Daily Links Archives: June, 2010

The Investment Company Institute's monthly "Trends in Mutual Fund Investing: May 2010" shows that money fund assets declined by $21.4 billion, or 0.7% in May, to $2.837 billion. Year-to-date through May 31, money fund assets have declined by $479.7 billion, or 14.5%. Money fund assets represented 26.5% of the $10.7 trillion in mutual funds overall as of the end of May. ICI writes, "Money market funds had an outflow of $21.61 billion in May, compared with an outflow of $126.54 billion in April. Funds offered primarily to institutions had an outflow of $37.50 billion. Funds offered primarily to individuals had an inflow of $15.89 billion." Liquid assets of stock mutual funds, a proxy for how much "cash" stock investors hold, inched up to 3.6% from a record low 3.5% in April. (Look for an update on ICI's monthly "Portfolio Holdings of Taxable Money Market Funds" tomorrow.) In other news, registrations for Crane's Money Fund Symposium, our conference July 26-28 at The InterContinental Boston, have broken over the 200 level. There are only a handful of discounted hotel rooms remaining. Register soon!

Investment News writes "Money funds may prove a tough sell for clients of SSgA stable-value funds", which says, "State Street Global Advisors' decision to urge its defined-contribution clients to use money market instruments as their 'safe' option now that the firm has closed its stable-value business could be a hard sell with prevailing money market returns near zero. Competitors predict a flurry of requests for proposals from SSgA's clients, which had more than $8 billion in stable value with the firm as of March 31.... SSgA is recommending that clients 'immunize their accounts immediately and convert to money market instruments in order to preserve current favorable market value,' Ms. Roberts wrote, adding that they also can choose to transfer assets to another stable-value manager.... In sister publication Pensions & Investments' latest annual money manager survey, SSgA was the 13th-largest stable-value manager, with $9.9 billion in assets." The piece adds, "The broader story is a Darwinian one: Stable-value managers that were investing in riskier assets in search of higher returns three or four years ago are getting shorter shrift now from wrap providers, consultants and clients than those managers focused more on capital preservation, he said."

Katten Muchin Rosenman LLP via Lexology writes "CFTC provides clarification on Regulation 1.25 with respect to suspension of money-market mutual fund redemptions". It cites a recent CFTC letter on Guidance Regarding Commission Regulation 1.25 that says, "This letter provides guidance regarding new Securities and Exchange Commission (SEC) rule 22e-3 (Rule 22e-3) and its impact on the investment of customer funds under Commission Regulation 1.25 (Reg. 1.25). Rule 22e-3, adopted by the SEC February 23, 2010 and effective May 5, 2010, allows a money market mutual fund (MMMF or fund) to suspend redemptions and postpone payment of redemption proceeds to facilitate an orderly liquidation of the fund. Below, the Division provides an overview of the Reg. 1.25 treatment of MMMFs, outlines Rule 22e-3, and discusses the interplay of Reg. 1.25 and Rule 22e-3. The Division concludes that Rule 22e-3 falls within the parameters of Reg. 1.25(c)(5)(ii)(D) and therefore the status of an MMMF that otherwise qualifies as a Reg. 1.25 permitted investment will not change as a result of the new rule." It adds, "Reg. 1.25(a) provides a list of permitted investments for customer segregated funds, among them, interests in MMMFs. Reg. 1.25(c) sets forth certain requirements for MMMFs and, in particular, requires that '[a] fund shall be legally obligated to redeem an interest and to make payment in satisfaction thereof by the business day following a redemption request.' This 'next-day redemption' requirement is a significant feature of Reg. 1.25 and is meant to ensure adequate liquidity.... Reg. 1.25(c)(5)(ii)(D) provides, as an exception to the next-day redemption requirement, '[e]mergency conditions set forth in section 22(e)....' While the circumstances addressed by Rule 22e-3 are not specifically identified in Section 22(e)(i)-(iii), the Division considers Rule 22e-3 to be a 'rule or regulation' as contemplated by the final paragraph of Section 22(e)."

