J.P. Morgan's latest "Short-Term Market Outlook And Strategy," discusses the Fed's new SRF, or Standing Repo Facility, Treasury bills vs. Fed RRP, and the fact that "Stablecoins are not money market funds." They write, "Price action in money market rates remained remarkably stable despite yet another $130bn decline in net T-bill issuance this month. Thanks to the Fed's ON RRP facility, which continues to absorb a substantial amount of liquidity from the markets ($1.039tn on month-end), rates have generally been floored at 5bp with the exception of some short-dated T-bills that are trading slightly below. Next week's Treasury's Quarterly Refunding Announcement should give some further insight into Treasury's use of extraordinary measures until the debt ceiling is either lifted or suspended again. Unfortunately, at this time, it's unlikely that debt ceiling legislation will be included in the bipartisan infrastructure package, which suggests that any movement on the debt ceiling front could be delayed until September. In the meantime, 3Q tends to be a low net T-bill issuance period, and in the absence of any resolution to the debt ceiling, T-bill supply will likely be muted for the time being."
In a section entitled, "Stablecoins are not MMFs," authors Alex Roever and Teresa Ho comment, "Public scrutiny of stablecoins and their reserve management practices have intensified sharply over the past few weeks. `Most recently, news surfaced that Tether and the Facebook-backed Diem were the focus of a recent meeting of the President's Working Group on Financial Markets. (See the Bloomberg article here.) Some official sector observers have likened stablecoins to unregulated money market funds because of the potential for disorderly liquidation in time of crisis. While the comparison nominally takes aim at stablecoins, it also throws shade on MMFs -- particularly prime MMFs -- which have long been a target for some regulators. It's a poor comparison for a number of reasons, not least of which are MMFs are highly regulated and very transparent. Furthermore, besides MMFs, there are other liquidity investors that buy money market instruments, such as banks, corporates, state and local governments, mutual funds, ETFs, etc., some of which have the potential to encounter similar run risks."
The JPM piece explains, "MMFs are regulated by the SEC under Rule 2a-7 and are subject to strict investment and disclosure guidelines. They are required to hold 10% and 30% in overnight and weekly liquidity respectively. They are only allowed to invest in instruments that have a legal final maturity of less than 397 days. They have 60-day and 120-day WAM and WAL limitations. There’s an overall issuer concentration limit of 5%. Securities need to be rated investment grade. On a daily basis, they have to disclose their shadow NAVs. On a monthly basis, they have to disclose their portfolio holdings on their websites as well as submit their holdings to the SEC. These are just some of the requirements for MMFs."
They add, "This is not to say that stablecoins do not pose financial stability concerns. Their reserve exposure into CP bears watching, considering the potential impact on the short-term markets. Recent commentary from regulatory officials suggests that it's a matter of time before they are subject to regulations, much like banks, MMFs, mutual funds, etc. As our derivative strategists note, regardless of where regulators ultimately fall in their treatment of this new asset class, presumably they will impose liquidity and asset quality requirements as well as a combination of regular, standardized and more extensive disclosure requirements. Though their decentralized nature does not necessarily allow for these to be imposed directly, in principle they can be implemented through the domestic commercial banking system, which is currently acting as either custodian or correspondent to these issuers."
In other news, Federated Hermes' Deborah Cunningham says the money markets are, "Looking like a trillion bucks." She tells us, "[I]t's no small thing that the usage of the Federal Reserve's Reverse Repo Program (RRP) has lately approached the $1 trillion mark. It was below $100 billion as recently as April. In March, the Fed increased the counterparty limit from $30 billion to $80 billion and then in June raised the rate to 5 basis points. Usage has steadily grown since then, and it's been a valuable outlet for the money markets, which still are facing heavy demand."
Cunningham continues, "A different Fed repo facility was in the news last week with the Federal Open Market Committee's (FOMC) announcement that the Fed has created a domestic standing repo facility (SRF) to replace the temporary open market operations it previously offered. (The Fed also announced the creation of a similar repo facility for foreign and international monetary authorities.) Although the Fed characterized these as being backstops for the money markets, the facilities are for borrowing rather than investing. While limited initially to primary dealers, the SRF will be expanded to other depository institutions."
She states, "Although money funds will not benefit directly from them, we view their creation as yet another sign the Fed is preparing for the tapering process, which Chair Powell mentioned in his comments after the meeting. Also, the September 2019 repo market volatility came amid a decline in reserves, and the Fed does not want a repeat of that experience. The new facilities are a sign of good advance planning and perhaps a Fed that utilizes numerous existing facilities to promote market liquidity rather than emergency ones."
Cunningham also says, "In the meantime, the biggest issue for cash managers remains the recent decline in Treasury bill issuance and the low supply of Treasury bills, a combination that continues to hold down yields. The decline in issuance is tied to the reinstatement of the federal debt limit on Aug. 1, and we expect constrained issuance until Congress takes action to raise the limit. The Treasury should have enough cash and other measures to meet the basic funding needs of the government into the fall. We fully anticipate lawmakers to eventually raise the limit or to suspend it again. Expect political theater, but not anything serious."
Finally, she writes, "The other trillion-dollar issue hanging around is the infrastructure deal. This week the Senate finally voted to take up the bill. But everyone -- in particular state and local governments and the municipal market -- is still playing the waiting game for the details. None of the above had led us to change the targeted weighted average maturities of our money market funds, which remain in ranges of 35-45 days for government and 40-50 days for prime and municipal."
