Daily Links Archives: February, 2011

Financial Sciences, which produces a money market and commercial paper trading platform, announced "the release of ATOM Version 8" in a new e-mail newsletter. The company says, "ATOM Money Market Trading is uniquely designed to support the specialized processing needs of issuers and dealers of commercial paper, certificates of deposit, and other money market securities." The newsletter says, "Financial Sciences is pleased to announce the release of ATOM Version 8. With a brand new look and feel, Version 8 is full of advanced features and functionality. Utilizing a state of the art web-based architecture, Version 8 delivers the speed and flexibility of a browser-based application without sacrificing the rich functional benefits of a traditional GUI based application. This new version of ATOM provides robust integrated ad-hoc reporting, broad financial instrument coverage, advanced analytics, and seamless integration with Microsoft Excel." The ATOM product page adds, "ATOM Money Market Trading includes these features and benefits: Security Types: handles a wide variety of security types and structures including: Commercial Paper, Certificates of Deposit, Guaranteed Investment Contracts (GICs), Medium Term and Floating Rate Notes, Asset-backed Notes, Master Notes, and Private Placements; Direct and Dealer Programs: provides support for both direct and dealer placed programs; Rate Management: manages offering rates for distribution, execution and historical application purposes; ... Electronic Trading: supports direct connections to Bloomberg, Reuters, and other electronic trading platforms, allowing the communication of rate publication and the secure entry of commercial paper purchase requests directly by end investors; Bank Settlement and Cash Management: manages a real-time interface between ATOM and the Issuing and Payment Agent bank in order to settle money market trades and exchange settlement information; Investor Management and Marketing: tracks all aspects of investor related information.... In addition, the module analyzes historical trade data in order to calculate purchasing analytics for each investor; Extensive Reporting: includes a robust reporting package with reports for Investor Marketing/Sales Management, Trade Settlement and Administration, Cash and Positioning, Accounting and Portfolio Analytics/Performance."

A release entitled, "Federal Reserve's Liquidity Facilities Had Positive Income Impact While Helping Stabilize Financial Markets, says, "The Federal Reserve Bank of New York today released "Income Effects of Federal Reserve Liquidity Facilities," the latest article in its Current Issues in Economics and Finance series." It explains, "One of the key measures taken by the Federal Reserve to support the broader economy in response to the financial crisis was the introduction or expansion of facilities designed to provide liquidity to the funding markets. The intention and impact of these facilities was to foster stable financial conditions and preserve the flow of credit in the economy. In addition to helping stabilize market conditions, this article asserts that the liquidity facilities generated an estimated profit of $13 billion. In this article, authors Michael J. Fleming and Nicholas J. Klagge examine the effects of the liquidity facilities on the Federal Reserve's interest and fee income between August 2007 and December 2009 -- the period of the facilities' greatest usage. Their analysis concludes that the programs contributed an estimated $20 billion to the Federal Reserve's interest and fee income during that period, or $13 billion after taking into account the estimated $7 billion cost of funds.

Yesterday's Wall Street Journal Opinion page featured, "The Myth of Corporate Cash Hoarding". The piece, written by The Cato Institute's Alan Reynolds, says, "American nonfinancial corporations were 'sitting on' $1.93 trillion in liquid assets at the end of last year's third quarter, according to the Federal Reserve Board. This has become one of the most frequently echoed statistics, viewed as indisputable evidence that U.S. business leaders are unduly timid or evil.... Like so many statistics used to score political points, this datum de jour has been totally misunderstood. The chorus of media outrage about supposedly excessive corporate cash reveals nothing about the financial health of any U.S. business. It simply reveals appalling ignorance of elementary accounting.... From 2007 to September 2010, the value of nonfinancial corporate real estate fell by more than 30% -- a loss of more than $2.8 trillion. The ratio of cash to total assets rose largely because the value of total assets collapsed. Meanwhile, liabilities topped $13.6 trillion last fall, up from $12.9 trillion at the last cyclical peak.... Point No. 2, about safety cushions, alerts us to the fact that $1.93 trillion of liquid assets would not begin to cover $3.67 trillion of short-term debts, let alone ongoing expenses such as payroll. To describe the liquid assets as 'hoarding' (regardless of debts) is witless. The recession in 2008-09 would have been far less painful if nonfinancial corporations in 2007 had been 'hoarding' more liquid assets (they had $1.53 trillion)."

