Daily Links Archives: January, 2014

A press release entitled, "Northern Trust Ultra-Short Fixed Income Funds Exceed $4 Billion in Assets" tells us, "Northern Trust's two ultra-short fixed income mutual funds have surpassed $4 billion in combined assets, as investors continue to seek alternatives to money market funds in a continuing environment of low-interest rates. As of December 31, 2013, the Northern Ultra-Short Fixed Income Fund (NUSFX) had $1.45 billion in assets and the Northern Tax-Advantaged Ultra-Short Fixed Income Fund (NTAUX) had $2.63 billion, with combined assets up 47 percent from a year earlier." Northern's Colin Robertson says, "Our ultra-short strategies continue to grow in size, confirming our view that investors are eager to find lower risk strategies that still offer the potential for some incremental yield. We believe that interest rates will remain low for the foreseeable future, helping our ultra-short funds gain further momentum among investors seeking a total-return strategy." The release adds, "Both ultra-short mutual funds were launched in 2009 as a complement to Northern Trust's established cash management and ultra-short duration portfolio management strategies, including more than $200 billion across institutional and personal client assets. Ultra-short strategies are an option for investors with an appetite for modest interest rate risk, credit risk, and liquidity risk compared to traditional money market funds." Carol Sullivan adds, "With low interest rates and increased regulatory pressure on money market funds, investors are looking for opportunities to improve yield without taking more than moderate risk in the process.... In targeting a neutral duration of one year, the ultra-short funds can be part of an investor's larger fixed income strategy, helping them achieve specific investment goals." Finally, the company statement says, "The minimum investment required for each fund is $2,500. The current net expense ratio for Northern Ultra-Short Fixed Income Fund is .26%, or $26 for every $10,000 invested. The current net expense ratio for Northern Tax-Advantaged Ultra-Short Fixed Income Fund is .25%. According to Morningstar, as of 12/31/2013, the average expense ratio for Ultra-Short Bond Funds is .63%. It is important to note that the funds are not money market funds, which strive to maintain a $1.00 net asset value."

The Financial Times writes, "Floating rate Treasuries register strong demand". The article comments, "Investor demand for the first new US Treasury security in 16 years pulled in orders worth nearly six times the size of the issue on Wednesday, ahead of another debt ceiling showdown in Washington. The Treasury sold $15bn of floating rate notes, whose benchmark rate is based on the three-month Treasury bill yield, and attracted orders of $85bn, a healthy bid-to-cover of 5.67 times. Dealers underwriting the sale bought $7.94bn of the sale, with investors accounting for just under half of the entire issue.... Money market funds, starved by low yields and worried about sharp swings in short-term bills because of the prospect of another Federal debt ceiling battle in March, are expected to seek the new floating rate note that has a maturity of two years. Peter Crane, president of Crane Data, a money market research firm, said: "Treasury money market funds are so starved for yield that anything giving them an extra basis point or two, and with the same quality and liquidity features of a Treasury security, means it's a no brainer for them to own.""

Fitch Ratings published a note entitled, "Treasury FRNs Attractive Option for Money Market Funds" yesterday. It explains, "The U.S. Treasury's new floating rate note (FRN) program would provide additional investment options for short-term investors and money market funds at a time when the supply of other money market securities is declining, according to Fitch Ratings. The Treasury announced last week that it will offer $15 billion of the two-year FRNs at the program's first auction on Jan. 29. The initial issue is expected to be welcomed by short-term investors as market and regulatory developments are reducing the supply of other short-term instruments. Treasury has been cutting its issuance of short-term T-bills as it seeks to extend the average maturity of the government's debt. These dynamics will likely lead to strong demand from money market funds that invest in government debt, as they must replace maturing T-bills. Lesser demand is expected from prime money market funds, which can also invest in bank and corporate securities, and have also seen the supply of these instruments shrink. Fitch considers the two-year FRNs as eligible securities for 'AAAmmf'-rated money market funds. The interest paid on the FRNs is based on the three-months T-bill auctions, and resets daily. This daily reset feature should be attractive from the perspective of a fund's weighted average maturity (WAM), which is limited to 60 days under Fitch's criteria for 'AAAmmf' funds. The two-year maturity of the FRNs is consistent with Fitch's eligibility criteria for rated money funds, but will constrain the amount of the security that any money fund can buy. 'AAAmmf'-rated fund portfolios are limited to a weighted average life (WAL) of 120 days.... Nevertheless, the expected incremental spread to T-bills will likely generate significant demand for the FRNs among money market funds and other conservative short-term investors, providing for good liquidity of the instrument. Fitch will include FRNs maturing between one and two years toward rated money funds' weekly liquidity calculations, while FRNs and other Treasury securities maturing in less than one year are counted towards daily liquidity calculations."

