Online money fund trading "portal" ICD hosted a webinar entitled, "Money Market Update: Finding Normal" yesterday, which was hosted by ICD's Jason Owen and which featured UBS Asset Management's Rob Sabatino and Crane Data's Peter Crane. The session discussed the latest in money market fund developments, with a heavy emphasis on March's market turmoil. When comparing the Coronavirus Panic to the Great Recession, Sabatino commented, "If you look at 2008, there was fear of insolvency, whereas this crisis was more of a market illiquidity event with tremendous uncertainty given how quickly the crisis came on. There was no signaling and there was no ability for people to understand how significant Covid-19 would be, and how it would play out in the market.... This time we weren't concerned about downgrades and the bankruptcy of any of the issuers in the money market space. What we really had was a lack of liquidity and the fear that ... outflows from funds ... would use up all of our excess liquidity."
He continued, "There was a lot of concern around that 30% [weekly liquid assets mandate].... But the key here is that it's up to the board's discretion.... At no time did we anticipate any money funds putting up a gate or enacting liquidity fees, because we still had tremendous amount of ability to meet redemption spreads. If you think about 30% of the assets being in that liquid bucket, that's a lot of outflow that you could see and not even have to worry. But we're always concerned about investor sentiment, what they would be focused on.... We did see a migration out of prime funds into what's perceived the safe haven of government and treasury funds, but now things have settled down."
Sabatino added, "I think one of the benefits we had with this crisis was the Fed and Treasury understood what needed to be done. They were able to quickly act and resurrect some programs, create new programs and return some stability to the markets, that was key to getting through the last few weeks."
Crane commented, "I think [the bucketing of liquidity] was one of the things that really helped in this crisis too. You have such huge government money fund tranches in the first place that the prime funds didn't have to be hit so hard and so fast with those liquidity needs. Investors could sort of pay out of them as things came due.... The size of the markets helped, too.... Back in 2008, commercial paper, including asset-backed commercial paper, was $2 trillion. It's now $1 trillion (or was). Prime funds were up there at $2 trillion, and they're now $1 trillion (or were before this started). So, they had smaller problems.... The immediate threat in the Commercial Paper market was more towards other pools beyond money funds.... But because money funds are all buying bank debt in the "credit" (or Prime) funds, they had immediate access to the Fed.... The jury's going to be out for a while on whether the reforms worked or not."
He also told the ICD audience, "The reforms of 2011 and 2014, that went into effect in 2016, didn't remove the ability for sponsors to support the fund, and we saw a couple of managers step in and purchase securities just to provide liquidity. They knew it was all 'money good'. There had been no defaults or major downgrades in the space. So that tool for U.S. money funds was very important. I'm a positive spin guy with this business, as you all know.... You can really argue that the reforms worked like a charm here, that the NAVs bent but they did not break or 'break the buck.' They eroded down and they came back up as those securities paid off. The Fed actions worked well."
Crane also said, "Given Prime funds' slow steady recovery following the big shift in 2016, this may be a setback, and [recovery] may take longer. But ... as these Government Institutional funds start hitting zero, the Prime recovery may be faster than expected, because pretty soon people are going to forget the danger and start starving and searching and for yield."
On negative yields, Sabatino explained, "There were a few weeks there that we were very concerned about our Treasury and Government funds. Given the fact that there is such demand for safe haven, high quality assets that we saw most of the Treasury bill curve trade negative. There were points where some of the bills were being offered at negative 15, 20 basis points.... Now that we've had this massive new issuance -- over the last two weeks we've had a net increase in bill supply of over $600 billion -- the market has adjusted fairly well.... As assets flow into these funds, the yields are impacted because we're investing at current market rates. So, we do see the gross yields on Treasury and Government funds slowly decline. But at this point, now for most of the institutional investors and portal investors who are in low fee funds, I don't anticipate much of a problem."
Finally, Sabatino commented, "The Fed has made it clear that they, unlike parts of Europe, don't really see the usefulness of having negative interest rates. At this point, the Treasury auctions can only come at zero or positive, they can't even come at a negative rate.... I'm hopeful that we won't get to negative rates, but clearly over time we could see rates on government and Treasury bonds close to zero."
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be released later Thursday, and we'll be writing our normal monthly update on the March 31 data for Monday's News. (We're closed, along with the money markets, for Good Friday.) But we also generate a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings, and we posted these to the website Wednesday. (We continue to merge the two series, and the N-MFP version is now available via Holding file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of March 31, 2020, includes holdings information from 1,078 money funds (down four from last month), representing assets of a record $4.759 trillion (up a massive $727.7 billion). We review the latest N-MFP 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 $1.551 trillion (up from $1.326 trillion), or 32.6% of all assets. Treasury holdings total $1.359 trillion (up from $1.047 trillion), or 28.6%, and Government Agency securities totaled $1.072 trillion (up from $777.1 billion), or 22.5%. Holdings of Treasuries, Government agencies and Repo (the vast majority of which is backed by Treasuries and agencies) combined total $3.982 trillion, or 83.7% of all holdings.
Commercial paper (CP) totals $313.6 billion (down from $338.2 billion), or 6.6%, and Certificates of Deposit (CDs) total $216.1 billion (down from $292.1 billion), or 4.5%. The Other category (primarily Time Deposits) totals $143.0 billion (down from $156.8 billion), or 3.0%, and VRDNs account for $103.5 billion (up from $94.1 billion last month), or 2.2%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $190.3 billion, or 4.0%, in Financial Company Commercial Paper; $52.8 billion or 1.1%, in Asset Backed Commercial Paper; and, $70.5 billion, or 1.5%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($1,041B, or 21.9%), U.S. Govt Agency Repo ($464.6B, or 9.8%) and Other Repo ($45.0B, or 0.9%).
The N-MFP Holdings summary for the 221 Prime Money Market Funds shows: CP holdings of $308.3 billion (down from $332.3 billion), or 31.4%; CD holdings of $216.1 billion (down from $292.1 billion), or 22.0%; Repo holdings of $169.1 billion (down from $220.6 billion), or 17.2%; Treasury holdings of $109.8 billion (up from $103.4 billion), or 11.2%; Other (primarily Time Deposits) holdings of $97.4 billion (down from $107.9 billion), or 9.9%; Government Agency holdings of $69.7 billion (up from $45.0 billion), or 7.1%; and VRDN holdings of $11.1 billion (up from $5.2 billion), or 1.1%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $190.3 billion (down from $209.9 billion), or 19.4% in Financial Company Commercial Paper; $52.8 billion (down from $63.4 billion) or, 5.4% in Asset Backed Commercial Paper; and $65.2 billion (up from $59.0 billion), or 6.6% in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($83.0 billion, or 8.5%), U.S. Govt Agency Repo ($41.1 billion, or 4.2%), and Other Repo ($45.0 billion, or 4.6%).
