A blog from the Brookings Institution asks, "What is swing pricing?" Authors Anil Kashyap, Donald Kohn, and David Wessel blog, "In March 2020, at the start of the COVID-19 pandemic in the U.S., investors pulled more than $100 billion out of corporate investment-grade and high-yield bond mutual funds, forcing funds to sell some of their holdings. The spread between corporate bond yields and U.S. Treasuries (a market that had its own dysfunction) widened, transaction costs rose, and issuance of new bonds came to a halt, disrupting the flow of credit to the nation's corporations. This led the Federal Reserve to intervene by offering, for the first time, to buy corporate bonds and exchange traded corporate bond funds in what proved a successful effort to keep credit to corporations flowing. It was an extraordinary move that underscores the risks these funds pose to financial stability. (For details, see this Federal Reserve note.)"
They explain, "The growth of open-end fixed income funds magnifies the systemic significance of the tension between shareholders' expectations of daily liquidity and the (often illiquid) holdings of the funds. The average corporate bond is traded about once a month. Shareholders in an open-end bond fund expect (and receive in many cases) to be able to sell their shares much more easily and quickly than if they held bonds directly. When he was governor of the Bank of England, Mark Carney said, 'These funds are built on a lie, which is that you can have daily liquidity, and that for assets that fundamentally aren't liquid.'"
The Brookings piece continues, "In normal times, redemptions are modest and can be met by an offsetting inflow of funds or by selling liquid securities in the portfolio like Treasuries. But big outflows can force a fund to sell holdings of less liquid securities that may require a price concession to attract a buyer. Especially in times of stress, big sales force down bond prices because of the absence of a truly liquid market for the underlying bonds. This, in turn, raises the rates that all corporate borrowers have to pay on newly issued bonds -- if they can sell them at all -- thus harming the overall economy."
It comments, "Swing pricing is widely used in Europe but not in the U.S., although its use was authorized by the SEC in 2018. Basically, it allows the manager of an open-end fund to adjust its net asset value up or down when inflows or outflows of securities exceed some threshold. In this way, a fund can pass along to first movers the cost associated with their trading activity, better protect existing shareholders from dilution, and reduce the threats to financial stability. This brief draws from the report of the Task Force on Financial Stability, which recommended more widespread use of swing pricing, and a roundtable the Task Force convened with industry, academic, and public sector officials to consider the pros, cons, challenges and costs to doing so."
The authors tell us, "Money market funds are a special kind of open-end fund that can hold only short-dated securities such as U.S. Treasury bills, commercial paper, and certificates of deposit. By limiting the securities to those deemed relatively safe and liquid, it is expected that the price of the fund will be stable as the securities have no price risk if held to maturity. Problems can -- and do -- still arise for money market funds if they sell the securities they hold before maturity; in that case, there is price risk. Prime money market mutual funds invest in short-term private-sector securities such as commercial paper and certificates of deposit. Default rates on these securities are low, but they trade infrequently so they are subject to the same kind of illiquidity problems as open-end bond and loan funds."
They add, "Prime money market mutual funds suffered a run in March 2020, leading commercial paper markets to freeze up and prompting the Federal Reserve to intervene to keep credit flowing to businesses. Investors in prime money market funds generally are using these funds as substitutes for bank accounts. They expect to withdraw, possibly large amounts in some circumstances, and at multiple times during the day. As a result, these funds often set an NAV multiple times throughout the day. Some in the industry say that feature of these funds means the information demands of setting a swing would be daunting and incompatible with how investors use them. Still, in a June 2021 consultation report, the Financial Stability Board included swing pricing among several possible policy responses to the problems posed by money market mutual funds."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of July 30, 2021) includes Holdings information from 63 money funds (the same number as a week ago), which represent $2.455 trillion (up from $1.900 trillion) of the $4.949 trillion (49.6%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.197 trillion (up from $944.4 billion a week ago), or 48.7%, Repurchase Agreements (Repo) totaling $890.5 billion (up from $686.5 billion a week ago), or 36.3% and Government Agency securities totaling $191.6 billion (up from $152.6 billion), or 7.8%. Commercial Paper (CP) totaled $64.3 billion (up from $44.2 billion), or 2.6%. Certificates of Deposit (CDs) totaled $42.1 billion (up from $20.5 billion), or 1.7%. The Other category accounted for $45.6 billion or 1.9%, while VRDNs accounted for $24.5 billion, or 1.0%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.197 trillion (48.7% of total holdings), Federal Reserve Bank of New York with $370.3B (15.1%), Federal Home Loan Bank with $81.7B (3.3%), BNP Paribas with $71.2B (2.9%), Fixed Income Clearing Corp with $56.0B (2.3%), RBC with $47.5B (1.9%), Federal Farm Credit Bank with $44.2B (1.8%), Federal National Mortgage Association with $42.0B (1.7%), JP Morgan with $37.8B (1.5%) and Barclays with $29.9B (1.2%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($232.8B), Goldman Sachs FS Govt ($200.4 billion), BlackRock Lq FedFund ($174.5B), Wells Fargo Govt MM ($152.7B), Morgan Stanley Inst Liq Govt ($137.4B), Fidelity Inv MM: Govt Port ($128.1B), BlackRock Lq T-Fund ($118.0B), Dreyfus Govt Cash Mgmt ($117.3B), Goldman Sachs FS Treas Instruments ($110.3B) and BlackRock Lq Treas Tr ($103.8B). (See our July 13 News, "July MF Portfolio Holdings: Repo Surge Again on RRP; T-Bills Plunge" for more, and let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
