Daily Links Archives: April, 2010

The latest monthly "Trends in Mutual Fund Investing: March 2010," says, "The combined assets of the nation's mutual funds increased by $237.1 billion, or 2.1 percent, to $11.209 trillion in March, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI." It shows money fund assets decreasing by $155.2 billion in March and $332.2 billion, or 10%, YTD, to $2.984 trillion. ICI says, "Money market funds had an outflow of $155.70 billion in March, compared with an outflow of $77.26 billion in February. Funds offered primarily to institutions had an outflow of $125.62 billion. Funds offered primarily to individuals had an outflow of $30.08 billion." `ICI's weekly "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $5.85 billion to $2.872 trillion for the week ended Wednesday, April 28.... Assets of retail money market funds decreased by $10.59 billion to $982.83 billion.... Assets of institutional money market funds increased by $4.74 billion to $1.889 trillion."

The Federal Reserve released its latest statement Wednesday, saying, "Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve.... With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis.... Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly."

The spring Treasury conference season kicks off next Wednesday, May 5, at the Boston Marriott Copley Place with the Treasury Management of New England's (TMANE) annual show. Crane Data's Peter Crane and Dwight Asset Management's John Donohue will talk the first afternoon on "Rising Rates and New Regulations: Monitoring Your Money Funds & Positioning Your Money Market Holdings". The two will discuss the current short-term investing environment and will review the pros and cons of cash during periods of interest rate hikes and will also review recent changes in money markets and money fund regulations. Other topics of interest include: Cash Investment Management "101", an "introduction to the investment of cash assets for corporate investors," led by Morgan Stanley Private Wealth Management's Tom Kazazes; Fundamental Analysis of Prime Institutional Money Market Funds, presented by Capital Advisors Lance Pan; and, Reform, Ratings and Returns: The New Era of Money Market Funds by Fidelity Investments' Michael Morin. Note too the latest agenda changes for our own Crane's Money Fund Symposium, our July 26-28 conference at The InterContinental Boston.

A BusinessWire press release entitled, "Fitch Withdraws 'AAAmmf' Ratings on BlackRock's Money Market Funds," says, "Fitch Ratings has today withdrawn the 'AAAmmf' ratings assigned to the following money market funds managed by BlackRock Institutional Management Corporation and BlackRock Advisors, LLC: BlackRock Liquidity Fund: MuniFund, BlackRock Liquidity Fund: Treasury Trust Fund, BlackRock Liquidity Fund: Federal Trust Fund, FFI Treasury Fund (BlackRock), FFI Government Fund (BlackRock), FFI Institutional Fund (BlackRock), FFI Select Institutional Fund (BlackRock), and Master Institutional Portfolio (BlackRock)." The release adds, "At the time of the rating withdrawals, the funds' portfolio parameters were viewed as consistent with Fitch's 'AAAmmf' rating criteria. The withdrawal of the ratings does not reflect any adverse financial factors or the emergence of any negative credit issues. Fitch will no longer provide rating and analytical coverage of these money market funds." These funds continue to be triple-A rated by Standard & Poor's and Moody's Investors Service. The move appears to be a cost-savings and consolidation measure.

ICI's weekly "Money Market Mutual Fund Assets says, "Total money market mutual fund assets decreased by $35.39 billion to $2.878 trillion for the week ended Wednesday, April 21, the Investment Company Institute reported today. Taxable government funds decreased by $11.06 billion, taxable non-government funds decreased by $19.38 billion, and tax-exempt funds decreased by $4.95 billion." Retail assets broke below $1 trillion as tax-related and zero-interest rate-related outflows continued. The report continues, "Assets of retail money market funds decreased by $8.63 billion to $993.33 billion. Taxable government money market fund assets in the retail category decreased by $920 million to $154.27 billion, taxable non-government money market fund assets decreased by $5.08 billion to $622.24 billion, and tax-exempt fund assets decreased by $2.63 billion to $216.81 billion. Assets of institutional money market funds decreased by $26.76 billion to $1.885 trillion. Among institutional funds, taxable government money market fund assets decreased by $10.15 billion to $686.32 billion, taxable non-government money market fund assets decreased by $14.29 billion to $1.056 trillion, and tax-exempt fund assets decreased by $2.32 billion to $142.30 billion."

