The Wall Street Journal writes "Asset Growth in the World's Largest Money-Market Fund Slows Sharply." The piece explains, "Asset growth in the world's largest money-market fund hit a plateau at the end of 2017, following a series of measures by the fund's manager to control its swelling size. The fund known as Yu'e Bao, whose name means "leftover treasure" in Mandarin, had assets of 1.58 trillion yuan ($251.2 billion) at the end of 2017, according to its manager, Tianhong Asset Management Co. While the fund was nearly twice its size from a year ago, it grew just 1% from the end of September, the data showed."

It continues, "Yu'e Bao is an online money-market fund that was started in 2013 as a way for users of popular Chinese payments network Alipay to earn returns on idle funds sitting in their virtual wallets. Its rich investment yields -- which topped 4% on an annualized basis at various points last year and hit a record of 6.8% in 2014 -- have drawn a flood of cash from investors. Yu'e Bao's rapid growth and scale, however, has worried Chinese regulators, which have suggested it is "systemically significant."

The Journal piece tells us, "China has around 400 money-market funds, whose assets totaled $1.07 trillion at the end of 2017, up 57% from a year earlier. The industry contracted for the first time in the fourth quarter, with assets shrinking 1% between September and December, according to data from the Asset Management Association of China."

It adds, "The association, an industry group supervised by the China Securities Regulatory Commission, late last year told fund-rating firms and some Chinese media outlets to stop publishing the sizes of money-market mutual funds in their reports and rankings. The push was seen as an attempt by regulators to slow the industry's growth and discourage investors from picking funds based on their size."

See also our "Link of the Day from last Thursday, "Ant's Yu'e Bao Put in Caps." It quotes the Reuters piece, "Ant Financial's money market fund imposes temporary caps for Lunar New Year," which says, "Ant Financial's money market fund will place a temporary daily cap on subscription volumes ahead of an expected surge in inflows during the Chinese Lunar New Year, as calls grow for tighter regulations of these funds to prevent systemic risks. The restrictions by Yu'e Bao - the world's largest money market fund - will be in place from Feb. 1 through Mar. 15, Ant Financial said in a statement.... Ant Financial said the caps were "voluntarily announced" by Tianhong Asset Management Co., Ltd., which manages the fund."

In other news, the Federal Reserve Bank of New York's "Liberty Street Economics" blog posted an article entitled, "A New Perspective on Low Interest Rates." It says, "Interest rates in the United States have remained at historically low levels for many years. This series of posts explores the forces behind the persistence of low rates. We briefly discuss some of the explanations advanced in the academic literature, and propose an alternative hypothesis that centers on the premium associated with safe and liquid assets. Our argument, outlined in a paper we presented at the Brookings Conference on Economic Activity last March, suggests that the increase in this premium since the late 1990s has been a key driver of the decline in the real return on U.S. Treasury securities."

It explains, "Recognizing that persistent low rates have important implications for fiscal and monetary policy, economists have put forward many explanations for the secular (long-term) decline in real interest rates. One of the most influential, proposed by Laubach and Williams, is that the decline is connected to the fall in the economy's potential growth rate. Others have emphasized the role of demographic factors, and in particular the aging of the population, which tends to increase desired saving and hence to depress real interest rates."

The Liberty Street blog tells us, "Intuitively, the fall in Treasury yields, and the corresponding increase in the securities' value, reflects a surging mismatch between the demand and supply of the safety and liquidity services provided by U.S. Treasuries. Since the late 1990s, with the acceleration in global financial flows and their re-direction toward safer uses following the Asian financial crisis, a rising tide of international saving has been chasing a limited supply of safe and liquid assets."

It adds, "Moreover, this supply has been further curtailed by the realization during the global financial crisis that many assets previously considered to be akin to Treasuries -- most notably the highly rated tranches of mortgage-backed securities -- were not so safe after all. The role of this shortage of safe assets has been recently explored by Ricardo Caballero and others (Caballero, Caballero and Farhi, and Gourinchas and Rey)."

Finally, they write, "Their view is also related to the saving glut hypothesis first proposed by Ben Bernanke. For instance, Bernanke and others provide evidence that from 2003 to 2007, foreign investors acquired substantial amounts of U.S. Treasuries, agency debt, and agency-sponsored mortgage-backed securities. In the words of Caballero (pp. 17–18), "There is a connection between the safe-assets imbalance and the more visible global imbalances: The latter were caused by the funding countries' demand for financial assets in excess of their ability to produce them, but this gap is particularly acute for safe assets since emerging markets have very limited institutional capability to produce them.""

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