S&P Global Ratings published quarterly updates yesterday on both U.S. and European money market funds. Their "U.S. Domestic 'AAAm' Money Market Fund Trends (Third-Quarter 2021)" brief tells us, "The third quarter of 2021 for rated U.S. MMFs continued to see a slow bleed out of prime funds, while government funds maintained a near record level of net assets. Prime fund net assets were down to $373 billion or 18% compared to the previous year, just above March 2020 lows of $362 billion. Government fund assets were up to $2,935 billion or 12% over the previous year, around $300 billion higher compared to the market dislocation period of March 2020." (Note: Please join us Thursday morning for our European Money Fund Symposium Online, a free 2 1/2 hour webinar, which takes place Oct. 21 from 9:30am-12:00pm Eastern. Register here to attend and watch for the recordings and coverage in coming days.)
It explains, "There continues to be a massive imbalance of supply and demand, and that will likely continue in the near to medium term. The spread difference between prime funds and government funds is only a few basis points (bps). Across both fund types, yields are flat compared to last quarter. However, there continues to be pressure on yields, driven by the shrinking pool of low-risk assets, debt ceiling noise, the prospect of regulatory reform and continued scrutiny on prime funds. There was some relief through the third quarter following the tweaks to the reverse repurchase agreement (repo) facility in late June by the Federal Reserve."
S&P writes, "In terms of portfolio composition, the purchases of Treasury bills in government MMFs saw its lowest allocation going to back to March 2020, as supply diminished following the Department of the Treasury's efforts to reduce its cash balances. Also, agency issuance has been somewhat limited in recent months, which further reduced exposure to very low levels. This has been offset by fund managers increasing their allocation into repos, with most of being overnight. There was also a modest increase to seven-day liquidity due to the increase in overnight positions."
The piece states, "Similar to last quarter, the Federal Reserve's repo program saw a spike in activity. Prime fund managers increased their allocation to repos and slightly reduced their exposure to commercial paper (CP) and asset-backed commercial paper (ABCP) during the quarter, which is reflected in the small increase in overnight and seven-day liquidity within prime funds. Compared to the previous year, there was an increase in time deposits, CP, and ABCP, with a decrease in exposure to sovereigns, supranationals, and agencies (SSA)."
It says, "Like government funds, supply constraints in the short-term funding markets may have reduced the option to invest in certain asset classes. Yields remained low throughout the quarter. Seven-day and 30-day net yields for government funds were 0.01%, unchanged from the previous quarter and down two basis points (bps) from the previous year. The seven-day net yield for prime funds was 0.01% and the 30-day net yield was 0.04%, unchanged from the last quarter and down 12 bps and 10 bps form the last year, respectively. Fund managers extended their use of fee waivers, which have been a widespread and crucial tool for attracting continued inflows into MMFs."
The trends publication adds, "Among purchases of floating-rate securities, we observed a very limited use of Bloomberg Short Term Bank Yield Index (BSBY) floaters in some rated funds. Most fund managers are no longer adding LIBOR floaters and are letting their exposure roll off by year-end. Managers have been more active in Secured Overnight Financing Rate (SOFR) and Fed fund floaters, but now they are seeing more value in fixed paper."
S&P's other update, "European 'AAAm' Money Market Fund Trends (Third-Quarter 2021)," comments, "In the third quarter of 2021, net assets for rated European-domiciled MMFs denominated in euro and U.S. dollar were range-bound, rising 1.3% to €107 billion for euro MMFs, and falling lower by 1.9% to $492 billion for U.S. dollar MMFs, quarter on quarter. Net assets for sterling MMFs continued their decline since peaking at £252 billion in December 2020, falling 1.1% to £220 billion in the third quarter. While net assets for sterling MMFs are now approaching February 2020, pre-pandemic levels of £212 billion, the net assets for U.S. dollar and euro MMFs remain above their February 2020, pre-pandemic levels of $440 billion and €85 billion, respectively. Thus, cash in the sterling market is being re-deployed at a slightly faster pace than in the euro or offshore U.S. dollar market."
