Vanguard announced that it will liquidate its $400 million Ohio Tax-Exempt Money Market Fund, the latest in a long line of liquidations in the municipal money market space. The Prospectus Supplement filing for Vanguard OH Tax-Exempt MMF, entitled, "Important Changes to Vanguard Ohio Tax-Exempt Money Market Fund," tells us, "On November 17, 2016, the board of trustees for Vanguard Ohio Tax-Exempt Money Market Fund (the Fund) approved a proposal to liquidate and dissolve the Fund on or about February 22, 2017 (the liquidation date). In anticipation of the liquidation and dissolution, the Fund will be closed to new investors after the close of business on November 22, 2016, and will be closed to new investments after the close of business on January 18, 2017." We review this news below, and also excerpt from J.P. Morgan Securities' 2017 Outlook, which discusses the uncertainty surrounding the money markets following their massive 2016 transformation.
Vanguard's filing continues, "On the liquidation date, the Fund will redeem all of its outstanding shares at the net asset value of such shares. On this same date, all outstanding shares of the Fund will be canceled and the Fund will cease operations as a mutual fund. In order to provide for an orderly liquidation and satisfy redemptions in anticipation of the liquidation, the Fund may deviate from its investment objective and strategies as the liquidation date approaches. Prior to the liquidation date, the Fund will declare and pay its shareholders of record one or more dividends and/or other distributions of its investment company taxable income, if any, and net realized capital gains, if any, for the current taxable year through the liquidation date."
It adds, "The liquidation and dissolution is not expected to result in income tax liability for the Fund. The Fund may pay more than one liquidating distribution in more than one installment. Distribution of liquidation proceeds, if any, to Fund shareholders may result in a taxable event for shareholders, depending on their individual circumstances. Shareholders should consult their own tax advisors about any tax liability resulting from the receipt of liquidation proceeds."
We wrote in our Nov. 21 Link of the Day that Vanguard also filed recently to change the names of its State Tax-Exempt Money Market Funds to "Municipal." They explain, "The boards of trustees of Vanguard California Tax-Free Funds, Vanguard New Jersey Tax-Free Funds, Vanguard New York Tax-Free Funds, Vanguard Ohio Tax-Free Funds, and Vanguard Pennsylvania Tax-Free Funds have approved the renaming [to "Municipal" MMF] of the following Funds. `These name changes are expected to occur in the first quarter of 2017. The investment objective and limitations of each Fund will remain the same, including the 20% limitation on investments in securities that are subject to the alternative minimum tax."
For more on liquidations in the Tax Exempt money fund sector, see our Aug. 17 News, "Federated Tax-Free MMF Liquidating; Impact on Investment Policies," our Aug. 4 News, "Muni MMFs "Decimated" by Rules Says Bloomberg; More Liquidations," our July 15 News, "BIF Liquidates Muni MMFs; Nicholas Closes; MS; PFM Prime Goes Govt," and our Feb. 24 News, "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche." Also, note that Western Inst Cash Reserves (CFSXX) has stated that "effective November 9, 2016, the Fund will no longer offer Class S shares."
In other news, J.P. Morgan Securities' Alex Roever, Teresa Ho and John Iborg write in a new "Short-Term Fixed Income 2017 Outlook about life after Prime. They tell us, "Normally, these year-ahead outlooks are focused on the future. We forecast how markets are going to evolve and what that means for short-term fixed income. Yet as we write this in November 2016, our forecasts are clouded with a level of uncertainty, not only because of the outcome of the US elections but also because there's been a significant transformation in the money markets this past year, leaving many to wonder just how liquidity investors and issuers will behave in the new world absent the large presence of prime MMFs."
The piece explains, "In the current environment, the only thing we know for certain is the significantly diminished buying power of prime MMFs. The onset of MMF reform prompted a massive, but orderly run from prime MMFs into government and Treasury MMFs. As of November 15, total prime MMF AUM registered $375bn, down over $1tn over the past year. Over the same time, government and Treasury MMFs increased by $942bn and $152bn, respectively. The drawdown in prime MMF AUM has forced international banks to borrow less and/or seek out alternate, more expensive sources of USD funding."
It continues, "So far, there have been other buyers, both traditional and non-traditional, providing alternative sources of liquidity. Some of these buyers are what we consider to be "beyond" money market investors, whose duration and investment mandates are generally greater than 6 months and span a variety of credit products respectively. That being said, their participation thus far has largely been opportunistic in nature. Should spreads change such that they are no longer attractive relative to the rest of the credit curve, it's unclear whether they will continue to participate. If not, there could be implications for issuers that wish to continue to fund in the money markets."
J.P. Morgan writes, "Going forward, for issuers looking to access the short-term markets, liquidity will not be from your 2a-7 prime funds but from a set of non-2a-7 investors. Their focus may not be isolated to the very front-end of the money markets (0-6m duration) but also in a space we call beyond the money markets (6-24m duration). As we saw this past summer, they have helped to prevent bank CP/CD outstandings from plummeting even as prime MMFs faced massive redemptions."
They add, "The challenge of course is that these investors each have different mandates and liquidity needs. More importantly, their buying capacity for short-term credits is significantly smaller than prime MMFs. Furthermore, some of these investors are going through structural changes themselves. Who are these investors we are referring to?" The article lists: Offshore prime MMFs, Securities Lenders, Private Liquidity Funds, Short-Term Bond Funds and Separately Managed Accounts (SMAs).
Finally, the paper comments, "Taken together, we highlight the above investors because their motivations will be what drive money market credit spreads and in turn Libor in 2017. For now, we do not foresee their demand for bank CP/CD fading, but their participation will be very much driven by how money market bank CP/CDs, and in particular 6m-1y floaters, price relative to the rest of the credit curve."
