Daily Links Archives: September, 2015

The Wall Street Journal writes, "When the Fed Lifts Off, This Is What to Watch at Banks." The article says, "The Federal Reserve's liftoff may be far more turbulent for banks than many expect. Investors should buckle up. Bank stocks have taken a beating in recent weeks as investors pared back expectations about the upside to earnings from a rise in interest rates. Less attention, however, has been paid to the liability side of bank balance sheets. As a result, this could produce some surprises for investors in the months to come, especially given Fed officials have been again banging the drum about a rate increase coming this year. Years of superlow rates have encouraged complacency about the cost of funding. During the era of excess reserves, there was little reward for monitoring a bank's ability to attract low-cost deposit funding. If anything, banks faced criticism for having "too many" excess reserves. That is likely to change rapidly when the Fed begins to raise rates. Higher rates could drain deposits from banks, possibly into things like money-market funds or short-term debt. Thanks to new liquidity rules requiring banks to hold so-called high-quality liquid assets, any the deposit drain shouldn't be ruinous for large banks. But compliance with the liquidity rules doesn't mean all the big banks are equally well-equipped to deal with any big moves." It continues, "Banks that have more reserves than the deposits they lose should have the easiest time navigating the new environment.... But banks whose liquidity positions are more heavily reliant on U.S. Treasurys and mortgage-backed securities will find things more complicated. They may find themselves having to sell these bonds to finance deposit outflows or lend them out in the repurchase market. Preferably, they could also pay more for deposits in the wholesale market to stem the outflow. Regardless, this could mean tighter net interest margins and diminished profits. So which banks are best positioned? ... Credit Suisse analysts recently suggested comparing the reserve levels of banks to their nontransactional institutional deposits, a rough proxy for the kind of fast-money deposits that are likely to quickly leave banks. Of the four universal U.S. banks, only J.P. Morgan Chase has more reserves than fast-money deposits, according to Credit Suisse. Wells Fargo's reserves liquidity position amounts to nearly 60% of its fast-money deposits, putting it in the next-strongest place. Bank of America and Citigroup are in distant third and fourth places, with each holding reserves equivalent to one-third of their fast-money deposits.... The only thing certain is that banks will soon step into unexplored territory. The odds of one or more banks stumbling over new ground are high."

The Securities and Exchange Commission posted a "Notice to Form N-MFP Filers" that says, "The Form N-MFP technical specifications have been updated to incorporate the amendments to the form adopted by the Commission on July 23, 2014." Form N-MFP is the SEC's monthly Portfolio Holdings reporting form, which was initially mandated in November 2010 and modified with the 2014 Money Fund Reforms. Starting in April 2016, funds will have to alter their reporting on Form N-MFP, with the main changes being the removal of a 2-month lag and a tweaking of Portfolio Holdings categorizations. It explains, "Filers should be aware of the following: Filers should not make any Form N-MFP filings constructed using the updated technical specifications at this time. Filers will be able to submit test filings following EDGAR Release 15.4 later this year. For current N-MFP filings, filers should continue to construct submissions using the "EDGAR Form N-MFP XML Technical Specification (Version 3.1)." You can download the new specs here. For more, see our August 6, 2014, News, "SEC Money Fund Reform Disclosure Requirements Not Quite Kitchen Sink." We wrote then, "[T]he SEC included a host of enhanced disclosures and reporting requirements in its Money Fund Reform package.... The new rules ... will require funds to disclose daily on their web site daily and weekly assets, inflows/outflow, and market NAVs per share, as well as whether there has been any imposition of gates and fees, or any use of affiliate sponsor support. It will also remove the delay in disclosing monthly portfolio holdings via Form N-MFP, among other stipulations." In other news, CNBC reports, "Fed's Dudley: Fed will likely raise rates later this year." It says, "New York Federal Reserve Bank President William Dudley said on Monday the Fed remains on track for a likely rate hike this year and could reach its inflation target next year, faster than many other policymakers anticipate. Dudley said the first hike could come as soon as October as policymakers take stock of an improving economy. The Fed "will probably raise rates later this year," with the Oct. 27-28 session "live" for the rate hike debate, Dudley said at an event sponsored by the Wall Street Journal in New York. The Fed also meets in December."

