Wells Fargo Asset Management says money market funds ended 2018 in a celebratory mood, as four Fed rate hikes and a "miserable fourth quarter for risk assets" cleared the way for "cash" to seize "the crown (as) king of returns." Their latest "Portfolio Manager Commentary" comments, "The upshot is that after eight years of near-zero yields (and a few hikes in 2017), Prime money market funds garnered attention as a real asset class again in 2018, with the path of money market rates generally following the pace of the four Fed rate hikes. In addition, the bear flattening of the U.S. Treasury curve, the underperformance of credit products, and U.S. equities approaching bear market territory have brought favorable attention back to money markets."
The Wells Overview observes, "The rise in short rates has brought not only attention but perhaps also nontraditional money market investors (those that typically invest in longer-term debt or equities) into the short end of the market. The Crane Prime Institutional Money Market Index was up over $71 billion this year, with all prime assets up over $139 billion."
Though the money fund industry fought hard against certain aspects of the latest rounds of re-regulation, sunbeams are now apparently piercing the doom and gloom once presented. They write, for example, "Investors reexamining prime money market funds are realizing the changes implemented from the 2010 money market reform have made a material difference in the construction of prime money market fund portfolios. The added liquidity requirements and maturity restrictions have had a beneficial impact on dampening net asset value (NAV) volatility even as the FOMC continues to raise rates, as well as in the face of widening credit spreads."
Wells notes, "Going forward, money market rates should continue to look toward the FOMC and other market indicators for future rate guidance. As we get closer to the end of the tightening cycle, money market participants may look to extend weighted average maturities to capture higher yields. Our strategy of emphasizing highly liquid portfolios, relatively short WAMs, and a position in securities that reset frequently allows us to capture future FOMC rate moves with minimal NAV pricing pressures and affords us the flexibility to add longer-dated securities as opportunities arise."
The piece concludes, "[M]oney market funds were the place to be, with higher returns than other segments of the market, in the final quarter of the year. The positive returns on money market funds was not just the story of the quarter -- we feel it was the story of the year. On average, yields are up 97 to 100 bps, in line with the Fed moves. Did investors vote with their dollars? Yes, they did. Money market funds ended the year with net inflows of more than $219 billion, topping out at $3.15 trillion."
Finally, the Wells piece adds, "With increasing volatility in risk assets, we would anticipate money market funds may continue to offer investors a port in the vortex. But, as we have seen in the past, increases in demand, plus an approaching end to the tightening cycle, usually temper further rises in yields, which may have an offsetting effect on funds' assets. Our best expectations at this point is that the money market fund assets will remain relatively stable for the very near term before typical tax-related cyclical events take their toll."
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be published today (Thursday), and we'll be writing our normal monthly update on the Dec. 31 data tonight for Friday's News. But we've also been generating a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings. (We continue to merge the two series, and the N-MFP version is now available via Holdings file listings to Money Fund Wisdom subscribers.) Our summary, with data as of Dec. 31, includes holdings information from 1,179 money funds (down from 1,193 on Nov. 30), representing assets of $3.344 trillion (up from $3.242 trillion). We review the latest data below.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds totaling $1,057.8 billion (up from $1,019.3 billion on Nov. 30), or 31.6% of all assets. Treasury holdings total $945.1 billion (up from $880.6 billion) or 28.3%, and Government Agency securities total $680.1 billion (up from $656.2 billion), or 20.3%. Commercial Paper (CP) totals $237.6 billion (down from $250.2 billion), or 7.1%, and Certificates of Deposit (CDs) total $194.7 billion (down from $200.2 billion), or 5.8%. The Other category (primarily Time Deposits) totals $115.7 billion or 3.5%, and VRDNs account for $112.6 billion, or 3.4%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $149.1 billion, or 4.5%, in Financial Company Commercial Paper; $54.7 billion or 1.6%, in Asset Backed Commercial Paper; and, $33.8 billion, or 1.0%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($638.5B, or 19.1%), U.S. Govt Agency Repo ($376.9B, or 11.3%), and Other Repo ($42.4B, or 1.3%).
The N-MFP Holdings summary for the 215 Prime Money Market Funds shows: CP holdings of $232.8 billion (down from $245.5 billion Nov. 30), or 30.5%; CD holdings of $194.7B (down from $200.2B), or 25.5%; Repo holdings of $140.3B (up from $124.4B), or 18.4%; Other (primarily Time Deposits) holdings of $73.6B (down from $84.8B), or 9.6%; Treasury holdings of $82.4B (up from $77.1B) , or 10.8%; Government Agency holdings of $32.5B (up from $29.6B), or 4.3%; and VRDN holdings of $6.6B (down from $6.7B), or 0.9%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $149.1 billion, or 19.5%, in Financial Company Commercial Paper; $54.7 billion, or 7.2%, in Asset Backed Commercial Paper; and, $29.0 billion, or 3.8%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($50.0B, or 6.6%), U.S. Govt Agency Repo ($47.9B, or 6.3%), and Other Repo ($42.3B, or 5.5%).