JPMorgan Current Yield Money Market Fund - Capital Shares recently filed for launch. The new $50 million minimum fund will charge 0.18%. The fund's new prospectus says of "The Fund's Main Investment Strategy," "Under normal market conditions, the Fund invests in high quality, short-term money market instruments that are issued and payable in U.S. dollars. The Fund principally invests in: repurchase agreements, debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits and other short-term securities, and securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. Under normal market conditions, the Fund will maintain a maximum dollar-weighted average maturity of ten days or less." It also says, "The Fund is a money market fund managed in the following manner: The Fund seeks to maintain a net asset value of $1.00 per share. The Fund invests only in U.S. dollar-denominated securities. The Fund will only buy securities that present minimal credit risk. The Fund may invest more than 25% of its total assets in obligations issued by U.S. banks. The Fund's adviser seeks to develop an appropriate portfolio by considering the differences in yields among securities of different maturities, market sectors and issuers."

ICI's weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $11.69 billion to $2.817 trillion for the week ended Wednesday, June 23.... Taxable government funds increased by $1.88 billion, taxable non-government funds increased by $11.69 billion, and tax-exempt funds decreased by $1.89 billion.... Assets of retail money market funds decreased by $6.61 billion to $986.97 billion.... Assets of institutional money market funds increased by $18.29 billion to $1.831 trillion. Among institutional funds, taxable government money market fund assets increased by $3.41 billion to $689.92 billion, taxable non-government money market fund assets increased by $14.80 billion to $1.003 trillion, and tax-exempt fund assets increased by $80 million to $138.36 billion." In other news, see the press release, "Webinar Helps Administrators Prepare for Money Market Fund Reform Rule Reporting as Fourth Quarter Reporting Deadlines Quickly Approach ", which says, "Confluence, a global leader in investment management data automation, today announced a webinar to help fund administrators take the right steps to ensure compliance with the SEC-mandated Money Market Fund Reform Rule (IC-29132) as critical 2010 fourth quarter reporting deadlines approach.... The complimentary webinar entitled 'Managing the Countdown to Money Market Reform Reporting: Chaos or Control?' will take place Wednesday, June 30 from 11:00-11:45." It will feature Chuck Daly, Vice President, Assistant General Counsel of Fund Administration at JP Morgan, and Sara Reece, Assistant Financial Controller at The Principal Financial Group, and Scott Powell, Senior Market Analyst, Confluence."

Robert Pozen writes "$100,000 Is Plenty for Deposit Insurance" in an Op-Ed piece in yesterday's Wall Street Journal. The article, subtitled, "Raising the cap will enhance the ability of weak banks to expand their deposit base and cause trouble for the FDIC," says, "It looks as if Congress is about to permanently increase FDIC deposit insurance to $250,000 from $100,000 per bank account. What's more, it plans to make this increase retroactive to Jan. 1, 2008, in order to protect certain depositors at Indy Mac and other banks that became insolvent before the financial crisis reached its height. This move will substantially raise the cost of resolving troubled banks, and isn't necessary to protect small depositors. The old limit of $100,000 per bank account was interpreted so flexibly by the FDIC that a family of four could easily obtain federal insurance for $600,000 by opening multiple accounts under different names.... Less than 2% of all bank accounts were above the old $100,000 limit. These uninsured accounts were not held by small depositors, but by high net worth individuals and local business people, many of whom could not easily create enough different accounts in one bank to cover their large deposits." Pozen adds, "Historically, the weakest banks have attracted a flood of deposits by advertising sky-high interest rates. These bankers typically believe that they can grow their way out of problems by investing in new loans and high-yield bonds. This practice was one of the key factors that caused the savings and loan debacle of the 1980s. By raising the maximum insurable limit to $250,000 per account, we will enhance the ability of weak banks to expand their deposit base very quickly. The result is predictable: much higher costs for the FDIC when it takes over insolvent banks."

