Moody's Investors Service published a brief entitled, "Vanguard will convert its prime fund, the industry's largest, to a government fund, a credit positive." They comment, "On 27 August, Vanguard Group announced that it will convert its $125.3 billion Prime Money Market Fund into a government fund, a credit positive for the asset management sector because one of its bellwether funds will no longer bear the credit and liquidity risks inherent in the prime money market fund product. The fund, the industry's largest prime fund, holds 3% of US money market fund (MMF) industry assets under management (AUM).... Designated a retail fund, it manages 29% of all prime retail AUM. The changeover should be completed in late September, at which time the fund will be renamed the Cash Reserves Federal Money Market Fund." (See also our August 28 Crane Data News, "Vanguard Prime Money Market Fund Going Government.")
Moody's writes, "In its announcement, Vanguard essentially implied that the yield advantage of prime MMFs does not adequately compensate investors for the risks they assume. Therefore, the fund sponsor said, it would be better to enhance yield by reducing fees, while transitioning the Prime Fund to a safe government format. The reclassified fund will invest almost exclusively in US government securities, cash, and repurchase agreements collateralized solely by US government securities or cash."
They continue, "Already this year, Fidelity and Northern Trust closed prime funds with approximately $15 billion of assets in response to declining yields, market volatility, and a background of rising concern about the future direction of MMF industry regulation. We would not be surprised if other sponsors followed Vanguard and these firms, and we anticipate additional prime fund closures or fund consolidations."
The piece adds, "Historically, the Prime Fund took a conservative approach, with approximately one-third of its assets in US Treasury bills and other government obligations. In advance of its conversion, Vanguard is reinvesting maturing proceeds from 'risk' assets, predominantly Yankee (dollar-denominated) foreign liabilities, certificates of deposit, and US commercial paper, into US Treasuries and government paper, which already comprise three-quarters of the Prime Fund's assets."
Moody's says, "In the past, fund sponsors have repeatedly acted to avoid realizing losses on the part of MMF shareholders, exposing themselves (and investors in their debt and equity securities) to risk. Regulators have intervened to stabilize MMFs and liquidity markets. In March, at the onset of the coronavirus crisis, prime fund assets declined $138 billion and the Fed quickly launched seven funding facilities to address the severe market dislocation, including the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility. Shortly after it opened, the MMLF's loans to mutual fund sponsors (collateralized by assets acquired from MMFs) exceeded $50 billion. Two fund sponsors intervened to stabilize prime funds."
Finally, they tell us, "In 2010, Moody's identified over 200 MMFs in the US and Europe, as far back as 1980, that were beneficiaries of sponsor support. In 2012, researchers at the Federal Reserve Bank of Boston identified at least 31 instances between 2007 and 2011 in which, absent sponsor intervention, prime MMFs would have 'broken the buck' -- or traded below a net asset value of $1." (For more, see Moody's "Sponsor Support Key to Money Market Funds" and the Boston Fed's "The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011.")
In other ratings agency news, Fitch Ratings published "U.S. Money Market Funds: August 2020" dashboard recently. They tell us, "Total taxable money market fund (MMF) assets decreased by $50 billion from July 21, 2020 to Aug. 21, 2020, with government and prime funds losing $14 billion and $36 billion, respectively. This follows outflows of $87 billion from June 22, 2020 to July 21, 2020."
The brief continues, "MMF yields continue to decline as cash from maturing securities is re-invested in lower yielding instruments given the low interest-rate environment. From July 27, 2020 to Aug. 25, 2020, MMF net yields declined from 0.04% to 0.02% for institutional government funds, and from 0.11% to 0.07% for institutional prime funds, according to iMoneyNet."
Lastly, Fitch comments, "Taxable MMF allocations to the U.S. Treasury decreased by $80 billion in July 2020, following inflows of $1.5 trillion from Feb. 29, 2020 to June 30, 2020. In July, MMFs increased exposure to repos by $40 billion and reduced exposure to agencies by $45 billion."
In other news, Bloomberg writes, "Investors Dump 'Dead Weight' Cash-Like ETFs at Record Pace." They explain, "Investors are abandoning cash holdings at a record clip as momentum continues to build behind 2020's risk rally. Roughly $5.4 billion has exited from the $20 billion iShares Short Treasury Bond exchange-traded fund -- the biggest ultra-short duration ETF -- over 14 consecutive weeks of outflows. That was the longest streak on record for the product, whose ticker is SHV. Meanwhile, investors have pulled $2.4 billion from the $14 billion SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) over 10 weeks, according to Bloomberg Intelligence data."
The article continues, "Investors accumulated record amounts of cash earlier this year amid concern over the impacts of the coronavirus pandemic on the global economy, with assets in money-market mutual funds soaring to a record $4.8 trillion in late May. Now, that cash is coming off the sidelines as stocks surge and corporate bonds look increasingly appealing. Additionally, the Federal Reserve's commitment to keep interest rates at near-zero levels for the foreseeable future is further curbing appetite for short-duration Treasury ETFs."
They quote Charles Schwab's Kathy Jones, "It's recognition that 'ZIRP' will be around for a long time, combined with a rising risk appetite.... Short-term Treasury ETFs are looking less attractive than alternatives. Equities are benefiting. We also see interest in foreign equities and high-yield and emerging-market bonds."
Bloomberg adds, "The exodus from ultra-short duration ETFs is also likely due to investors trying to eliminate the 'cash drag' in their portfolios by reinvesting in higher-yielding assets, according to Dan Suzuki at Richard Bernstein Advisors." (For more on ultra-short bond ETFs, register for our upcoming Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash, which is Sept. 24, 2020 from 1-2pm ET, or ask us to see our Bond Fund Intelligence publication.)