Citi Research money market strategist Andrew Hollenhorst writes "Too Much Cash, Too Few T-Bills" in his latest "Short-End Notes." It says, "Following the Fed's decision not to raise rates last week, cash has poured back into US T-bills and the front-end of the curve, with yields 1bp or below out to March of 2016. In other words, interest rate derivatives curves are upward sloping to reflect the possibility of Fed hikes but pricing in the T-bill market is dominated by technical supply/demand factors. We expect the demand pressure and lack of supply to intensify over the next two months, keeping bill yields low. The next buying opportunity will likely not emerge until December. The Fed not hiking has increased front-end demand for at least three reasons: 1. Lower probability of rate hike.... 2. Less duration risk aversion [and] 3. Less need for foreign central banks to sell USD reserves." It continues, "The effect of the increased demand has been exacerbated by expectations of a projected $135 billion drop in T-bill supply over the next two months.... It remains Treasury's goal to keep its cash balance above $150bln. This is meant to provide enough "money in the bank" to cover government payment obligations if Treasury were unable to issue (for instance in the event of a natural disaster). Debt ceiling considerations have complicated these plans. Treasury is now cutting T-bill issuance to make room under the ceiling for upcoming planned coupon issuance. Also, Treasury's cash balance recently dipped below $100 billion and is likely to decline again as we approach the "hard" ceiling date. Cumulatively, we expect Treasury reduce bills outstanding by $135 billion ahead of the "hard" ceiling later this year. Our point estimate for the "hard" debt ceiling remains December 1st when Treasury will need to make significant recurring payments. However we note that government day-to-day cash needs are volatile and Treasury will likely push for Congress to raise or (more likely) suspend the debt ceiling ahead of this date. A new debt ceiling suspension may or may not be tied to a possible government shutdown which will occur on October 1st if Congress fails to approve a short-term spending plan or continuing resolution (CR).... The confluence of a drop in supply and increased demand led one month bills to trade at negative yields this week.... T-bills are likely to stay rich until a resolution of the debt ceiling which would allow Treasury to increase the supply of bills. This, together with constrained dealer balance sheet may create the next buying opportunity for bills in December."

Money market fund assets rose in the latest week, snapping a three-week slide, according to ICI's latest "Money Market Mutual Fund Assets" report. The release says, "Total money market fund assets increased by $13.96 billion to $2.66 trillion for the week ended Wednesday, September 23, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $5.36 billion and prime funds increased by $10.66 billion. Tax-exempt money market funds decreased by $2.05 billion. Assets of retail money market funds decreased by $1.65 billion to $897.19 billion. Among retail funds, Treasury money market fund assets increased by $230 million to $205.23 billion, prime money market fund assets decreased by $570 million to $512.91 billion, and tax-exempt fund assets decreased by $1.30 billion to $179.05 billion. Assets of institutional money market funds increased by $15.61 billion to $1.76 trillion. Among institutional funds, Treasury money market fund assets increased by $5.13 billion to $768.13 billion, prime money market fund assets increased by $11.23 billion to $928.73 billion, and tax-exempt fund assets decreased by $750 million to $66.30 billion." Year-to-date, money fund assets are down $73 billion, or 2.7%. Month-to-date in September (since 9/3), MMF assets are down $18 billion. In other news, Fed Chair Yellen said in a speech on "Inflation" yesterday, "By itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions and the general economy. What matters for overall financial conditions is the entire trajectory of short-term interest rates that is anticipated by markets and the public. As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short-term interest rates at a quite gradual pace over the next few years. It's important to emphasize, however, that both the timing of the first rate increase and any subsequent adjustments to our federal funds rate target will depend on how developments in the economy influence the Committee's outlook for progress toward maximum employment and 2 percent inflation.... Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly.... In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data."

