Since the SEC's Money Market Fund Reforms went into effect two years ago, there have only been a handful of Form N-CR filings, which indicate that financial support has been provided to a money fund. While we have yet to see any true money fund bailouts, we have seen a handful of filings to "top-up" money fund NAVs before liquidations and mergers. The latest filing, and first filing of 2018, is from the $265 million MFS U.S. Government Money Market Fund (MCMXX), which provided a small capital contribution to get rid of a "historical net realized loss" before it could no longer be carried forward. We review the brief MFS U.S. Govt MMF SAI Supplement and the N-CR rule below, and we also quote from a new Citi piece on Muni MMFs, the SIFMA Index and VRDNs.
MFS U.S. Government MMF's "Supplement to the Statement of Additional Information says, "The date of this supplement is July 2, 2018. Effective immediately, the following is added to the end of the section entitled "Appendix J – Investment Strategies and Risks": Money Market Fund Material Event. Financial Support Provided to U.S. Government Money Market Fund. On July 2, 2018, MFS, the investment advisor to the MFS U.S. Government Money Market Fund, made a capital contribution to the fund in the amount of $582,494. The fund was required to disclose additional information about this event on Form N-CR and to file this form with the SEC. Any Form N-CR filing submitted by the fund is available on the EDGAR Database on the SEC's website at http://www.sec.gov."
The MFS Form N-CR filing explains, "The capital contribution was made by Massachusetts Financial Services Company to offset historical realized capital losses incurred by the Fund prior to January 1, 2010. Massachusetts Financial Services Company did not receive any Fund shares in exchange for the contribution, and has no claim on the Fund's assets with respect to the contribution."
MFS Spokesperson Dan Flaherty tells us, "The fund was closed since February 2009," but it's recently been reopened (and unlike most of these filings, it is not liquidating or merging). He says it was a "historical net realized loss" that could only be carried forward for up to 8 years.
The SEC's description of the Form N-CR disclosure mandate in its 2014 "Money Market Fund Reforms (see page 374) says, "Today we are adopting, largely as we proposed, a new requirement that money market funds file a current report with us when certain significant events occur. New Form N-CR will require disclosure of certain specified events. Generally, a money market fund will be required to file Form N-CR if a portfolio security defaults, an affiliate provides financial support to the fund, the fund experiences a significant decline in its shadow price, or when liquidity fees or redemption gates are imposed and when they are lifted."
For more on Form N-CR, see our Dec. 24, 2015 News, "Northern on Reforms, Ultra-Short Strategies; First Form N-CR Filings," our May 21, 2015 News, "Dechert Examines Upcoming Form N-CR and Disclosure Requirements," and our April 14, 2016 News, "Money Fund Disclosure Reforms Go Live; Websites Add MNAVs, DLA, WLA."
In other news, a recent Citi Short Duration Strategy brief published Monday and entitled, "SIFMA/VRDNs - The parallax view," tells us, "The SIFMA index last reset at 94bp and is about 48% of 1wk Libor (currently at 196bp) and about 45% of 1m Libor (currently at 208bp). Thus, even on a tax adjusted basis, SIFMA seems extremely rich vs. its taxable counterparts. Humorously, we allude to this distortion in VRDN yields as the 'parallax view' by tax-exempt investors (a parallax error is an optical illusion caused by viewing the object at an oblique angle; this makes the object appear to be at a different position on the scale).... [H]ow do we explain this dislocation in VRDN yields? And, do we expect a correction in the near term? We discuss."
Author Vikram Rai explains, "The number of constituents of the SIFMA index continues to decline ... and clients have often asked us if the index is indeed a true representation of overall VRDN yields. We believe that it is, and while there are instances of paper trading far richer than the index (for instance, CA paper), the SIFMA index remains a somewhat accurate reflection of the average VRDN yield in the market. Also, while it is true that the numbers of index constituents has declined, so has the number of overall VRDN cusips in the market."
Discussing "Rationalizing the current SIFMA reset levels," he tells us, "We must admit that the richness of the SIFMA index ... is hard to justify but we believe the resets are low for two main reasons: Diminishing supply of investible paper: Tax-exempt MMFs face a unique problem, that of diminishing investible paper. VRDO outstandings, currently at $142 billion, have been shrinking.... The same is true for TOB outstandings and the size of this market is currently about $40.4 billion ... down 80% from its peak of $200 billion in 2007. VRDOs and TOBs account for 77% of the short term tax-exempt market."
The Citi piece continues, "On the other hand, demand for this category of paper from the traditional tax-exempt base can be quite sticky. This was one of the reasons why the SIFMA index was stuck in low single digits for a very long time ... i.e. supply was low while demand was somewhat constant. While we had hoped that VRDO net supply would increase this year, the increase has been far below our expectations."
It states, "Seasonality in demand patterns: Tax-exempt MMFs form a very large portion of the demand base for short term tax-exempt paper. If we look at the current supply demand equation, we find that the aggregate AUM for tax-exempt MMFs is about $134 billion and tax-exempt MMFs account for 57% of the overall demand for short-term tax-exempt products. Crossover investors such as prime funds are not equipped to pass on the benefit of tax-exemption to their investors and they become interested in VRDOs only when rates on SIFMA based products are at least in the same territory as comparable taxable rates (for instance, 1wk or even 1m Libor)."
Rai writes, "Thus, their influence has been declining. Accordingly, when tax-exempt MMFs witness inflows, as was the case after tax day, SIFMA tends to richen and vice-versa. And, there can be significant fluctuation in SIFMA resets owing to the fragile supply-demand balance for this section of the market. For instance, tax-exempt MMFs witness outflows around tax season as investors tend to sell their near cash alternatives in order to pay their tax bill and SIFMA tends to reset significantly higher around this period."
Finally, he asks, "Will SIFMA cheapen from here on? Yes, we believe it will. Prime funds have lost 60% of their assets under management ... due to money fund reform and before, they used to step in quickly to buy VRDOs during periods of cheapening and help provide some sort of a cap on SIFMA resets. Since their AUM has diminished, so has their demand and the short term tax-exempt sector is more reliant on demand from tax-exempt money funds. Over the last two weeks, tax-exempt money funds have witnessed about $4.5 billion in redemptions ... and this is reflected in the build-up of dealer inventory.... Thus, we do believe that increased dealer inventory will result in a higher SIFMA reset next Wednesday (August 1, 2018)."
