Fidelity Says Investors Positioning
Fidelity published a new "Money Markets" brief, entitled, "Investors Positioning for October Regulation Changes." Written by Michael Morin and Kerry Pope, it says, "Despite the domestic and international environments, Fed officials are sounding slightly more upbeat about the prospect of another hike before year-end.... Investors could gain more clues about the Fed's interpretation of economic data and its interest rate outlook when Fed Chair Yellen speaks at the Jackson Hole economic symposium on August 26." Fidelity explains, "In 2014, the Securities and Exchange Commission (SEC) approved regulatory changes for MMFs. The final date for compliance with the regulations is October 14, 2016.... Aspects of the regulatory changes, such as potential redemption gates and liquidity fees for prime MMFs during periods of heightened market stress, have caused investors to shift assets from prime to government MMFs, which are exempt from the SEC's new reforms. While the flow of assets to date has largely been driven by sponsors of money market funds, flows into government MMFs over the past couple of months were driven by institutional investors seeking to avoid implications of regulatory changes, and may accelerate as the regulatory deadline approaches.... The anticipated shift in investors' preferences has resulted in LIBOR (London Interbank Offered Rate) moving higher. Banks, in a scramble to lock-in term funding, have paid up for three- to 12-month term funding as demand for prime money market funds has waned.... While prime MMFs have been aggressive buyers of issues with one month or less to maturity, fixed-rate bank commercial paper and certificates of deposit maturing in three months or longer now represent just 7% of the total market, down from 25% at the beginning of 2016. During July, transactions with maturities of one week or less made up close to 85% of all dollar-weighted transactions. To attract term funding, banks have increased rates to attract funding from non-prime MMF sources. For example, Japanese and French banks have led the drive for term deposits, pushing three-month LIBOR to 0.76% and six-month LIBOR to 1.11%.... This growing supply-versus-demand imbalance could continue through October. Prime MMFs continue to build liquidity, given uncertainty surrounding the timing and amount of potential redemptions as the date to comply with money market regulations nears." See also, WSJ's blog "Money Market Squeeze on Short-Term Bank Debt Gets Tighter".
