Fitch on MMFs and Short-Term Funding
Last week, Fitch Ratings published, "Money Market Fund Developments Constrain Short-Term Funding." They write, "The combination of more conservative money market fund (MMF) portfolio positioning, fund outflows and changes to MMF providers' product ranges have reduced the availability of short-term funding for financial institutions and corporate entities, Fitch Ratings says. Recent comments from US and European regulators highlighting the potential for further reforms to MMFs may also constrain funds' ability to provide short-term funding. Fitch does not expect these dynamics to have rating impacts for financial institutions or corporate entities, but it may incrementally impact their funding costs and/or necessitate modest changes to their funding strategies. The pandemic-driven market volatility earlier this year resulted in significant redemptions from prime MMFs, with institutional prime funds affected to a higher degree than retail funds, while government MMFs saw strong inflows. Investors' flight to quality in March caused US prime fund assets to fall by $158 billion, or 20%, to $646 billion between Feb. 20 and Mar. 31, according to iMoneyNet data. This was somewhat lower than the outflows of 2008, when US prime MMFs lost 25% of assets, or $515 billion, between Sept. 9 and Oct. 8, 2008. MMFs held about 21% of US commercial paper (CP) as of 1Q20, according to the Fed. Outflows from MMFs can affect the US CP market, which has declined by about $193 billion between Jan. and Sept. of this year, to $957 billion." Fitch continues, "Persistently low interest rates and falling yields have caused some prime MMFs to reduce or waive management fees, exacerbating the effect of the outflows on fund providers' revenues. In some cases, reputational and business considerations have led providers to close funds or convert them into government funds. These changes constitute an effective outflow from prime MMFs, reducing the aggregate short-term funding prime MMFs can provide. Prime MMFs are more conservatively positioned now than they were prior to the March stress. US prime institutional MMFs averaged 57% weekly liquidity as of Oct. 7 compared with 44% average weekly liquidity as of March 19, according to Crane Data. Therefore, we expect these MMFs to be better able to withstand the effects of a similar market shock should one occur in the future. However, this more conservative positioning means prime MMFs are holding a relatively higher share of government securities than normal as part of their weekly liquid asset bucket and that non-government exposures are shorter in maturity. Together, these factors result in less short-term funding provision for banks and corporates, while further depressing fund yields." They add, "The severity and speed of outflows in March caused the Fed to respond with the Money Market Mutual Fund Liquidity Facility (MMLF), which stabilized the short-term funding markets by facilitating asset sales by prime MMFs amid severe illiquidity. The exit fees and redemption gates features present in MMFs that are designed to stop runs on funds by temporarily barring investors from withdrawals have been criticized by some market participants for exacerbating outflows, with funds becoming forced sellers of assets in volatile and/or down markets. Preserving principal and providing timely liquidity are key credit considerations to our MMF ratings and Outlooks. Fitch's negative global sector outlook for MMFs is driven by the liquidity stress affecting funds in March, continued uncertainty with respect to potential further market shocks and downside pressure on portfolio credit quality. A second wave of the pandemic could lead to resumed financial market stress and further outflow pressure while many eligible issuers underlying prime MMFs are on Rating Outlook Negative, highlighting the challenging credit conditions rated funds continue to face." (See also, Fitch's "Chinese Money Market Fund Dashboard: October 2020," and "Fitch: Amundi Money Market Fund-Short-Term (GBP)'s 'AAAmmf' rating following the liquidation of the fund.")