It explains, "Third quarter seven-day net yield averages have remained flat since they hit the lower bound in the first quarter of 2021, yielding -0.65% for euro, 0.00% for sterling, and 0.02% for U.S. dollar MMFs. In September, the Bank of England and the Federal Reserve began sending more hawkish signals, leaving the market to price in sooner-than-expected policy tightening and sending longer yields higher. Nevertheless, with interest rates set to remain at ultra-low levels at least until next year, and the short end of the curve being almost flat, the pressure to avoid net negative fund yields remains high."
S&P writes, "The average level of 'A-1+' credit quality of the rated U.S. dollar MMFs remained steady in the third quarter of 2021 at 75%, yet trended slightly lower for Euro and sterling MMFs, averaging 63%, which is still at a level higher than the minimum 50% required for AAAm-rated MMFs. With ultra-low interest rates and benign markets, WAMs have extended beyond pre-pandemic levels, and there has been a greater proportion invested in credit securities, such as bonds, certificates of deposits, commercial paper, and floating rate notes. They account for close to 60% in euro and sterling MMFs, whereas this is trending at less than 50% in U.S. dollar MMFs, which explains the higher credit quality for U.S. dollar MMFs."
Finally, they tell us, "The third quarter incurred persistent inflation pressures and increased rhetoric for tighter monetary conditions, starting with the initial discussions of easing central bank asset purchases. Despite this backdrop, our rated MMFs have maintained or lengthened their WAMs and are not positioned for any rate hike soon. In fact, our rated MMF sponsors are planning their year-end strategies during which time liquidity condition can be challenging, which means for some, lengthening their maturities during the quarter to ensure sufficient liquidity over the year-end period. In the past 12 months, all MMFs we rate had their 'AAAm' ratings affirmed. Going forward, we trust that our weekly surveillance and regular interactions with MMF fund managers will continue the affirmative ratings trend."
In other news, Fitch Ratings' published a "Stablecoin Dashboard: 1H21," which states, "Stablecoins, such as Tether and USDCoin, are increasingly relevant participants in the short-term credit markets, says Fitch Ratings, due to their ownership of short-term securities backing outstanding coins. Stablecoins are typically used by cryptocurrency investors to hold realised profits, for conversions between cryptocurrencies, or as a means of payment.... Fitch estimates that total stablecoin market capitalisation growth was around 420% as of 30 September 2021."
Fitch says, "Stablecoins have a broad asset allocation. Tether's assets include precious metals and secured loans, which may be more volatile than short-term securities such as commercial paper (CP). Both USDCoin and Tether focus on investment-grade quality: Tether's minimum credit quality is 'F3' or equivalent, and USDCoin can hold corporate bonds rated 'BBB+' or higher. However, USDCoin materially altered its security portfolio between June and August 2021, shifting the vast majority of its assets into cash equivalents. Tether's portfolio has a maximum maturity of 365 days, while USDCoin can extend maturity up to three years. Estimating the share of assets with very short maturities (i.e. overnight and within one week) is not possible given disclosure limitations. However, available data suggest longer maturities: within Tether's CP and CD portfolio, the bulk of exposures mature beyond six months."
The one-page brief adds, "Fitch estimates that stablecoins had aggregate CP holdings equivalent to 3%–5% of the total onshore US CP market (USD1.1 trillion as of end-June 2021 according to Fed data) -- assuming most stablecoins have a similar underlying asset allocation to Tether and USDCoin. Given the growth rate of the stablecoin market, and the relatively stable US CP market, stablecoins could soon hold a more significant part of the US CP market.... Stablecoins had material price volatility in early 2020. The largest daily price move was -5.1% on 13 March 2020 for Tether; however, this is still less volatile than most cryptocurrencies."