The Bond Buyer writes "Tax-Free Money Funds See a Boost". It says, "The sovereign debt crisis in Europe is coupling with the general malaise in financial markets to make life easier for tax-free money market funds by boosting key short-term interest rates. The higher rates have given taxable money funds a more attractive variety of paper to buy to deliver better yields to clients. Why should better yields on taxable money funds make any difference for tax-free money funds? For much of the past year, rates on everything from commercial paper to Treasury bills were so puny that taxable funds were looking for unorthodox places to pick up extra yield. That lured many of them to tax-exempt variable-rate demand notes and some of the other products that are traditionally the exclusive domain of tax-free funds. The new competition from taxable funds helped drag down short-term tax-exempt rates and create a drastic scarcity of paper eligible for purchase by tax-free money funds." The piece adds, "European banks' funding troubles helped taxable money funds both indirectly -- by punching Libor higher -- and directly. According to a Crane Data estimate, money funds hold about $400 billion in commercial paper and certificates of deposit from European institution, many of which now carry higher yields. In its monthly commentary, Crane Data said the slight improvement in yields has apparently allowed some fund families to reduce their fee waivers."

Though of course you didn't hear it on any news reports, the Federal Reserve's Commercial Paper Outstanding page showed CP issuance rebounded last week, rising over $18 billion from $1.065 trillion to $1.083 trillion. Foreign CP and Asset-backed CP increased also. The Fed's data show that foreign CP accounts for $34.0 billion of $139.9 billion in nonfinancial CP and $166.8 billion of $515.8 billion in Financial CP. ABCP accounts for $427.4 billion of the total CP outstandings. The Fed's weekly data also show that Tier 1 CP totals $870.3 billion while Tier 2 CP totals a mere $40.0 billion. The Federal Reserve also shows CP Rates. See also, "A nation of risk-takers reverses course, hoards cash"," which says, "Has the modern world ever been willing to earn so little on so much? The amount Americans have in basic savings accounts at banks and thrifts rose to a record $5.1 trillion at the end of May, a jump of $215 billion just since the start of the year. Nobody is parking cash at a bank for the yield. These accounts -- passbook-type vehicles and money market deposit accounts -- are mostly earning less than 1 percent annual interest.... But even as bond portfolios hold a record $2.4 trillion, individuals and institutions still sit with $2.8 trillion in money market mutual funds that pay next to nothing."

SmartMoney writes "How to Protect Your Cash Now". It says, "Savers with a long view can breathe a sigh of relief. As part of the process of reconciling House and Senate versions of financial reform legislation, lawmakers have agreed to permanently raise the limit on FDIC-insured deposits to $250,000. This agreement doesn't immediately change anything for investors, because the limit had been temporarily raised during the financial crisis. It does remove some uncertainty about what would have happened in 2013, when the limit had been scheduled to revert back to $100,000." In other news, see Asset-Backed Alert "Finacorp Calls It Quits After Brief MBS Stint", which says, "Broker-dealer Finacorp Securities, which made a big push into mortgage-backed securities amid the credit crisis, closed its doors this week. It's unclear why the Irvine, Calif., firm suddenly shut down after 16 years as a fixed-income broker. Some market players speculated Finacorp was unable to raise enough capital to establish a viable inventory of mortgage bonds -- the same problem that plagued now-defunct Utendahl Capital." Finacorp also ran online money market fund portal TradeFunds.

The U.K.'s LocalGov.co.uk features "'Safe haven' fund plan to protect council cash", which says, "Hard up councils could be thrown a financial lifeline by the Local Government Association before next week's emergency Budget, with Smith Square poised to approve the establishment of a giant investment fund for public bodies. The new money market fund could become a safe haven for a large chunk of councils' estimated L30bn cash deposits, and may quell town hall fears over lingering investment risks -- such as poor treasury management advice -- since the Icelandic banking collapses of 2008. See also, "BP's short-term funding will be scarce," which says, "Oil company BP is now in danger of losing access to the commercial paper market, with one rating agency downgrading its short-term rating and another threatening to do so. Were a second major agency to follow Fitch's steep ratings cut of BP on Tuesday, the company's ability to fund itself through the commercial paper market would be curtailed because of ratings rules for U.S. money market funds investing in that debt." Finally, see BankRate.com's "CD or money market? Depends on rate direction".

