Daily Links Archives: October, 2007

"Money-Market Funds Reassure Investors" Says WSJ. The article says, "Some advisory firms have taken action to buy back troubled securities that could have become unsuitable or, at worst, caused funds to 'break the buck,' or drop below the $1 share price they strive to maintain." It quotes Peter Crane, on "record inflows in the third quarter" and notes, "Assets in the funds are approaching $3 trillion." It also quotes Susan Wyderko of Mutual Fund Directors Forum, saying "she is aware of a number of money-market funds at which ... have taken action to moderate the impact of decreases in the value of the funds. In these cases, the advisers have purchased securities, taking the losses upon themselves."

Federal Reserve Governor Frederic Mishkin's recent speach on "Financial Instability and the Federal Reserve as a Liquidity Provider". The talk took place Oct. 26 at the Museum of American Finance's Commemoration of the Panic of 1907 in New York. It mentions the Fed's role in a prior CP crisis, the "1970 bankruptcy of the Penn Central Corporation, an important issuer of commercial paper". He says on recent problems, "some asset-backed commercial paper could not be rolled over; yields in the Treasury bill market fluctuated considerably; and spreads in interbank funding markets rose to unusually high levels. To prevent these problems from turning into a severe credit crunch ... the Federal Reserve used several tools to inject liquidity into the system.".

Pensions & Investments says "Managers cash in on a volatile market: Money market fund inflows help assets under management rise in 3rd quarter". The article says, "a number of publicly traded money management companies reported significant upticks in their cash management and liquidity strategies, which helped support an overall increase in assets under management," citing results from Bank of New York Mellon, BlackRock, Federated, Janus, and State Stree.

"Turmoil in auction-rate securities market cited as 'tremendous buying opportunity'" says FinancialWeek. Crain's FW reports from last week's AFP conference, "Corporate treasurers usually take the path of least resistance and stick their excess cash in a money market mutual fund," quoting Lisa Joublanc of Global Payments. It quotes Tony Russo of Jefferies & Co. on auction-rate securities, saying the recent auction failures of 2% of the market were "A tremendous buying opportunity".

Sunday's New York Times writes on cash parking spaces, "Shedding Stock-Market Vertigo (but Still Making Some Money)". The article says cash rates have not fallen as much as they normally do after Fed cuts, and that money market rates remain attractive vs. lower longer-term CD rates. "Many funds have only dropped half of what they'd be expected to drop," said Peter Crane, president of Crane Data, which tracks money market investments, quotes the Times.

Yesterday, CNNMoney.com's Fortune posted the ridiculous speculation that "Risky money market fund bets may be illegal". The article offers absolutely no support that recent SIV purchases might have been in violation of money fund quality, diversity, and maturity regulations, a.k.a. Rule 2a-7 of the Investment Company Act of 1940. Money funds must hold securities with "minimal credit risks", but writer Peter Eavis doesnt' realize that the rules apply only when a fund purchases a security.

Federated Investors "Reports Strong Third Quarter 2007 Earnings; Money Market Assets Climb to Record $210 Billion" says the press release. Federated, which hosts an earnings conference call Friday at 9 a.m. EDT, grew money fund assets by $16.5 billion, or 9.0%, in Q3, and by $47.1 billion, or 29%, over the past year. "The long-term credit and risk management strength of Federated's money market franchise positioned our products well for the unsettled credit markets in the third quarter. As a result, we were able to substantially grow our money market mutual fund assets," said President & CEO Chris Donohue.

Associated Press writes "Money Market Funds Get Fresh Worries". The article includes comments from The Reserve's Bruce Bent on past bailouts. Bent says it is "unlikely the companies running money market funds would allow them to 'break the buck' ... even if the funds lost money on SIV-related investments".

"SIV Situation: Will Rescuers Arrive in Time?" asks WSJ. In another case of an overly bearish headline with a rational article, the Journal says, "Holders of SIV capital notes are bearing the brunt of the SIV fallout. Investors in capital notes typically supply an SIV with as much as 5% of its money. In return, these noteholders -- often European banks and insurers -- receive a share of the SIV's profits or losses." Note that money funds hold limited amounts of SIV CP and MTNs, and not the more at risk SIV capital notes.

Bloomberg writes "Fed Signals Support for Paulson Plan to Help Commercial Paper". The article says, "The agreement reached by Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. is well-enough designed that it may help credit markets, a Fed official, who declined to be identified, said late yesterday in Washington. The plan also may help investors establish prices for complex securities that funds purchased with the proceeds of commercial-paper sales, the official said."