Bloomberg writes "Lampert's Hedge Fund Buys Junk-Rated Paper From Lampert's Sears", which says, "Sears Holdings Corp. is bypassing barriers to junk-rated companies in the $1.1 trillion commercial-paper market by selling the debt to its largest stockholders, including Chairman Edward Lampert. Lampert and his hedge fund, ESL Investments Inc., bought $150 million of 30-day commercial paper from a Sears subsidiary in March, the Hoffman Estates, Illinois-based retailer disclosed in its annual proxy filed April 6.... Companies such as Sears Roebuck Acceptance, whose debt rating from Standard & Poor's is four notches below the minimum level for money-market holdings, are often shut out of the commercial-paper market. According to U.S. Federal Reserve figures released April 8, there was about $883 billion of top-rated commercial paper outstanding and $39 billion of debt with the second-highest grade. The remaining $168 billion of commercial paper outstanding consists of securities 'ineligible' for purchase by money-market funds, according to the Fed." Bloomberg quotes Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts, money-market research firm, "Junk commercial paper is an oxymoron." The piece adds, "In response to the September 2008 collapse of the $62.5 billion Reserve Primary Fund, the SEC tightened restrictions on money-market investments in January, requiring funds to hold at least 97 percent of their assets in the highest-rated paper."

A press release posted late yesterday is titled "Fitch Downgrades Federated Municipal Obligations Fund to 'Ammf' on Increased 'F2' Exposure". It says, "Fitch Ratings has downgraded Federated Municipal Obligations Fund to 'Ammf' from 'AAmmf'. The downgrade reflects the fund's increased exposure to assets rated 'F2' (or equivalent), as well as the expectation that 'F2' (or equivalent) rated assets will remain at or near 5% on a going forward basis. Federated Municipal Obligations Fund is a tax exempt money market fund managed by Federated Investment Management that invests primarily in short-term, high-quality, tax-exempt securities. Approximately 80% of the fund's total assets are invested in variable-rate demand notes (VRDNs).... The increase in 'F2' (or equivalent) assets follows the downgrade of SunTrust Bank (SunTrust) to 'BBB+/F2' from 'A-/F1' on March 26, 2010."

SmartMoney writes "Money-Market Funds: Down to Zero". It says, "Another chapter in the financial crisis is winding down: Not only has the government stopped backing money market funds -- a vote of confidence that the industry can stand on its own -- investors in the now-closed Primary Reserve Fund are expected to be made almost whole. But that doesn't mean that money-market-fund investors don't have anything to worry about. For investors who haven't glanced at their account statements lately, the latest problem is near-zero interest rates. While the Primary Fund announced this week that it has sold the remainder of its Lehman Brothers debt (and will come close to paying investors all of their money back), money-market-fund yields are barely a ripple in the income stream. With rates so low, several fund companies have been subsidizing fees for investors." It adds, "The safety and liquidity of money-market funds could improve this year. In January, the Securities and Exchange Commission amended regulations governing money-market funds, and those changes will start taking effect in May.... According to an SEC statement, that means money-market funds will have to meet both daily liquidity requirements of 10% of assets in cash and cash equivalents, and weekly liquidity requirements of 30%. The good news is, these changes could help quell the fear of a repeat "breaking the buck" scenario, when a money-market fund trades below a dollar, says Peter Crane, president of Crane Data, which tracks money-market funds. On the other hand, they could also mean that yields will drop a bit as a result."

A press release entitled, "Schwab Reports First Quarter Results" quotes CFO Joe Martinetto, "Short-term rates finally stopped declining in late January/early February and subsequently began to rise a bit, which helped our first quarter net interest margin reach 183 basis points, up slightly from the prior quarter.... The rate environment improvement occurred too late, however, to prevent money market fund fee waivers from reaching $125 million in the first quarter." See also, a Reuters story on ABCNews.com entitled, "Pimco's McCulley Calls for Money Market Fund Reform", which says, "A top executive at the world's largest bond fund said on Thursday that money market mutual funds should not exist in their current form. Pacific Investment Management Co's (PIMCO) Paul McCulley told a Levy Economics Institute conference that money market funds contributed directly to the instability of the financial system by acting as foundation for the shadow banking system. McCulley's remarks followed a similar call by former Federal Reserve Chairman Paul Volcker at the same conference."

A press release entitled, "Local Authorities in the UK Use SunGard's STN Money Market Funds Portal to Manage Cash", says, "Several local authorities in the UK have adopted the SunGard Transaction Network's (STN) Money Market Funds portal to help them manage their short-term investment requirements and reduce counterparty risk. STN's Money Market portal is a global, multi-currency trading and connectivity solution for institutional money market investors, such as local governments, corporate treasurers and hedge funds. Among the UK local authorities using STN are London Borough of Bromley and Arun District Council." The release quotes Martin Reeves, group accountant for London Borough of Bromley, "While the Council has been investing in money market funds for a number of years, using STN has helped us to open additional money market funds quickly and efficiently. The STN portal offers greater transparency by giving us the ability to view the countries and counterparties in which the money market funds are investing, and take our own view on acceptable levels of risk. It provides easy access to a fund's prospectus and application form, the ability to compare interest rates paid by different funds, and confirmation e-mails as soon as a deal is placed." It also quotes Sian Southerton, accountant and treasury & investment officer for Arun District Council, "Since we began using STN, we more than doubled our number of money market funds. STN provides a single platform for viewing all of our money market fund trades. STN is straight-forward to use, providing views on daily yields and balances on all funds and readily accessible fact sheets on the funds."