Crane's Money Fund Symposium, which will be held July 26-28, at The InterContinental Boston, has just recently added two more sponsors to its roster and two more speakers to its packed, 2 1/2-day agenda. Dreyfus and Credit Suisse have joined twenty other sponsors and exhibitors, including: Platinum level backers Bank of America Merrill Lynch and JPMorgan Securities, Gold level supporters Barclays Capital, Federated Investors, Fidelity Investments, and Wells Fargo Advantage Funds; and Silver level patron Western Asset (and now Dreyfus). The agenda (e-mail Kaio for the latest PDF brochure) now includes a session on "Europe & Stresses in the Money Markets," and we've added U.S. Securities & Exchange Commission Senior Special Counsel Sarah ten Siethoff to the final Wednesday session, "Critical Questions on the New Rule 2a-7." Please note that space is running out for the conference, and to receive the negotiated hotel rate of $235 plus tax you must register your hotel reservation through the conference website by June 25th. (Visit https://www.kinsleymeetings.com/Crane/register.asp to register; registration is $750.)

The Associated Press writes "Money fund investors: Prepare to stay underwhelmed" (this version is from The Oakland Press). It says, "Money-market mutual funds are safe places to stash cash and see it slowly but steadily grow. Except for one recent misstep, it's been that way for four decades. Now, the industry is playing by new rules to make amends for that one false move. It's all about restoring confidence in money funds' biggest selling points: the near-certainty that investors won't lose money, and that they can quickly pull cash out even when markets are in turmoil. The problem is, the tighter rules are shaving a bit off money funds' historically small returns. These days, that's not much." The piece quotes, "Peter Crane, of the fund researcher Crane Data, is a bit more optimistic. He notes that investor withdrawals from money funds eased in May as worries about Europe's debt troubles led them to seek protection. Investors are also nervous about the government's removal of measures to lift the U.S. economy out of recession, like the homebuyer tax credit.... That increase is lifting the returns that money funds earn, offsetting the hit to returns from the SEC rules and the more cautious investing style they require. The opposing forces are nearly canceling one another out." AP quotes Crane, "The impact is barely noticeable in this super-compressed yield environment.... We're years away from measuring returns in full percentage points ... and we're months away from returns of a quarter of a percentage point or more."

The Mutual Fund Directors Forum website posted a piece entitled, "JP Morgan: Results of Survey on Money Market Stress Testing", which says, "In May, JP Morgan surveyed a group of money market mutual funds with questions designed to help understand the frequency, scope and resources industry members anticipated utilizing as part of their stress testing program. JP Morgan has released a summary of the survey results giving an interesting look at how money funds are implementing the SEC's recent rules requiring stress testing." In other news, ICI released its latest "Money Market Mutual Fund Assets", which says, "Total money market mutual fund assets increased by $740 million to $2.841 trillion for the week ended Wednesday, June 9, the Investment Company Institute reported today. Taxable government funds increased by $20 million, taxable non-government funds increased by $2.75 billion, and tax-exempt funds decreased by $2.03 billion."

Brian Sack, Executive Vice President of the Federal Reserve Bank of New York gave a speech yesterday at the New York Association for Business Economics entitled, "Reflections on the TALF and the Federal Reserve's Role as Liquidity Provider." Sack said, "In my remarks today, I had intended to focus on the Federal Reserve's experience with the Term Asset-Backed Securities Loan Facility, or the TALF. This facility, which is scheduled to end later this month, was the last of the Federal Reserve's special liquidity programs.... However, the context for this talk has shifted importantly with recent developments in financial markets. In particular, investors' concerns about sovereign risk in some European countries, with the attendant pressures on financial firms with exposures in those areas, have put renewed emphasis on liquidity provision and led the Federal Reserve and five foreign central banks to reestablish dollar liquidity swap lines." He added, "Although the structure of the TALF differed considerably from the other liquidity programs initiated by the Federal Reserve, its basic role was similar in many ways to the traditional central bank function of providing liquidity to the financial system and encouraging the flow of credit. In this case, however, the program was geared toward providing support for market-based credit intermediation, as opposed to the traditional banking sector. More specifically, the TALF was designed to support the market for securitized credit."

