Citi's Rai on T-E MMFs, SIFMA
Citi's latest "Short Duration Strategy," discusses, "Tax season and revisiting the fixed vs. floating debate." Authors Vikram Rai, Jack Muller and Vedanta Goenka asks, "How will money funds fare this tax season? Short duration investors approach tax season with some trepidation given that funding pressures can cause significant market volatility. And, since most fund categories witness fairly momentous outflows, money fund managers prepare by building up liquidity. We discuss how money fund assets flows fared this tax season." They continue, "Retail investors tend to sell their money fund holdings, typically tax-exempt holdings, to meet their personal income tax bill needs. Similarly, institutional investors make redemptions to meet their corporate tax payment needs. Figure 1 shows the money fund redemptions over the last two weeks, and tax-exempt money funds have borne the brunt of redemptions." Citi adds, "Nonetheless, so far, the redemptions faced by money funds, which can be attributed to seasonal factors, have been somewhat muted vs. past years. And while we could see some more redemptions over the next few weeks, we do not expect the intensity of outflows to increase. And, we expect more outflows from retails funds vs. institutional funds.... [M]ost corporations seem to have already made their tax-payments and thus the rush to redeem from institutional money funds in July is likely to be less. Fewer retail investors seem to have made their tax-payments and we could see more redemptions from retail funds, especially tax-exempt money funds." Finally, they comment, "We have admitted that SIFMA has humbled our forecasts on more than one occasion. But, we must admit its volatility can still surprise us, as it did during the market disruption witnessed in March. While rollover worries over a BAN issued by a very high profile issuer contributed to the spike in SIFMA witnessed in May, we can expect SIFMA resets to stay volatile for two main reasons: Tax-exempt MMF demand remains exposed to seasonal fluctuations: Tax exempt MMFs form a very large portion of the demand base for short term tax exempt paper. If we look at the current supply demand equation, we find that the aggregate AUM for tax-exempt MMFs is about $124 billion and tax-exempt MMFs account for 51% of the overall demand for short-term tax-exempt products.... Tax-exempt MMFs face a unique problem, that of diminishing investible paper. `VRDO outstandings, currently at $135 billion, have been shrinking. The same is true for TOB outstandings and the size of this market is currently about $54.4 billion, thus down 73% from its peak of $200 billion in 2007. VRDOs and TOBs account for 79% of the short term tax-exempt market and demand for this category of paper from the traditional tax-exempt base can be quite sticky."
