Money fund assets plunged at month-end and ended January down sharply, 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 $43 billion, or -1.5%, year-to-date in 2018 (through 1/31). This should come as no surprise since money funds have averaged outflows of $37 billion in January over the previous 3 years (January and March have been the weakest month seasonally over the past five years). We review ICI's latest asset totals, as well as a couple publications on "repatriation," below.

ICI writes, "Total money market fund assets decreased by $25.39 billion to $2.80 trillion for the week ended Wednesday, January 31, the Investment Company Institute reported today. Among taxable money market funds, government funds2 decreased by $19.70 billion and prime funds decreased by $5.45 billion. Tax-exempt money market funds decreased by $231 million." Total Government MMF assets, which include Treasury funds too, stand at $2.204 trillion (78.7% of all money funds), while Total Prime MMFs stand at $457.8 billion (16.4%). Tax Exempt MMFs total $137.5 billion, or 4.9%.

They explain, "Assets of retail money market funds decreased by $4.33 billion to $997.22 billion. Among retail funds, government money market fund assets decreased by $2.14 billion to $604.19 billion, prime money market fund assets decreased by $1.60 billion to $262.38 billion, and tax-exempt fund assets decreased by $592 million to $130.64 billion." Retail assets account for over a third of total assets, or 35.6%, and Government Retail assets make up 60.6% of all Retail MMFs.

The release adds, "Assets of institutional money market funds decreased by $21.05 billion to $1.80 trillion. Among institutional funds, government money market fund assets decreased by $17.56 billion to $1.60 trillion, prime money market fund assets decreased by $3.85 billion to $195.44 billion, and tax-exempt fund assets increased by $361 million to $6.90 billion." Institutional assets account for 64.4% of all MMF assets, with Government Inst assets making up 88.8% of all Institutional MMFs.

In other news, Wells Fargo Securities published a recent "Short-Term Market Strategy" report entitled, "Reinvesting Repatriation," which explains, "As implementation of the Tax Cuts and Jobs Act (TJCA) is being discussed at Fortune 500 companies, conversations are being had on the investment implications for one aspect of tax reform, notably repatriation. Under the new tax guidelines, the IRS is introducing a Transition Tax/Deemed Repatriation on accumulated pre-2018 earnings at a rate of 15.5% for earnings in cash positions, and at 8% for all other earnings. The tax on repatriated earnings will be payable in lump sum or installments over the next eight years. Going forward, earnings generated outside the United States will be taxed at rates prevalent in foreign jurisdictions, not after they are brought back to the United States. The formal term for this new tax system is a "modified territorial" system, versus the previous "worldwide" system wherein the U.S. taxed global income only after it was brought on shore."

Authors Garret Sloan and Vanessa Hubbard tell us, "By comparison, the 2004 tax holiday was used opportunistically by corporations to quickly bring overseas earnings back to the United States at an effective tax rate of 3.7 percent. The window of opportunity provided by the 2004 tax holiday was narrow, and most businesses considered the event to be unique. Consequently, companies had little incentive to fundamentally change capital plans, and repatriated earnings largely went towards shareholder-friendly activities."

They state, "Fast forward 13 years and we see the 2017 tax reform less in terms of a tax holiday and more like a permanent change to the tax system. As such, the immediate need to “do something” quickly with the cash may be less prevalent this time around. While certain companies have already announced their intention to reinvest repatriated earnings, we believe that the permanent changes to the tax system may extend the reinvestment timeframe relative to 2004."

Wells adds, "In addition to the lengthier reinvestment period, the dollar value of repatriated earnings is likely to be much higher this time around, with an estimated $2.5 trillion in accumulated offshore earnings." As a result, conversations on portfolio investment for the period between repatriation and final cash deployment are materially important for short-term markets and individual investors alike…. Despite this massive number, our opinion is that repatriation’s impact on fixed-income markets will feel less like a blowout and more like a slow leak. The potential for an incremental rise in yields is real given the potential dollar amount, but the fact that all accumulated offshore earnings are subject to taxation suggests that decisions for redeployment may be drawn out, potentially softening the impact on short-term fixed-income markets."

Credit Suisse's Zoltan Posnar also recently commented on the subject in "Repatriation, the Echo-Taper and the E/$ Basis." He writes, "The view that the repatriation of U.S. corporations' offshore cash balances will lead to a stronger U.S. dollar and tighter money markets is wrong, in our opinion. It is wrong because offshore cash balances are in U.S. dollars already and are invested mostly in one to five-year U.S. Treasuries and term debt issued by banks.... Offshore balances were invested in the money market a decade ago, but as they grew, corporate treasurers added more risk. Corporate cash pools became corporate bond portfolios."

He continues, "You don't run trillions the way you run billions: size forces you to diversify.... In our discourse about corporate tax reform, we should replace the concepts of “cash balances” with “bond portfolios” and “repatriation” with “distribution”. Cash balances are not hallmarks of an era where corporations are net providers of funding -- where firms have positive operating cash flows and need to invest their surplus cash. If surplus cash accumulates faster than the need for long-term capital outlays, it tends to gravitate toward the bond market, not the money market."

Email This Article

Use a comma or a semicolon to separate

captcha image