A press release entitled, "ICD Enhances Transparency Plus Money Market Fund Exposure Application to Highlight 'Regional Risk Exposure' for Corporate Treasurers" says, "Institutional Cash Distributors (ICD), the world's largest independent money market fund portal, today announced the release of Transparency Plus 2.0, the latest version of ICD's advanced money market exposure analytics application. Driven by corporate treasurers' demand for a more comprehensive, geographical view of risk exposure in their portfolios, the major enhancements to version 2.0 are engineered to uncover global credit exposure identified by country, in a fraction of the time previously taken to generate such data." The release quotes Neil King, Group Treasurer for Carphone Warehouse Group and Best BuyEurope, comments, "With all the turmoil in the world, we recognized the need to better manage our global headline risk. The ICD team answered that need with their country exposure enhancement for Transparency Plus. The ability to understand our exposure to specific countries is extremely timely and fits seamlessly with ICD's other exposure analytics."

Reuters' wrote late Friday "Money Markets - Libor eyed as other short-term U.S. rates fall". The article commented, "As short-term U.S. rates fall, all eyes are on a dollar borrowing rate that is stubbornly immobile: the London interbank offered rate. Libor is an important benchmark for consumer and business loans in the United States and analysts expect it to fall soon.... But even as supply scarcity pushes down short-term Treasury rates, the Libor has held steady, just marginally ticking lower in its last setting on Thursday night." The piece quotes Barclays Capital's Joseph Abate, "Bank funding costs have been surprisingly sticky despite the declines in other front-end rates." Reuters says, "He said worries over banks' credit-worthiness among the banks on the panel in charge of setting the Libor rate each night, as well as skittishness among money market fund managers, has helped keep the Libor elevated."

ICI weekly "Money Market Mutual Fund Assets report says, "Total money market mutual fund assets increased by $5.56 billion to $2.756 trillion for the week ended Wednesday, February 16, the Investment Company Institute reported today. Taxable government funds increased by $520 million, taxable non-government funds increased by $4.56 billion, and tax-exempt funds increased by $480 million." This marks the second week in a row of asset increases following five straight weeks of outflows. Last week MMF assets rose by $10.2 billion. Institutional assets continue to represent almost exactly 2/3 of money fund assets, 66.2%. Taxable Non-Government (or "Prime") money funds now account for 59.5% of all money fund assets ($1.64 trillion), while Taxable Government (Treasury and Government) account for 28.7%, or $790 billion). Tax-Exempt money funds account for 11.8% ($325 billion).

"Virtus Investment Partners Selects BNY Mellon Asset Servicing for Transfer Agency Services" says a press release issued yesterday. It explains, "BNY Mellon Asset Servicing, the global leader in securities servicing, announced today that Virtus Investment Partners has selected the company to provide mutual fund transfer agency services. BNY Mellon Asset Servicing will provide shareholder services, financial and regulatory reporting, and money market stress testing for the Virtus Mutual Funds, which had $14.9 billion in assets and 290,000 shareholder accounts as of December 31, 2010. BNY Mellon Asset Servicing currently provides fund accounting and administration, Blue Sky, and custody services, as well as shareholder services for closed-end funds, to Virtus Investment Partners." According to Crane Data's latest Money Fund Intelligence XLS, Virtus ranks 38th among 80 money fund managers with $2.75 billion in assets.

Crane Data recently revamped its Fund Detail pages, which give visitors a "profile" of a particular money market mutual fund. (Go to "Resources" on our main menu and choose "Browse Funds" to find a list of funds, then pick a particular fund.) We now show charts of historical money fund assets and yields, and we allow sorting and searching by portfolio, family and symbol. We also now include Money Fund Portfolio Holdings for subscribers of our Money Fund Wisdom database, and Portfolio Composition charts for subscribers to our Money Fund Intelligence XLS product. The Fund Detail pages list "Basic" information for all registered users with free Web Access, including Ticker Symbol, Type, AM (days), Category, Assets ($M), Minimum ($K), Expenses, Inception, AAA-Rated, 7-Day Yield, 7-Day Effective Yield, 30-Day Yield, and Rankings. We also include Contact information, Fund Phone and Website. The Fund Detail pages show more Return and Rankings information for subscribers to our Money Fund Intelligence, such as 1-Month, 3-Month, YTD, 1-Year, 3-Year, 5-Year, 10-Year and Since Inception Returns and Rankings.

