Prime money market mutual fund assets dropped by another $56.4 billion in July, according to Crane Data's Money Fund Intelligence Daily, after declining by $119.3 billion in June and $29.2 billion in May. Since October 31, 2015, just prior to the massive conversion of Fidelity Cash Reserves into Fidelity Government Cash Reserves, Prime money fund assets have declined by $404.3 billion, or 29.2%, while Government MMF assets have risen by $432.8 billion, or 42.8%. Up until June, the shift was primarily driven by fund conversions (almost $268 billion to date), but now it appears as if institutional investors and cash fiduciaries are driving the outflows. After a long period of little attention, these changes in the money markets have recently caught the attention of the broader financial markets and press. We excerpt from a couple new stories that discuss the shift and approach of reforms, and we also touch on some recent "spread shrinkage" and the latest fund changes below.
Among the recent articles, ignites yesterday featured "Down to the Wire: Money Fund Sponsors Prod Clients for 'Pledges'," which says, "With the compliance deadline for the biggest parts of the SEC's reforms just over two months away, some money fund sponsors are stepping up efforts to get a better handle on where existing institutional clients plan to put their money when those provisions kick in. Starting October 14, institutional prime funds will move away from a stable $1-per-share net asset value and become subject to potential liquidity fees and redemption gates in times of market duress, under the rule. As that deadline approaches, the pace of decision making among institutional investors has picked up in the third quarter, and Federated Investors expects those decisions to accelerate with each passing week, says Bud Person, national director for the Pittsburgh-based shop's wealth management and cash division."
The piece continues, "The next wave of preparations for the October compliance deadline is likely fund firms looking for explicit pledges from their clients on how much money they plan on keeping with the manager and how much they'll pull out, says Peter Crane, CEO of Crane Data. "Fund companies are trying to get a better handle on what their clients are going to do," he says. Firms should take any pledges with a grain of salt, however, Crane warns. "You don't really get long-term commitments from short-term investors," he says."
Ignites adds, "Another factor complicating the decision-making process is that some clients have to rewrite their investment management agreements in order to buy shares of a floating NAV money fund, while others are grappling with systems and process issues that make it difficult to invest in such products, he [BlackRock's Tom Callahan] says. Investors are adjusting to intraday strike times, and some transact with fund sponsors through third-party portals, which are updating their interfaces."
Bloomberg also writes about the other side of the shift in "A $400 Billion Influx Squeezes U.S. Bond Market's Safest Asset." The piece, by Liz McCormick, says, "After years in the making, a post-crisis rule to prevent a run on the money-market industry will finally take effect this October. It will force funds that oversee about $600 billion to abandon a fixed $1-a-share price and float their net asset value. But because businesses and state governments treat the funds like bank accounts, the prospect of prices falling below a buck is causing a big shift into money-market funds that buy only government debt."
It explains, "To cope, the Treasury Department stepped up bill issuance and boosted supply by almost a quarter-trillion dollars after its share of U.S. government debt fell to multi-decade lows last year. That still might not be enough. Estimates suggest between now and mid-October, the influx may produce an extra $400 billion or more in demand for short-term government securities and put a squeeze on a sizable chunk of the $1.51 trillion bill market."
Bloomberg explains, "Since June of last year, assets in all funds that focus on buying government debt have ballooned by more than a half-trillion dollars and now stand at about $1.5 trillion, according to Crane Data LLC, which specializes in money-market research. That influx is likely to accelerate in coming months. Bank of America Corp. predicts half the $300 billion to $500 billion leaving prime funds will flow into the safer money-market alternatives."
Finally, the piece says, "Bill rates rose from rock-bottom levels in the lead-up to the Fed's rate increase last December, but they've held steady since. Across all maturities, they average 0.28 percent, data compiled by Bank of America show. More bill issuance from the Treasury and the Fed's reverse repo program will help mitigate any supply-demand issues, according to Michael Pak, a fixed-income trader at TCW Group Inc.... The Treasury will add about $188 billion in additional bill supply during the next two quarters, based on overall U.S. debt sales and how much cash on hand it plans to hold, according to Stone & McCarthy Research Associates."
One big variable influencing the amount that will leave Prime in the next 2 months is the spread between Prime and Government (or Treasury) money funds. While money funds had been seeing stable spreads of about 15 basis points between Prime Institutional MMFs on average and Treasury Inst MMFs, these have quietly started shrinking. (Historically, these spreads have been about 25 bps.) Over the month of July, Prime Institutional yields have declined from 0.27% to 0.23%, while Treasury Inst funds have remained at yields of 0.12%. (Govt Inst MMF yields have inched in from 0.16% to 0.15%.)
The most recent Prime to Government conversions include: the $7.4 billion T. Rowe Price Prime Reserves, which became T. Rowe Price Govt Money Market on August 1; the $6.3 billion SEI Daily Income Trust Prime Oblig and $1.6 billion SEI Liquid Asset Trust Prime Oblig, which liquidated July 22, and AB Exchange Reserves, which became AB Govt Exchange Reserves on July 1. (For more on the latest changes, see our July 19 News," "SSGA Merging MMFs Into State Street Lineup; State Farm Going Govt," and our July 15 News," "BIF Liquidates Muni MMFs; Nicholas Closes; MS; PFM Prime Goes Govt.")
The New York Fed said yesterday of its latest "Reverse Repo Counterparty Name Change," "T. Rowe Price Prime Reserve Fund changed its name to T. Rowe Price Government Money Fund, Inc., T. Rowe Price Summit Cash Reserves Fund changed its name to T. Rowe Price Cash Reserves Fund and T. Rowe Price Reserve Investment Fund changed its name to T. Rowe Price Government Reserve Fund, effective August 1."
