State Street Global Advisors published its "Global Cash Outlook," entitled, "The Year Ahead – Chaos or Calm?" Portfolio Strategist Will Goldthwait writes, "The overall theme of 2023 will be confusion. The current geopolitical macro-economic back drop could deliver such a broad array of outcomes that it's anyone's guess where we will be at the end of the year. Looking back at my 2022 outlook made me chuckle ... I had said, 'inflation is less transitory,' and predicted the Fed raising rates by 75 bp by the end of 2022. Oh, how naïve. Just in the last few weeks of this year central banks have made it clear that they have a lot more to do. I predict the next year will be full of surprises, some more shocking than others, with outcomes that we might never have imagined, (like the Fed raising rates by 425 bp, not just 75)."
On Money Market Reform, he states, "The SEC's US Money Market Reform announcement appears to be delayed. Recall the most discussed and debated rule change was the application of swing pricing on Institutional Prime Money Market funds. Based on the industry comment letters submitted, the implementation of swing pricing as proposed would be unworkable and thus, it is assumed those remaining prime money market funds would close.... Currently there is rumor of one of the Democratic commissioners reconsidering their decision and not supporting the rule change as it was put forth in the SEC's proposal."
Goldthwait continues, "The more interesting part of this puzzle is that the majority of AUM in these funds ($474bln of the $657bln total as of Dec 20, 2022, from Crane Data) is part of the 'sweep' function. For some of the largest mutual fund companies, like Vanguard, Fidelity and American Funds, end of day cash is swept into these funds as part of the cash management function. As such, these funds are not really subject to 'run risk' as they are part of an internal cash management process. So as the saying goes, the SEC might be throwing the baby out with the bath water. The rule change might only impact a very small portion of the overall cash in Institutional Prime MMF. There has always been concern that if you outlaw prime funds, where does the cash go? Perhaps, simply, into government funds or perhaps it ends up out of the SEC's purview, and maybe that is just what they want."
He asks, "Will this change impact credit conditions in the money markets? Perhaps. We did see substantial repricing in the summer of 2016 prior to the implementation of the October 2016 prime money market fund reform. And markets rebounded relatively quickly. As time went on credit conditions reverted back to their pre-reform levels, in some cases even better. I would suspect the same would happen this time."
Goldthwait adds, "One other not so small matter that the SEC will decide is whether government and treasury money market funds need to float their NAV in a negative interest rate environment. The lunacy of this potential rule cannot be understated. Whomever drafted it does not know the simple fact that so many systems that support the ownership of a money market fund cannot handle a variable NAV. This is the primary reason the industry saw over $1trillion of AUM move out of variable NAV prime funds in the fall of 2016. I hope the committee has come to their senses on this and will allow for reverse distribution in the event cash yields go negative."
Discussing European Money Funds, SSGA says, "Reform for European domiciled money market funds remains a long way off. The current Presidency of the European Commission sits in Sweden. A country with little or no connection to money market funds. We don't expect any substantial progress on this until end of '23 or beginning of '24. As one might remember from the last time Europe embarked on money fund reform the process is politically charged. Expect to hear more from us as this tale unfolds."
The Outlook comments, "ESG and Prime money market funds in the United States have not grown as one would have hoped, and to be honest I'm not sure if this is an ESG challenge or a prime money market fund challenge. I tend to think the latter. Over the past several years there were five ESG prime funds that were either launched or converted from existing prime funds. The funds have either closed or have not seen growth due to their ESG label. A few of these funds were small (<$5 billion) and that in of itself is a challenge for the MMF investor. And with pending MMF reform, investors seem content to sit in Government or Treasury funds rather than 'risk it' in prime."
It concludes, "But there is a silver lining: Diversity, Equity and Inclusion (DEI) strategies have done well. Some funds were created or converted, but more often individual share classes that focus on a specific cause were created off of existing money market funds. These causes can include partnering with a specific broker/dealer or contributing some portion of a fund's revenue to a particular cause. The growth has been concentrated in government or treasury funds and clients have been pleased with this approach as they can benefit from all of the existing positive attributes of a money market fund while also knowing they are contributing to the minority broker/dealer or charitable cause."
Finally, Goldthwait says, "To wrap up, 2023 will be a year when global inflation declines, central banks raise rates further than they need to, and economic growth slows to a crawl. The labor market will be the most important indicator of a hard or soft economic landing. If only modest layoffs ensue, perhaps central banks can thread the needle and engineer a soft landing. This author has his doubts. All of this means sitting in cash for another 12 months just might be the best move."
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 Jan. 20) includes Holdings information from 67 money funds (up 35 from a week ago), which represent $2.040 trillion (up from $940.1 billion) of the $5.190 trillion (39.3%) 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 Repurchase Agreements (Repo) totaling $1.227 trillion (up from $617.0 billion a week ago), or 60.1%; Treasuries totaling $508.7 billion (up from $210.4 billion a week ago), or 24.9%, and Government Agency securities totaling $117.7 billion (up from $67.9 billion), or 5.8%. Commercial Paper (CP) totaled $73.1 billion (up from a week ago at $21.6 billion), or 3.6%. Certificates of Deposit (CDs) totaled $32.6 billion (up from $6.1 billion a week ago), or 1.6%. The Other category accounted for $56.7 billion or 2.8%, while VRDNs accounted for $25.0 billion, or 1.2%.
The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $808.4 billion (39.6%), the US Treasury with $508.7 billion (24.9% of total holdings), Fixed Income Clearing Corp with $110.8B (5.4%), Federal Home Loan Bank with $76.0B (3.7%), JP Morgan with $46.5B (2.3%), Federal Farm Credit Bank with $38.4B (1.9%), RBC with $37.1B (1.8%), Barclays PLC with $29.5B (1.4%), Citi with $21.4B (1.0%), and Mitsubishi UFJ Financial Group Inc with $21.0B (1.0%).
The Ten Largest Funds tracked in our latest Weekly include: Dreyfus Govt Cash Mgmt ($166.6B), Fidelity Inv MM: Govt Port ($127.4B), BlackRock Lq FedFund ($126.4B), Morgan Stanley Inst Liq Govt ($124.8B), Federated Hermes Govt ObI ($115.7B), Allspring Govt MM ($99.6B), BlackRock Lq Treas Tr ($97.6B), Fidelity Inv MM: MM Port ($91.6B), BlackRock Lq T-Fund ($86.1B), and Invesco Govt & Agency ($83.3B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