MarketWatch writes "Money market funds argue ways to weather meltdown". The piece, subtitled, "Industry at odds about how to avoid 'breaking the buck'," says, "As policy makers debate ways to ensure that money market mutual funds bail themselves out in the event of another financial crisis, the funds themselves are at odds over the best way to keep taxpayers from footing the bill. At the center of a flurry of proposals to limit taxpayer costs in any future meltdowns is a plan put forward by mutual-fund lobby group the Investment Company Institute to create a central pool of money that could be used as a last resort. The pool would buy securities from money market funds in exchange for cash, Treasurys or agency securities that funds can use to allow retail or institutional investors to redeem their investments. Yet the ICI approach is receiving some backlash from mutual fund firms including giants Fidelity Investments and BlackRock Inc., both of which are seeking to set up capital buffers either within fund portfolios or having each fund set up external mini-banks holding reserves. Their concerns vary, but one key criticism stems from worries that an external fund won't be fairly administered in a crisis."

Friday's Bond Buyer writes "Low Rates Shrink Government Income". The article says, "Low short-term interest rates continue to erode the investment income of state and local governments. While interest on bank deposits and other short-term investments contribute a small percentage of municipal revenues, the squeeze on investment income is yet another pressure at a time when most sources of state and local government revenue are under significant stress. Municipalities that have filed financial statements for fiscal 2010 show a drastic decline in investment earnings. According to Merritt Research, the median city in 2010 reported investment income of $593,000, down 28% from fiscal 2009 and 72% from fiscal 2008. The median school district's investment earnings tumbled 72% from 2009 and 88% from 2008.... The decline is broadly attributable to two things: municipalities have lower cash balances because urgent spending needs have coincided with a sharp drop in tax receipts the past few years, and the income that governments can wring out of their cash has shriveled because of low interest rates. Like just about any entity with imperfectly matched cash inflows and outflows, municipalities often find themselves holding cash before they need to use it.... [G]overnments park this money in super-safe places like bank accounts, money market funds, guaranteed investment contracts with a bank or insurance company, short-term Treasuries, or other iron-clad instruments generally considered equivalent to cash. Until a few years ago, even short-term low-risk cash-equivalent interest rates provided a meaningful amount of revenue. According to the Census Bureau, state and local governments in 2008 collected $93.4 billion in interest -- 3.5% of their total revenue."

A recent filing on the SEC's EDGAR says, "At a meeting held on January 27, 2011, Vantagepoint Investment Advisers, LLC recommended, and the Board of Directors of The Vantagepoint Funds approved, a proposal to liquidate and terminate the Vantagepoint Money Market Fund, a series of The Vantagepoint Funds. After considering a number of factors, including market conditions and the ongoing low interest rate environment, the Board concluded that it is in the best interest of shareholders to liquidate and terminate the Fund. The Fund is expected to discontinue operations and liquidate on or about March 25, 2011 pursuant to a Plan of Liquidation and Termination which also was approved by the Board at the January Meeting. After the close of business on the Liquidation Date, the Fund will automatically redeem shares held by remaining Fund shareholders and make liquidating distributions to those shareholders, and will cease business operations, except for those related to its liquidation and termination." (Note that Crane Data does not track the Vantagepoint MMF.)

The Bond Buyer wrote "Liquidity Fears May Be Overblown" recently, saying, "Climbing the wall of expiring bank guarantees on municipal debt in the coming months may not turn out to be as daunting as anticipated. One propellant of the current hysteria over municipal credit is fear among market participants about the nearly $100 billion of letters of credit and other bank liquidity facilities on state and local government debt set to expire this year. With the banking sector smaller, less leveraged, pickier about risk, and facing more stringent regulations on how it allocates capital, issuers especially are worried about their ability to renew these facilities, which many flocked to after the collapse of the market for auction-rate securities in 2008. The impending wave of expirations was the subject of a recent front-page story in the Wall Street Journal and has been fodder for panels at several conferences.... As the biggest cluster of expirations nears, it is beginning to appear that banks in fact have the capacity to extend credit to most of the governments that need it. Moreover, governments with investment-grade ratings that are unable to obtain extensions from their banks are enjoying improved access to a bond market with interest rates that are still low, and several alternatives to bank financing have begun to take off." The piece quotes Rich Raffetto, head of government banking at U.S. Bank, "There's plenty of issuers out there that are looking for liquidity facilities and are finding them. We have capacity, and we have intent to continue to play a role."

