Higher yields in money market funds should bring heavy assets inflows in the coming months, but not quite yet it seems. The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows assets falling for the third week in a row in August after 4 straight weeks of gains in July. Year-to-date, MMFs are down by $143 billion, or -3.0%, with Institutional MMFs down $158 billion, or -4.9% and Retail MMFs up $15 billion, or 1.0%. Over the past 52 weeks, money fund assets are up by $40 billion, or 0.9%, with Retail MMFs rising by $56 billion (3.9%) and Inst MMFs falling by $16 billion (-0.5%). (For the month of August through 8/17, MMF assets have increased by $23.4 billion to $5.021 trillion according to Crane's MFI XLS, which tracks a broader universe of funds than ICI.)
ICI's weekly release says, "Total money market fund assets decreased by $5.42 billion to $4.56 trillion for the week ended Wednesday, August 17, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $17.81 billion and prime funds increased by $9.94 billion. Tax-exempt money market funds increased by $2.46 billion." ICI's stats show Institutional MMFs decreasing $11.6 billion and Retail MMFs increasing $6.1 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.972 trillion (87.1% of all money funds), while Total Prime MMFs were $490.7 billion (10.8%). Tax Exempt MMFs totaled $99.1 billion (2.2%).
ICI explains, "Assets of retail money market funds increased by $6.14 billion to $1.48 trillion. Among retail funds, government money market fund assets decreased by $2.48 billion to $1.13 trillion, prime money market fund assets increased by $7.18 billion to $261.17 billion, and tax-exempt fund assets increased by $1.44 billion to $88.79 billion." Retail assets account for just under a third of total assets, or 32.5%, and Government Retail assets make up 76.4% of all Retail MMFs.
They add, "Assets of institutional money market funds decreased by $11.56 billion to $3.08 trillion. Among institutional funds, government money market fund assets decreased by $15.34 billion to $2.84 trillion, prime money market fund assets increased by $2.76 billion to $229.54 billion, and tax-exempt fund assets increased by $1.01 billion to $10.34 billion." Institutional assets accounted for 67.5% of all MMF assets, with Government Institutional assets making up 92.2% of all Institutional MMF totals. (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.)
In other news, J.P. Morgan Securities published "A Stablecoin Market Update" in its latest "U.S. Fixed Income Strategy." Authors Teresa Ho, Alex Roever and Holly Cunningham explain, "Since we last published on stablecoins in May, the size of the stablecoin market has shrunk, along with the broader cryptocurrency market. According to CoinMarketCap, the size of the stablecoin market has fallen from a peak of ~$180bn in early April to ~$147bn currently, based on the six issuers that we track. TerraUSD's (UST) collapse earlier this year erased about $18bn, contributing to about 57% of the overall market decline. Tether (UST) suffered a similar fate, despite fundamental differences between the two (TerraUSD is an algorithmicstablecoin, while Tether is asset-backed). Nevertheless, Tether's market cap still decreased by $16bn. Notably, USD Coin (USDC) was the only stablecoin issuer that gained market share, as they increased their market cap by $3.7bn during the same time period."
They tell us, "Overall, Tether and USD Coin remain dominant players, comprising over 80% of the stablecoin market. However, it is clear that market confidence in Tether as a stablecoin has been gradually eroding, with the events over the past few months accelerating that dynamic. Indeed, nearly two years ago, Tether represented 78% of the market, while USD Coin 13%. Presently, Tether only commands 45% of the market, while USD Coin 37%. In fact, USD Coin's market share increased by 10% over just the last couple of months."
JPM writes, "We believe one of the primary drivers behind the dramatic shift has been the superior transparency and asset quality of USD Coin's reserve assets versus those of Tether, particularly in the wake of TerraUSD's collapse and Celsius's bankruptcy. In the case of USD Coin, in addition to monthly attestation reports by a large US-based accounting firm, the issuer also provides weekly updates of its reserve asset allocation. As of August 12, it had $54.0bn of USDC in circulation, backed by $54.5bn of reserve assets. Of the latter amount, $42.5bn (79%) was in short-duration US Treasuries; the remainder $11.5bn (21%) was in cash."
They continue, "In contrast, Tether provides quarterly attestation reports by a Cayman-based accounting firm that details its reserve asset allocation. As of March 31, it had $82.3bn in total reserve assets. However, only $39.3bn (47%) and $4.1bn (5%) were in Treasury bills and cash, respectively. The remainder were in CP/CD (24%), MMFs (8%), and other asset classes such as secured loans, corporate bonds, and digital tokens."
The piece adds, "Interestingly, in early July, Tether announced that it intends to reduce its CP holdings." (See our Aug. 15 Link of the Day, "Tether Says No More Chinese CP.") JPM states, "Based on this, it appears maturing CP will be reinvested in Treasury bills. Combining this with Circle's investment, this would make stablecoin issuers a sizable player in Treasury bills, currently comprising 2% of the market as of May 2022, with considerable room to grow should stablecoins become a form of digital payment.... In fact, they hold more Treasury bills than prime MMFs, offshore MMFs, primary dealers, Berkshire Hathaway, or international organizations."
Finally, the update adds, "It didn't take long for tokenized MMFs to emerge. In late May, JPM transferred the token representation of BlackRock's MMF shares as collateral on its private blockchain. This opens the door for a wider range of assets to be pledged as collateral and also demonstrates that there could be potential demand for tokenized MMFs. One of the concerns we previously noted with regulating stablecoins like banks is that it could encourage a rotation from bank deposits and MMFs towards stablecoins, disintermediating the traditional financial system and leading to less credit and liquidity provided to the broader economy. Arguably, with the ability to transfer tokenized MMF shares as collateral, we could see less money rotate out of MMFs and into stablecoins. Somewhat interestingly, this might create a secondary market for MMF shares to the degree that shareholders decide to trade their tokenized MMF shares as opposed to redeeming from MMFs. It's still too early to know how this will play out, but it might have implications for liquidity in the money markets."