A press entitled, "FDIC Board of Directors Approves Extension of Transaction Account Guarantee Program," says, "The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved an interim rule to extend the Transaction Account Guarantee (TAG) program to December 31, 2010. Last year the program was extended to June 30, 2010. Under the TAG program, customers of participating insured depository institutions are provided full coverage on transaction accounts." The release adds, "Nearly 6,400 insured depository institutions, about 80 percent of the industry, continue to participate in the TAG program and benefit from the guarantee provided by the FDIC. These institutions held an estimated $266 billion of deposits above the insured deposit limit and guaranteed by the FDIC through the TAG program as of the end of 2009. Under the interim rule, participating institutions can opt out effective July 1, 2010. Last year the Board adjusted the assessment rate to make it risk based and approved an increase in the rates; the current rates will remain unchanged under the interim rule. The Board also voted to require TAG assessment reporting be based on average daily account balances and to reduce the maximum rate that can be paid for qualifying NOW accounts to 0.25 percent from 0.50 percent."

Wells Fargo's latest "Overview, Strategy, and Outlook" publication, released late yesterday, says, "March saw higher rates in all sectors of the money markets. An increase in the supply of all types of U.S. Treasury securities drove dealers to finance them in the repo markets. This rise in supply pushed overnight repo rates up from 0.10% in February to 0.20% in the latter part of March. As overnight rates became more attractive to money market participants, the issuers of other types of instruments raised their rates in order to attract investors. This move pushed rates higher across the curve and in all sectors." A table in the piece shows rates for Overnight Repurchase Agreements moving from 0.10 to 0.20% in March; rates for 1-Month Agency Discount Notes moving from 0.08 to 0.11%; rates for 1-Month Commercial Paper moving from 0.18 to 0.22%; rates for 3-Month Treasury Bills moving from 0.12 to 0.15%; and rates for 3-Month LIBOR moving from 0.25 to 0.29%. Wells' Dave Sylvester writes, "[I]f it chooses, the Fed could raise its target for Fed funds and still argue that rates are at historical lows. The question being debated is whether economic conditions and the inflationary outlook will permit such a move. Either way, it appears that money market yields, thanks to a number of basic supply and demand imbalances, have picked themselves up off the bottom, at least for now."

DB Advisors webcast "Short-term portfolio strategies for uncertain times" Here's a look at some upcoming events. DB Advisors will host a webcast "Short-term portfolio strategies for uncertain times" on Thursday, April 15, at 1pm. The quarterly webcast will feature Head PM Joe Benevento and Institutional Liquidity Management Product Specialist Nagesh Gopal. Also, next week, Pensions & Investments will host "Stable Value: Low risk, high return funds in tune with the times" on Wednesday, April 21 at 2pm. It says, "As many Americans delay retirement due to falling asset prices and the impact of the global economic crisis, stable value funds represent an oasis in the world of investment. This web seminar brings together key players from the stable value community, who will share insights and new opportunities for plan sponsors in this attractive and fast-changing industry." Finally, Federated Investors will report earnings on Thursday, April 22 after the market closes, and BlackRock will release earnings on Monday, April 26 before the market opens.

Reuters writes "NY Fed to entice market funds into reverse repos". The article says, "The Federal Reserve Bank of New York is planning to include a feature in one of its liquidity-draining schemes that would allow money-market funds to participate without running afoul of new liquidity rules, a fund manager told Reuters on Wednesday. The New York Fed, which is planning to try to drain cash from the financial markets through reverse repurchase agreements with a variety of counterparties, will include a seven-day put agreement alongside its contracts with money-market funds, said Deborah Cunningham, executive vice president and chief investment officer at Federated Investors in Pittsburgh.... The seven-day put would allow funds to liquidate their repo holdings and retrieve cash quickly in the event of an emergency. It would also let money market funds classify their repo agreements with the Fed as short-term cash investments under a new set of rules the Securities and Exchange Commission implemented earlier this year."

MarketWatch's Chuck Jaffe writes "What to do when the Fed puts up a fight". It says, "[W]ith many investors now convinced that a rate hike is in the offing, it makes sense to consider what changes, if any, you should make to your portfolio. Truth is, one rate hike -- if and when it happens -- is a headline event, not something that demands immediate reaction. Only after a second move, or maybe a third, will rising rates warrant a response from the average investor.... Indeed, for many investors, the impact of a rate increase will be negligible and temporary. Investors in money-market funds, for example, can expect that fund management will keep the bulk of a rate hike for itself, recapturing fee waivers that have allowed it to deliver positive returns while rates were practically zero." MarketWatch continues, "Peter Crane of Crane Data, which publishes Money Fund Intelligence, said that money fund costs have dropped to 0.25% from roughly 0.4% thanks to waivers that funds put in place in order to keep returns positive. If there is a rate hike, he expects the funds to grab back most of their pay before passing it along to investors." Crane says, "Of a quarter-point hike, investors will probably split that with the fund company. It will take two hikes to remove the fee waivers entirely, assuming quarter-point increases. The Fed has never made just one increase -- they have always taken one step and then another and another -- but investors won't really start to feel a difference in their money-fund returns until you get to the second increase, or maybe the third."

