A new SEC filing from J.P. Morgan Money Market Funds heralds the launch of J.P. Morgan Institutional Tax Free Money Market Fund, the second new Tax Exempt Institutional fund to announce this month. As we mentioned in our Nov. 7 Link of the Day, "Fidelity Files for Inst Muni MMF," Crane Data tracks just 11 Tax Exempt Institutional money fund portfolios (23 counting all share classes) run by just 10 managers totaling $10.1 billion. (Also, see our December 2015 Money Fund Intelligence article, "Tax Exempt MFs Hit; Will Any Go Inst?" for more.) Given the overall attrition in the Tax Exempt MMF space the past two years, new fund launches by the two largest money fund managers are an interesting development. We review the new filing below, and we also quote from a new New York Fed paper on "Safe Assets."
JP Morgan's N1-A explains, "The Fund aims to provide current income, while seeking to maintain liquidity and a low volatility of principal." Its "Main Investment Strategy" tells us, "Under normal conditions, the Fund invests primarily in municipal obligations, the interest on which is excluded from federal income taxes. As a fundamental policy, under normal circumstances, the Fund will invest at least 80% of the value of its Assets in municipal obligations.... `The Fund is a money market fund managed in the following manner: The Fund calculates its net asset value to four decimals (e.g., $1.0000) using market-based pricing and operates with a floating net asset value."
It continues, "The Fund's policies and procedures permit the Board to impose liquidity fees on redemptions and/or redemption gates in the event that the Fund's weekly liquid assets were to fall below a designated threshold. If the Fund's weekly liquid assets fall below 30% of its total assets, the Board, in its discretion, may impose liquidity fees of up to 2% of the value of the shares redeemed and/or gates on redemptions. In addition, if the Fund's weekly liquid assets fall below 10% of its total assets at the end of any business day, the Fund must impose a 1% liquidity fee on shareholder redemptions unless the Board determines that not doing so is in the best interests of the Fund."
Finally, the filing says, "You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time."
For more on recent trends in the Tax Exempt market, see our Oct. 25 News, "Schwab Simplifies MMF Lineup, Lowers Minimums; Federated Muni Exits," our Aug. 1 Link of the Day, "Dreyfus Liquidating AMT-​Free MMF," and our August MFI article, "Managers Flee from State Tax Exempt Money Funds.")
In other news, the Federal Reserve Bank of New York's Liberty Street Economics blog recently posted "What Makes A Safe Asset Safe?" They explain, "Over the last decade, the concept of 'safe assets' has received increasing attention, from regulators and private market participants, as well as researchers. This attention has led to the uncovering of some important details and nuances of what makes an asset 'safe' and why it matters. In this blog post, we provide a review of the different aspects of safe assets, discuss possible reasons why they may be beneficial for investors, and give concrete examples of what these assets are in practice."
The blog continues, "In an idealized setting, a safe asset is easy to define. It is an asset that pays off a fixed amount with absolute certainty at some future date.... Consider, for example, U.S. Treasury securities, which are considered to have absolute safety of repayment, making them the prototypical 'safe asset.' Among U.S. Treasuries, there are ones guaranteeing nominal repayment and ones indexed to inflation, thus guaranteeing repayment in real terms."
They note, "In practice, safe assets are those with a very high likelihood of repayment, and are easy to value and trade. These assets play an important role in the financial system. Because of their safety they provide advantages above and beyond their risk-adjusted return.... Importantly, their high likelihood of repayment makes them immune to asymmetric information about their ultimate payoff, which allows investors to value them with a high degree of certainty and makes them easy to exchange for other assets or goods. Each of these features implies that investors are willing to forgo yield in order to reap the additional benefits safe assets provide. As a result, safe assets typically trade at a premium, known in the academic literature as a 'convenience yield,' which reflects the nonpecuniary benefits investors receive for holding them."
The NY Fed blog explains, "Although there is considerable focus on the safe asset properties of short-term T-bills, longer-term U.S. Treasury notes are also an important safe asset. Even though longer-term Treasuries are exposed to interest rate risk, they have zero credit risk, can be seamlessly used as collateral, and naturally do not suffer from any informational asymmetries about their ultimate payoff. In addition, longer-term Treasuries have a unique benefit which differentiates them from T-bills and makes them particularly useful as a safe asset for investors with longer horizons: they tend to appreciate in times of aggregate market downturns.... This example suggests that short maturity of an asset is not necessary for its usefulness as a safe asset."
It adds, "Importantly, the additional premia embedded in T-bills and Treasury notes is good news for the United States. Their safe asset status implies that the U.S. Treasury can issue bonds at lower rates, reducing the government’s debt burden, and ultimately benefiting U.S. taxpayers."
Finally, the piece comments, "In this post, we explore the role safe assets play in financial markets by focusing on U.S. Treasury securities, safe assets produced by the public sector. In addition to the public sector, the private sector can also create safe assets. For example, many of the benefits ascribed to public safe assets are also attributed to private short-term debt of certain issuers. An important difference between public and private safe assets, however, is that the reliability of private safe assets can come into question. In a follow-up post, we will explore these issues in more detail, including the incentives financial firms have to produce private safe assets, and their potential to increase fragility in the financial system."
