For those of you who might have missed it, we hosted our first webinar, entitled, "Crane's Money Fund Update & Training," last Thursday. It featured Peter Crane reviewing recent events and trends involving money market mutual funds for 30 minutes, including discussions of asset flows, negative yield and a number of other topics. The webinar also included a brief, 15 minute tutorial on our Money Fund Intelligence Daily product. Below, we review Crane's latest comments, and we also include links to the recordings and Powerpoint. (See the bottom of our "Content" page for all of our Webinar and conference materials.) Mark your calendars and watch for details on our next webinar, which will be held June 25 at 2pm, and bear with us as we ramp up our virtual event capabilities over the next couple of months.
On record money fund asset growth, Crane comments, "The ICI series is hitting $4.8 trillion. Crane Data's [series] has hit $5 trillion already. We're saying money fund assets are over $5 trillion because we're counting funds that ICI is not. (Crane Data tracks internal money market funds like American Funds Central Cash, Fidelity Cash Central Fund and Vanguard Market Liquidity Fund.) The inflows into government funds were just gigantic, so, it's been quite a huge buildup. Looking at the month-by-month numbers, it has certainly tapered off. And in the last few days, you've even seen outflows."
He continues, "The ICI's weekly numbers are going to come out this afternoon, they'll probably show a little increase. We're about to see a decrease in assets for almost the first time this year, but ... the flows have been incredible.... Government funds have seen $1.16 trillion in assets the last two and a half, three months. In March, they saw $790 billion. In April, they saw $362 billion. Then month-to-date in May, it's been interesting because Prime has been taking the lion's share. Prime funds saw about $160 billion of outflows in March. In April, they saw an $82 billion inflow. And in May, they've seen an $82 billion inflow. So, the inflows into prime funds have recovered all of the outflows from March, which is just amazing."
Crane explains, "You probably saw the news on Northern liquidating its Prime. That was a little bit of an anomaly and a leftover from what had already happened there during March, when one of the funds went below the 30% weekly liquid assets. But the asset inflows have been incredible.... Looking at ICI's number, they're up $1.2 trillion, 31.8% year-to-date, and that's after a 20% gain in 2019. The 52 week [changes] are up 54%. It has been incredible, the buildup."
He says "I'm guessing we're going to see a flattening out [of asset growth]. But this cash war chest that you've seen raised -- no cash bucket is big enough for the coronavirus or is big enough, for individuals, governments, institutions. It's like everybody's got to plan for operating for two months, three months, six months, two years. Who knows? With no revenue coming in, with no cash coming in. So, there's been this just mad raising of cash. And of course, that's the giant spikes that we've seen. I don't think it's going out anytime soon. I think that you're basically going to have people spending down the cash as they have to meet payrolls and expenses. But as they turn revenue on, and they're going to be converting other cash and trying to protect themselves because they were just taught a painful lesson that you shouldn't just have a couple of days of spending money in the kitty. You better have a couple of months. And who knows? Maybe even a couple of years."
Crane also comments, "The Fed support programs were awesome. We'll be arguing about how necessary they were. But from my standpoint, they were a godsend. It certainly was a real dangerous scenario. You’ve probably heard other fund companies talking about the Money Market Liquidity Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, they were all good in ways and helped support the market in general. And putting pricing under those Commercial Paper and CD markets was key because at the time, in that week in the middle of March, you didn't know what to price things at. And of course, if you want to sell something, good luck with that. Now things have stabilized, Prime is back and things are doing fine."
He tells us, "As an aside, the Treasury Guarantee Program was never used, never implemented, but it was part of that first big CARES Act. Back in that nail-biting week, it looked as if it might be necessary. Who knows how it would have been structured, whether it would have been like it was in 2008. Everybody went to the 2008 playbook and assumed that's where you start.... Unfortunately, with the coronavirus they don't have a playbook for that yet, we're writing it out. So, it certainly helps if you've been through this before."
Crane continues, "Looking at the deposit numbers too … bank deposits were up $1 trillion as well. That has been an absolute crazy side effect, too. If you look at the overall cash. I like adding the Fed's H.6 series. I'll take their money fund stats and add them to their deposit, their money market deposit accounts from banks and thrifts. Those two are now $15 trillion, so you've seen this $2.2 plus trillion surge in cash, in both money funds and bank deposits. That's usually a rarity, they're usually sort of battling against each other and taking market share against each other. But bank deposits have been absolutely gigantic as well. The cash build up has been immense."
On yields, he states, "The big thing is the yields already had been declining going into 2020. You saw yields roughly at 2.0% at the start of 2019, 1.5% at the start at 2020 and then during March with that big 100 basis point Fed cut to zero. You're seeing money funds digest those and come down. Money fund yields on average went through 1.0% in March, through 0.5%, and now are 0.17% according to the Crane 100, as of yesterday. That's the hundred largest money funds and is really representative of what the market's yielding.... The average Prime institutional fund is 0.31%, as of yesterday. The average government institutional fund is 0.11%, with the treasury at 0.8%. So, you’ve got 20 basis points or so of spread in there. As yields are being crushed to zero, you do see this migration and push out of risk and struggle for yield on the curve. So, expect to see more of that."