Federated Investors' most recent "Month in Cash" is entitled "The market is starting to do what the Fed has yet to do -- nudge up rates". It says, "Market interest rates moved higher across the cash-yield curve in March as the relative absence of unsettling economic news reinforced growing investor expectations that a Fed rate hike will occur late summer or early fall. Overnight repo rates, which had traded close to 10 basis points earlier in the year, briefly climbed into the low 20s before settling back to the high teens. Farther out the cash curve, the one-month London interbank offered rate (Libor) rose two basis points to 0.25%, three-month Libor climbed four basis points to 0.29%, six-month Libor increased five basis points to 0.44%, and 12-month Libor rose seven basis points to 0.91%. In perhaps the clearest reflection of market expectations, the yield on the U.S. Treasury's two-year note -- the security most sensitive to consensus shifts in the outlook for monetary policy -- climbed 18 basis points to finish the month at 1.04%. That was the highest close on the two-year note since early January, when year-end technical conditions temporarily distorted its yield." See also, the New York Federal Reserve's "Federal Funds Data" page for data on recent Fed funds effective rates.

Monday's Wall Street Journal writes "Money Funds Face New Rules". It says, "New rules designed to bolster the safety of money-market mutual funds will soon put pressure on already low yields -- and could force more firms to exit the business. Starting in May, the Securities and Exchange Commission will require money funds to hold more liquid and high-quality assets. While the changes are designed to help funds better weather trouble, they come at a tough time for the industry." The Journal cites Pete Crane, "The safeguards could reduce yields by about 0.1 to 0.2 percentage point in a more normal interest-rate environment.... But if the Federal Reserve starts to raise short-term rates, as some expect it might do later this year, the higher rates should more than outweigh the additional costs, he says." It adds, "It probably will take two quarter-point rate increases before money-fund advisers reinstate all of the fees they have waived, Mr. Crane says." In other news, see Pensions & Investments' "Henderson leads pack to acquire RidgeWorth from SunTrust", which says, "Henderson Group PLC has emerged as the leading bidder for the bulk of SunTrust Bank's money management arm, Atlanta-based RidgeWorth Capital Management Inc., according to bankers and industry executives, who declined to be named.... Sources say Henderson Group is interested in the group's roughly $36 billion of non-money market assets."

The Wall Street Journal writes "Money-Fund Assets Fall Under $3 Trillion, ICI Says. It says, "Cash has been leaving money-market funds as investors seek higher returns than the funds can offer; their yields have been close to zero for months. In addition, seasonal factors are likely at play." The WSJ quotes Peter Crane, president of Crane Data LLC, "Last year, it was retail investors; this year, it's institutional investors that are moving out of money-market funds. In general, the zero yields are driving investors to everywhere but cash." The Journal adds, "Institutional investors can now get relatively competitive yields in Treasurys, government securities and repos, which they haven't had in years, he said. Money is likely moving from money-market funds into separate accounts and bond funds, and even corporations are likely reallocating cash, Mr. Crane said." Finally, it says, "Meanwhile, the release of the long-awaited President's Working Group on Financial Markets report, which will make recommendations to further reduce money funds susceptibility to a run, is imminent, Mr. Crane said."

Bloomberg writes "BlackRock's Fink Snubs 'Socialized' Money-Fund Industry Plan". The article says, "Laurence Fink, chief executive officer of BlackRock Inc., stands alone among the biggest U.S. money-market fund providers in opposing a proposed safety net for the industry that manages $3 trillion for investors. Fink, who has said companies should set aside their own capital cushions, won't back a plan to spread risk among money-market mutual fund firms.... JPMorgan Chase & Co., Federated Investors Inc., Vanguard Group Inc., Goldman Sachs Group Inc. and four other firms have endorsed the plan, which was proposed by the industry's trade group last month." Bloomberg quotes Peter Crane, "`Larry Fink has invested a lot of time and energy on an alternative idea, talking about capital reserves." Bloomberg adds, "BlackRock's dissent may make it harder for money funds to head off regulatory changes that could include an end to the stable $1 net asset value that made the funds a popular alternative to bank accounts.... The industry has planned since last year for an emergency-liquidity facility that would protect money-market mutual funds that invest in corporate debt, stepping in to buy securities at face value in the event of a financial crisis."