On Friday, S&P Global Ratings published the brief, "Rapidly Rising Rates Are Putting Some Money Market Funds At Risk," which discusses the `movement of NAV and 'shadow' NAVs of money market mutual funds due to the Federal Reserve's rapid increases in interest rates. They write, "As the Fed pursues rate tightening, S&P Global Ratings expects certain funds with longer-dated positions and longer average maturities to experience modest stress on their net asset values (NAVs). Since January 2022, the Federal Reserve has increased its target federal funds rate from a lower bound of 0.00%-0.25% to 1.50%-1.75% as of June 2022. S&P Global Economists now expect the Fed to be much more aggressive, with the policy rate rising from zero at the beginning of 2022 to 3% by year-end, reaching 3.50%-3.75% by mid-2023. We expect the Fed to keep monetary policy tight until inflation decelerates and nears its target in the second quarter of 2024. From our recent observations, it appears the market is preparing for an interest rate rise of 75 basis points next week, with some possibility of an increase of 100 basis points."
S&P explains, "When assigning a principal stability fund rating (PSFR), we assess management's focus on key characteristics such as credit quality, diversification, maturity, and liquidity of assets as tools to determine the likelihood of a fund maintaining a stable NAV.... These characteristics reflect management's approach and commitment to maintaining principal stability. While this task is generally challenging during times of market volatility, for principal stability funds, management may be placed under enhanced pressure during periods such as the one we are experiencing now: rapid inflation risk accompanied by uncertain and large magnitude monetary policy action to manage that risk."
They tell us, "Typically, but not always, managers reposition portfolios to limit risk of volatile NAVs by shortening duration and managing liquidity risk with enhanced focus on stress scenarios. If a 'AAAm' rated fund's NAV falls below 0.9985, we typically enhance our standard surveillance to ensure funds are maintaining metrics consistent with their assigned rating (i.e., for a 'AAAm' rated fund, the lowest NAV threshold to maintain that rating is 0.99750).... More specifically, our enhanced surveillance includes a shift from weekly portfolio pricing submissions to daily portfolio pricing and stress testing. Enhanced surveillance may also include daily dialogue with the rated fund sponsors. If we observe continued NAV deterioration based on our daily review, we often request a formal management action plan (MAP), typically when marked-to-market NAVs are at or below 0.9980."
S&P also says, "We focus on these NAV levels as warning signs that a fund is inching toward a NAV of less than 0.9950, at which point the fund will have 'broken the buck' as its NAV falls below $1. We focus on these levels to better understand management's commitment to and plan for limiting NAV volatility. We state different NAV sensitivities in our rating criteria in part to provide clarity to the market and fund managers that we would prefer to transition ratings through categories as opposed to simply waiting for a fund to break the buck -- which would represent a rating of 'Dm'."
Finally, they add, "As such, if NAVs fall below 0.9975 for a 'AAAm' rated fund, we have a maximum five-business-day cure period for management to restore and maintain the NAV to at least 0.9975, which is the lowest NAV associated with 'AAAm' rated funds. During the cure period, we would take into account a fund sponsor's MAP to remedy the pressured NAVs as we consider whether to place a rating on CreditWatch or not. We may also provide a bulletin to the market identifying those specific funds whose NAVs are below our criteria's threshold to support their rating (e.g., 0.9975 for 'AAAm' rated funds). A failure to cure the NAV breach within those five business days would typically lead to a downgrade. So far, in the current inflationary cycle, we have not taken any rating actions on funds rated under the PSFR methodology. We continue to closely monitor developments under an enhanced, often daily, surveillance."
Crane Data's latest Money Fund Intelligence Daily publication shows our Crane Money Fund Average, the average of the 671 taxable money funds tracked on a daily basis, with an average NAV, or net asset value, of 0.9996 (as of 7/21/22). This is down from 0.9999 on June 1. We expect NAVs to inch lower later this week once the Federal Reserve hikes rates sharply again.
In other news, BNY Mellon's latest earnings release states, "Total revenue increased 7%, primarily reflecting: Fee revenue increased 4%, primarily reflecting lower money market fee waivers, higher client activity and higher foreign exchange revenue, partially offset by the unfavorable impact of a stronger U.S. dollar, lower market values and the impact of lost business in the prior year in both Pershing and Corporate Trust. Investment and other revenue was unchanged primarily reflecting higher strategic equity investment gains, offset by lower seed capital results. Net interest revenue increased 28%, primarily reflecting higher interest rates on interest-earning assets and a change in asset mix, partially offset by higher funding expense and lower interest-earning assets."
It tells us, "The drivers of the total revenue variances by line of business are indicated below. Also see page 7 for information related to money market fee waivers. Asset Servicing – The year-over-year increase primarily reflects higher net interest revenue, lower money market fee waivers, higher foreign exchange revenue and client activity, partially offset by the unfavorable impact of a stronger U.S. dollar and lower market values.... Issuer Services – The year-over-year increase primarily reflects higher net interest revenue in Corporate Trust, higher Depositary Receipts revenue and lower money market fee waivers, partially offset by the impact of lost business in the prior year in Corporate Trust. The sequential increase primarily reflects the accelerated amortization of deferred costs for depositary receipts services related to Russia recorded in 1Q22, higher Depositary Receipts revenue, higher net interest revenue in Corporate Trust and lower money market fee waivers."
BNY Mellon writes, "The drivers of the total revenue variances by line of business are indicated below. Also see page 7 for information related to money market fee waivers. Pershing – The year-over-year increase primarily reflects lower money market fee waivers and higher transaction activity, partially offset by the impact of prior year lost business. The sequential increase primarily reflects lower money market fee waivers, partially offset by lower equity markets and lower transaction activity. Treasury Services – The year-over-year increase primarily reflects higher net interest revenue, lower money market fee waivers and higher payment volumes. The sequential increase primarily reflects higher net interest revenue and lower money market fee waivers. Clearance and Collateral Management – The year-over-year increase primarily reflects higher net interest revenue and clearance volumes. The sequential increase primarily reflects higher net interest revenue. The drivers of the total revenue variances by line of business are indicated below. Also see page 7 for information related to money market fee waivers."
They comment, "Investment Management – The year-over-year decrease primarily reflects the unfavorable impact of a stronger U.S. dollar, lower seed capital results and market values, an unfavorable change in the mix of AUM and lower equity income, partially offset by lower money market fee waivers. The sequential decrease primarily reflects lower market values, timing of performance fees and the unfavorable impact of a stronger U.S. dollar, partially offset by lower money market fee waivers. Wealth Management – The year-over-year and sequential decreases primarily reflect lower market values, partially offset by higher net interest revenue."
The release adds, "The following table presents the impact of money market fee waivers on our consolidated fee revenue, net of distribution and servicing expense. In 2Q22, the net impact of money market fee waivers was $66 million, down from $199 million in 1Q22, driven by higher interest rates."