The Wall Street Journal published a piece, "Yield of Zero? There's Record Demand for That." It says, "Amid fresh worries about the global economy, a $15 billion sale of U.S. government debt attracted record demand on Tuesday -- even though the securities, which will mature in a month, were sold with a yield of zero. The auction drew $9.47 bids for each dollar offered, surpassing the previous high from a December 2011 T-bill sale. Investors handed out free cash to the U.S. Treasury in exchange for a place to preserve capital. It was the third time from the past four sales with a zero auctioned yield. The result underscores the strong appeal of highly-liquid U.S. government debt, among the safest in the world amid growing anxiety over the global growth outlook and the timing of the Federal Reserve's first interest-rate increase since 2006. On Tuesday, investors flocked into assets seen as relatively safe -- Treasury bonds, German bunds and U.K. gilts -- as stocks, oil and emerging-market currencies sold off. "There is a lot of fear in the financial markets," said Jim Caron, global fixed income portfolio manager at Morgan Stanley Investment Management, which had $403 billion assets under management at the end of June. "The Fed is concerned about global growth, so investors should be concerned <b:>`_." It continues, "Demand for T-bills usually rises as the end of a quarter approaches.... Adding to demand for bills: the Treasury has been selling fewer of them lately as it has hit its "debt ceiling," and is waiting for the U.S. Congress to raise the cap later this year. Tuesday's four-week bill auction was $5 billion smaller than a week ago and the smallest since Feb 2014. "Treasury will have to continue to keep the sizes of the 4-week bills low over the next few weeks because of limited headroom under the debt limit," said Thomas Simons, money-market economist at Jefferies. In the meantime, demand remains robust from money-market funds which are mandated to invest in very short-term debt instruments. Tighter regulations are pushing many money market funds investing in short-term corporate debt instruments such as commercial paper into buying safer T-bills. Analysts said such demand is going to continue to keep yields on T-bills at very depressed levels even as the Fed appears to be close to raising short-term interest rates for the first time since 2006.... Tom Sontag, a money manager in Chicago at Neuberger Berman Group LLC which has $251 billion assets under management, said this dynamic means yields on T-bills could "decouple" from the Fed's rate-increase campaign. Mr. Sontag said he doesn't expect bill yields to rise a lot because higher yields would attract fresh buying interest, keeping a lid on the yields."

The Securities and Exchange Commission issued a release entitled, "SEC Proposes Liquidity Management Rules For Mutual Funds And ETFs," which doesn't apply to money market funds (they already have liquidity mandates) but is aimed primarily at bond funds. (Watch for more coverage in our next Bond Fund Intelligence.) It says, "The Securities and Exchange Commission today voted to propose a comprehensive package of rule reforms designed to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs). "Promoting stronger liquidity risk management is essential to protecting the interests of the millions of Americans who invest in mutual funds and exchange-traded funds," said SEC Chair Mary Jo White. "These significant reforms would require funds to better manage their liquidity risks, give them new tools to meet that requirement, and enhance the Commission's oversight <b:>`_." Under the proposed reforms, mutual funds and ETFs would be required to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. The proposal is designed to better ensure investors can redeem their shares and receive their assets in a timely manner. A fund's liquidity risk management program would be required to contain multiple elements, including: classification of the liquidity of fund portfolio assets based on the amount of time an asset would be able to be converted to cash without a market impact; assessment, periodic review and management of a fund's liquidity risk; establishment of a fund's three-day liquid asset minimum; and board approval and review. In addition, the proposal would codify the 15 percent limit on illiquid assets included in current Commission guidelines. The proposed reforms also would provide a framework under which mutual funds could elect to use "swing pricing" to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity. The swing pricing proposal would enable mutual funds, subject to board approval and oversight, to reflect in a fund's net asset value (NAV) costs associated with shareholders' trading activity. It is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be an additional tool to help funds manage liquidity risks. The proposals will be published on the Commission’s website and in the Federal Register. The comment period for the proposed rules will be 90 days after publication in the Federal Register." The SEC also posted statements on the rule from all of the SEC commissioners, including SEC Chair Mary Jo White." ICI also released a "Statement on SEC Action on Liquidity Risk Management Programs for Mutual Funds" from its president, Paul Schott Stevens. Stevens says, "For 75 years, mutual funds have successfully managed liquidity and met redemptions under SEC rules and guidance. Based on the information available, today's proposal raises a number of complex issues for funds, their directors, and their investors. We look forward to engaging with the SEC to ensure that any final rules in this area are well-founded, practicable, and effective. We also commend Chair White and the Commission for their leadership in working to ensure that funds continue to manage liquidity and redemption risks successfully for years to come."

