Federated Investors' posted its latest "Month in Cash commentary, written by Global CIO for Money Markets Deborah Cunningham, which discusses how floating NAV money funds have mostly been well over the 4-digit, $1.0000 level to date. The company's CEO also presented to an investor conference and briefly discussed a number of money fund issues, including rising rates' impact on MMFs, private funds, and consolidation. We quote from both of these updates below, and we also review the latest on Prime money fund assets.
Cunningham writes "When $1 isn't equal to $1," explaining, "As money market reform neared last year, many investors voiced concern about the possibility that the floating net asset value (NAV) of institutional prime and tax-free money funds could slip below $1, or more specifically below the new $1.0000 reporting standard. Unlike stable NAV products, these institutional fund shares could lose actual value. It was a legitimate worry, of course. But it turns out that since the recent reforms, floating NAVs across the money market fund industry largely have been fractionally above $1 (most coming in the fourth decimal place). That has led to a common question: Are we required to manage our funds to pull these FNAVs down to $1.0000? The answer is simply no."
She explains, "The confusion is understandable. For decades the tenet of money funds has been that shares remain at a dollar, with managers permitted to round by the penny to stay there. There is no such restriction for institutional prime and municipal money funds. Their floating NAVs can end each trading day higher or lower than $1.0000, increasing or decreasing total return."
Cunningham continues, "So, we don't set out to exceed a dollar; it is just a function of how we manage. We make decisions based on our fundamental research about the credit of the issuers, our economic outlook and our predictions for Federal Reserve policy. That can result in NAV appreciation or depreciation. But we don't consider the former a positive or the latter a negative -- just the result of what value the market is providing at that time. That being said, it would take a major market moving event to pull the currently elevated NAVs down significantly. Movement either way likely will be gradual."
She tells us, "Why have floating NAVs risen in the first place? Usually when interest rates rise, prices go down. We think it's been due to a combination of the dramatic appreciation of floating-rate securities in late 2016 and early 2017, and enlarged spreads between government and prime securities -- both a result of the reforms. The spread contraction that followed was exacerbated by a mismatch between supply and demand in the money markets. Balancing that, yields on fixed-rate securities increased as the Fed has tightened in recent months, but not as much as we have seen historically. It will be intriguing to see if this continues as policymakers appear set to raise the target rate again in June to a range of 1% to 1.25%."
Finally, she adds, "For the time being, the short end of the yield curve has flattened to the point that it is not worth the maturity risk to invest out any distance. We pulled in the target weighted average maturity (WAM) of our government money funds by five days, bringing it in line with our municipal funds' WAM of 30-40 days, and kept the target WAM of 35-45 days for our prime products."
Federated President and CEO J. Christopher Donahue presented Thursday at Keefe, Bruyette & Woods' "Mortgage Finance and Asset Management Conference." (See the press release, "Federated Investors, Inc.'s CEO to Present at Keefe, Bruyette & Woods Conference.) Donahue commented, "People have been, for so long, at zero or nothing [yields].... They got kind of used to that. It's taken awhile for institutional investors to look at the impact of the October changes, which basically put fees and gates and a variable NAV on institutional prime and muni money funds. They're looking at it, saying 'What [do] these numbers look like? How many zeros or nine do you have after the decimal point? ... They're just taking their time. `What will help them a lot are the two rate rises we think are baked in the cake in June and September."
Higher rates, he explains, "That will actually pay people for keeping their money short. In the meantime, you've had a rigorous consolidation in the money fund business. Unfortunately, one of the inexorable effects of increased regulation is oligopolization.... We're one ... of the larger players in that space. In terms of the people and the product, you have a product in a money market fund that since '08 has been trashed by regulators, [etc.], and the underlying efficacy has been re-proven day after day.... So people want a dollar-in, dollar-out, net asset value."
Donahue adds, "P.S. There's a coalition that's been put together, basically representing municipal issuers.... There's been a bill dropped in the Senate and in the House that restores institutional prime and muni money funds to the way they were before the 2010 amendments, i.e., removing the variable net asset value and removing fees and gates. Because remember the 2010 amendments were put in to enhance the resiliency of money funds. The 2014-2016 were designed to kill ... or destroy money funds.... So we're just saying cut the regulations off there. So that's another one that has a reasonable shot ... because it is bipartisan, it stands alone, [and] it does not attack Dodd-Frank.... It's right down the middle of the plate."
He adds, "The other thing that we've done is create a lot of new products. We've got a collective fund and we've got a private fund, and those things have about $600 and $700 million.... They are poised for growth, but it takes a while ... to make that grow. So we're very optimistic about the domestic money fund business."
In other news, Prime money market fund assets dipped after rising for five weeks in a row. ICI's latest "Money Market Fund Assets" report shows Prime assets fell by $0.92 billion to $405.9 billion. Our Money Fund Intelligence Daily shows Prime MMFs up by $9.3 billion in May (through 5/31/17) to $534.5 billion, their fifth monthly increase in a row. (Our collection includes a number of internal money funds not tracked by ICI, so our Prime totals are much higher.)
ICI writes, "Total money market fund assets increased by $5.01 billion to $2.65 trillion for the week ended Wednesday, May 31, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $6.45 billion and prime funds decreased by $924 million. Tax-exempt money market funds decreased by $518 million." Total Government MMF assets, which include Treasury funds too, stand at $2.119 trillion (79.8% of all money funds), while Total Prime MMFs stand at $405.9 billion (15.3%). Tax Exempt MMFs total $129.1 billion, or 4.9%.
They explain, "Assets of retail money market funds decreased by $3.59 billion to $958.01 billion. Among retail funds, government money market fund assets decreased by $3.15 billion to $583.80 billion, prime money market fund assets decreased by $290 million to $250.75 billion, and tax-exempt fund assets decreased by $150 million to $123.47 billion." Retail assets account for over a third of total assets, or 36.1%, and Government Retail assets make up 60.9% of all Retail MMFs.
Finally, ICI's release adds, "Assets of institutional money market funds increased by $8.60 billion to $1.70 trillion. Among institutional funds, government money market fund assets increased by $9.60 billion to $1.53 trillion, prime money market fund assets decreased by $634 million to $155.17 billion, and tax-exempt fund assets decreased by $369 million to $5.63 billion." Institutional assets account for 63.9% of all MMF assets, with Government Inst assets making up 90.5% of all Institutional MMFs.
