Fitch Recaps Prime Liquidity Strains
Last week, Fitch Ratings published a brief entitled, "Fed's Intervention Stems U.S. Prime MMF Liquidity Strains." It tells us, "The Federal Reserve Bank's (Fed) Money Market Fund Facility (MMLF) program has significantly improved liquidity in U.S. prime money market funds (MMFs) by providing an avenue for securities dealers to purchase longer dated assets from funds otherwise challenged to meet increased redemptions. Prime institutional MMFs saw $94.68 billion in outflows (14.8% of assets) between Feb. 19 and March 18, 2020, with some funds losing up to 55% of assets during this period.... The high level of redemptions brought many funds close to the 30% regulatory requirement for weekly liquidity; in one case, the threshold temporarily breached despite liquidity cushions that the funds held before the outflows. Since the Fed introduced the MMLF, weekly liquidity has risen above pre-volatility levels for many funds. The MMLF provides loans to eligible borrowers secured by certain types of assets bought from prime MMFs, and the list of eligible collateral has steadily expanded since the program's launch, encompassing a large portion of MMF assets. According to the Fed balance sheet, the MMLF has $52.67 billion outstanding in loans as of April 1, 2020." Fitch continues, "The MMLF's direct impact of higher MMF liquidity has also improved investor confidence and indirectly slowed redemptions in prime institutional funds, with small inflows seen in recent days.... The MMLF intervention was driven by market illiquidity that challenged MMFs' ability to meet redemptions, not by imminent credit issues in fund portfolios. Collateral eligibility requirements for the MMLF include high credit quality (in the top short-term rating category, such as 'F1' by Fitch Ratings) and maturities of up to 12 months." The report adds, "There were also two instances of MMF sponsors (BNY and Goldman) providing liquidity support to their funds, buying out high credit quality collateral that was then not eligible for the Fed's MMLF. Examples of the types of securities that sponsors purchased out of their funds include commercial paper issued by Swedbank AB (rated A+/F1 by Fitch, maturing July 28, 2020) and a certificate of deposit issued by Natixis S.A. (rated A+/F1 Rating Watch Negative by Fitch, maturing June 5, 2020). Fitch views the types of liquidity support provided by sponsors and the Fed differs from that provided during the 2008 financial crisis, when a number of MMF sponsors bought highly distressed or defaulted securities out of their funds at prices above fair market value (such as debt issued by Lehman Brothers and different Structured Investment Vehicles) and the government ultimately provided a blanket guarantee of MMFs." Finally, it says, "Despite the stabilizing effects of recent Fed intervention, Fitch maintains a negative outlook on the U.S. prime MMF sector given continued market volatility and the potential for credit issues to emerge." See also Fitch's "ESG Adoption Increases Burden of Proof on Money Market Funds."