A recent Letter from Treasury Secretary to Congress on the Debt Ceiling Limit says, "I am writing to follow up on my December 19, 2013 letter regarding the debt limit. As you know, the Continuing Appropriations Act, 2014 suspended the statutory debt limit through February 7, 2014. When that suspension period ends, the United States will again reach the debt limit. The best course of action would be for Congress to act before February 7 to ensure orderly financing of the government. In the absence of Congressional action, Treasury would be forced to use extraordinary measures to continue to finance the government on a temporary basis. When I previously wrote to you in December, I estimated that Treasury would exhaust extraordinary measures in late February or early March. Based on our best and most recent information, we believe that Treasury is more likely to exhaust those measures in late February. While this forecast is subject to inherent variability, we do not foresee any reasonable scenario in which the extraordinary measures would last for an extended period of time. The length of time that the extraordinary measures can extend the nation's borrowing authority is significantly shorter than it was in 2011 and 2013."

The Treasury writes "Assistant Secretary Rutherford Discusses Floating Rate Notes on Bloomberg", which says, "After the Treasury Department announced details of the first Floating Rate Note (FRN) auction yesterday, Assistant Secretary for Financial Markets Matthew Rutherford appeared on Bloomberg TV to discuss the introduction of the first Treasury security in 17 years. FRNs are a type of marketable security with a floating interest rate that resets each day and makes coupon payments each quarter. Speaking to Bloomberg's Peter Cook, Assistant Secretary Rutherford explained how Treasury's debt management office plans to use FRNs to manage Treasury's maturity profile. He added, "Over the coming year, it will probably replace some of our T-Bills so we're not introducing any incremental interest rate risk into the portfolio but at the same time, we are getting a longer maturity" for Treasury debt." See also, "Treasury Announces First Floating Rate Note Auction," which explains, "The U.S. Department of the Treasury's Bureau of the Fiscal Service today announced details of the first Floating Rate Note (FRN) auction, a new type of marketable security with a floating interest rate that resets each day and makes coupon payments each quarter. Today's announcement marks the first new security Treasury has offered since Treasury Inflation Protected Securities (TIPS) were first auctioned in 1997."

Money fund assets rose in the latest week after falling the first two weeks in 2014. ICI's latest "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $6.38 billion to $2.707 trillion for the week ending Wednesday, January 22, the Investment Company Institute reported today. Taxable government funds decreased by $730 million, taxable non-government funds increased by $7.68 billion, and tax-exempt funds decreased by $570 million. Assets of retail money market funds decreased by $2.79 billion to $922.46 billion. Taxable government money market fund assets in the retail category increased by $220 million to $198.49 billion, taxable non-government money market fund assets decreased by $2.53 billion to $527.52 billion, and tax-exempt fund assets decreased by $480 million to $196.46 billion. Assets of institutional money market funds increased by $9.17 billion to $1.785 trillion. Among institutional funds, taxable government money market fund assets decreased by $950 million to $751.47 billion, taxable non-government money market fund assets increased by $10.21 billion to $957.89 billion, and tax-exempt fund assets decreased by $90 million to $75.27 billion."