CNNMoney.com Fortune writes on SIVs with "Even 'safe' funds play with fire". The website mentions several money funds holding tiny positions in structured investment vehicles. It quotes a Fidelity spokesperson, "We can state unequivocally that Fidelity's money market funds continue to provide safety and security for our clients cash investments. We continue to invest in money market securities of the highest quality, and our clients continue to have full access to their holdings to invest as they wish."

"SIV Shock, Inflation Make U.S. Treasuries Unbeatable" says Bloomberg.com. The article dicusses the renewed flight to quality following problems with a handful of mortgage-related structured investment vehicles, or SIVs, companies that issue commercial paper and medium term notes to fund investments in longer-term securities. Yields of 2-year Treasury notes are now 3.78% according to Bloomberg.

Reuters writes "SIV Fund Support Grows". saying, "PIMCO and Fidelity have joined the so-called super SIV fund set up by three big U.S. banks, boosting confidence in the plan, Bank of Italy Governor Mario Draghi said," after a G-7 meeting. However, today Bloomberg reports that PIMCO has declined to participate. Bloomberg also features, "Two-Year Treasuries Rise Most on Credit Since Sept. 11 Attacks". Today's Wall Street Journal also cites growing support for the M-LEC super-conduit, writing "Banks May Pony Up $60 Billion for SIVs".

Wachovia discloses size of money fund loss, saying "Growth was partially offset by a $40 million valuation loss related to the purchase of certain asset-backed commercial paper investments from Evergreen money market funds." Dow Jones says the "Move To Cash At BlackRock Bodes Well For Federated, Legg" writing about powered-by-money-fund-flow quarterly earnings. Also, WSJ writes "Citi's SIVs: Staving Off a Fire Sale" and "MetroPCS Sues Merrill Over Risky Investment" about a lawsuit over auction rate securities. NYTimes writes "Banks' Plan to Help May Itself Need Help". Bloomberg writes "Rhinebridge Commercial Paper SIV May Not Repay Debt". Finally, the Federal Reserve's Commercial Paper Outstandings show continued recovery.

Forbes.com writes "BlackRock Surges On Safety". The article says, "Laurence D. Fink, chief executive officer of BlackRock , said that the uncertainty in the credit markets 'caused investors to flock to safe havens,' which in turn caused a 'sharp influx in money market funds'." Crane Data shows BlackRock as the biggest money fund asset gainer in the quarter with a $45.4 billion increase.

"Banks' Safety Net for Lenders May Have Holes in It" writes The New York Times. The article paraphrases Federated's Debbie Cunningham, saying, that "most [SIVs] invested in much healthier bonds that have been tarnished in a rush to judgment. Some problems were brought on, she said, by SIV operators' not fully disclosing their holdings." The Times adds, "Ms. Cunningham said the group that created the fund, which is known as the Master Liquidity Enhancement Conduit, is hoping that the fund's mere creation will provide some comfort to investors."

The Wall Street Journal continues reporting on M-LEC "superconduit" with "Behind Banks' Credit Rescue Fund", saying that Wachovia has pledged to join the effort to back a fund to buy SIV assets, but that others are slow to jump aboard. Money funds are mentioned for the first time, "Fidelity Investments and Federated Investors Inc., for example, voiced support for the effort. Both hold debt issued by an arm of Gordian Knot, one of the SIVs that could benefit from the fund."

"Despite rate cut, money funds continue to attract assets" in Investment News. IN discusses the continued growth in money fund assets and the lack of interest in short-term bond funds, which normally would be benefitting from a falling rate scenario. The article quotes Peter Crane, "Usually, money fund yields drop when the fed funds rate is cut, but that hasn't happened, Mr. Crane said. He noted that they have come down slightly but not enough to reflect the half-point cut."

"Treasury funds are riskier than you thought" writes Financial Week, joining the debate over whether prime money funds are safer than Treasury money funds. "Surprisingly, new research indicates that these "prime" funds may be safer than Treasury funds as well, thanks to their diversification. John Bilson, a finance professor at the Illinois Institute of Technology, recently published research in support of this contrarian idea, in an attempt to influence a Securities and Exchange Commission debate that currently favors Treasury money funds," says FW.

Standard and Poor's rates new SSgA Institutional Money Funds AAA. S&P gave State Street Institutional U.S. Government Money Market Fund and State Street Institutional Treasury Plus Money Market Fund its highest AAAm rating, and gave State Street Institutional Treasury Money Market Fund a `AAAm-G rating. See our story on SSgA's recent launch of new "premium" share classes.

