Fitch Ratings published, "2021 Outlook: Global Money Market Funds," which tells us, "Fitch Ratings is revising its sector outlook for money market funds (MMFs) to stable. MMFs have significantly higher liquidity levels than in early 2020, and have benefitted from broadly increasing assets under management since March 2020. Nonetheless, the sensitivities remain: central bank intervention alleviated strains on MMFs in March 2020, but there are still structural issues in the short-term secondary market – any resurgence of market volatility, potentially related to the effects of the coronavirus pandemic, could renew liquidity stress for MMFs. Finally, while no MMFs suspended redemptions in 2020, unlike in 2008, the stress experienced has triggered a regulatory review. The Financial Stability Board has specified liquidity risk and fund structures as important topics for review in 2021."
The outlook explains, "Fitch's MMF Rating Outlook is Stable, reflecting conservatively positioned portfolios, with liquidity levels well above minimum rating and regulatory ranges. The high share of widely held issuers on Rating Watch or Outlook Negative has begun to decrease recently as underlying issuers' ratings have been downgraded or affirmed, implying that credit conditions for MMFs are beginning to stabilise. Nonetheless, ratings are sensitive to credit and liquidity developments. Renewed market volatility – pandemic-related or due to major market events – and the gradual withdrawal of central bank support could pressure ratings."
Fitch writes, "MMF ratings could be sensitive to renewed asset flow volatility in 2021, as temporary facilities put in place by central banks terminate. In March 2020, prime MMFs in both the US and the EU had monthly, aggregate outflows equal to 19.1% and 28.5%, respectively. US prime institutional and EU low volatility net asset value (LVNAV) MMFs had larger outflows , with drops totaling USD104.7 million (-27.9%) and USD97.5 million (-29.1%), respectively. The potential for further market disruption, and a resurgence of investor flight-to-quality, would challenge non-government MMFs more than government-only MMFs." [Note: The Federal Reserve just extended these programs -- see Reuters' "Fed says extending four emergency liquidity programs to March 31, 2021"."]
They continue, "Fitch expects rated funds will maintain high liquidity, well above regulatory and rating thresholds, for the foreseeable future. While high liquidity levels increase rating headroom, they also raise the possibility of adverse developments, such as sudden or severe redemptions or renewed disruption to the secondary market. The possibility of a second wave of the pandemic also causes uncertainty for MMFs. A material reduction in liquidity levels before a significant improvement in the course of the pandemic, such as a viable medical solution, would be viewed as negative for the credit profiles."
Fitch warns, "A large share of issuers held in MMF portfolios are on Negative Outlook, signaling the continued risk of credit deterioration across a large portion of MMFs' investible portfolios. As of end-September 2020, 80% of 'super-core' issuers (defined by Fitch as those held by at least 75% of Fitch-rated prime funds in Europe and the US) and 77% of 'core' issuers (defined by Fitch as those held by at least 50% of Fitch-rated prime funds in Europe and the US) were on Negative Outlook."
The report also comments, "Fitch forecasts sustained low policy rates across major developed markets. Fund providers typically reduce or waive fees to maintain positive yields as market yields approach zero. The spread between gross and net yields of MMFs has declined in Europe and the US, indicating that fee reductions are now widespread. This will pressure fund provider revenues and may make exits from the sector more likely, leading to potential consolidation. The Federal Reserve System has publicly stated that it is opposed to negative rates, and forward markets are not pricing in negative market yields. However, some fund providers have prepared for the possibility of negative fund yields."
On potential regulatory reform, Fitch states, "The Financial Stability Board has identified a review of MMF regulations as a priority focus area for 2021. While specific regulatory proposals are not yet available, regulators have highlighted liquidity, and trigger points for redemption gates or liquidity fees as areas for investigation. A recent Federal Reserve System study found preliminary evidence that redemptions from MMFs increase as weekly liquid assets declined towards the 30% weekly liquidity threshold, at which point a fund's board of directors may consider applying a redemption gate or liquidity fee to the fund."
Finally, they add, "While regulatory changes could increase MMFs' resilience, and thus increase rating headroom, the full effectiveness of these changes may be limited without changes to market structure. While MMFs were under severe redemption pressure in March 2020, their ability to withstand that pressure would have been greater if secondary market liquidity had remained adequate throughout the stress period."
In other news, Bond Buyer published a piece written by deposit broker MaxMyInterest entitled, "Why advisors should ditch money market funds." They comment, "Money market funds have long been a staple in brokerage accounts as a safe place to stash cash that's not being invested. In light of the events of the past year, it's time financial advisors and their clients re-examine this approach."
The piece continues, "The most prominent government MMFs yield only five basis points (0.05%), and while prime funds may yield slightly more, they also carry more risk. Under the Securities and Exchange Commission's new rules promulgated following the financial crisis, retail-held prime funds can be subject to 10-day redemption gates and redemption penalties of 1-2% in periods of financial stress, making it potentially even harder to access cash when needed. For clients seeking safety, liquidity and yield there are far better options than MMFs."
Unsurprisingly, they tell us, "What's a much simpler solution for keeping client cash safe? Plain vanilla FDIC-insured savings accounts. Today's leading online banks -- which are able to pay higher yield by eschewing brick-and-mortar branches -- are delivering yields of 0.40% to 0.60%. Through platforms some are even able to pay rates as high as 0.85% -- a full 80 basis point premium over a government money market fund. With the funds sitting in FDIC-insured and same-day liquid accounts, this incremental yield comes with greater safety and liquidity as compared to an MMF."
The Bond Buyer piece adds, "Sadly, institutional investors can't easily benefit from FDIC insurance coverage in scale and so will remain beholden to MMFs for the time being. But, for retail investors who hold six-to-seven figures in cash, FDIC-insured bank accounts can deliver dramatically higher yield than money market funds."
