once SEC reforms are implemented in 2016. Thirty-seven percent expect to decrease their holdings, identifying accounting, intraday liquidity and investment policy constraints as the biggest obstacles."
On the other hand, our July 9 News, "AFP Liquidity Survey 2015 Shows Safety Still First, Record Deposits," indicates potentially significant outflows. The survey says, "Nearly half (46 percent) anticipate their companies will either discontinue investing in prime funds altogether or move some or all their holdings out of those funds. Specifically, 29% said they would not invest in Prime funds altogether and 17% would move out of Prime funds. Also, 37% would not make any significant changes to how it invests in Prime funds, while 20% would move into Government funds or bank products."
What about perhaps the most important variable, spreads? As of Feb. 1, our Crane Prime Inst Index shows a 7-Day Yield of 0.21% vs 0.07% for our Crane Treasury Inst Index -- a spread of 14 basis points. (The Crane Govt Inst Index is yielding 0.09% -- a spread of 12 basis points.) That could potentially widen, particularly if the Fed raises rates again before the Oct. 14, 2016, reforms kick in, which is projected to happen at least once, possibly twice. Historically, the spreads between Prime and Treasury is about 24 basis points, as our 10-year returns show. The Crane Prime Inst Index had a 10-year average annualized return of 1.32% compared to the Crane Treasury Inst Index at 1.08%. The 10-year return for the Crane Govt Inst Index is 1.22%.
Note: For more on previous fund conversions and fund re-categorizations, see our Jan. 6 News, "Rolling w/Reform Changes II: Recap of '15 Announcements, '16 Plans" for a recap of conversions to date, and see our Jan. 15 News, "The Big Sort: Who's Going Retail or Floating Inst Among Prime MMFs?." Finally, watch for more coverage of yields, spreads and potential outflows in our pending February issue of Money Fund Intelligence.
