Bank of America Merrill Lynch published a brief entitled, "Year end contraction in MMF repo again pronounced," which discusses the drop in non-Fed repo at year-end. Authors Mark Cabana and Olivia Lima explain, "Total MMF repo ex-Fed has been increasing since 2015 and continued to rise in Q4 2017.... At the end of November, total MMF repo activity reached a high of $900bn according to the Treasury Office of Financial Research. This was driven by a steady increase in Treasury and Agency repo, while MMF repo across other collateral types remains subdued following 2a-7 reform." We review their latest research, and also cover ICI's most recent money fund asset totals, below.
BofA writes, "Repo provided to MMF continues to show material contraction around year-end reporting dates especially from US & EU dealers. Total MMF repo ex-Fed decreased by $175bn at the end of 2017. This is most pronounced with Treasury repo, although it has leveled off as a percentage of total MMF repo outstanding." (For Crane Data's latest on 12/31 repo totals, see our Jan. 11 News, "Jan. Money Fund Portfolio Holdings: Repo Jumps, Breaks $1.0 Trillion.")
They continue, "The largest declines in dealer repo availability typically come from European firms on quarter-end dates, as they report SLRs as a snapshot on the last day of the quarter. The contraction on year-end dates tends to be the most pronounced as these dates are also used to calculate GSIB surcharge scores. There was a $150bn decrease in Treasury repo provided by EU firms in the US market at the end of 2017, though the decline as a percentage of total EU repo was similar to last year.... Together, BNP and Credit Agricole made up 64% of this reduction."
Cabana and Lima tell us, "Large US firms have also started to contract their repo availability to MMF on quarter- and year-end reporting dates.... Treasury repo activity declined by $20bn in comparison to a $6bn decrease at the end of 2016, the first year of the GSIB surcharge phase in. The extent of future repo balance sheet contraction on year-end dates will likely depend on the extent to which US GSIBs manage down their total balance sheet exposures to fall into a lower GSIB surcharge bucket."
The "US Rates Watch" update says, "FICC Treasury repo activity increased by $21bn in December, from 13bn to 34bn - the highest level to date.... The biggest counterparties to the FICC are Goldman, Federated and Invesco. Each firm increased its repo activity, with Federated and Invesco more than tripling. Sponsored members of the FICC are likely to participate in the program to achieve a higher rate on their overnight repo investment or expand their repo across a range of participants. Using weighted averages, these counterparties achieve higher O/N Treasury repo rates by 9 bps vs investments with dealers."
It states, "Repo provided to MMF by Canadian dealers also continues to show pronounced growth. December saw a jump of $28bn, of which $25.8bn was in Agency repo.... Royal Bank of Canada and Canadian Imperial Bancorp made up almost all of this change. It is uncertain why Canadian Agency repo activity increased sharply, though some Canadian dealers may have stepped in to absorb year-end repo contractions elsewhere."
Finally, BofA adds, "Given the current trend, we expect to see continued increase in repo activity, especially from non-traditional sources such as EU and Canadian providers and the FICC. In addition, we anticipate on-going contractions on quarter- and year-end dates will continue to necessitate the existence of the Fed's ON RRP facility especially on quarter-end dates despite the recent drop in overall usage."
In other news, money fund assets increased for the first time in 2018, after falling for three weeks in a row, according to the Investment Company Institute's latest "Money Market Fund Assets" report. After rising by $113 billion, or 4.1%, in 2017, money fund assets have declined by $18 billion, or -0.6%, year-to-date in 2018 (through 1/24).
ICI writes, "Total money market fund assets increased by $8.38 billion to $2.82 trillion for the week ended Wednesday, January 24, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $6.71 billion and prime funds increased by $1.04 billion. Tax-exempt money market funds increased by $625 million." Total Government MMF assets, which include Treasury funds too, stand at $2.223 trillion (78.7% of all money funds), while Total Prime MMFs stand at $463.3 billion (16.4%). Tax Exempt MMFs total $137.8 billion, or 4.9%.
They explain, "Assets of retail money market funds decreased by $1.68 billion to $1.00 trillion. Among retail funds, government money market fund assets decreased by $879 million to $606.34 billion, prime money market fund assets decreased by $1.13 billion to $263.98 billion, and tax-exempt fund assets increased by $332 million to $131.23 billion." Retail assets account for over a third of total assets, or 35.5%, and Government Retail assets make up 60.5% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $10.06 billion to $1.82 trillion. Among institutional funds, government money market fund assets increased by $7.59 billion to $1.62 trillion, prime money market fund assets increased by $2.17 billion to $199.29 billion, and tax-exempt fund assets increased by $293 million to $6.54 billion." Institutional assets account for 64.5% of all MMF assets, with Government Inst assets making up 88.7% of all Institutional MMFs.