Bloomberg writes "Floating Notes Debut in U.S as Cash Chases Fewer Securities". It says, "The U.S. Treasury Department's floating-rate notes may generate strong investor demand given a scarcity of money-market securities and a looming debt limit that's accelerating a decline in bill supply. Floaters would be the Treasury's first new security in 17 years. Details of the inaugural sale of the two-year notes Jan. 29 will be announced tomorrow even as legislation on the nation's borrowing limit causes the Treasury to scale back on bill sales and as dealers reduce activity in the repurchase agreement market." Citi's Andrew Hollenhorst comments, "With money-market mutual fund assets at the highest in the last few years and supply at relatively low levels, there is more cash chasing less securities. There is more cash now in the money funds and less investable assets on the supply side -- both of which should support demand at the Treasury's auction this month." See also, EU's Committee on Economic and Monetary Affairs "on the proposal for a regulation of the European Parliament and of the Council on Money Market Funds".

Mutual fund website ignites.com featured an article yesterday, entitled, "Congress Weighs In on Money Fund Reforms." It says, "Congress is using the recently passed budget that will fund the government through September to put pressure on the SEC to conduct a thorough cost-benefit analysis of final money market fund reforms. President Barack Obama signed the spending bill into law on Friday. The conference report that accompanies the law contains a provision that directs the SEC to conduct a "rigorous economic analysis" of final money market fund reforms. The conference report signals legislative intent and is not binding. But the language in the report regarding money fund reforms is significant because it puts additional pressure on the Securities and Exchange Commission to conduct a thorough cost-benefit analysis of any final reforms. It also implicitly recognizes that the SEC has jurisdiction over money fund reforms, rather than the Financial Stability Oversight Council or other entities, sources say." ignites quotes the conference report, "The [Appropriations] Committee expects that the final [money market fund] rules will take into account the substantive concerns of stakeholders who use these products for short-term financing needs."

Compliance Week writes "FASB Readies Final Standard on Repurchase Agreements". It says, "The Financial Accounting Standards Board is expected soon to issue its final word on how companies will be required to account for repurchase agreements when the company is obligated to buy back securities it has sold. After changing its mind about its January 2013 proposal, FASB ultimately determined it will stick with the approach it initially proposed. That would require a company to consider whether it retains effective control over an asset and account for any transfer as a secured borrowing rather than a sale if the company is obligated to buy it back. FASB says it has concluded its discussion of the proposal and plans to issue a final standard in the first half of 2014."

We're getting ready for next week's Money Fund University, Crane Data's "basic training" conference on money market mutual funds, which will take place on Jan. 23-24 at the Providence Renaissance Hotel, and we just posted the majority of the Powerpoints and the latest version of the Conference binder on the website. Note that we make our Conference Materials available to all Crane Data subscribers via our Content Center on the website (page down to the bottom to see the last several years of events). Recordings and late Powerpoints will be posted after next week's show, but the following are now available: Crane: History & Current State of MMMFs; Smedley, Abate: The Federal Reserve & Money Markets; Smedley, Giles: Interest Rate Basics & Money Fund Math; Fayvilevich, Weiss, Crane: Ratings, Monitoring & Performance; Crowe, Sinniger: CP & ABCP; Sloan, Byrne: CDs, TDs & Bank Debt; Meehan, White: Tax-Exempt Securities; Ackerman: Credit Analysis & Portfolio Mgmt; Hunt, Swirsky: Money Fund Regulations: 2a-7 Basics; Murphy, Keen: Regulations II: Proposed MMF Rule Changes; and Crane, Hunt: New Disclosure Requirements & MMF Data. We look forward to seeing many of you in Providence next week!

