Fitch Ratings published a brief entitled, "MMF Reform Flows Could Reduce Effectiveness of Fed's Tools," which tells us that, "Proposed U.S. money market fund (MMF) reforms, if enacted, could result in large inflows into government MMFs, and force the Federal Reserve (Fed) to adjust the tools it uses to manage interest rates. Already, in March 2021, the Fed raised capacity on its reverse repo program (RRP) to $80 billion from $30 billion per counterparty, to account for the large amount of cash that government MMFs hold, at $4 trillion as of July 31, 2021 according to Crane Data."
The piece continues, "Similarly, in June 2021, the Fed increased the overnight RRP rate to 0.05% from 0.00% in an effort to keep interest rates above 0%. The increased capacity of the RRP has provided MMFs a venue to park excess cash, which otherwise may have gone into Treasury, Agency, and repo markets, and pushed interest rates lower. If MMF reforms cause significant flows into government MMFs, the Fed may be compelled to consider further actions."
Fitch tells us, "The Fed's recent changes have led to a material increase in demand for the RRP, with total balances topping $1.09 trillion as of August 12, 2021, from effectively no utilization a few months prior. As of July 30, 2021, MMFs held $861 billion in the RRP, which was 83% of the program's total utilization as of the same date. MMFs' demand for the RRP is driven by the low interest rate environment and the recent rate increase for the program, a decrease in Treasury Bill (T-Bill) supply, and pandemic-driven inflows into government MMFs."
They explain, "Outstanding T-Bill supply peaked in June 2020, reaching over $5 trillion outstanding, and declined by $938 billion since then to July 31, 2021, according to SIFMA. Between February 28, 2020 and July 31, 2021, government MMFs have gained $1.2 trillion in assets, according to CraneData. This mismatch between supply and demand has caused MMFs to push yields on Treasuries and other instruments to the lower end of the Fed's target range, but the Fed's recent changes have corrected this imbalance to a large degree. Fitch views MMF exposure to the RRP as commensurate with U.S. government risk, and therefore, there is no impact to 'AAAmmf' ratings."
The brief adds, "U.S. MMF reforms currently under consideration could lead to large flows out of prime and into government MMFs, similar to 2016, when government MMFs gained $884 billion between February and October at the expense of prime funds. Numerous reform proposals are being discussed, and the magnitude of MMF flows will depend on the outcome. If mild reforms are implemented, such as de-linking funds' weekly liquidity levels from their ability to impose redemption fees or gates, this is unlikely to cause material prime fund outflows. However, if the outcome is to ban prime funds or introduce material structural changes, large prime fund outflows would be expected, with the money largely moving to the same fund managers' government funds, based on historical experience. Under such a scenario, certain large government MMFs may be constrained in their ability invest such inflows in the Fed's RRP."
Fitch's piece includes a table of the "Top 10 Fund Exposures to RRP," which includes a listing of "Fund, Fund Type, RRP Exposure, Fund AUM and Remaining RRP Capacity" as of (7/31/21). The table includes: Fidelity Government Cash Reserves (Retail Govt, $56B, $204B, $24B), Fidelity Government Money Market (Retail Govt, $54B, $224B, $26B), Morgan Stanley Inst Liq Government Port (Inst Govt, $50B, $143B, $30B), Fidelity IMM: Govt Port (Inst Govt, $49B, $128B, $31B), JPMorgan US Govt MM (Inst Govt, $46B, $232B, $34B), Federated Hermes Government Obligs (Inst Govt, $44B, $128B, $36B), Dreyfus Government Cash Mgmt (Inst Govt, $36B, $117B, $44B), Wells Fargo Govt MM (Inst Govt, $33B, $152B, $47B), BlackRock Liquidity FedFund (Inst Govt, $26B, $178B, $54B) and Northern Institutional Treasury MM (Inst Treas, $20B, $76B, $56B).
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 Aug. 20, 2021) includes Holdings information from 78 money funds (up 12 from 3 weeks ago), which represent $2.495 trillion (up from $2.455 trillion) of the $4.860 trillion (51.3%) 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 $1.057 trillion (down from $1.197 trillion 3 weeks ago), or 42.3%, Repurchase Agreements (Repo) totaling $1.001 trillion (up from $890.5 billion 3 weeks ago), or 40.1% and Government Agency securities totaling $186.8 billion (down from $191.6 billion), or 7.5%. Commercial Paper (CP) totaled $86.2 billion (up from $64.3 billion), or 3.5%. Certificates of Deposit (CDs) totaled $53.7 billion (up from $42.1 billion), or 2.2%. The Other category accounted for $80.6 billion or 3.2%, while VRDNs accounted for $29.9 billion, or 1.2%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.060 trillion (42.5% of total holdings), Federal Reserve Bank of New York with $477.7B (19.1%), Federal Home Loan Bank with $82.6B (3.3%), BNP Paribas with $61.1B (2.4%), Fixed Income Clearing Corp with $60.4B (2.4%), RBC with $49.8B (2.0%), Federal Farm Credit Bank with $42.2B (1.9%), Federal National Mortgage Association with $38.3B (1.5%), JP Morgan with $37.4B (1.5%) and Credit Agricole with $31.4B (1.3%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($246.1B), BlackRock Lq FedFund ($174.1B), Wells Fargo Govt MM ($148.1B), Morgan Stanley Inst Liq Govt ($146.3B), Fidelity Inv MM: Govt Port ($130.4B), Federated Hermes Govt Obl ($123.5B), BlackRock Lq T-Fund ($118.0B), Dreyfus Govt Cash Mgmt ($116.7B), BlackRock Lq Treas Tr ($110.4B) and JPMorgan 100% US Treas MM ($99.3B). (See our August 11 News, "August MF Portfolio Holdings: Treasuries Plunge Again; Repo, TDs Jump" 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.)