Wells Fargo Advantage Fund's latest monthly "Overview, Strategy, and Outlook" says, "Following a relatively calm month-end in April, concerns over the possibility of Greece defaulting on its debts, questions about the adequacy of the European Union's rescue efforts, and nervousness over contagion in other countries and banks in the eurozone all came to a head during the first week of May. As a result, money market participants pulled in maturity limits on many European banks or ceased lending to them altogether, concentrating instead on investments in domestic banks and financial instruments, as well as U.S. government and agency obligations. This flight to quality resulted in a rally in U.S. government debt, a rally in the U.S. dollar versus the euro, and an increase in London Interbank Offered Rate (LIBOR) across the curve. The crescendo peaked during the second week of May, as media outlets and the 24-hour news cycle focused on what they termed a Lehman-like crisis. Coordinated efforts by the U.S. Federal Reserve (the Fed) and the European Central Bank (ECB), in combination with successful term auctions and improved liquidity in Europe, helped to allay U.S. investors' concerns as the month of May wound down.... It is worth repeating from last month: Direct Greece exposure does not pose a problem for our money market funds.... While banks' exposure to Greek sovereign debt appears to be manageable, especially by those banks in which we invest, the risk is that increasingly negative market sentiment will continue to affect other European banks."

Federated Investors' "Month in Cash" features "Sovereign-debt jitters drive up yields," which says, "Interest rates moved in opposite directions in May as U.S. government yields dropped and dollar Libor yields rose in response to mounting jitters over sovereign debt issues within the 16-country euro zone. The unusual bifurcation in yields reflects the first significant reappearance of credit-related uncertainty since the world financial system began to stabilize in the spring of 2009. Within the government sector, one-month Treasury yields dropped two basis points to 0.16% while one-year Treasury bill yields plunged 11 basis points to 0.31%. Meanwhile, one-month Libor rose from 0.28% to 0.35%, three-month Libor spiked from 0.35% to 0.54%, six-month Libor climbed from 0.53% to 0.75%, and one-year Libor jumped from 1.01% to 1.20%. By comparison, three-month Libor (the rate often cited as the benchmark for interbank funding stresses) peaked at 5.75% during the 2008-'09 financial crisis."

Sunday's New York Times features "This Flight to Safety Wasn't Supposed to Happen", which says, "When Treasury bonds are hotter than stocks, it's a sign that something is very wrong with the stock market.... People with cash in money market funds are getting a much, much lower yield than that -- only 0.07 percent annually for the largest funds, on average, according to Peter G. Crane, the president of Crane Data of Westborough, Mass. That's better than the 0.05 percent average of earlier this year -- but not enough to make a difference." Crane says, "It's still awfully close to zero. The amazing thing is that even at these rates, when you're getting virtually no return on your money at all, people are still moving cash into money market funds. It's sobering."

ICI's latest weekly "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $9.64 billion to $2.840 trillion for the week ended Wednesday, June 2, the Investment Company Institute reported today. Taxable government funds decreased by $600 million, taxable non-government funds decreased by $9.31 billion, and tax-exempt funds increased by $260 million." Yields remained flat in the latest week, according to Crane Data's Money Fund Intelligence Daily. Our Crane 100 Money Fund Index remained at 0.07% (annualized, simple 7-day yield) as of June 2, unchanged from the week prior. Our broader `Crane Money Fund Average also remained unchanged at 0.04%. Also, see the press release, "Bowne Announces Launch of Web-Based Solution for Latest Money Market Disclosure Reforms," which says, "The new amendments include two important changes to existing disclosure requirements: Rule 30b1-7, which requires money market funds to report their portfolio holdings to the SEC using the new Form N-MFP on a monthly basis in XML format beginning December 7, 2010; and, an amendment to rule 2a-7 that requires funds to disclose certain information about their portfolio holdings on their websites on a monthly basis beginning October 7, 2010."

