Federated Hermes hosted a webinar late last week entitled, "ESG integration: A difference maker in the pandemic" where CIO for Global Liquidity Debbie Cunningham discusses the latest in ESG investing, negative yields and fee waivers, among other things. She comments, "Historically, through the credit process in our liquidity group, governance has been our biggest ESG sort of qualitative concern, mainly because of the large exposure that we have to the banking sector. Stewardship, however, during the pandemic and the social unrest has changed that focus a bit.... Engagement on some of these high impact risk events is really now core to this active management program that we have through EOS and incorporated again in the liquidity group through our credit analysis factor. So social factors, data governance, human capital, those have come to the forefront over the course of the year-to-date timeframe."
Cunningham explains, "We've also been noting, for clients specifically, a lot of positive ESG stories that have involved from many of our issuers that we invest in. Some examples of a few of those would be: a large consumer beverage company that distributes products through plastics, which has heretofore been a negative, in fact uses those plastics to manufacturer face shields for the healthcare sector during the first and second quarters of the year. Several auto companies have reconfigured their manufacturing lines away from making automobiles and turned to making respirators. Again, for the benefit of the social factors that we're considering."
She continues, "And certainly when you look again at that large exposure in banks and in our government products, in the housing GSEs, the fact that they've been adjusting forbearance and other types of processes to allow people to stay in their homes, and to stay current on their credit, has been immensely helpful to the overall economy through these very difficult times."
On Treasury supply, Cunningham comments, "Second half Treasury funding needs are greater than $2 trillion, and that's not with anything that's brand new. In the month of April alone, they issued a trillion dollars of net new bill supply. They had a huge pace in the month of May, though it's a little more gradual in the month of June. But it's continuing.... This has reduced the chance ... that Treasury securities will trade [in] negative territory like they did a few days in late March.... So the large amount of Treasury issuance is ... quite beneficial not only for those who are the ultimate recipients of it, but for those of us who are investing in the short-term cash markets as well.... Treasury issuance will remain robust, which really should help keep a floor again under short term rates."
Discussing negative rates, she says, "We think it's highly unlikely that would ever occur. A couple different reasons.... The Fed has told us that. Chair Powell has said on numerous occasions, and in press conferences where at least a dozen times he's referenced the fact that they have lots of other options.... On the operational side of things, the Treasury doesn't have the capability right now of issuing negative rates at auction. So that's a pretty big deterrent to doing it. There would likely be a big lead up to that happening should they choose to ever go down that path.... Another reason is ... it's been undertaken in other areas of the world [and] it hasn't really helped from an economic stimulus standpoint."
Cunningham also talks about bank deposits, saying, "[Among] the largest, most high-quality traditional U.S. banks in the country, [a huge amount is] in non-interest-bearing deposits. So nothing is being earned on ... probably the vast majority of banks deposits. When you see attractive teaser rates in the marketplace, these are likely potentially for lower quality issuers.... It doesn't matter where market interest rates are, you're not going to earn anything in those deposits."
She adds, "These points that I just noted do seem to have been taken into consideration by investors in the liquidity market on a year-to-date basis. [T]he growth rate in money market funds on a year-to-date basis, which has been 28%, has exceeded the growth rate in bank deposits, which has been 16%. So, clients do seem to have differentiated in their, what I'll call a flight to quality decision and, maintained asset growth at a higher level on a percentage basis in the money market fund products in the industry."
Finally, during the Q&A, Cunningham was asked whether fee waivers would hit Prime Institutional MMFs. She responds, "Our expectation would be, no, they shouldn't. We should maintain enough of the spread from a market issuance standpoint [because of] what we're able to purchase in the Prime funds versus, you know, Treasury and Government securities.... On the Government side, I'm going to couch it a little bit because it's very dependent on market metrics, and supply and demand are key variables to keeping interest rates a little bit higher and high enough for us.... The Fed and Treasury have been helpful by having a large amount of supply that they needed, a lot of that coming in the front end."
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be sent out Tuesday, and we'll be writing our normal monthly update on the July 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 July 31, 2020, includes holdings information from 1,076 money funds (down 2 from last month), representing assets of a record $5.060 trillion (down $93 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 $2.483 trillion (down from a record $2.566 trillion), or a shocking 49.1% of all holdings. Repurchase Agreement (Repo) holdings in money market funds totaled $992.1 billion (up from $952.8 billion), or 19.6% of all assets, and Government Agency securities totaled $850.0 billion (down from $896.0 billion), or 16.8%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $4.325 trillion, or a stunning 85.5% of all holdings.
Commercial paper (CP) totals $285.7 billion (down from $297.0 billion), or 5.6%, and Certificates of Deposit (CDs) total $196.4 billion (down from $208.9 billion), 3.9%. The Other category (primarily Time Deposits) totals $149.7 billion (up from $125.5 billion), or 3.0%, and VRDNs account for $103.1 billion (down from $107.7 billion last month), or 2.0%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $163.8 billion, or 3.2%, in Financial Company Commercial Paper; $58.6 billion or 1.2%, in Asset Backed Commercial Paper; and, $63.3 billion, or 1.3%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($582.8B, or 11.5%), U.S. Govt Agency Repo ($361.4B, or 7.1%) and Other Repo ($47.8B, or 0.9%).
The N-MFP Holdings summary for the 221 Prime Money Market Funds shows: Treasury holdings of $326.2 billion (down from $349.9 billion), or 28.4%; CP holdings of $280.0 billion (down from $290.8 billion), or 24.3%; CD holdings of $196.4 billion (down from $208.9 billion), or 17.1%; Repo holdings of $142.5 billion (down from $155.4 billion), or 12.4%; Other (primarily Time Deposits) holdings of $98.3 billion (up from $77.1 billion), or 8.5%; Government Agency holdings of $92.4 billion (up from $77.7 billion), or 8.0% and VRDN holdings of $14.3 billion (up from $12.5 billion), or 1.2%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $163.8 billion (down from $174.0 billion), or 14.2%, in Financial Company Commercial Paper; $58.6 billion (down from $61.9 billion), or 5.1%, in Asset Backed Commercial Paper; and $57.5 billion (up from $55.0 billion), or 5.0%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($40.4 billion, or 3.5%), U.S. Govt Agency Repo ($54.3 billion, or 4.7%), and Other Repo ($47.8 billion, or 4.2%).