The Preliminary (draft) Agenda for the 2014 Crane's Money Fund Symposium has now been posted on the www.moneyfundsymposium.com website. Crane's Money Fund Symposium 2014, which will take place June 23-25, 2014, at the Boston Renaissance Waterfront, should once again be the largest gathering of money market professionals anywhere. (We attracted over 450 last summer at our event in Baltimore.) Some speakers and invitations are still being confirmed, but we also expect once again to have the most knowledgeable and highest level speakers in the money fund and cash investment business. E-mail Pete to request a copy of the conference brochure, which will be released to subscribers of our Money Fund Intelligence with the February issue. Join us too next week at our latest Crane's Money Fund University, which will take place January 23-24 (Thurs. and Friday) at the Providence Renaissance Hotel. MFU is our smaller "basic training" event held each January for investment professionals new to the money fund space or for those seeking certification in the money market field. Finally, mark your calendars our second European Money Fund Symposium, which is scheduled for Sept. 23-24, 2014, in London. Contact us about speaking and sponsorship opportunities for this or any of our future events.

A press release entitled, "Work on the Liquidity Coverage Ratio finalised by the Basel Committee," says, "In January 2013, the Basel Committee's oversight body, the Group of Governors and Heads of Supervision (GHOS), agreed the final form of Basel III's Liquidity Coverage Ratio (LCR). At that time, the GHOS asked the Committee to undertake some additional work on liquidity disclosure, the use of market-based indicators of liquidity within the regulatory framework, and the interaction between the LCR and the provision of central bank facilities. The Committee has completed this work, and has today published a package of material that responds to these requests. The Committee has today issued final requirements for banks' LCR-related disclosures. These requirements will improve the transparency of regulatory liquidity requirements and enhance market discipline. Consistent with the Basel III agreement, national authorities will give effect to these disclosure requirements, and banks will be required to comply with them, from the date of the first reporting period after 1 January 2015. The Basel Committee also published today Guidance for Supervisors on Market-Based Indicators of Liquidity. This document was published to assist supervisors in their evaluation of the liquidity profile of assets held by banks, and, for the purposes of Basel III's LCR, to help promote greater consistency in High Quality Liquid Assets (HQLA) classifications across jurisdictions. Importantly, the guidance does not change the definition of HQLA within the LCR; rather, it helps supervisors assess whether assets are suitably liquid for LCR purposes."

Treasury Today features a piece entitled, "Bank Interview: Hugo Parry-Wingfield, HSBC Global Asset Management" that says, "Liquidity management remains a challenging area for corporates, particularly with the low interest rate environment, incoming regulatory change and new risks emerging. With this magnitude of change it is prudent to review investment policies and processes in order to ensure they properly manage risk, according to Hugo Parry-Wingfield, Investment Director, HSBC Global Asset Management." The interview asks, "Why is liquidity a key area of focus for HSBC?" Parry-Wingfield answers, "Liquidity is the lifeblood of any company, and its management has consistently topped the corporate treasurer's agenda over the past five years, both from a risk as well as a utility perspective. In order to protect their company's business, treasurers need to know where their cash is and how quickly they can access it. They need both visibility and control. HSBC is responding to our clients' key requirement for effective liquidity management, by servicing them across all the markets we are present in, and providing a range of services to support their liquidity management activities. This core competency stretches across the whole Group, including HSBC Global Asset Management."

The New York Times writes "An Advantage Vanishes for Money Funds". It says, "When money market mutual funds were invented back in 1971, they offered something new. Investors could earn higher yields than on bank deposits, with nearly the same liquidity and safety. But that has changed. Currently, a money market deposit at Citibank pays about five times as much interest as an investment in the Fidelity Cash Reserves fund -- though, in today's low-rate environment, the yields are minuscule. The bank's advantage appears to be a trend. In early 2007, money market mutual funds typically paid almost four percentage points more than bank deposit accounts, according to the Investment Company Institute, a trade association. But ever since 2009, bank money market deposit accounts have consistently paid more, on average, than their mutual fund counterparts." They quote our Peter G. Crane, a founder of the money market fund information company Crane Data, "The zero-interest-rate environment has been brutal on money market funds. They have lost their yield advantage." The piece adds, "The difference between 0.05 percent and 0.01 percent may not look like very much. But then again, the appeal of a money market mutual fund in the first place was that you could earn more than you could get from your bank. That helps explain a surge of outflows from money market mutual funds in 2010 and 2011." See also, Gretchen Morgenson's latest anti-Wall Street and anti-fund rant, "Bailout Risk, Far Beyond the Banks".

ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $4.18 billion to $2.715 trillion for the eight-day period ending Wednesday, January 8, the Investment Company Institute reported today. Taxable government funds decreased by $15.01 billion, taxable non-government funds increased by $7.71 billion, and tax-exempt funds increased by $3.12 billion.... Assets of retail money market funds increased by $2.09 billion to $931.32 billion. Taxable government money market fund assets in the retail category increased by $20 million to $199.66 billion, taxable non-government money market fund assets increased by $170 million to $533.22 billion, and tax-exempt fund assets increased by $1.90 billion to $198.44 billion. Assets of institutional money market funds decreased by $6.26 billion to $1.783 trillion. Among institutional funds, taxable government money market fund assets decreased by $15.04 billion to $747.49 billion, taxable non-government money market fund assets increased by $7.55 billion to $960.04 billion, and tax-exempt fund assets increased by $1.22 billion to $75.65 billion." ICI's "Weekly Estimated Long-Term Mutual Fund Flows" also shows that bond fund outflows continued. It says, "Bond funds had estimated outflows of $2.85 billion, compared to estimated outflows of $3.46 billion during the previous week."

A release entitled, "Federated Investors, Inc. Announces Fourth Quarter 2013 Earnings and Conference Call Dates," tells us, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, will report financial and operating results for the quarter ended Dec. 31, 2013 after the market closes on Thursday, Jan. 23, 2014. A conference call for investors and analysts will be held at 9 a.m. Eastern on Friday, Jan. 24, 2014. President and Chief Executive Officer J. Christopher Donahue and Chief Financial Officer Thomas R. Donahue will host the call. Investors interested in listening to the teleconference should dial 877-407-0782 (domestic) or 201-689-8567 (international) or visit FederatedInvestors.com for real time Internet access. To listen via the Internet, go to the About Federated section of the website at least 15 minutes prior to register, download and install any necessary audio software. A telephone replay of the call will begin at approximately 12:30 p.m. Eastern on Jan. 24, 2014 and will be available through Jan. 31, 2014. To access the telephone replay, dial 877-660-6853 (domestic) or 201-612-7415 (international) and enter the access code 13574383. The Internet replay will be available via FederatedInvestors.com for seven days. Federated Investors, Inc. is one of the largest investment managers in the United States, managing $366.7 billion in assets as of Sept. 30, 2013." (Watch for our Money Fund Market Share fund family rankings with Dec. 31, 2013, later this week.)

On Thursday morning, Jan. 9, 2014 (10am EST), Treasury Strategies will host a "Quarterly Corporate Cash Briefing". The description says, "The Federal Reserve Bank of the US just announced the largest increase in corporate cash flows quarter over quarter since 2009. Tune in for Treasury Strategies' Quarterly Corporate Cash Briefing on Thursday, January 9 to hear more about how corporate cash levels are fluctuating again, and what that means for you. You'll also hear insights from our expert panel including Association of Corporate Treasurers (ACT), Federated Investors, and Fitch Ratings who will shed more light to help participants understand the implications for our industry for total corporate cash holdings in the US, UK & Eurozone." Sponsors & Panel Participants include: Martin O'Donovan, FCT, Deputy Policy & Technical Director - Association of Corporate Treasurers (ACT), Deborah A. Cunningham, CFA, Chief Investment Officer - Federated Investors, and Roger Merritt, Managing Director - Fitch Ratings. Treasury Strategies' Speakers & Panel Moderators include: Tony Carfang, Partner, and Monie Lindsey, Managing Director.