Yesterday, mutual fund newsletter ignites featured a Q&A entitled, "Are Funds Spending Less on Money Fund Biz?" A reader asked, "Are mutual funds deemphasizing their money market fund businesses?" Crane Data's Peter Crane responded, "Most asset managers don't emphasize or spend a lot of money on sales and marketing for their money funds in the first place. But of course the zero-yield environment has made marketing money funds an even tougher sell. So marketing spending is likely down, though there are no good statistics on this. It's been almost 30 years since money funds were large and regular advertisers on TV and in national publications.... Overall, spending on money funds appears to be rising, though, driven primarily by costs related to the Securities and Exchange Commission's money market fund reforms." Crane adds, "But the sector no doubt remains under pressure due to ultra-low yields, asset outflows and regulatory uncertainty. While many have predicted a spate of exits and a rash of consolidation in the space, there still have been surprisingly few withdrawals from the money fund field." In other news, the American Securitization Forum announced the date (Feb. 6-9) and location (Orlando World Center Marriott) for its 2011 securitization conference.

The Treasury Management Association of NY's New York Cash Exchange begins today and runs through Friday at the Hilton New York. Over a dozen money fund complexes and several online money market trading "portals" will be exhibiting, and the agenda contains a half a dozen talks involving cash investing and money market mutual funds. Wednesday morning, BlackRock's Lynn Evans speaks on "Navigating the Changing Landscape of Cash Investing" and Capital Advisors Lance Pan speaks on "Essential Analysis of Prime Institutional Money Market Funds." More heavyweight money fund managers come out on Thursday with Federated Investors' Debbie Cunningham speaking on "Recent Regulatory Changes and What They Mean for Short-Term Investors" and Fidelity Investments' Michael Morin speaking on "Reform, Ratings and Returns: The New Era of Money Market Funds." (Look for Crane Data's Peter Crane at NY Cash on Thursday; he'll be interviewing managers and roaming the exhibit hall.) Note also that time is running out on the discounted hotel rate and space is running out for our upcoming Crane's Money Fund Symposium, which will be held July 26-28 at the InterContinental Boston.

This weekend's Wall Street Journal writes "Euro Pain Hits Money Funds". It says, "The European debt crisis has rippled into one of the last redoubts of safety for U.S. investors: money-market funds. Money funds are thought to be low-risk because they invest in high-quality short-term debt issued by governments and big corporations. But many funds are holding big slugs of European bank debt. As of March 31, nine of the top 10 corporate issuers of short-term debt held by Moody's-rated U.S. prime money funds were big European firms. Yet that doesn't mean investors in money funds should rush for the exits, say analysts. Some funds are trimming their European holdings and changing the types of securities they buy in an effort to make their portfolios safer. Meanwhile, there might even be a silver lining from the crisis: improved yields." The article adds, "So far, investors haven't panicked. The funds attracted inflows in the week ended May 25, according to iMoneyNet. Inflows are 'a reassuring occurrence, because they're not forced to sell anything,' says Peter Crane, president of Crane Data LLC, which tracks the funds. The European debt crisis may even have a silver lining: It has prompted upticks in the London interbank offered rate, or Libor. Increases in Libor, a rate that banks charge one another to borrow, help push up money-fund yields, which lately have been close to zero. The 100 largest taxable money funds now have an average yield of 0.07%, up from 0.04% in January, according to Crane Data." In other news, see also, Investment News' "Advisers make a mad dash for cash", Boston Herald's "Money funds not worth owning", and Fidelity Investments' "Seeking Higher Yields?".