SIV "Superconduit" Stories Today's Wall Street Journal Writes, "Big Banks Push $100 Billion Plan To Avert Crunch" discussing a 3-week old plan on how to support structured investment vehicles, or SIVs, by creating a "superconduit" backed by major banks. "The tentative name for the fund is Master-Liquidity Enhancement Conduit, or M-LEC," says the Journal. First to report on the news was Bloomberg, writing, "U.S. Treasury Talks With Banks on Commercial Paper", saying major banks, including Citi, JPMorgan, Bank of American and HSBC, met with the Treasury to discuss how to "jump-start the asset-backed commercial paper market". Also, Sunday's NY Times writes "Banks May Pool Billions to Stop Securities Sell-off". An announcement is expected Monday.

Israel business publication Globes online says the Israeli "Finance Minister approves mutual fund reform" and money market funds. The article says, "The first kind of new mutual fund will be money market funds, which will basically function as an alternative to bank deposits. Money market mutual funds will only invest in short-term Israeli or foreign bonds with a duration of up to one year. The minimum rating for these securities will be AA."

ICI Reports Record Money Fund Assets. Yet again, money funds broke new ground, rising $16.7 billion to a record $2.909 trillion in the week ended Oct. 10. Money fund assets have grown by $527 billion, or 22%, year-to-date, and by $645 billion, or 28.5$%, over 52 weeks. Money funds are seeing huge inflows from banks, enhanced cash, structured vehicles, and other conservative alternatives that are either paying non-competitive yields or experiencing unexpected price deterioration.

Alpine Municipal Money Market Fund broke above the $1 billion level in assets says a press release from the company. "High-taxed individuals and corporations have historically benefited from the lower risk and higher after-tax income of a strong municipal money market fund," says portfolio manager Steve Shachat. Alpine is the top-yielding fund tax-exempt fund with a yield of 3.85% and $1.153 billion in assets as of 9/30. Visit http://www.alpinefunds.com for more details.

HSBC Direct Launches Sweepstakes for Savers. Former online savings rate leader HSBC Direct is hosting a "$20K Dash Savers Sweepstakes" to introduce a new line of HSBC Direct high-yield online CDs. Entries for the $20K giveaway are earned for each $250 increase in deposits. The new 6- and 9-month CDs have yields "up to 4.85%".

The upcoming AFP (Treasury Management) Conference features a session entitled, "Why Pay for Liquidity You Don't Need?" by Lisa Joublanc of Global Payments and Tony Russo of Jefferies & Company will discuss "domestic short term securities, enhanced cash solutions, and trading strategies in various interest rate environments". The conference, October 21-24 in Boston, is relatively light on cash investing content, but plenty of money fund vendors will be there.

Federated Investors announces conference call dates for its 3rd Quarter Earnings. Given that money market funds saw their best month ever in August and likely best quarter for asset inflows ever, it should be a very good quarter.

Money fund portal technology company CacheMatrix just released a white paper on hedge funds and money markets entitled "Cash Management: Every Basis Point Counts for Hedge Funds". Founder George Hagerman writes, "While myths persist that hedge funds only use leverage and never hold cash, the overwhelming evidence is to the contrary: `the majority of hedge funds do have cash positions, and many employ a variety of cash management strategies to maximize interest income on cash balances."

"Bond Tumult Is Jostling Auction-Rate Securities" Says Wall Street Journal. "Corporations and other investors buy auction-rate securities as a way to earn a bit more money on their spare cash than a traditional money-market account would offer." Alas, "parts of the $300 billion market froze up" in August and "demand vanished for issues backed by risky assets" says the piece.

"U.S. Commercial Paper Grows; First Gain Since August" Says Bloomberg. Commercial paper outstanding rose for the first time in eight weeks, according to this week's Federal Reserve data. The article says, "U.S. commercial paper debt maturing in 270 days or less rose $4.5 billion in the period ended yesterday to a seasonally adjusted $1.86 trillion, ending the biggest decline in at least seven years.... Asset-backed commercial paper fell $6.1 billion."

The October issue of Money Magazine (article not available online yet) writes about "The Money Fund Scare", saying, "Let's set the record straight. Money funds, though not FDIC-insured, invest only in high-quality debt with less than a year to maturity.... [S]trict Securities and Exchange Commission rules limit a fund's holdings below the very top credit tier to just 5%, a percentage that most money funds rarely come close to, according to Peter Crane of Crane Data LLC".

"Fed's Cut in Interest Rate Could Be Pitfall for Cash Investors". This article, which appears in the TheLedger.com and Orange County Register, says "savers might need to rethink their strategies". It says, "Yields will come down on cash investments," quoting Greg McBride of BankRate.com. But the piece was likely written prior to news that yields have stopped falling and prior to expectations that more Fed cuts may not be necessary.

WSJ's "UBS to Report Big Loss Tied To Credit Woes" reveals another casualty of investing in longer-than-money market asset backed bonds and ABS. See the September issue of Money Fund Intelligence for our article "Collateral Damage: Will Bankerage Get Blasted?"