Fitch Ratings published an update entitled, "Repo Use Declines in Prime European Money Funds," which reviews holdings of repurchase agreements in "offshore" money market funds denominated in US dollar, euro and pound sterling. It explains, "Repurchase agreement exposures in European 'AAAmmf' rated prime money market funds (MMFs) declined to 4% in September 2016 from 7% two years earlier. Fitch Ratings attributes this decline to a reduction in the availability of high-quality collateral and regulation affecting banks' ability and willingness to engage in short-dated repo.... Temporary declines in money funds use of repo at month-end, quarter-end and year-end are linked to reduced availability of high-quality collateral at these times as banks use this collateral for other regulatory purposes." We review Fitch's latest update, and also excerpt from updates on T-bill supply from Citi and BofA and the latest monthly from Federated.
Fitch's summary tell us, "Around 65% of Fitch-rated MMFs were undertaking repo transactions in September 2016, up from about 60% two years earlier, despite the decline in exposures. All MMFs are eligible to engage in repo transactions, and about 85% of rated fund complexes have set up the required legal documentation and counterparty relationships to do so.... Repo transactions in European MMFs are mainly used for portfolio liquidity management as they have short maturities, between overnight and seven days, or longer but with up to 48-hour call options. UCITS funds in particular are required by regulation to limit repo investment maturities to seven days (or callable within seven days)."
It explains, "Setting up a repo transaction can be operationally complex. For this reason, 70% of repo transactions are conducted in tri-party form where the custodian handles the operational side. Setting up the required legal documentation can also be a hurdle.... The number of repo counterparties has not significantly changed over the last two years. US and French banks are the most widely used repo counterparties in European-domiciled prime MMFs."
Finally, Fitch says, "Repo collateral in European MMFs comprises high-quality US and European governments and their agencies. There is typically no maturity restriction on collateral, and EU prime MMFs typically require the standard 102% overcollateralization.... European prime MMF repo investments totaled approximately EUR 26bn as of end-September 2016. This compares with a total repo amount outstanding in Europe of EUR5.4trn in June 2016 according to the International Capital Market Association, marginally down from the year before."
In other news, Citi's Steve Kang mentions a "2017 Supply Forecast for Treasury Bills" in his latest update. He writes, "There is much uncertainty around Treasury supply over the course of 2017. For now, we use the current law with an assumption that much of the fiscal change will kick in from FY2018. We project unchanged coupon supplies (net issuance of +560bn) and positive bill issuance (+150bn). For bill supply, we highlight two events ahead of us in 2017. First is the "soft" debt ceiling deadline in March.... Due to this, we expect negative bill issuance in 1H 2017 (Figure 9), likely alleviated in 2H. Treasury's cash balance remains very high around 420bn.... We think drama around a "hard" debt ceiling is less likely given the Republican sweep."
Citi adds, "Second is the timing and the scope of the repatriation.... Repatriation has potential to bring in a revenue windfall ($190bn) to the government. Given that there is bipartisan support for the bill, it could be delivered earlier than expected and this would pose a downside risk to deficits and bill supply. However, given that a repartition bill can be announced as a part of a larger bill as it was in 2004, it could also come in FY2018. We will keep a close eye on developments on this front and adjust our supply forecasts if needed."
Bank of America Merrill Lynch's Mark Cabana adds on the topic of T-bills, "We expect the Treasury Borrowing Advisory Committee (TBAC) will continue to advocate for additional bill issuance given "structural changes in the market" and still record low proportion of bills to total debt.... Increasing all bill offering sizes to 50% of their total capacity raises an additional $287bn in 2017, our baseline. Treasury would then need to raise $177 billion in additional coupon supply, on our estimates."
Finally, Federated Investors new "Month in Cash" discusses "Hiking expectations for hikes." The piece explains, "November brought more than a few uncertainties to the fore following the election of Donald Trump, but we were surprised that many included a rate hike as one of them.... Fed futures are now nearly unanimous in expecting a 25 basis-point increase in the target fed funds range at this point. There would have to be a calamity in the world for this not to happen. Every Fed governor who has spoken publically, including Chair Yellen recently in front of Congress, has essentially said this."
It continues, "We also expect the Dec. 14 Federal Open Market Committee (FOMC) meeting to raise expectations of future action. As you know, on several occasions in 2016 policymakers reduced their projections for the number of times they would raise rates this year and next. We think the improving U.S. economy and the likelihood for fiscal stimulus from the Trump administration, in whatever form it takes, will lead to higher growth, inflation and rates. This scenario won't play out until at least mid-2017, but expectations are growing for three hikes instead of two. If the latter, it would probably be one in March and September. Cash managers' main instruments, including Treasuries, agencies and commercial paper, already are beginning to price that in."
Federated writes, "All of this, of course, is good news from a return perspective for money market funds. And it is important to keep in mind that total return is now the gauge of performance for institutional prime money market funds rather than just yield, which has the potential to change slightly because prime funds now float their shares' net asset value (NAV)."
They also add, "On this subject, hardly a day goes by that someone doesn't ask us if the Trump administration's pledge to reduce regulation would apply to the reforms of Rule 2a-7 that forced a floating NAV. We don't see it. The focus likely will be on changes that have not yet occurred, such as the recently announced Department of Labor fiduciary rule or some Dodd-Frank requirements not yet enacted."
