The Federal Reserve Bank of New York posted a brief on "The Money Market Mutual Fund Liquidity Facility" on its "Liberty Street Economics" blog Friday. It tells us, "Over the first three weeks of March, as uncertainty surrounding the COVID-19 pandemic increased, prime and municipal (muni) money market funds (MMFs) faced large redemption pressures. Similarly to past episodes of industry dislocation, such as the 2008 financial crisis and the 2011 European bank crisis, outflows from prime and muni MMFs were mirrored by large inflows into government MMFs, which have historically been seen by investors as a safe haven in times of crisis. In this post, we describe a liquidity facility established by the Federal Reserve in response to these outflows."
The post explains, "From March 2 to March 23, the assets under management (AUM) of prime and muni MMFs dropped by $120 billion (15 percent of the industry) and $9 billion (7 percent of the industry). To prevent outflows from prime and muni MMFs from turning into an industry-wide run, as happened in September 2008 when one prime MMF 'broke the buck,' the Federal Reserve announced the establishment of the Money Market Mutual Fund Liquidity Facility, or MMLF, on March 18. Under this facility, the Federal Reserve Bank of Boston provides loans to eligible borrowers (U.S. depository institutions, bank holding companies, and branches and agencies of foreign banks), taking as collateral eligible securities purchased from prime and muni MMFs. The U.S. Department of the Treasury provides $10 billion of credit protection to the Federal Reserve from the Treasury's Exchange Stabilization Fund."
Authors Marco Cipriani, Gabriele La Spada, Reed Orchinik, and Aaron Plesset tell us, "The set of eligible collateral was gradually expanded over time; it now includes U.S. Treasuries, government-sponsored enterprise (GSE) debt, first-tier asset-backed and unsecured commercial paper (CP), top-tier negotiable certificates of deposit (CDs), municipal short-term debt, and variable rate demand notes (VRDNs). All securities accepted under the facility must have a residual maturity lower than twelve months or, in the case of VRDNs, must be putable within 12 months. The facility officially opened on March 23, and usage has been robust, with outstanding loans of more than $50 billion as of April 14."
They continue, "The facility, which has many similarities with the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) put in place during the 2008 financial crisis, can be beneficial in two ways. First, by facilitating the sales of securities, it helps MMFs meet redemptions in an environment in which secondary market liquidity is strained. Second, by reassuring MMF investors that funds will be able to meet redemptions in the future, it reduces their incentive to withdraw preemptively, thereby reducing overall outflows. As outflows abate, prime and muni MMFs can continue to fund American businesses, states, and other localities."
The NY Fed blog comments, "The facility has been very successful, over a short period of time, at slowing investor outflows from prime and muni MMFs and improving conditions in money markets.... Since the facility's inception to the end of March, prime MMFs only suffered a $20 billion decline in AUM, more than half of which occurred over the first two days after the inception (before CDs and VRDNs became eligible collateral on March 25); on April 2, prime MMFs started to experience moderate inflows. Similarly, outflows from muni MMFs stopped on March 25, when VRDNs (an important part of their portfolios) became eligible collateral; muni-MMF AUM have been increasing since and are now back at their level at the beginning of the year."
It also says, "By helping prime and muni MMFs meet redemptions without having to sell in disorderly markets, the MMLF has also supported the net asset value (NAV) of prime and muni MMFs.... [I]n the second half of March, for the bottom 10th percentile of prime and muni MMFs, the NAV per share dropped below $1 by more than 10 basis points (a large drop for the MMF industry) only to recover after the facility was put in place. In addition, the NAV of the median fund also dropped below $1, went back to $1 by early April, and has been above that level since. Similarly, by converting less liquid collateral (such as CP and CDs) into cash, the facility has also allowed prime and muni MMFs to rebuild their buffers of liquid assets, which had been partly depleted over the high redemption period."