Schwab posted commentary called, "When Doves Cry ... Yeah! Fed Punts and Keeps Rates Unchanged." Author Liz Ann Sonders, Senior VP. Chief Investment Strategist, writes, "The Fed opted to stall on raising rates for the first time since 2006; primarily citing global turmoil and still-restrained inflation for its decision. In addition, the accompanying Federal Open Market Committee (FOMC) statement was not as hawkish as many expected (meaning, those who had been expecting no hike, were also expecting a more hawkish statement).... The main, not-so-hawkish sentence in the statement released by the Federal Open Market Committee: "The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term." The blandness of that, in relation to its statements in the past, likely means some of the uncertainty around Fed policy will be with us at least until the next FOMC meeting in October." She also recapped the new "dot plot," "The median fed funds rate projection for year-end 2015 is now 0.375% instead of 0.625%. The median for year-end 2016 is now 1.375%, down from 1.625%. The median for year-end 2017 dropped to 2.625% from 2.875%. And the new median for year-end 2018 is 3.375%. The Fed also lowered its estimate for the longer-run normal fed funds rate to 3.5% from 3.75%." JP Morgan's Short Duration Strategy team stated in its "Short Duration Strategy Weekly," "Coming into this week we had envisioned three potential outcomes at the September FOMC meeting. The first was for the Fed to move the Fed funds target range 25bp higher, but to communicate a very cautious view on the pace of future hikes both through its statement and the SEP and dots. Although we wrote last week that the likelihood of a September hike was a coin flip, we saw this as most probable of our three scenarios. Our second most likely scenario was for the Fed to pass on the September liftoff, but for it to provide some sort of affirmation that it was ready to move soon. This kind of signaling could be viewed as preparing the markets the first hike in nine years. Obviously, neither of these were delivered by the FOMC. If we were looking for an affirmation of their intent, what we received was the opposite of affirmation. The FOMC presented us with something like our third scenario, which was no hike, no clarification on when we might get one and no indication of what might get the Committee to take action.... Adding to the confusion, the Committee seems to have introduced another set of goals in the form of expectations about the stability of international markets and the dollar."

Moody's issued a report, "US Prime Money Fund WAMs at Three-Year Low Ahead of Thursday's Fed Meeting." It says, "US prime money market fund (MMF) managers move aggressively to position their funds for an increase in US short-term interest rates. Average weighted average maturities (WAM) of Moody's-rated US dollar denominated prime funds (both domestic and offshore) fell to 30 days at the end of July, their lowest level in three years. Investments in overnight assets reaches its highest level in years. At 31 July 2015, 35.8% of prime MMF assets were invested in overnight securities. The benefit of higher liquidity will be twofold: first, MMFs are better positioned to manage a pick-up in redemptions following a rate hike, since MMF yields temporarily lag market yields on direct investments. Secondly, managers will further reduce interest rate risk by reinvesting faster at the new higher short-term rates. Sharp decline in prime MMF WAMs drives improvement in Moody's MMF NAV stress scores. Reduced sensitivity to interest rate changes combined with higher liquidity levels have resulted in the strongest stress NAV scores for Moody's-rated US dollar prime funds in a year, at approximately 0.9940. Market data for the week ended 11 September shows a slight uptick in US prime MMF WAMs. Following the elevated market volatility of the last several weeks, some managers may now be expecting the Fed to remain on hold in September, waiting until later in the year to begin its tightening cycle.... While euro funds maintained the 2015 lowest level of WAM in July, sterling prime funds' WAMs were 0.7 days lower on average in July than during Q2. The most recent market data shows that in August and beginning of September, WAMs of euro- and sterling- denominated prime funds are in line with those of July." In other news, Reuters posted a story, "No Champagne for Hard-Hit U.S. Money Funds as Fed Holds Rates." It says, "There will be no champagne corks popping in the $2.7 trillion U.S. money-market fund industry. The U.S. Federal Reserve kept interest rates unchanged on Thursday, meaning investors will continue to receive next-to-nothing yields on their money funds."