Reuters writes "Money funds repo activity may lag Fed's hopes". It says, "Money market funds may not participate in reverse repurchase activity as much as the Federal Reserve is hoping once the central bank begins the process of draining cash from the financial system. Investment managers at the funds may not consider reverse repurchase (repo) agreements, in which the Fed sells securities to counterparties with an agreement to buy them back at a later date, to be the best place to park their money, says Alex Roever, head of short-term fixed income strategy at JPMorgan Securities in New York." The article also says, "On Tuesday, U.S. short-term interest rate futures extended earlier losses as traders briefly priced in the expectation that the Federal Reserve will raise interest rates at the end of the year. Futures traders are now pricing in a 98 percent chance of an increase in December to the Fed's target rate for overnight lending between banks, fed funds futures trading at CME Group Inc's Chicago Board of Trade shows. This compared with an implied 82 percent chance of a year-end rate hike at Monday's close."

Wells Fargo Advantage Funds' latest monthly "Portfolio Manager Commentary Overview, strategy, and outlook" says, "The yield curve is much steeper than its historical average, and it's getting steeper. At a certain point, when there is a reasonable pickup in payroll numbers, some improvement in the unemployment rate, and a move away from the deflationary zone, the Fed may be able to raise short-term rates, so as to not be seen as out of step with the rest of the markets. That day may come sooner than many expect." The overview also says, "As credit spreads narrowed after year-end, some market participants began to relax their limits on Spanish, Italian, and Belgium bank issuers. Although the term of that funding is still relatively short -- concentrated primarily on one month and in -- issuers from more favored countries, such as Australia, Canada, and the Scandinavian countries, can easily access the markets for virtually unlimited financing and in maturities that are much longer."

U.S. Securities and Exchange Commission Chairman Mary L. Schapiro gave a speach Friday entitled, "Evolving to Meet the Needs of Investors, an Address to the Practising Law Institute's SEC Speaks Program. The talk briefly mentioned money market mutual funds, saying, "Additionally, just this week, because of our actions, investors for the first time were able to access detailed information that money market funds file with the Commission -- including their "shadow NAV" or net asset value. While the Commission uses this information in its real-time oversight of money market funds, we believe that public disclosure can provide investors and market analysts with useful insight for their evaluation of funds. Going forward, we will be working with our regulatory colleagues to assess the various options for making sure these funds are as safe and structurally sound as investors are led to believe." In other news, some late entries to the President's Working Group Report on Money Market Fund Reform Request for Comment on the SEC's website have appeared, including: a Memorandum from the Office of the Chairman regarding a January 26, 2011, meeting with representatives of Fidelity, which says, "On January 26, 2011, Didem Nisanci, Ricardo Delfin, James Burns and Jennifer McHugh of the Chairman's Office, along with Robert Plaze and David Vaughan of the Division of Investment Management met with following representatives of Fidelity: Peter Stahl, John Lunter, Kevin Meagher, and James Febeo along with Laura Unger of Promontory Financial Group. Among other issues, the Fidelity representatives discussed the views expressed in Fidelity's January 10, 2011 comment letter on the President's Working Group Report on Money Market Fund Reform, including the letter's recommendation of the creation of a mandatory reserve within money market funds."

ICI's latest "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets decreased by $20.83 billion to $2.737 trillion for the week ended Wednesday, February 2, the Investment Company Institute reported today. Taxable government funds decreased by $4.22 billion, taxable non-government funds decreased by $17.83 billion, and tax-exempt funds increased by $1.21 billion.... Assets of retail money market funds increased by $940 million to $936.79 billion. Taxable government money market fund assets in the retail category decreased by $70 million to $165.78 billion, taxable non-government money market fund assets increased by $370 million to $565.05 billion, and tax-exempt fund assets increased by $640 million to $205.96 billion.... Assets of institutional money market funds decreased by $21.77 billion to $1.800 trillion. Among institutional funds, taxable government money market fund assets decreased by $4.15 billion to $622.56 billion, taxable non-government money market fund assets decreased by $18.20 billion to $1.058 trillion, and tax-exempt fund assets increased by $580 million to $119.66 billion."