The blog states, "Finally, although the effect of the facility cannot be easily disentangled from other interventions of the Federal Reserve, conditions in money markets also improved shortly after the introduction of the MMLF. For instance ... rates on 30‐day AA asset‐backed CP, which peaked at 2.37 percent on March 23, traded at 0.54 percent on April 17."
It adds, "[F]rom March 4 to March 23, offshore USD prime MMFs lost $90 billion of their AUM (23 percent of the industry size), whereas offshore government MMFs witnessed inflows of about $44 billion, similar to their domestic counterparts. By easing broad money-market conditions, the MMLF also had a positive effect on offshore USD prime MMFs. After the MMLF came into place, outflows from offshore prime MMFs slowed significantly, and since April 1, their AUM have increased constantly throughout April 17."
Finally, the post concludes, "The MMLF helped reduce outflows from prime and municipal MMFs. The facility not only helped avoid a broad run on the MMF industry but also eased the strains in money markets that had emerged since the second week of March. Because of its positive effect on secondary markets, the facility has also had a beneficial impact on offshore MMFs, which it does not directly target. By helping prime and muni MMFs meet demands for redemptions and by reducing outflows from the industry, the facility not only improves overall market functioning but also supports the provision of credit to the real economy."
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be released on Monday, and we'll be writing our normal monthly update on the April 30 data for Tuesday's News. But we also generate a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings, which we posted to the website Friday. (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 April 30, 2020, includes holdings information from 1,045 money funds (down 33 from last month), representing assets of a record $5.191 trillion (up a huge $432.0 billion). We review the latest N-MFP data below.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Treasury holdings totaled $2.118 trillion (up from $1.359 trillion), or 40.8%, Repurchase Agreement (Repo) holdings in money market funds totaled $1.251 trillion (down from $1.551 trillion), or 24.1% of all assets and Government Agency securities totaled $1.037 trillion (down from $1.072 billion), or 20.0%. Holdings of Treasuries, Government agencies and Repo (the vast majority of which is backed by Treasuries and agencies) combined total $4.406 trillion, or 84.9% of all holdings.
Commercial paper (CP) totals $296.8 billion (down from $313.6 billion), or 5.7%, and Certificates of Deposit (CDs) totals $227.1 billion (up from $216.1 billion), or 4.4%. The Other category (primarily Time Deposits) totals $147.9 billion (up from $143.0 billion), or 2.8%, and VRDNs account for $113.8 billion (down from $103.5 billion last month), or 2.2%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $179.8 billion, or 3.5%, in Financial Company Commercial Paper; $54.3 billion or 1.0%, in Asset Backed Commercial Paper; and, $62.7 billion, or 1.2%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($731.7B, or 14.1%), U.S. Govt Agency Repo ($471.0B, or 9.1%) and Other Repo ($48.5B, or 0.9%).
The N-MFP Holdings summary for the 211 Prime Money Market Funds shows: CP holdings of $291.1 billion (down from $308.3 billion), or 26.7%; Treasury holdings of $248.9 billion (up from $109.8 billion), or 22.8%; CD holdings of $227.1 billion (up from $216.1 billion), or 20.8%; Repo holdings of $156.3 billion (down from $169.1 billion), or 14.3%; Other (primarily Time Deposits) holdings of $92.9 billion (down from $97.4 billion), or 8.5%; Government Agency holdings of $62.3 billion (down from $69.7 billion), or 5.7%; and VRDN holdings of $12.6 billion (up from $11.1 billion), or 1.2%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $179.8 billion (down from $190.3 billion), or 16.5% in Financial Company Commercial Paper; $54.3 billion (up from $52.8 billion) or, 5.0% in Asset Backed Commercial Paper; and $57.0 billion (down from $65.2 billion), or 5.2% in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($45.8 billion, or 4.2%), U.S. Govt Agency Repo ($62.1 billion, or 5.7%), and Other Repo ($48.5 billion, or 4.4%).
