Federated Investors Money Markets CIO Deborah Cunningham discusses liquidity and in her latest "Month in Cash." The update, entitled, "Preparation for reforms in full swing," tells us, "Liquidity, liquidity, liquidity. Not quite "location, location, location," but as the implementation date for the new SEC money market fund reforms draws near, cash managers have a mantra that is as all-encompassing as that famous Realtor one." We reprint Federated's latest below, and we also review the most recent WAM (weighted average maturity) and WLA (weekly liquid asset) data for Prime Institutional MMFs
Cunningham explains, "The long-term impact of the money fund reforms that take effect on Oct. 14 has dominated the dialogue to this point, and for good reason. As is well known by now, investors and institutions have been forced to decide if they want to stay in the two categories of money funds -- institutional prime and tax-free (municipal) funds -- that will have to float the net asset value (NAV) of their shares, or move into government money market portfolios. The latter will retain the ability to use amortized cost for daily pricing and as such, retain their stable NAV of $1.00. It is not just a case of some investors preferring a stable NAV, many must go that route because of their policies regarding risk."
She continues, "But managers of floating NAV portfolios have plenty to figure out themselves due to the new rules. First and foremost, cash managers and their firms have been working hard to strategize about the future cash flows and to offer their clients new options and products, as we have. Most managers are in a holding pattern as prime and muni clients decide if they will or will not shift money to government portfolios."
Federated adds, "There is really only one recourse for prudent cash managers to prepare for that scenario: build up enough liquidity capable of handling all redemptions. Liquidity, liquidity and, yes, liquidity. Security selection and yield are always prominent, but the responsible approach is to be able to service clients in whatever decision they make."
The update says, "Actually, most money market firms have a good idea what their clients will do, if they haven't already done it. But we respect their right to change their minds. So it is a waiting game to see what will actually happen to flows in October. Until clients actually make or don't make the switch, redemptions need to be more of a focus than decision-making based on expectations of the Fed's next rate hike or even on value. With the prime money market yield curve, i.e., the London interbank offered rate (Libor), currently so high above that of the Treasury yield curve, many clients are going to wait until the last minute to switch to grab as much yield as possible."
It goes on, "So, although our prime portfolios' weighted average maturity (WAM) targets remain at 35-45 days, they are presently in the low-teens and we are buying short-dated instruments. That just shows how much we must prepare for any scenario. The second week in October is going to be one in which TGIF will not apply and lunch breaks will be severely curtailed."
Finally, Cunningham comments, "Having said that, the Fed is still on our minds. The minutes of the most recent Federal Open Market Committee (FOMC) meeting in July, as well as Fed Chair Janet Yellen's speech at the Jackson Hole, Wyo., meeting of central bankers, suggest policymaker confidence in the U.S. economy. She even went so far as to say: "the case for an increase in the federal funds rate has strengthened in recent months" and that the U.S. economy is "now nearing the Federal Reserve's statutory goals of maximum employment and price stability." The data has to stay on its present upward trajectory, but our outlook, therefore, is still that there will be a move in 2016, possibly this month, but more logically in December after the election. It's gearing up to be a momentous autumn."
Weighted average maturities, or WAMs, continued setting record lows in August according to Crane Data's Money Fund Intelligence Daily. Prime Institutional MMFs saw their steepest WAM declines ever, dropping from 18 days to 12 days. Last month, Prime Inst WAMs declined from 22 to 18 days. Since May 31, Prime Inst WAMs have declined by more than half, from 26 days to 12 days. WAMs for our all taxable Crane Money Fund Average remained at 31 days in August, after declining from 36 days in March 2016. The Crane 100 Money Fund Index dipped to 29 days as of August 31, down from 31 days July 31 and 37 days on 3/31.
Prime Retail MMF WAMs dropped to 22 days as of 8/31 from 24 days on 7/31 (and down from 29 days on 5/31). Govt Inst MMF WAMs lengthened again in August, rising to 38 days from 37 (and up from 36 days on 5/31). Treasury Inst MMF WAMs jumped from 39 to 43 days in August, and Treasury Retail MMF WAMs rose from 40 to 42 days. Government Retail MMF WAMs dipped from 37 to 36 days. The Crane Tax Exempt MMF WAM Index declined from 19 to 17 days.
The shortest WAMs, often an indication of either pending liquidation or a sign of funds expecting very large outflows, include: Morgan Stanley Act As Prime Tr, Morgan Stanley Active As CA T-F, Morgan Stanley Liquid Asset (1 day WAMs), Morgan Stanley Act As Govt Sec, Morgan Stanley Act As Money Tr, Morgan Stanley T-F Daily Inc Tr (2 day WAMs), BlackRock Lq TempCash (60 day max maturity fund), Federated Master Trust (soon to be renamed Federated Inst Prime 60 Day), Federated Tax-Free MMF IV, Federated Tax-Free MMF SS, Goldman Sachs FS MM, Goldman Sachs FS Prm Ob, JPMorgan Liquid Assets, Morgan Stanley Active As Tax-Free, PIMCO Government MMF, PIMCO Money Market Fund (3 day WAMs), Dreyfus Cash Mgmt, Dreyfus Municipal Cash Mg Pls, Morgan Stanley CA Tax-Free DIT, Morgan Stanley Inst Liq MMP, Morgan Stanley Inst Liq T-E, Morgan Stanley NY Municipal MM Trust, Wells Fargo Cash Inv and Wells Fargo MMF (4 day WAMs).
Weekly Liquid Assets (WLA), which include securities maturing in 7 days plus Treasury and Government discount securities, rose to 79.9% for All Taxable MMFs (from 75.8% a month ago) and to 76.0% for Prime Inst MMFs (from 59.2% in July). Prime Retail MMFs saw WLAs rise to 63.1% from 55.7%. Treasury Retail MMFs has a WLA of 99.0%, while Govt Retail MMFs had a WLA of 66.7%. Treasury Inst MMFs' WLA was 99.0% as of 8/31 while Govt Inst MMFs' WLA was 68.1%.
In the week through Sept. 1 (Thurs.), money fund assets were flat (down 182 million), but Prime asset outflows accelerated at month-end. Prime MMFs fell 61.6 billion in the week ended 9/1, while Tax Exempt MMFs fell 4.6B and Govt MMFs rose 49.1B. Last Thursday, Prime MMFs (including both Prime Retail and Prime Inst) dropped 16.8B, but Govt MMFs (including Treas Retail, Govt Retail, Treas Inst and Govt Inst) rose by 18.3B.