The Federal Reserve Board did not raise interest rates on Thursday, despite much speculation that it would. It cited concerns over inflation and “developments abroad.” The statement from the Federal Open Market Committee says, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2 percent inflation. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term." In other news, the September swoon continues for money market mutual fund assets as they decreased for the third straight week, according to ICI's latest "Money Market Mutual Fund Assets" report. Once again, Treasury funds took a major hit, dropping $11 billion after falling $11 billion last week. The release says, "Total money market fund assets decreased by $16.23 billion to $2.65 trillion for the week ended Wednesday, September 16, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $11.05 billion and prime funds decreased by $3.61 billion. Tax-exempt money market funds decreased by $1.56 billion. Assets of retail money market funds increased by $2.04 billion to $898.84 billion. Among retail funds, Treasury money market fund assets increased by $920 million to $205.00 billion, prime money market fund assets increased by $2.00 billion to $513.48 billion, and tax-exempt fund assets decreased by $890 million to $180.35 billion. Assets of institutional money market funds decreased by $18.26 billion to $1.75 trillion. Among institutional funds, Treasury money market fund assets decreased by $11.98 billion to $763.00 billion, prime money market fund assets decreased by $5.61 billion to $917.51 billion, and tax-exempt fund assets decreased by $670 million to $67.04 billion." Year-to-date, money fund assets are down $87 billion, or 3.2%. Month-to-date from September 3, MMF assets are down $32 billion.

The Wall Street Journal published, "Will a Rate Rise Reach Money-Fund Investors?." It says, "Few areas of finance have as much riding on the Federal Reserve's interest-rate decision this week as the $2.7 trillion money-market-fund industry. While interest rates have been near zero, asset managers including Charles Schwab Corp. and Federated Investors Inc. have waived more than $30 billion worth of fees on their money funds over the past six years to keep expenses from eating up the funds' yields and taking a bite out of investors’ principal. If the Federal Reserve raises interest rates -- which could happen as soon as Thursday -- asset managers will need to decide how to divvy up the funds' increased interest income between reinstating fees and passing along higher yields to return-starved investors. "My guess is that half of the first rate hike won't be passed through to consumers, because it will go to unwinding these fee waivers," said Peter Crane, president of Crane Data LLC, a Westborough, Mass., firm that tracks money-market-fund assets. It continues, "Some share classes of Federated's institutional funds no longer have waivers, so all of a rate increase could flow through to those investors, said `Deborah Cunningham, chief investment officer for money markets at the Pittsburgh-based company. "It won't happen immediately, but will filter through over a month, with 60% of the increase expected in the first week, and the remainder happening over the rest of the month," she said.... Assuming the Fed raises rates in quarter-point increments, that latter group would see a benefit with a second Fed move, she said, and by a third move all waivers should be gone. Asset managers have been forgoing much of their usual fees for running the funds because with interest rates so low, charging the full fees would cause the funds' share price to fall below the steady $1 a share they aim to maintain." The WSJ piece adds, "Charles Schwab alone waived $168 million in fees during the second quarter, on top of $184 million in the first quarter and $2.01 billion over the three years through 2014. Money-fund sponsors have gotten a bit of relief this year. Slight increases in some short-term rates in the marketplace have allowed companies to scale back waivers.... Federated pointed to the reduced waivers -- costing it $22.2 million in the second quarter compared with $29.6 million in the same period a year earlier -- as a major reason its second-quarter revenue rose by 7% from a year earlier. T. Rowe Price Group and Northern Trust Corp. also reported lower waivers.... Asset managers are anxious to claim the lion's share of that to help cover costs incurred due to regulatory changes that were put in place after the 2008 credit crisis, Mr. Crane said. In a recent conference call with analysts, Charles Schwab executives said they were looking for a resumption of higher fees on the more than $150 billion Schwab clients hold in money funds to help generate revenue to support the company's growth plans. Investors in money funds with the lowest usual fees -- and thus either small or no waivers currently -- will see the biggest and most immediate benefit from rising interest rates. That could mean bigger gains for investors in institutional money-market funds, which typically charge lower fees than funds for individuals."