Crane adds, "You've probably heard about the Treasury soft closings; they're not liquidating the funds, they just restricted tempered new money coming in. Fidelity did that first and then Vanguard did that with a Treasury fund. None of the other big providers have done that. And the negative yields on T-bills have gone away for now and have been alleviated."
He continues, "What you're looking at now is when you had this period of zero yields before in 2009 through 2015, you had, in effect, fund companies waive fees to maintain a positive yield. And if you look at funds with fee waivers now, they change them day to day so they're hard to spot. The easiest way to spot who's waiving fees is to look at the yield and say, 'Is their yield 0.00 or 0.01%?' And right now, brokerage sweep accounts are all, across all the tiers, 0.01%, so they've hit the floor. Money funds, you have 20% of assets at 0.00 to 0.01%, which is usually the floor. So, they pay a tiny token dividend just so they're not mistaken as an n/a and it stays positive. So, 20% is at zero already and so it's starting to get hit by fee waivers. Another 20% is at 10 basis points to 0.01%, and that percentage is getting crushed in. You’re soon going to have 40% of the assets at zero and starting to waive fees that can be felt."
Crane says, "Money fund managers and others have said the Fed doesn't want to go negative. The Fed has said they don't want to go negative. But we've seen the last couple of years, couple of decades, that the Fed does what the market tells it to do and the government does what the market tells it to do. So, though people say it's unlikely, you know, people are starting to gear up and say, what happens if we might go negative? From a theoretical standpoint, it's no big deal. In Europe, in euro, you have $100 billion. If you look at the euro money funds, which are much smaller, they're different, they're institutional, but they're yielding negative 0.5%. These numbers are all annualized realize, of course. It's been that way for five years and they're hitting record asset levels; they got a big surge from the coronavirus panic as well. I think it's merely jumping through some regulatory hoops and dealing with some issues. Money funds might even prefer to go negative and to have negative yields because then they don't have the waive expenses."
He explains, "Though it's unlikely, negative yields do not mean investors are going to take their cash away. I mean, in this scenario, it's the old Will Rogers comment about return of principal, instead a return on principal, that always applies to cash. And of course, if people are worried, they're nervous, they're panicked if they have to pay payrolls, if they have to meet expenses, what do you care what rate you're getting? The rate is nice, it drives money around the margin, but it's not going to make a big dent in that gigantic $5 trillion balance. So, I don't see the money fleeing."
Crane asks, "If you go negative, how would you do it? That’s the question. But I think that problem can be solved as well, whether you do a reverse distribution mechanism or a share cancelation mechanism like euro money funds used to do before they changed the regulations. Some people think you have got to have an S.E.C. change to do that. The S.E.C. might even be able to do it through a no action letter, or it might be something that doesn't require a big regulatory change. That's unclear. Or, you could even have government funds going and filing and saying we're going floating and going to a four-digit NAV, and just having that gradual small erosion. But negative yield is not breaking the buck, is not losing money. People aren't losing the money if they're paying you the fee. They're aware of what that charge is, of what that cost is, and I believe they're going to be more than happy to pay it."
He also states, "Regulatory changes are something that people are asking about, they're a big issue. I don't think money funds are destined for dramatic reforms, but people are dusting off their copies of the President's Working Group or ICI Working Group and seeing what kind of crazy ideas might come out of the woodwork again.... We went through and settled on modest incremental changes last time. This time you're going to blame the coronavirus and not mortgage backed securities and complex securities and the financial system. But of course, a lot does depend on what regulators are looking at and who wins the election. If Elizabeth Warren gets in there, she's probably going to want to regulate something. But who knows what's going to happen? Regulators have a lot of bigger fish to fry and other issues, but I'm sure it is going to be talked about again."
Crane adds, "If you, like me, lived through the last set of regulatory discussions and issues you realize in 2007/2008, the subprime liquidity crisis, there was no clear answer to any of this stuff. And again, I think you're going to have that same problem and issue. Do you want to kill the money funds to save them? Do you want to change radically? And I think we're destined for a stalemate and perhaps minor tweaks again. So, I'd bet against regulatory issues and changes. The one big thing that you could argue worked was the prime space was half the size that it was in 2008. It was a trillion dollars in the CP markets, in the prime markets, versus $2 trillion plus back then. So, your problem was smaller and the fact that everybody's got government money funds, and that tier of government fund liquidity certainly may have helped. I think Prime survives. I think credit survives, but that's something that people will be talking about."
Again, watch for more webinars in coming months, and we still remain hopeful that travel will resume later this summer and that we'll be able to host our annual Money Fund Symposium and European Money Fund Symposium. Crane's Money Fund Symposium is scheduled for August 24-26, 2020 at the Hyatt Regency Minneapolis. We'll continue to monitor events carefully in coming weeks, and we'll be prepared to move, to cancel, and/or to webcast if our client base deems it unsafe. Meanwhile, we'll be preparing for the show and taking steps to spread out and make the event safer. (Note: We'll offer full refunds or credits for any cancellations.) Our next European Money Fund Symposium is now scheduled for Nov. 19-20, 2020 in Paris, France. Also, mark your calendars for next year's Money Fund University, which is scheduled for Jan. 21-22, 2021, in Pittsburgh, Pa, and our next Bond Fund Symposium, which is scheduled for March 25-26, 2021 in Newport Beach, Calif. Watch for details in coming months, and we'll keep you posted on our upcoming virtual, and live, events.
