Crane Data hosted its second annual Bond Fund Symposium last week at the InterContinental Los Angeles Downtown. Our latest bond event attracted 110 bond fund managers, marketers, fixed-income issuers, investors and service providers. We briefly review some of the highlights and quotes below, but watch for more in coming days and in the April issue of our Money Fund Intelligence and our Bond Fund Intelligence newsletters. (We also review a new Bank for International Settlements paper on funding.) Note: The Powerpoints and recordings for Bond Fund Symposium Los Angeles are now available to conference attendees and Crane Data subscribers at our BFS 18 Download Center. Thank you again to those who attended and supported the event! (Next year's BFS will take place March 21-22, 2019 in Philadelphia. Watch for details later this year.)
The biggest topics of the day and a half event included: rising rates, risks and yields; repatriation; the surge in Treasury issuance; and the wave of "outside-in" money likely to fuel ultra-short bond funds' growth going forward. During Day One's State of the Bond Fund Marketplace, with Peter Crane, of Crane Data and Sean Collins of the Investment Company Institute, Crane said, "Bond funds in general seem like a tale of two industries ... the best of times, the worst of times. We're going to talk about flows which have been absolutely gigantic and magnificent, but at the same time we're going to talk about trends of passive versus active and expense ratios and fees being crushed and compressed. And of course looming higher rates poses a threat to all of that.... Just a couple of stats -- bond funds broke over $4 trillion, and ETFs add another $500 billion."
In the Keynote Discussion: Ultra-Shorts vs. SMAs with Dave Martucci of J.P. Morgan Asset Management and Jerome Schneider of PIMCO, Schneider commented, "This [ultra-short bond] is clearly a growing segment of the marketplace. The notion of liquidity management and capital preservation is something that's been on people's minds over the past 10 years, and it's taken a long time for people to actually think about how it should be articulated."
He explained, "We all work with [ultra-short funds] in different ways, and I think we would all agree that preferences is about managing capital is very unique. So, the purpose of these discussions the past year or two has been really focus on offering products, offering solutions to clients that help fill various risk factors that they feel are in the marketplace. The evolution of Pete's franchise is simply an acknowledgement that investors are moving around in there, and they're thinking more about more direct ways to manage capital."
Crane Data, which has been publishing its `Bond Fund Intelligence newsletter for 3 years, recently expanded its fixed-income offerings with the launch Bond Fund Wisdom and our new Bond Fund Portfolio Holdings data. (We just released our March Bond Fund Holdings data last week.) Our Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent and informal networking venue.
In other news, the Bank for International Settlements published a working paper entitled, "Business models and dollar funding of global banks." The Abstract says, "Since the eurozone crisis, there has been a stark divergence between European banks and Japanese banks in their dollar uses and sources. We show that these shifts have implications for the price of dollar funding. We document a "Japan Repo Premium." Japanese banks pay a premium for repos with US money market funds (MMFs), despite identical contract and risk characteristics."
Authors Inaki Aldasoro, Torsten Ehlers and Egemen Eren explain, "Using the US MMF reform as a natural experiment, we establish that Japanese banks' long maturity dollar assets generate a relatively inelastic demand for long maturity dollar borrowing. Differences in the demand for dollar funding combined with market and supply side frictions can explain these pricing differences. MMFs mainly provide short term repos and favor longer term clients for long maturity repos. Japanese banks concentrate their repo borrowing, reducing their bargaining power in order to extend their funding maturity. Our results have implications for the formation of global dollar funding networks. We provide evidence for European banks intermediating repos to Japanese banks, with economically significant estimated spreads from maturity transformation."
The paper's "Summary" tells us, "Non-US banks collectively hold $12.6 trillion of dollar-denominated assets -- almost as much as US banks. Since the Great Financial Crisis (GFC) and the eurozone crisis, however, there has been a stark divergence between European and Japanese banks' business models. We study the impact of this divergence on pricing of dollar funding and dollar funding networks. We use transaction-level data from the regulatory filings of US money market funds (MMFs) as well as quarterly regulatory filings of US branches and agencies of foreign banks, and BIS international banking statistics to develop a rich picture of the dollar funding landscape."
It continues, "Dollar funding stress of non-US banks was at the center of the GFC. The dollar funding landscape has changed dramatically since then, owing to the shifts in demand and differential implementation of Basel III regulations across jurisdictions. Our research shows how the demand for dollar funding has changed, how global banks obtain dollar funding and differential funding cost across banks for different funding instruments. This information is crucial in case of a new surge in dollar funding stress."
The BIS paper adds, "We find that Japanese banks pay a premium in their repurchase agreements ("repos") with US MMFs. We show that the bargaining power of MMFs fund families, together with the particular demand for long term funding of Japanese banks, help explain this premium. Our findings point to the existence of dollar funding networks. We derive implications from the existence of these networks and provide supporting evidence for them. Finally, we also show that disruptions in dollar repo markets spill over to other important dollar funding markets, such as that of foreign exchange swaps."