The Financial Times posted a story, "Federal Reserve Sharpens Tools for Lift-off." It reads, "Engineering the great escape from near-zero interest rates will present the Federal Reserve with a universe of challenges. A key one is ensuring short-term market interest rates obediently head where the Fed wants to see them. Achieving this is going to be a daunting feat for a central bank facing a financial sector that has changed radically following the crisis. Markets specialists at the New York Fed have for two years been extensively road-testing a new toolkit aimed at setting short-term rates in this new world, but success will only be judged when lift-off actually occurs. Some analysts argue the operation could lead to unexpectedly choppy movements in financial markets. Zoltan Pozsar, a former adviser at the US Treasury and now director at Credit Suisse, warns: "This could be a turbulent process." It continues, "A key question is how effective the new tools will be in terms of influencing market rates. Given the importance of the central bank proving it is firmly in charge of its key policy rate, many investors say they are confident the Fed will pull it off. `Brian Jacobsen, chief portfolio strategist at Wells Fargo Fund Management, said: "I'm pretty confident they will be able to hit the target they want. The [RRP] is the really potent tool <b:>`_. They can use that to enlist the money market industry." Further, "Fed chair Janet Yellen has said the size of the RRP programme will be "elevated" when rates are first lifted, but that it will be quickly reduced in size thereafter. Ben Bernanke, the former Fed chairman, has on the other hand suggested the RRP should be a permanent feature of a big central bank balance sheet. `Joseph Gagnon, a former Fed official, now with the Peterson Institute for International Economics and who co-authored a key paper on the topic in 2014, argues this flight risk has been exaggerated and that the RRP will either have to be "very big or unlimited in size" if it is to work well. It is currently capped at $300bn.... "If depositors move from banks to money market mutual funds, then many of those deposits will stay with the MMFs and the RRP will need to be permanent." Mr Pozsar says tougher regulations under Basel III will encourage many banks to shed institutional deposits that are costly to maintain, and billions could flow out of non-interest bearing deposits and into MMFs when interest rates rise. He and his colleague James Sweeney have argued the RRP will have to become very big -- north of $1tn -- as rates rise.... The cost of having a full-allotment RRP is massive flows of money from the banks and into the money funds that will be users of the RRP, and this creates problems of its own, Mr Pozsar added. "These huge flows of cash could generate volatility in the financial markets. For example, individual banks could face unexpected bottlenecks."

Bloomberg writes, "Fed Rate Increase Too Late for BlackRock, Alpine Muni Cash Funds." It says, "Whether the Federal Reserve's first interest-rate increase since 2006 comes this week or not, it won't be soon enough for Alpine Funds' municipal money-market fund. Alpine Woods Capital Investors closed the $120 million fund in April after more than 12 years of operations, joining seven other tax-exempt money-market funds that have liquidated in the last 12 months, according to data compiled by Bloomberg. That number is set to grow. BlackRock Inc. in July said it would close its New Jersey, North Carolina and Virginia money funds by the end of year, leaving it with 15. "It's tough times in the muni market," said Peter Crane, president of Westborough, Massachusetts-based Crane Data, a money-fund researcher. "Rates are so low that nobody cares about the taxes on them, because there's no income to be taxed." Caught in a vice of the Fed's zero interest-rate policy and the cost of implementing new government regulations, fund companies are culling their offerings through liquidations and mergers. Municipal money-fund assets have plunged by half since peaking in August 2008, to $250 billion. The falloff has far outpaced taxable money-market funds, which dipped 20 percent in that period, to $2.4 trillion as of Sept. 10, according to the Investment Company Institute." The piece adds, "Tax-exempt money-market funds, which invest in high-rated, short-term debt and are treated like cash by investors, may still recover as rates rise. Balances in tax-exempt funds more than doubled from the early 1980s through 2008, with faster inflows when the Fed funds rate was rising than it was declining, according to Moody's Investors Service. Alpine Woods, based in Purchase, New York, said its fund wasn't big enough to justify additional expenses resulting from U.S. Securities and Exchange Commission rules that take effect in October 2016 aimed at preventing a run on the funds. Costs for lawyers, technology, disclosure and stress testing are going up, fund managers said.... "Clearly there are some organizations where the cash product is essential to their product line-up and they have the scale to weather the storm," said Steven Shachat, who managed the Alpine fund. Alpine still has a $980 million "ultra short" municipal fund, whose holdings have an average maturity of about 90 days. Some bigger fund companies are also trimming product lines. In July, Western Asset Management, a Legg Mason Inc. affiliate, merged its $540 million Institutional AMT Free fund into the $1.3 billion Institutional Tax Free Reserves Fund, citing similar objectives and investment strategies."

