Capital Advisors Group published a new research piece entitled, "Liquidity in Question – What Do We Do with Prime Money Market Funds?" Author Lance Pan says in the "Abstract," "After sudden shareholder redemptions in March stressed money market funds, it became clear that several rounds of reforms since the 2008 crisis have failed to bolster institutional prime money market funds as liquidity vehicles. While extraordinary government measures once again helped to stabilize the market, they should not be recurrent policy decisions. Regulations have reduced the systemic status of prime funds in commercial paper (CP) funding and the overall economy."
He continues, "Increasing portfolio liquidity or restricting CP allocation may not resolve the drawbacks inherent in prime money market funds due to shared liquidity. Additional reforms are possible, including external and contingent liquidity, shareholder transparency and concentration limits, and repositioning prime funds as ultra-short mutual funds. However, a permanent solution for the funds may take time due to conflicts of interests from the stakeholder groups. Ultimately, we expect institutional cash investors may begin to regard prime funds more as income solutions than as liquidity vehicles."
Capital Advisors' "Introduction" tells us, "Groundhog Day has been a familiar phrase describing the financial markets' responses to the Covid-19 pandemic, including prime money market funds (MMFs). For a few days in late March, heavy shareholder redemptions overwhelmed some funds' abilities to adhere to regulatory requirements. In response, the Federal Reserve swiftly reinstalled several crisis-era liquidity facilities, and Treasury Secretary Steven Mnuchin went to Congress for permission to guarantee MMFs."
They write, "These events were reminiscent of the 2008 financial crisis, when a credit default in one prime fund caused it to break the $1 NAV, precipitating runs on other funds. The Fed reacted by creating several liquidity facilities, and Treasury provided principal guarantees. The Securities and Exchange Commission (SEC) subsequently enacted two rounds of regulatory reforms to protect the funds against future liquidity events and to remove taxpayer liability. However, judging from what happened this past March, even those measures may not be enough. What really happened and where do we go from here with prime funds?"
The article concludes, "Over the last five decades, money markets funds underwent several transformations and rounds of regulatory overhaul. The liquidity flaws exposed during the Covid-19 crisis are only the latest sign that regulators have systematically ignored or overlooked the structural vulnerabilities of prime funds."
It explains, "Prime funds' performance in episodes of market volatility is empirical evidence that the asset class is not a reliable liquidity product, at least not as a primary or contingent source of liquidity. Extraordinary measures from the federal government, while necessary to reintroduce faith in the short-term credit markets, should not be recurrent policy decisions. We think successive regulations have reduced the systemic status of prime funds in CP funding and the overall economy. While the asset class at times offers income advantage over government funds and deposit products, investors may be better served by redirecting funds to other liquidity vehicles."
Finally, Pan comments, "We discussed why bolstering portfolio liquidity or restricting CP allocation may not resolve the inherent drawbacks of shared liquidity. Instead, a solution needs to come from external and contingent liquidity. Shareholder transparency and concentration limits may help distribute liquidity risk more evenly among the funds, and changed shareholder perception and behavior may lessen the need for regulatory solutions. Reforming the funds as ultra-short bond funds may also make sense. These and other changes may help lead to more effective form of prime money market funds. However, any permanent solution will take time, due to the conflicting interests of many different stakeholder groups."
In other news, money market fund yields continue to bottom out just above zero; our flagship Crane 100 inched down by just one basis point to 0.10% in the latest week. The Crane 100 Money Fund Index fell below the 1.0% level in mid-March and below the 0.5% level in late March. It is down from 1.46% at the start of the year and down from 2.23% at the beginning of 2019. Over 60% all money funds and over 30% of MMF assets have since landed on the zero yield floor (0.01%), though many continue to show at least some yield.
According to our Money Fund Intelligence Daily, as of Friday, 7/10, 511 funds (out of 849 total) yield 0.00% or 0.01% with assets of $1.533 trillion, or 30.6% of the total. There are 181 funds yielding between 0.02% and 0.10%, totaling $1.834 trillion, or 36.6% of assets; 119 funds yield between 0.11% and 0.25% with $1.366 trillion, or 27.2% of assets; and, 38 funds yield between 0.26% and 0.50% with $280.9 billion in assets, or 5.6%. No funds yield more than 0.50%.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 671), shows a 7-day yield of 0.06%, down a basis point in the week through Friday, 7/10. The Crane Money Fund Average is down 41 bps from 0.47% at the beginning of April. Prime Inst MFs were down 3 basis points to 0.15% in the latest week and Government Inst MFs were flat at 0.06%. Treasury Inst MFs were unchanged at 0.05%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.02% (unchanged in the last week), and Prime Retail MFs yield 0.08% (down 2 bps for the week), Tax-exempt MF 7-day yields were down a basis point at 0.02%. (Let us know if you'd like to see our latest MFI Daily.)
The largest funds tracked by Crane Data yielding 0.00% or 0.01% include: Fidelity Govt Cash Reserves ($200.9B), Fidelity Government Money Market ($194.4B), Fidelity Treasury Fund ($28.4B), Edward Jones Money Mkt Inv ($22.8B), Northern Trust US Govt MMF ($18.0B), Schwab Government Money Fund Swp ($17.3B), Schwab US Treasury MF Investor ($16.9B), American Funds US Govt MMF A ($15.1B), and Franklin Inst Fiduciary Trust US Govt MM ($14.6B).
Our Crane Brokerage Sweep Index, which hit the zero floor roughly three months ago, remains at 0.01%. The latest Brokerage Sweep Intelligence, with data as of July 10, shows no changes in the last week. All of the major brokerages now offer rates of 0.01% for balances of $100K. No brokerage sweep rates or money fund yields have gone negative to date, but this could become a distinct possibility in coming weeks or months. Crane's Brokerage Sweep Index has been flat for the last ten weeks at 0.01% (for balances of $100K). Ameriprise, E*Trade, Fidelity, Merrill Lynch, Morgan Stanley, Raymond James, RW Baird, Schwab, TD Ameritrade, UBS and Wells Fargo all currently have rates of 0.01% for balances at the $100K tier level (and almost every other tier too).
