Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be sent out late Tuesday morning, and we'll be writing our normal monthly update on the May 31 data for Wednesday's News. But we also published a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Monday. (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 May 31, 2020, includes holdings information from 1,076 money funds (up 31 from last month), representing assets of a record $5.321 trillion (up $13 billion). We review the new N-MFP data below.

Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Treasury holdings totaled $2.506 trillion (up from $2.118 trillion), or 47.1%, Repurchase Agreement (Repo) holdings in money market funds totaled $1.078 trillion (down from $1.251 trillion), or 20.3% of all assets and Government Agency securities totaled $962.3 billion (down from $1.037 trillion), or 18.1%. Holdings of Treasuries, Government agencies and Repo (the vast majority of which is backed by Treasuries and agencies) combined total $4.546 trillion, or 85.5% of all holdings.

Commercial paper (CP) totals $303.4 billion (up from $296.8 billion), or 5.7%, and Certificates of Deposit (CDs) total $219.6 billion (down from $227.1 billion), or 4.1%. The Other category (primarily Time Deposits) totals $137.2 billion (down from $147.9 billion), or 2.6%, and VRDNs account for $114.0 billion (up from $113.8 billion last month), or 2.1%.

Broken out into the SEC's more detailed categories, the CP totals were comprised of: $171.6 billion, or 3.2%, in Financial Company Commercial Paper; $61.5 billion or 1.2%, in Asset Backed Commercial Paper; and, $70.3 billion, or 1.3%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($620.2B, or 11.7%), U.S. Govt Agency Repo ($409.8B, or 7.7%) and Other Repo ($48.4B, or 0.9%).

The N-MFP Holdings summary for the 221 Prime Money Market Funds shows: Treasury holdings of $325.9 billion (up from $248.9 billion), or 28.2%; CP holdings of $297.6 billion (up from $291.1 billion), or 25.7%; CD holdings of $219.6 billion (down from $227.1 billion), or 19.0%; Repo holdings of $153.9 billion (down from $156.3 billion), or 13.3%; Other (primarily Time Deposits) holdings of $90.0 billion (down from $92.9 billion), or 7.7%; Government Agency holdings of $57.9 billion (down from $62.3 billion), or 5.0%; and VRDN holdings of $12.8 billion (up from $12.6 billion), or 1.1%.

The SEC's more detailed categories show CP in Prime MMFs made up of: $171.6 billion (down from $179.8 billion), or 14.8% in Financial Company Commercial Paper; $61.5 billion (up from $54.3 billion) or, 5.3% in Asset Backed Commercial Paper; and $64.5 billion (up from $57.0 billion), or 5.6% in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($45.6 billion, or 3.9%), U.S. Govt Agency Repo ($59.9 billion, or 5.2%), and Other Repo ($48.4 billion, or 4.2%).

In related news, J.P. Morgan writes in a recent "Mid-Week US Short Duration Update," that, "Over the past month, total MMF balances have held steady at around $4.5tn as the events from late March have faded into the rearview mirror. Thanks to some of the early intervention brought in by the Fed (i.e., PDCF and MMLF), prime MMF balances have grown by $100bn since the end of March to $745bn, retracing nearly two-thirds of the assets lost at the onset of the crisis. Meanwhile government MMF assets, after a meteoric rise over March and April, have largely plateaued at around $3.8tn.... Even so, prime funds are holding more liquidity than ever before outside of the MMF reform episode in 2016 (the 7d liquidity bucket is at 49%). At the same time, government MMFs must think about how to stay fully invested when Treasury decides to shift its issuance towards coupons instead of bills later this year."

They continue, "But while the issues of liquidity and supply have receded for the time being, another is rising -- that is, zero interest rate policy. Since the Fed first engaged in emergency rate cuts in early March, gross prime and government yields have plummeted by 120bp and 126bp to 0.60% and 0.36% respectively.... This makes sense, particularly with government MMFs, as repo, bills, and discos have been trading inside of 30bp during the better part of this time period, significantly dragging fund yields down along with them. Once we factor in expense ratios, which based on Crane Data have a median of 27bp (25% percentile is 27bp, 75% percentile is 45bp), it's not surprising that 43% of fund share classes (mostly government funds) currently have net yields of 0.00% or 0.01%. Were it not for fee waivers, which some funds have already employed, net yields to shareholders would have otherwise been negative."

JPM adds, "This then raises the question: how long can this persist? Many fund complexes endured the original ZIRP period (the 'OZ') which lasted six years from Dec 2008 to Dec 2015. While rates were low, they were nonetheless positive, allowing funds to offset some of their costs of running a money fund even when they provided fee waivers to their clients. Others approached the low rate environment by soft closing their funds. Both of these OZ tactics are being reused today as bills/discos are now trading inside of 15bp, leading to a variety of funds to announce fee waivers and/or soft closes. We expect to see more of this."

The brief asks, "Perhaps more critically, what happens to MMFs if the Fed decides to engage in negative rates (NIRP)? At -25bp, there would be no yield to offset the costs of running a money fund; rather, negative rates would only add to it. Soft closing a fund would not help as assets would still be reinvested at negative rates. At that point, we have to assume that some sort of reverse distribution mechanism would have to be put in place to deal with negative rates should NIRP eventually become a reality. This type of process was used for a time by some MMFs operating in Europe. However, it has not been used in the US and would need to be structured into US funds. Multiple fund managers have indicated to us that they are currently investigating including this type of mechanism, in case market rates head lower."

Finally, Ignites also (again) writes about the issue in "Fearing Negative Yields, Money Funds Explore Their Options." They explain, "The $4.7 trillion money market fund industry is preparing for the products' yields to enter negative territory, even if the threat is not imminent.... During the roughly seven-year period of ultra-low rates following the 2008 financial crisis, the industry waived fees on money funds to maintain zero or positive yields. Money fund yields never dipped into negative territory, though. With interest rates once again in a range of 0 to 0.25%, and heightened concerns around negative money fund yields, U.S. sponsors are exploring a tactic that European shops have used to cope with negative rates, known as reverse distribution mechanism."

The article continues, "Treasury and government money market funds can adopt floating net asset values, but none have. Consequently, they are essentially set up to operate at a $1.00-per-share net asset value. The reverse distribution mechanism would allow such money funds to keep a stable $1.00-per-share net asset value despite negative yields' weighing down their underlying holdings. This is done by passing on negative yields to shareholders through canceling the appropriate number of fund shares, fund commentaries explain.... The reverse distribution mechanism would be used when fee waivers are 'impractical' -- that is, in a true negative yield environment when funds would have to waive most or all of their fees, says Peter Crane, CEO of Crane Data."

Ignites quotes Citi's Sean Tuffy, "It's an open question whether it's allowed in the U.S." They write, "European money funds used the approach for several years to deal with negative interest rates. However, the European Securities and Markets Authority said in December 2018 that the tool would no longer be allowed. The regulator viewed share cancellation as being inconsistent with broader reforms and voiced concerns about shareholder fairness, Tuffy says. The Investment Company Institute is 'having ongoing discussions' with the SEC about possible alternatives to handle negative yields on money funds, including reverse distribution mechanisms, according to a statement from ICI general counsel Susan Olson."

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