Bloomberg on Prime Exodus, CP
Bloomberg writes, "The $400 Billion Money-Fund Exodus With Banks in Its Crosshairs." It says, "Banks and other companies that have seen borrowing costs rise in the past year are about to feel more pressure in a $1 trillion market for short-term IOUs. Investors are poised to pull as much as $400 billion from U.S. money-market funds that buy such debt, known as commercial paper, JPMorgan Chase & Co. predicts.... The move by investors is the next big wave of cash to leave prime funds because of the new rules. It would come on top of about $250 billion of assets that U.S. money-fund companies have already converted over the last year from prime funds to those that only hold government securities like Treasury bills.... The money-market industry's changing landscape has already lifted companies' short-term borrowing costs: Rates on six-month commercial paper reached the highest above Treasury bills since 2012 this year as demand waned relative to government debt. The six-month Treasury bill rate was about 0.45 percent, compared with 0.82 percent on similar-maturity commercial paper. Financial firms' short-term debts, including commercial paper, certificates of deposit and time deposits, make up U.S. prime funds' biggest holdings. Bank of Tokyo-Mitsubishi UFJ Ltd., Credit Agricole SA, Sumitomo Mitsui Bank Corp., Royal Bank of Canada and DNB Bank ASA comprise the top five issuers of this debt held by the funds, according to Crane Data LLC. It adds, "With fund companies converting or closing prime offerings, the industry's holdings of government securities have swelled. Taxable money-funds' investments in government obligations rose to $1.47 trillion as of the end of January, from $1.18 billion in February 2015, according to Crane. Estimates vary for the size of the next wave, when investors yank cash from prime funds. JPMorgan projects it will reach about $400 billion this year, while Barclays anticipates about $300 billion. Peter Crane, president of the Westborough, Massachusetts-based firm that tracks the industry, expects that only about $250 billion will leave prime funds, because he predicts investors will still favor the higher rates on those products and given his expectation that net asset values of prime funds will remain stable. Institutional prime funds' seven-day yield was 0.21 percent as of Jan. 31, compared with 0.1 percent for government funds, Crane data show. Even at the lower amount that Crane predicts, the flow of funds may push up borrowing costs on commercial paper relative to Treasury bill rates, which have crept up from near zero after the Federal Reserve's December liftoff. "Government securities will be in high demand, depressing the yields there, and the demand for credit instruments will be smaller," said Peter Yi, Chicago-based director of short-term fixed income at Northern Trust Corp., which manages $875 billion. "As that happens, we're forecasting spreads between commercial paper rates and government securities to widen." The SEC joined the Fed and the Treasury Department in moving to buttress money funds following the collapse of the $62.5 billion Reserve Primary Fund.... The fund's failure triggered a run on other money funds and brought the market for commercial paper, worth $1.76 trillion at the time, to a standstill. `The market has since shrunk to about $1.1 trillion, with U.S. money funds holding about $380 billion, Crane data show.... The commercial paper market may shrivel by an additional 15 percent, according to Abate at Barclays. He had originally expected the migration of money to take place next quarter. But with global financial-market turmoil sparking concern over the health of banks and traders trimming bets on Fed rate increases, investors may have little reason to wait, he said. "The market is going to contract and yields are going to get higher," he said.