The Wall Street Journal asks "Do Money-Market Funds Still Make Sense?" The piece says, "For the past few years, investors could probably have made more money by picking up loose change from the sidewalk than by investing in a money-market mutual fund. Money funds are likely to regain appeal once interest rates rise again. Historically, when rates start moving upward, money-fund yields quickly follow, unlike those of bank savings accounts, which can lag. But for now, persistently low rates -- coupled with uncertainty about a possible regulatory overhaul for money funds -- are reasons to avoid using the funds for all but very-short-term parking of cash, financial advisers say.... The average yield on taxable money funds for individual investors is just 0.01% a year, according to Crane Data LLC of Westborough, Mass. On an investment of $10,000, that is $1 a year. Such low yields are unlikely to climb soon, as many market professionals think there is still too much economic uncertainty for the Federal Reserve to start raising short-term rates. Moreover, the reason money funds have been able to offer any yield at all in recent years is that management companies have been waiving billions of dollars in fees.... With the exception of the Reserve Primary Fund, money-market funds came through the financial crisis and other turmoil, including the European debt crisis and the U.S. federal-government shutdown, unscathed. But still the Securities and Exchange Commission is considering new regulations to avoid future runs on funds." The article quotes, Peter Crane, president of Crane Data, "A floating NAV would really harm one of the core features of money-market funds. Investors want the ability to transact and not have to worry about gains and losses, or not having the amount that you thought you had." The Journal adds, "The timing of any SEC action is uncertain."

Boutique cash manager Capital Advisors writes on "Three Challenges in 2014" in its latest "The Capital Advisor" newsletter. The overview says, "Last year at this time, we cited acceleration in money fund reform, scarcity of eligible investments and the low rate environment as the predominate challenges for corporate cash investors. As we predicted, money fund reform accelerated quickly in 2013 with the comment period for a proposed floating NAV for institutional funds (along with fees and gates) expiring quickly in this past September. We currently anticipate that a reform proposal may be released as soon as the first quarter of 2014. With an anticipated two year implementation period, whatever the final outcome of the proposal, investors will have ample time to consider their alternatives, including separately managed liquidity accounts. Secondly, a scarcity of high grade investments presented challenges to investors as the issuance of AA2 bonds declined 26% last year on the heels of a 51% decline in 2012. The result was an increase in counterparty risk for organizations without much offset of return. Please review our thoughts on the difficulties of managing overall counterparty risk in an ultra-low rate environment. We welcome 2014 with a preview of how the changing cash management landscape is likely to impact treasurers. While many of the issues we identified in 2013 will continue to affect the market, the key themes that will challenge corporate cash investors in the upcoming year include the aftermath of financial regulations, the anticipation of a steeper yield curve and the proliferation of innovative products. In this month's whitepaper, we take a deeper look at each of these key themes and attempt to identify the overall impact on corporate cash portfolios."

On Tuesday, the ICI released its latest weekly "Estimated Long-Term Mutual Fund Flows", which says, "Total estimated outflows from long-term mutual funds were $930 million for the five-day period ended Monday, December 23, 2013, the Investment Company Institute reported today. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals. Equity funds had estimated inflows of $1.79 billion for the week, compared to estimated inflows of $430 million in the previous week. Domestic equity funds had estimated inflows of $254 million, while estimated inflows to world equity funds were $1.53 billion. Hybrid funds, which can invest in stocks and fixed-income securities, had estimated inflows of $875 million for the week, compared to estimated inflows of $465 million in the previous week. Bond funds had estimated outflows of $3.59 billion, compared to estimated outflows of $8.09 billion during the previous week. Taxable bond funds saw estimated outflows of $2.19 billion, while municipal bond funds had estimated outflows of $1.40 billion." Starting in June 2013, bond funds have had six straight months of outflows through November (losing $151.4 billion) and four straight weeks of outflows in December (down $22.1 billion). Since the start of 2009 and through May of 2013, bond funds accumulated a massive $1.137 trillion of inflows.