The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing - June 2018" report yesterday, which shows a $30.1 billion drop in money market fund assets in June to $2.821 trillion. This follows a $58.3 billion jump in May, a $0.4 billion decrease in April, and a $50.1 billion decrease in March. In the 12 months through June 30, money fund assets have increased by $187.5 billion, or 7.1%. (Month-to-date in July through 7/29 assets have increased by $83.3 billion, according to our MFI Daily. But note that we added $63.0 billion in new funds to our collections this month, so July's increase is more like $23.3 billion.) ICI's latest Portfolio Holdings totals also show a big drop in Repo holdings and another drop in Treasuries in June. We review ICI's Trends and Portfolio Composition statistics below, and we also quote from a new S&P update on SOFR-linked securities.

ICI's monthly report states, "The combined assets of the nation’s mutual funds decreased by $57.68 billion, or 0.3 percent, to $18.88 trillion in June, according to the Investment Company Institute’s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."

It explains, "Bond funds had an inflow of $10.28 billion in June, compared with an inflow of $7.10 billion in May.... Money market funds had an outflow of $32.50 billion in June, compared with an inflow of $56.41 billion in May. In June funds offered primarily to institutions had an outflow of $33.19 billion and funds offered primarily to individuals had an inflow of $691 million."

The latest "Trends" shows that both Taxable and Tax Exempt MMFs lost assets last month. Taxable MMFs decreased by $27.1 billion in June to $2.685 trillion, after increasing by $51.6 billion in May, increasing by $0.8 billion in April, and decreasing by $47.4 billion in March. Tax-Exempt MMFs decreased $3.1 billion in June to $135.7 billion. Over the past year through 6/30/18, Taxable MMF assets increased by $180.3 billion (7.2%) while Tax-Exempt funds rose by $7.2 billion over the past year (5.6%). Bond fund assets increased by $8.2 billion in June to $4.112 trillion; they rose by $225.7 billion (5.8%) over the past year.

Money funds now represent 14.9% all mutual fund assets (down from 15.1% the previous month), while bond funds represent 21.8%, according to ICI. The total number of money market funds rose by one to 383 in June, but this total is down from 417 a year ago. (Taxable money funds rose by one to 299 funds. Tax-exempt money funds were flat at 84 funds over the last month.)

ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which showed a drop in Repo and Treasuries in June. Treasuries which lost their position as the largest portfolio segment three months ago, fell by $13.0 billion, or -1.8%, to $728.3 billion or 27.1% of holdings. Treasury Bills & Securities have increased by $104.0 billion over the past 12 months, or 16.7%. (See our July 12 News, "July Money Fund Portfolio Holdings: Repo Falls, But Fed RRP Rebounds.")

Repurchase Agreements remained in first place among composition segments; they decreased by $31.2 billion, or -3.3%, to $909.0 billion, or 33.9% of holdings. Repo holdings have risen by $14.9 billion, or 1.7%, over the past year. U.S. Government Agency Securities remained in third place; they rose by $2.7 billion, or 0.4%, to $663.4 billion, or 24.7% of holdings. Agency holdings have risen by $20.5 billion, or 3.2%, over the past 12 months.

Certificates of Deposit (CDs) stood in fourth place; they increased $6.4 billion, or 3.7%, to $179.7 billion (6.7% of assets). CDs held by money funds have fallen by $97 million, or -0.1%, over 12 months. Commercial Paper remained in fifth place, increasing $1.0B, or 0.6%, to $169.6 billion (6.3% of assets). CP has increased by $45.2 billion, or 36.3%, over one year. Notes (including Corporate and Bank) were up by $34 million, or 0.5%, to $6.8 billion (0.3% of assets), and Other holdings increased to $28.4 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 383.3 thousand to 32.374 million, while the Number of Funds increased by one to to 299. Over the past 12 months, the number of accounts rose by 6.614 million and the number of funds decreased by 18. The Average Maturity of Portfolios was 31 days in June, up 2 days from May. Over the past 12 months, WAMs of Taxable money funds have shortened by 2 days.

In other news, S&P Global Ratings released a statement entitled, "The Secured Overnight Financing Rate (SOFR) Is Consistent With Our Principal Stability Fund Ratings Criteria." It tells us, "The first floating-rate security to use the secured overnight financing rate (SOFR) as a benchmark is currently coming to market. SOFR is based on transactions in the Treasury repurchase agreement market, where banks and investors borrow or loan Treasuries overnight. Today, S&P Global Ratings said SOFR is consistent with what it refers to as an 'anchor money market reference rate' in its principal stability fund ratings (PSFR) criteria."

They explain, "In our view, SOFR meets all the conditions outlined in our PSFR criteria (see 'Principal Stability Fund Rating Methodology,' published June 23, 2016). For PSFR purposes, since SOFR is considered an 'anchor money market reference rate,' floating-rate securities referencing SOFR would not be classified as higher-risk investments. When determining an anchor money market reference rate, we typically assess correlation to a core local currency anchor money market reference rate over a sustained period, trading history, market acceptance, and maturity profile. We also look at whether the rate is reflective of the movements in the short-term money markets. Indicative SOFRs show a high correlation to recognized anchor money market reference rates, such as the federal funds rate and one-month London Interbank Offered Rate (LIBOR)."

S&P Global Ratings concludes, "SOFR has an extremely short maturity profile, and given it is expected to replace LIBOR in the coming years, it has gained wide market acceptance with hundreds of billions of dollars' worth of trading volume since its inception. As a broad measure of the overnight Treasury repurchase agreement (repo) market, we believe SOFR's performance is reflective of the movements in short-term money markets. Additionally, the daily reset of SOFR floating-rate securities minimizes the index/spread risk that funds may experience."

J.P. Morgan Securities, in its latest "Short-Term Fixed Income" update, writes on "Fannie Mae debuts SOFR floaters." It says, "In spite of the quiet week in the money markets, there was a new security in town. This past Thursday, Fannie Mae issued three tranches of a floating rate note tied to the Secured Overnight Financing Rate (SOFR). This is the first security issued that's tied to SOFR, the new benchmark rate that's expected to eventually replace Libor. In total, Fannie Mae issued $6bn of SOFR-linked floaters, across the 6m, 12m, and 18m tenors, at SOFR +8bp, +12bp, and +16bp, respectively."

They continue, "Notably, the deal was oversubscribed though not necessarily all from the usual money market investors. In particular, participation from S&P-rated MMFs was minimal due to current rating agency guidelines that would consider this a 'higher-risk investment'. S&P notes that 'FRNs tied to indices we (and often others) do not view to be 'anchor' money market reference indices are considered 'higher-risk investments'.... In this context, it appears the SOFR is currently not considered an 'anchor' money market reference rate, as it does not yet demonstrate an 'established trading history, market acceptance, and performance commonly reflective of the movements in short-term money market markets in the local currency.'"

JPM's earlier piece adds, "Currently, over half of the MMF market ($1.6tn) is rated by S&P. That being said, we have been informed by S&P that it is currently assessing whether SOFR would be classified as an anchor money market rate. Interestingly, even without the support of S&P rated MMFs, the deal was still oversubscribed. We suspect unrated MMFs played a large part in the shorter tranches, while the longer tranche was distributed across a broad range of investors."

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