Money fund assets increased for the fourth straight week, jumping $26.0 billion and breaking above $2.8 billion trillion, their highest level since the end of 2010. The Investment Company Institute's weekly statistics also show that Government money funds now have more assets than Prime funds. Government MMF assets surpassed Prime last week for the first time ever and appear poised to stay that way. The latest weekly asset update says, "Total money market fund assets increased by $26.01 billion to $2.80 trillion for the week ended Wednesday, March 2, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $16.04 billion and prime funds increased by $11.61 billion. Tax-exempt money market funds decreased by $1.64 billion."
Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.270 trillion, slightly ahead of Prime assets, which are at $1.277 trillion. Since November, over $172 billion has converted from Prime MMFs to Govt, and another $100 billion is scheduled to switch over the next several months. Later this year, investors could shift hundreds of billions more in assets from Prime to Government funds as the October 14 deadline for the SEC's floating NAV, and emergency gates and fees, reforms approach.
ICI's weekly release explains, "Assets of retail money market funds decreased by $3.72 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $340 million to $376.31 billion, prime money market fund assets decreased by $2.56 billion to $461.20 billion, and tax-exempt fund assets decreased by $1.50 billion to $175.71 billion." It adds, "Assets of institutional money market funds increased by $29.73 billion to $1.79 trillion. Among institutional funds, government money market fund assets increased by $15.70 billion to $910.06 billion, prime money market fund assets increased by $14.17 billion to $815.42 billion, and tax-exempt fund assets decreased by $140 million to $65.12 billion." Year-to-date through March 2, MMF assets are up $45 billion.
For the month of February, assets are up about $52 billion. In six of the last 7 years, MMF assets have declined in February, averaging a drop of about $22 billion. A Footnote to ICI's release adds, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline."
In other news, BofA Merrill Lynch Rates Strategist Mark Cabana published the commentary, “Money Fund Reform Drawing Closer." He writes, "Compliance dates for SEC 2a-7 money fund reforms are drawing closer, with the deadline for diversification, stress testing, and disclosure requirements on April 14 and the floating NAV, gate, and fee requirements on October 14. `We expect additional prime fund outflows as a result of the October reforms, the magnitude of which will be largely driven by liquidity and return considerations."
Cabana continues, "Money managers concerned with liquidity are likely to (1) shift their most needed cash into government funds or bank deposits while using prime funds for yield enhancement, or (2) exit the 2a-7 money fund space to invest in separately managed accounts or short-duration funds. Managers focused on return may require additional yield pickup to remain in prime funds. Since 1995, the average spread between prime to Treasury and prime to government funds has been 26 and 12 bps, respectively, versus current spreads to both of around 15bps.... [S]ome additional spread widening from current levels may be required to keep investors in prime funds after October."
He adds, "The vast majority of prime fund financial CP and CDs are concentrated within 6 months according to Crane [Data]. While the distribution of these holdings has not materially changed over recent months, prime fund investments have become slightly more concentrated in tenors with maturities less than 3 months. The shorter-dated concentration may be due to Fed rate hike expectations or a more conservative approach to liquidity management ahead of money fund reform. Prime funds will likely remain very liquid and keep their maturities short ahead of the October implementation date.... Heading into the fall, CP issuers may find that they need pay higher rates in order to fund themselves at short tenors or consider alternatives."
Cabana writes "Given the increased yield and the desire for liquidity, there may be funding pressure on financial CP and CD rates in coming months. Some of this may be evident starting in April, when 6 month issuance will be rolled into October. This could bias FRA / OIS or LIBOR basis spreads wider and these pressures will likely increase should prime fund outflows accelerate ahead of the reform implementation date."
Finally, Principal Financial released a statement entitled, "Money Market changes will impact many clients in 2016," which announces changes to Principal's mutual fund platform for 401k plans. The update, says, "As part of the U.S. Securities and Exchange Commission's (SEC) money market fund rule amendments, effective October 14, 2016 all mutual fund companies must classify their money market mutual funds as either retail, institutional or government. Principal Life Insurance Company will not recordkeep retail or institutional money market funds due to the liquidity fees and redemption gates that may be imposed on these types of funds."
They add, "As a result, retail and institutional money market funds will be removed from our retirement plan platform. Government money market funds are not required to impose liquidity fees or redemption gates, but a government money market fund could voluntarily elect to be subject to them. We will continue to recordkeep government money market funds that do not intend to be subject to requirements surrounding the imposition of liquidity fees and redemption gates."
Regarding its own Principal Money Market Institutional Fund, they comment, "Effective on or about 10/7/16, this fund will be classified as a Retail fund and will close to retirement plans on our platform." Finally, they add, "Although not directly impacted by the SEC's money market fund rule amendments, we've decided to rename the Principal Money Market Separate Account. The Separate Account is being renamed the Liquid Assets Separate Account to distinguish it from a money market mutual fund and prevent investor confusion about the upcoming SEC money market rule amendments, which pertain primarily to mutual funds."
