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 Sept. 30) includes Holdings information from 33 money funds (down 22 from a week ago), which represent $925.8 billion (down from $1.498 trillion) of the $5.036 trillion (18.4%) in total money fund assets tracked by Crane Data. Though some have expressed concerns about Credit Suisse-related credits, money funds continue to hold the name as of Sept. 30, though the total has been reduced to just $1.2 billion. (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 Repurchase Agreements (Repo) totaling $555.1 billion (down from $849.2 billion a week ago), or 60.0%; Treasuries totaling $264.8 billion (down from $453.4 billion a week ago), or 28.6%, and Government Agency securities totaling $62.8 billion (down from $89.5 billion), or 6.8%. Commercial Paper (CP) totaled $17.7 billion (down from a week ago at $39.6 billion), or 1.9%. Certificates of Deposit (CDs) totaled $8.2 billion (down from $17.5 billion a week ago), or 0.9%. The Other category accounted for $13.0 billion or 1.4%, while VRDNs accounted for $4.3 billion, or 0.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $443.4 billion (47.9%), the US Treasury with $264.8 billion (28.6% of total holdings), Federal Home Loan Bank with $30.5B (3.3%), Federal Farm Credit Bank with $29.2B (3.2%), JP Morgan with $14.5B (1.6%), RBC with $9.8B (1.1%), BNP Paribas with $9.3B (1.0%), Mitsubishi UFJ Financial Group Inc with $8.9B (1.0%), Nomura with $7.8B (0.8%) and Fixed Income Clearing Corp with $6.1B (0.7%).
The Ten Largest Funds tracked in our latest Weekly include: Morgan Stanley Inst Liq Govt ($140.2B), Dreyfus Govt Cash Mgmt ($109.8B), Allspring Govt MM ($109.0B), State Street Inst US Govt ($107.5B), First American Govt Oblg ($79.4B), Morgan Stanley Inst Liq Treas Sec ($55.4B), Dreyfus Treas Sec Cash Mg ($45.7B), State Street Inst Treasury Plus ($41.4B), Morgan Stanley Inst Liq Treas ($37.3B) and Dreyfus Treas Obligations Cash Mgmt ($37.0B). (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.)
In other news, Capital Advisors Group published a paper entitled, "Managing Cash Portfolios in the Tug of War Between Growth and Inflation," which tells us, "With the 75-basis-point hike in the Fed funds rate on September 21st, Fed officials now peg their median forecast for the key policy rate in the 4.25%-4.50% range by the end of the year. The resulting rise in bond yields has been so breathtaking that the previous expectation that Fed funds would end the year in the 0.75%-1.00% range now seems both distant and farcical. On the day of the Fed action, the yield on the two-year Treasury note surpassed 4% for the first time in 15 years."
Author Lance Pan writes, "While cash investors initially welcomed higher yield, rising rates create potential for recent purchases to go under water quickly in market value terms. The message from Fed Chair Jay Powell is clear: the Fed's job is not done until inflation recedes to near the targeted 2% level, even at the risk of a recession. And therein lies the quandary: should investors stay with very short instruments such as money market funds or overnight deposits with yields that lag the Fed funds rate? Or should they grab higher yields in longer-term securities and risk opportunity costs if future rates exceed current projections?"
He asks, "How should fixed income investors, cash investors included, navigate this rising interest rate environment? Especially when other issues such as supply chain bottlenecks, energy and commodities shortages, a housing slump, and rising labor costs continue to challenge credit performance. With a recession looming on the horizon, we thought it would be a good time for a reality check of current conditions and assess how liquidity portfolios may weather the impending storm."
Capital Advisors says, "Portfolios entering this rising rate cycle with bonds purchased at near zero yield and months or years away from maturity may have less appetite to add positions. It is especially the case if the Fed is poised to hike some more, thus leading to more unrealized losses. The presumed safe bet is to leave cash in very short maturity instruments, such as government money market funds and Treasury bills, until there are clear signals of a Fed pivot or pause."
They comment, "Many cash investors have taken this cautious approach which helps explain why money market fund (MMF) assets, after declining from last December's $4.71 trillion to $4.47 trillion in April 2022, steadily climbed to $4.59 trillion as of September 28th. Similarly, the Fed's reverse repo (RRP) facility, where government and prime MMFs account for 80% and 12% of its usage respectively, reached a record balance of $2.425 trillion on September 30th, compared to $1.579 trillion at the beginning of the year."
The piece states, "The downside to this strategy is the lower yield potential of MMFs and short-dated Treasury bills than the Fed funds rate, or more appropriately, the RRP rate or comparable overnight government repo rates. Since the Federal Reserve limits its counterparties to a few large banks, MMFs, and government sponsored enterprises, many cash investors use government MMFs as an indirect way of accessing the RRP with the catch that they incur a management fee. Others chase after a limited supply of T-bills, which push their yield below the RRP rate. Investors capable of conducting overnight repos with broker-dealers through separately managed accounts (SMAs) may receive rates near or comparable to RRP, although the process of setting up such arrangements may be lengthy and the expertise of managing a repo book may be out of reach for some investors."
It suggests, "Another strategy to consider is to buy bonds with laddered maturities further out on the yield curve. The maturities can range from overnight to, say, 15-18 months, when interest rate policy is expected to approach a neutral stance. Securities with longer tenors may receive progressively diminished allocations. This strategy allows a portfolio to earn yield levels above the RRP with a maturity ladder that allows for reinvestment of proceeds as rates rise. It also provides a partial 'lock' of higher rates further up on the curve should the Fed pivot or stop sooner than the market anticipates. This strategy can be especially helpful in a 'hard landing' scenario where the Fed reverses course and cuts rates aggressively. Compared to the traditional 'barbell' MMF strategy, where portfolios are overweighed at both ends of the maturity spectrum, laddered portfolios tend to produce stable liquidity and minimize market value losses."
Capital Advisors Group adds, "A final word of caution concerns institutional Prime MMFs. These funds were popular with institutional liquidity accounts in previous rising rate cycles as they passed on higher returns to investors relatively quickly and provided attractive yield potential with short-term credit instruments. Investors may be tempted to do the same in this cycle, as the Crane Data money fund universe shows a 20 bps yield differential between the institutional prime and government fund groups as of August 31st. However, the liquidity squeeze in March 2020 exposed the structural vulnerability in prime funds' weekly liquid assets threshold that could trigger large outflows for fear of 'fees and gates.' Industry insiders indicated recently that the Securities and Exchange Commission may finalize its revised ruling on MMF reforms as early as October, and the new rule may include the esoteric requirement of 'swing pricing.' While actual implementation will not commence for at least 12 months, prime funds may experience larger-than-usual asset outflows, which may exacerbate NAV fluctuations, an undesirable outcome in a rising rate environment when instruments are often marked down in value from the time of purchase."
