ICI's latest weekly "Money Market Fund Assets" report shows money fund assets increasing for the second week in a row; they're now just a hair under their previous record of $4.821 trillion set 3 weeks ago. Over the past 52 weeks, money fund assets are up by $266 billion, or 5.8%, with Retail MMFs rising by $313 billion (21.2%) and Inst MMFs falling by $48 billion (-1.5%). ICI shows assets up by $85 billion, or 1.8%, year-to-date in 2023, with Institutional MMFs down $28 billion, or -0.9% and Retail MMFs up $113 billion, or 6.7%. (Note: Register soon for Crane's Bond Fund Symposium, March 23-24, 2023, in Boston, Mass. Click here for details.)
The weekly release says, "Total money market fund assets increased by $5.36 billion to $4.82 trillion for the week ended Wednesday, February 22, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $6.65 billion and prime funds increased by $6.11 billion. Tax-exempt money market funds increased by $5.89 billion." ICI's stats show Institutional MMFs falling $4.5 billion and Retail MMFs increasing $9.9 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.942 trillion (81.8% of all money funds), while Total Prime MMFs were $769.1 billion (16.0%). Tax Exempt MMFs totaled $109.7 billion (2.3%).
ICI explains, "Assets of retail money market funds increased by $9.90 billion to $1.79 trillion. Among retail funds, government money market fund assets decreased by $1.28 billion to $1.19 trillion, prime money market fund assets increased by $6.59 billion to $504.51 billion, and tax-exempt fund assets increased by $4.59 billion to $98.31 billion." Retail assets account for over a third of total assets, or 37.1%, and Government Retail assets make up 66.3% of all Retail MMFs.
They add, "Assets of institutional money market funds decreased by $4.54 billion to $3.03 trillion. Among institutional funds, government money market fund assets decreased by $5.37 billion to $2.75 trillion, prime money market fund assets decreased by $481 million to $264.63 billion, and tax-exempt fund assets increased by $1.31 billion to $11.41 billion." Institutional assets accounted for 62.9% of all MMF assets, with Government Institutional assets making up 90.9% of all Institutional MMF totals. Month-to-date in February (through 2/22/23), money fund assets have increased by $21.5 billion to $5.207 trillion, according to Crane Data's Money Fund Intelligence Daily. (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 writes in a new "Mid-Week US Short Duration Update" about, "A dynamic shift of T-bill holders." They tell us, "The primary holders of T-bills changed substantially over the course of last year. Though T-bill outstandings are flat year-over-year, MMFs -- historically the largest buyers of T-bills -- significantly reduced their T-bill holdings in 2022, comprising 31% of the market in December 2021 to 16% in December 2022.... This is not surprising given their access to the Fed's ON RRP, which allowed MMFs to tap the facility to the extent it made sense from a supply, duration, and/or economic perspective."
JPM explains, "As a result, other buyers such as corporates, SMAs, etc. -- who do not have access to the RRP but still sought safety, liquidity, and yield (relative to deposits) -- stepped in as dominant buyers. In fact, we estimate that investors that do not have access to the Fed's balance sheet held 63% of total T-bills as of December-end, versus 48% from a year ago.... Interestingly, despite T-bills being so rich, as reflected in their negative spread to SOFR, investors with no access to the Fed's balance sheet still bought T-bills."
They say, "It goes without saying that the Fed's ON RRP has proven to be a valuable facility for MMFs to park their excess liquidity as they grappled with the Fed's interest rate policy and fluctuations in T-bill supply over the course of last year. Looking ahead, we suspect this will remain the case, particularly given continued uncertainty around the Fed's terminal rate and looming concerns about the debt ceiling, which will not only likely prompt a reduction in T-bill supply over the summer but also cheapen T-bills that mature around the drop-dead date. MMFs will likely tread carefully with extending T-bill maturities as the drop-dead date nears, which our Treasury strategists project Treasury will run out of available resources by the middle of August."
JPM adds, "Indeed, taxable money fund investors have started to position themselves from headline risk surrounding the debt ceiling, with the bulk of their T-bill holdings maturing before June.... Meanwhile, other investors that might not be subject to the same headline risk as MMFs could remain buyers of T-bills, until a resolution is passed, particularly if affected T-bills begin to look attractive. Overall, ON RRP should remain elevated and affected T-bills could cheapen, though given the amount of liquidity still in the system, we suspect the backup could be limited relative to prior debt ceiling episodes."
Also, a release entitled, "U.S. Debt Ceiling Uncertainty a Risk for Treasury Money Market Funds," states, "A default by the U.S. Treasury could pose liquidity and headline risks and ratings pressure for U.S. Treasury-only money market funds (MMFs), but would not necessarily result in downgrades, with considerations including the size of any exposure to defaulted securities and alternative sources of fund liquidity, Fitch Ratings says."
It explains, "The U.S. government debt limit was reached on Jan. 19, 2023. However, the Treasury Department is using 'extraordinary measures' to avoid defaulting on obligations, such as halting contributions and investment redemptions to government pension and healthcare funds. The Congressional Budget Office has calculated the x-date will fall sometime between July and September 2023, though it cautioned that extraordinary measures could be exhausted sooner, and the Treasury could run out of funds before July."
Fitch then says, "Treasury-only MMFs have higher relative risk to a U.S. government default than prime and government MMFs that can diversify investments into other instruments. Treasury-only MMFs have very limited investment options, including Treasury securities spread across maturities or cash balances for liquidity purposes. These funds could face increased volatility in the Treasury market and heightened investor redemptions as the debt ceiling deadline approaches, with uncertainty around the potential 'X-date' range, when extraordinary measures would be exhausted and the government would no longer be allowed to issue debt, although it could conceivably prioritize debt payments over other obligations."
They write, "MMFs with U.S. Treasury securities maturing around the potential X-date are exposed to headline and liquidity risk from a potential default. However, Treasury-only MMFs have significant liquidity cushions, with the 27 funds monitored by Fitch averaging 91% daily liquid assets and 96% monthly liquid assets as of Jan. 30, 2023, although much of this liquidity is comprised of Treasury securities. To reduce these associated risks, we would expect Treasury MMFs to actively manage around the potential X-date, cutting exposures to U.S. Treasury securities that are maturing on or near the expected date as fund managers have done in the past, although managing these exposures may be challenging given the uncertainty around the X-date. At the same time, some funds may purchase securities maturing around the X-date to take advantage of higher yields, with the expectation that Congress will resolve the debt ceiling before then."
The release adds, "Fitch believes the U.S. government debt limit will once again be raised or suspended to avoid a default. If we assess this risk differently ahead of the X-date and feel that political brinkmanship had increased the possibility of missing an interest payment, the U.S. sovereign rating would likely be placed on Rating Watch Negative to signal a possible rating action."
Finally, Fitch concludes, "If the limit were not raised or suspended in time to avoid a default, the U.S. sovereign rating would be assigned a Restricted Default rating, and affected Treasury securities would carry a Default rating until the default was cured. While it is unclear if the government has the ability or willingness to prioritize debt payments, such action might not be consistent with a 'AAA' rating. A default would likely lead to significant market volatility, and potential outflows for MMFs, which present an additional risk for MMFs. A default could also give rise to operational challenges for MMFs and other market participants, including in systems reporting of defaulted securities, or screening repo collateral for such securities."