Wells Fargo Money Market Funds' posted its latest "Portfolio Management Commentary," which says, "Will the Federal Reserve (Fed) raise rates -- that is the question that had seemingly been answered during the first part of August with a resounding "yes they will raise rates in September." Gross domestic product was revised higher at the end of July, the employment number announced at the beginning of August showed continued strength, and consumer sentiment rose. The probability of a move in September crept above 50% for the first time on August 6, as calculated from futures prices. As we get closer to the September 17 meeting, the off/on switch of will-they-or-won't-they is getting more sensitive. By mid-August, it switched to off again, with the probability dropping below 30% by the end of the month. Oil prices took another dip down (not helping inflation move toward the Fed's 2% objective) and emerging markets equity volatility spilled over to developed markets.... Market pundits have been almost exclusively focused on a move in either September or December because both of those FOMC meetings have a press conference scheduled after the conclusion of the meeting. But there is also a meeting in October, and in response to an earlier press conference question, Fed Chair Yellen said the committee can call a press conference at any time if necessary. So, October should not be dismissed as an opportunity for the Fed to implement liftoff of its target rates." The piece continues, "It is not our strategy to position our portfolios to time possible interest-rate changes; rather, we focus on ensuring that we are adequately compensated for investments in any tenor we select. Consequently, our focus on preservation of capital by investing in high-quality securities and maintaining a high degree of liquidity is unchanged. We believe we are properly positioned to adjust quickly to changing market conditions as well as maintain our commitment to our twin objectives of liquidity and stability of principal." Wells adds, "Planning in our industry continues as each month progresses and we get closer to implementing the SEC's money market reforms, the bulk of which will take effect October 2016. As we get close to the implementation date, we expect to see a further shortening in the weighted average maturities of prime money market funds and more demand for government securities; this combination should prove to be interesting when the time comes for the Fed to raise rates because it will be a real test to see how well it will be able to control short-term rates. The federal funds futures rate tells us that there is over a 40% chance of a Fed hike in October and well over 50% by the end of December, so the market is anticipating one move by year-end. But, as we have seen, the markets have been wrong before. Stay tuned for further developments."

Money market mutual fund assets decreased for the second straight week, according to ICI's latest "Money Market Mutual Fund Assets" report. The drop was almost entirely among Treasury money funds, which mystified market watchers awaiting moves into the sector. It says, "Total money market fund assets decreased by $15.57 billion to $2.66 trillion for the week ended Wednesday, September 9, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $11.87 billion and prime funds decreased by $2.94 billion. Tax-exempt money market funds decreased by $760 million. Assets of retail money market funds increased by $2.39 billion to $896.80 billion. Among retail funds, Treasury money market fund assets increased by $1.21 billion to $204.08 billion, prime money market fund assets increased by $1.19 billion to $511.48 billion, and tax-exempt fund assets decreased by $10 million to $181.24 billion. Assets of institutional money market funds decreased by $17.96 billion to $1.77 trillion. Among institutional funds, Treasury money market fund assets decreased by $13.07 billion to $774.97 billion, prime money market fund assets decreased by $4.13 billion to $923.12 billion, and tax-exempt fund assets decreased by $760 million to $67.72 billion." Year-to-date, money fund assets are down $71 billion, or 2.6%. We're not clear what caused the steep drop in Treasury fund assets, but we'd guess some kind of huge merger or bond deal (see Wednesday's WSJ piece, "Corporate Borrowers Log a Banner Day"), or perhaps a big move of funds by China or a large government, might account for it. Among funds, our Money Fund Intelligence Daily shows that BofA Treasury Reserves Capital saw assets decline a massive $11.5 billion over the week, while Goldman Sachs FS Trs Ins Adm, Goldman Sachs FS Govt Admin, and Morgan Stanley Inst Liq Govt Inst all saw assets decline by over $5.0 billion.

