Money fund assets rose for the third week in a row to their highest levels since May 2010, and they're poised to break the $2.85 trillion level, according to the Investment Company Institute's latest "Money Market Fund Assets" report. ICI writes, "Total money market fund assets increased by $15.63 billion to $2.84 trillion for the week ended Wednesday, February 21. Among taxable money market funds, government funds increased by $13.26 billion and prime funds increased by $2.08 billion. Tax-exempt money market funds increased by $279 million." Total Government MMF assets, which include Treasury funds too, stand at $2.241 trillion (78.8% of all money funds), while Total Prime MMFs stand at $465.3 billion (16.4%). Tax Exempt MMFs total $138.0 billion, or 4.9%. We review ICI's latest below, and also quote from recent comments from RBC Capital Markets' Mike Cloherty on "repatriation".
ICI's weekly press release explains, "Assets of retail money market funds increased by $2.22 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $160 million to $618.50 billion, prime money market fund assets increased by $1.57 billion to $264.75 billion, and tax-exempt fund assets increased by $489 million to $131.28 billion." Retail assets, which are at their highest levels in 2 years, account for over a third of total assets, or 35.7%, and Government Retail assets make up 61.0% of all Retail MMFs.
It adds, "Assets of institutional money market funds increased by $13.41 billion to $1.83 trillion. Among institutional funds, government money market fund assets increased by $13.10 billion to $1.62 trillion, prime money market fund assets increased by $519 million to $200.54 billion, and tax-exempt fund assets decreased by $210 million to $6.96 billion." Institutional assets account for 64.3% of all MMF assets, with Government Inst assets making up 88.7% of all Institutional MMFs.
In possibly related news, RBC Capital Markets' Michael Cloherty writes again on "repatriation" yesterday in his latest, "US Interest Rate Focus." He explains, "For nearly two years we have been preaching that repatriation would have profound effects on the front end of the US curve. However, with LIBOR/OIS priced to hit 36.5 bps into the middle of the year, we don't think there is much room for LIBOR/OIS to move beyond that level. Many corporations that are bringing overseas cash home are likely to park the money in very short investments until the money is returned to shareholders, used for M&A, invested in a new plant, used to pay down debt, etc."
Cloherty tells us, "Normally, we would expect that cash to be invested in Government MMF (or invested in the same assets a Government MMF would buy). But if spreads were wide enough, that cash would likely be invested in Prime MMF (or directly invested in CP, CDs, etc). In 2016, offshore corporate cash seemed to be an aggressive CP/CD dip buyer once L/OIS moved into the 40s. That potential for an investment shift will serve as a ceiling on how cheap LIBOR can get."
He writes, "In general, we caution against underestimating the impact of repatriation. Almost three trillion dollars that is mostly invested in 0- to 3-year USD fixed income is likely to shift to an equity-heavy preferred investment profile. Swings of that size always create market stress. However, while we have spent nearly two years warning about higher LIBOR due to repatriation, we think that forward LIBOR/OIS spreads are starting to approach the peaks."
The RBC piece comments, "An extremely simplified look at the mechanics of how repatriation impacts LIBOR is: Company has its offshore cash invested in a $48 billion portfolio of 2yr bank floaters, with 1/24th of the book maturing each month for the next two years. Company decides to use that cash to buy back its stock (or do M&A, etc). But its minimum threshold for stock buybacks is $12bn increments. Company does not want to sell bonds from its portfolio, as any losses on those sales would flow through to quarterly earnings. So it slowly matures away its portfolio, and stuffs the cash in a government MMF (or directly in the assets that a government MMF would buy) until it hits the $12bn balance needed to trigger a stock buyback." This creates a saw-tooth pattern in its government MMF holdings."
They state, "As bank bonds mature, banks find that the demand for 2yr floaters has dropped dramatically, so they need to seek financing in other parts of the curve. The rise in reliance on CP/CD financing drives up LIBOR. If LIBOR rises enough, the corporation stops parking its maturing holdings in a government MMF -- it starts putting that cash into the CP/CD market. LIBOR stops rising."
Finally, they add, "Note that when MMF reform drove up LIBOR in 2016, offshore corporate cash seemed to be one of the aggressive dip buyers. We think LIBOR/OIS near 40bps would cause a meaningful shift into CP/CD. Eventually the corporation has spent all of its repatriated cash, and it no longer provides any support to the CP/CD markets. But that will take a couple of years, giving issuers time to find a more stable investor base."
