The Federal Reserve Bank of New York recently published a "Liberty Street Economics blog entitled, "The Federal Reserve's Large-Scale Repo Program." It explains, "The repo market faced extraordinary liquidity strains in March amid broader financial market volatility related to the coronavirus pandemic and uncertainty regarding the path of policy. The strains were particularly severe in the term repo market, in which borrowing and lending arrangements are for longer than one business day. In this post, we discuss the causes of the liquidity disruptions that arose in the repo market as well as the Federal Reserve's actions to address those disruptions."
The NY Fed piece continues, "As described in this Staff Report, the repo market serves in part to transfer liquidity from cash investors to cash borrowers, with securities dealers acting as intermediaries. In addition, dealers typically finance a substantial portion of their securities inventory through repo. A number of investors, the largest of which are money market mutual funds (MMFs), lend cash to dealers. Other major cash lenders include commercial banks and the government-sponsored enterprises."
It tells us, "Across all segments and collateral types, the repo market is nearly $4.0 trillion in size, with more than $1.0 trillion in overnight Treasury repo alone. The repo market is important given its size and scale as well as its role in providing funding for Treasury debt and other securities. Additionally, the Secured Overnight Financing Rate (SOFR), a broad measure of overnight Treasury repo rates, is the Alternative Reference Rates Committee's preferred alternative to USD LIBOR (the London interbank offered rate)."
The blog explains, "We focus here on the general collateral repo market, in which funding is provided against a broad set of acceptable high-quality collateral, rather than a specific asset. Repo against particular, specified assets is referred to as 'specific-issue' or 'specials' trading. While general collateral repo is typically aimed at borrowing cash against a portfolio of securities, specials trading is associated with obtaining securities."
It also says, "The U.S. repo market suffered severe strains in the second half of March, due in part to the heightened uncertainty related to the coronavirus pandemic, which affected financial markets broadly, and in part to some factors specific to the repo market, such as the increase in dealer inventories and the unwind of Treasury cash-futures basis trades. The Federal Reserve responded by increasing the frequency, offering sizes, and terms of its repo operations and by purchasing a large quantity of Treasury and agency securities in the secondary market, reducing pressures on dealer balance sheets. These operations appear to have been successful in restoring functioning in these important financing markets."
In other news, J.P. Morgan's "June 2020 Taxable money market fund holdings update" explains, "Taxable MMFs saw net outflows in June, with $125bn exiting the fund complex month over month, likely due to tax payments.... Government funds saw outflows of $138bn while prime funds received a net inflow of $13bn, recouping more of their AUM losses from earlier this year.... Dealer repo ex-FICC decreased $97bn month over month, while exposure to FICC sponsored repo decreased $25bn to $111bn in June.... RRP usage was minimal at just $1bn. Given a 5-10bp disparity between bill yields and repo, most MMFs found relative value by investing in bills rather than repo."
It continues, "Government MMFs pared down agencies exposure as well.... For yet another month, bills were the asset of choice for both Gov/Agy and Tsy funds in terms of AUM allocation. Adding in prime funds' holdings, MMFs now comprise 42% of the T-bill market -- near the record high we saw last month.... While the bulk of current bill holdings are concentrated in the very frontend of the curve ... new purchases were focused on the longer end of the bills curve.... The flows into prime funds (+$19bn) in May seem to have mostly found their way into Treasuries and Agencies instead of credit."
The update tells us, "On the benchmark reform front, government MMF Agency FRN holdings continued to be concentrated in SOFR FRNs. We estimate that at month-end these funds held $324bn of SOFR FRNs versus $186bn of non-SOFR floaters.... On the prime side, we have noticed a considerable uptick (+$20bn m/m) in agency SOFR floaters as well.... Much like the pivot prime funds made towards T-bills and away from CP/CD, we suspect this was driven by similar relative value considerations as credit spreads are rapidly tightening. And unlike credit SOFR-based FRNs, the GSE SOFR FRN market is massive and more liquid. On margin, when faced with low yields on bank credit, some managers now see agency SOFR FRNs as a safe and liquid alternative."
It adds, "In June, prime funds continued to de-risk, turning away from credit products and continuing to buy Treasuries.... Bank CP/CD/TD exposures decreased $20bn.... At the individual issuer level, changes were largely idiosyncratic.... Month over month, the weighted average maturity of bank CP/CD held by prime MMFs decreased 3 days to 53 days, while the weighted average life was flat at 83 days.... Swiss banks had the longest WAL at 141 days, followed by Australian banks at 100 days."
Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of July 31) includes Holdings information from 60 money funds (down 26 from a week ago), which represent $2.017 trillion (down from $2.475 trillion) of the $4.963 trillion (40.6%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website. For our latest monthly Holdings, see our July 13 News, "July MF Portfolio Holdings: Repo Plunges, Treasuries Break $2.5 Trillion.")
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.123 trillion (down from $1.326 trillion a week ago), or 55.7%, Repurchase Agreements (Repo) totaling $411.7 billion (down from $500.3 billion a week ago), or 20.4% and Government Agency securities totaling $299.8 billion (down from $381.5 billion), or 14.9%. Certificates of Deposit (CDs) totaled $67.6 billion (down from $86.3 billion), or 3.4%, and Commercial Paper (CP) totaled $58.2 billion (down from $89.8 billion), or 2.9%. VRDNs accounted for $29.6 billion, or 1.5%, while the Other category accounted for $26.3 billion or 1.3%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.123 trillion (55.7% of total holdings), Federal Home Loan Bank with $167.2B (8.3%), BNP Paribas with $58.3B (2.9%), Federal Farm Credit Bank with $53.9B (2.7%), Fixed Income Clearing Co with $48.5B (2.4%), Federal National Mortgage Association with $45.2B (2.2%), RBC with $37.6B (1.9%), Federal Home Loan Mortgage Co with $31.5B (1.6%), Mitsubishi UFJ Financial Group Inc with $26.7B (1.3%) and Credit Agricole with $25.7B (1.3%).
The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($255.8B), JP Morgan US Govt MM ($186.5B), Fidelity Inv MM: Govt Port ($166.1B), Wells Fargo Govt MM ($142.7B), JP Morgan 100% US Treas MMkt ($114.1B), Goldman Sachs FS Treas Instruments ($93.1B), Morgan Stanley Inst Liq Govt ($89.2B), Dreyfus Govt Cash Mgmt ($88.2B), State Street Inst US Govt ($83.4B) and JP Morgan Prime MM ($83.0B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
