AFP on Fed Action to Shore Up MMFs
An AFP article entitled, "Echoing 2008, Fed Takes Action to Shore Up MMFs," explains, "In the wake of the coronavirus crisis, both the Federal Reserve Board and the Department of the Treasury have taken steps to shore up money market funds. The actions come after a recent strain on prime funds has investors panicking. These actions by the Fed and the Treasury are largely due to prime funds seeing major outflows this week, losing more than 10% of their total portfolio assets." They write, "Prime funds are already a shadow of their former selves; the implementation of a floating net asset value (NAV) in 2016 caused many investors to exit prime funds entirely. Some have come back in the past few years, though this latest shakeup may keep investment in prime funds depressed for years to come." AFP quotes our Peter Crane, "We've seen noticeable outflows from prime money market funds, which are the credit or general-purpose type that buy commercial paper.... Over the past week, we've seen $85 billion come out of prime. They're still just above $1 trillion in size, so as a percentage basis, it's not life-threatening. But those steady outflows, coupled with the freezing of the commercial paper markets, are starting to threaten money funds from multiple angles." It continues, "Crane added that had the Fed and Treasury not stepped in, eventually, the outflows would have triggered gates and fees on some funds and may have even forced some funds to 'break the buck' like the Reserve Primary Fund did in 2008. 'As we saw in 2008, the Fed and now the Treasury thought a better scenario was to support the market before a full-scale run develops,' he said." The article adds, "There have been 'massive flows' into government funds this week, Crane explained, but he doesn't expect that to continue. Government funds have their own issues, such as yields that are pinned close to zero and could even go negative in certain cases." Finally, the article concludes, "For treasury professionals having flashbacks to 2008, Crane pointed out that the market has changed substantially since then; first of all, it's a smaller overall issue because the markets for both commercial paper and prime funds are half the size that they were in 2008. Second, the investment portfolios are drastically different than they were back then." Crane adds, "Almost every investor in prime money funds also has a government fund and uses government funds for their transactional functions, payroll, etc.... So prime is sort of the second-tier of liquidity or even third-tier liquidity on top of that. And while the gates and fees have never been triggered and never been tested, if a gate did come up, it presumably wouldn't be critical for any of those big investors because they've already got a big pool in a more liquid government fund."