Federated writes in its latest "Month in Cash: Self-sustaining recovery may prompt Fed to act sooner than consensus", "We expect tightening to begin in this year's second half. We believe that a self-sustaining economic expansion -- albeit a modest one by historical standards -- is underway and that the Fed will start to raise interest rates during the second half of 2011. Our forecast differs modestly from the consensus, which clings to the view that a monetary tightening cycle will not begin until next year. It is worth noting that real GDP in the fourth quarter of 2010 finally surpassed its previous peak, attained before the global financial crisis erupted, thus officially ending the recovery stage of the business cycle and heralding the onset of the expansionary phase. At nearly three years, the combined recession and recovery was the longest of the post-World War II era, and partially accounts for the extended period of super-low short-term interest rates that has deeply frustrated savers. Assuming the U.S. economy continues to gain traction as we expect, solid growth and rising inflation data this spring and summer should nudge cash yields higher in anticipation that the Fed will begin normalizing policy rates by the fall or early winter." In other news, see Capital Advisors' latest paper, "Dissecting Prime Money Fund Holdings".

Yesterday, Reuters wrote, "Large money funds meet first $1 'shadow price' test", which said, "The largest U.S. money-market funds reported "shadow prices" at $1 per share or more on the first day of a new federal reporting requirement, an outcome that analysts said should reassure investors shaken by the ride some funds took during the financial crisis. Factors like interest rate changes mean money fund shares can be worth slightly more or less than $1 each. Funds can value themselves at $1 per share even if their underlying securities are worth between $0.9950 to $1.0050 per share -- a level of detail known as the funds' "shadow price". The figures released by the U.S. Securities and Exchange Commission on Monday also suggest some firms pumped in extra money to keep the funds above the key $1 level, with an eye on avoiding tough new regulations under discussion for the industry." Reuters quoted www.cranedata.com's Peter Crane, "People were well aware of the risks that a value below $1 would be misinterpreted. So from the looks of it I don't think it's a coincidence they're all above that." The piece adds, "Out of 236 taxable money funds with more than $1 billion in assets, Crane said he counted just 30 with shadow prices of $0.9999 or less.... Of the 30 funds Crane said he found with shadow NAVs on the low side, Crane said half were at $0.9999, with only three below $0.9991. Crane declined to name individual funds."

"Shadow" NAVs reported for BofA Funds says a release from BofA Global Capital Management. Entitled, "BofA Global Capital Management Reports the BofA Funds' "Shadow" NAVs," it says, "In January 27, 2010, the Securities and Exchange Commission (SEC) amended Rule 2a-7 under the Investment Company Act of 1940 to better protect money market funds during periods of market stress. The changes included tougher requirements regarding credit quality, minimum liquidity levels and concentration limits, as well as enhanced disclosure requirements. Among the new rules issued by the SEC is the requirement that money market funds disclose their market based net asset value per share (referred to as the 'shadow' NAV), which is the market value of the fund's securities at a given time. Shadow prices routinely fluctuate around a fund's stable NAV -- which is determined using the amortized cost method of valuation -- due to factors such as changes in interest rates and portfolio composition. Under Rule 2a-7's accounting method, the mark-to-market value of a fund with a stable NAV of $1.00 per share can range between $0.9950 and 1.0049 per share without 'breaking the dollar' (requiring the fund to reprice its shares at a value other than $1.00).... We at BofA Global Capital Management, the sponsor of the BofA Funds, believe the additional transparency achieved by the SEC's disclosure of shadow NAVs will promote greater portfolio transparency, an important benefit for money market fund investors." The BofA Funds shadow NAVs range from 1.0000 to 1.0009, according to the document. See also, New York Fed's "Reverse Repo Counterparties List" and "Fitch Downgrades Alpine Municipal Money Market Fund to 'AAmmf'."