Invesco features a piece in their latest "Global Fixed Income Strategy" entitled, "How will repatriation impact money markets?" Written by Matt Bubriski, Joe Madrid and Robert Corner, the update says, "As discussed in this issue's Global Credit Strategy article, the repatriation of foreign earnings could materially impact the US investment grade yield curve. However, Invesco Global Liquidity believes it will likely have a limited impact on money markets. Below, we speak with three members of the Global Liquidity team about why repatriation is unlikely to disrupt US and offshore money markets and money market interest rates." We quote from Invesco's Q&A below, and we also summarize our latest Weekly Money Fund Portfolio Holdings statistics.
Invesco asks, "What is the size and allocation of unremitted foreign earnings?" Bubriski answers, "We estimate that US companies currently hold USD3 trillion in unremitted foreign earnings, but only half is held in liquid cash and investments. The remainder appears to be held in less liquid "operating assets" and is unlikely to be liquidated. The five largest holders of cash and investments, all technology firms, hold a large portion of these assets, and by using their holdings as a proxy, we estimate that money market instruments account for a relatively small portion of total cash, at about 8%."
They also ask, "How much will likely be repatriated? Will all earnings be returned in 2018?" Bubriski replies, "While headlines have suggested we'll see trillions of dollars return to US markets in a relatively short period, we believe this is being overestimated. Based on our estimates, the amount of cash available to be repatriated is around USD 1.5 trillion. Because companies can elect to pay the repatriation tax in installments over an eight-year period, we anticipate funds to flow back over several years. Also, because the majority of holdings are in 1-5 year securities, we expect repatriation flows to be distributed over time as companies allow them to gradually roll off to meet tax liabilities or be put toward other uses."
Invesco's piece queries, "What effect will repatriation likely have on US money market funds?" Corner tell us, "The overall amount of cash and investments that is ultimately repatriated could be meaningful and most likely will find its way into bank deposits, US money market funds, and other short-term investments. As Matt mentions, the amount of cash and investments repatriated could reach USD1.5 trillion. However, since there is no actual deadline, or requirement to immediately bring cash back onshore, except to pay the tax, we don't necessarily expect a flood of cash to come back to the US all at once. We think asset flows back to the US should be orderly and resulting onshore investments to be relatively short-lived as companies eventually redeploy their cash to reward shareholders, pursue M&A, or capital expenditures, among other things. Regardless of the ultimate uses, US money market funds should be an important parking spot for newly repatriated cash."
The piece continues, "Q: What are the implications for offshore money market funds?" Corner comments, "Similar to US money market funds, offshore money market funds could be a valuable parking spot for corporations prior to repatriating cash. These balances were remarkably stable over the four-year period ending in 2016 and likely reflect companies' actual working capital needs. Balances increased in 2017, but we think companies may be adding liquidity to help cover tax bills. We expect companies to draw down these balances as they prepare for initial tax payments, but we expect balances to be rebuilt to previous levels to meet working capital needs. There could be some large, one-off transactions that cause companies to tap their cash balances, but we would similarly expect them to be rebuilt as securities mature."
Finally, they ask, "What will be the likely impact of repatriation on money market interest rates?" Madrid answers, "We do not foresee a significant impact on money market interest rates due to repatriation. This is due to the small allocation to money market instruments relative to the total size of liquid offshore holdings, and based on our expectation that fund flows will likely be distributed over several years. As a guide, we look to 2016 US money market reform, which led to massive flows out of prime money market funds into government money market funds. In the year leading up to the compliance deadline, an estimated USD1 trillion flowed out of prime money market funds, with the bulk switching to government funds. This flow represents more than eight times our estimate of offshore cash in non-government money market instruments that could potentially be liquidated and repatriated to US markets."
He adds, "If we scale for the relative difference in the size of potential repatriation flows, this would imply a widening in the 3-month Libor OIS spread well below the 25-basis point move we saw in 2016. Given this potentially limited impact of repatriation, we would anticipate other factors, such as Fed interest rate hikes, to have a much greater influence on money market interest rates in the near-to-medium term."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary late Tuesday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of Feb. 23) includes Holdings information from 67 money funds (same as last week), representing $1.584 trillion (up from $1.326 trillion the prior week) of the $2.990 (53.0%) in total money fund assets tracked by Crane Data. (For our monthly Holdings recap, see our Feb. 12 News, "Feb. Money Fund Portfolio Holdings: TD, CP, CDs Jump; Repo Plummets.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $590.0 billion (up from $448.2 billion), or 37.2%, Treasury debt totaling $475.3 billion (up from $401.1 billion) or 30.0%, and Government Agency securities totaling $329.6 billion (up from $280.5 billion), or 20.8%. Commercial Paper (CP) totaled $62.6 billion (up from $48.2 billion), or 4.0%, and Certificates of Deposit (CDs) totaled $45.7 billion (up from $42.0 billion), or 2.9%. A total of $41.2 billion or 2.6%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $40.0 billion, or 2.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $475.3 billion, Federal Home Loan Bank with $255.9B, BNP Paribas with $76.9 billion, Federal Farm Credit Bank with $45.1B, RBC with $38.5B, Wells Fargo with $36.6B, Societe Generale with $34.3B, Credit Agricole with $34.2B, Nomura with $33.2B, and Natixis with $31.6B.
The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($147.7B), Fidelity Inv MM: Govt Port ($105.9B), BlackRock Lq FedFund ($90.2B), Goldman Sachs FS Govt ($86.6B), Federated Govt Obligs ($76.2B), Wells Fargo Govt MMkt ($73.7B), Blackrock Lq T-Fund ($71.3B), Dreyfus Govt Cash Mgmt ($64.3B), State Street Inst US Govt ($54.7B), and Goldman Sachs FS Trs Instruments ($48.5B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