Richard Berner, Director of the US Treasury's Office of Financial Research, published a paper, "Demystifying US Repo and Securities Lending Markets." Berner writes, "The Office of Financial Research released a working paper today intended to serve as a reference guide for the U.S. repurchase agreement, or repo, and securities lending markets. The first such comprehensive reference to these securities financing transactions, it is critically needed. The OFR working paper, "Reference Guide to U.S. Repo and Securities Lending Markets," authored jointly with staff from the Federal Reserve Bank of New York, gives an overview of the repo and securities lending markets, including the institutional structure, role and motivation of market participants, vulnerabilities and potential systemic risks, and recent efforts to limit those risks. The paper also provides an overview of existing data sources, highlighting specific shortcomings related to data standards and data quality, and steps regulators are taking to improve data coverage." He explains, "The repo and securities lending markets are important sources of short-term funding for financial companies that need to finance securities, such as broker-dealers and hedge funds. During the financial crisis, both experienced and transmitted distress. Despite significant improvements since the crisis in oversight and data, both markets remain opaque to regulators and market participants. And the participants in both markets are changing as traditional business models evolve and some activities migrate to new corners of the financial system. The OFR, in collaboration with other agencies, is expanding our research and data collections to demystify these markets and promote a better understanding of how they might behave when stressed again. Repos allow firms to sell securities to each other while promising to buy those securities back at a later date at a specified price. Securities lending involves a short-term loan of stocks or bonds in exchange for cash or noncash collateral. Both markets came under pressure during the financial crisis.... Estimates for the size of the repo market at its pre-crisis peak range widely, from $5 to $10 trillion. OFR researchers estimate the market is now about $3.4 trillion in repos (in which dealers sell securities and receive cash) and $2.4 trillion in reverse repos (in which dealers deliver cash and receive securities). The authors of the paper do not attempt to size securities lending because no comprehensive regulatory data collection covering this activity is currently available. Instead, market participants and policymakers rely on market surveys and data collections conducted by data vendors."

Federated Investors' CIO of Global Money Markets, Deborah Cunningham, posted her latest "Month in Cash" commentary, "Fed Hike Still in the Cards for 2015," last week. She writes, "The equity market ended August battered by choppy waves emanating from China. Money managers didn't have to navigate those, but we had ample concerns about how the turbulence could affect the Federal Reserve's desire to raise rates for the first time in many, many years. A speech by the Fed's vice chairman at the annual Jackson Hole conference more-or-less sums up the situation. Stanley Fischer said that the case for a hike continues to grow but that volatility coming from China and other issues could impact that decision. Yet he seemed to dismiss the benign inflation readings from the summer, saying there is "good reason" to expect it to rise, and pointed to improving U.S. economic data. Regardless of his noncommittal stance and the equally noncommittal minutes of the July Federal Open Market Committee meeting, we are still of the opinion that 2015 is in the cards and that liftoff in September is more likely than in October or December. The economic statistics out between the end of July and the end of August are impossible to discount. Data has been very good, with housing and employment numbers coming in strong. The revised gross domestic product (GDP) reading for the second quarter of 3.7% was great. The only soft spot continues to be low inflation abetted by the low price of oil -- probably the biggest reason that policymakers are still on the fence. We think there's another reason that points to an imminent hike in the federal funds rate range, one that money market managers pay more attention to than most product managers. Lately, the New York Fed has been accelerating its fine tuning of repo rates, term repo and other policy tools it will be using to guide rates when they climb. The staff won't implement everything until the FOMC actually raises the target range, but it has experimented with several different strategies on money funds over the past year or so." Cunningham adds, "From a portfolio positioning perspective we decreased the weighted average maturity (WAM) target range for our government portfolios, backing-up our expectation of a Fed move. It had been in the 40-50-day range and we decreased that to 35-45 days <b:>`_. It's also a reflection of short-term rates lately being a little bit more generous then they have been. We did not take the same approach with the prime portfolios, mainly because they were already at the short end of their WAM range of 40-50 days, with most near 40 days. Plus, we have more purchasing options for prime. By the same logic we have nearly maxed-out on how many floating-rate securities we can buy (per our portfolio allocation rules), and we haven't bought many fixed-rate instruments past six months."

Forward Funds is the latest investment manager to exit the money fund business. It liquidated its Forward US Government Money Market Fund late last month. The filing says, "On June 9, 2015, the Board of Trustees of Forward Funds (the "Trust"), including all of the Trustees who are not "interested persons" of the Trust (as that term is defined in the Investment Company Act of 1940, as amended), approved the liquidation of the Forward U.S. Government Money Fund (the "Fund"), a series of the Trust. The Fund will be liquidated pursuant to a Board-approved Plan of Liquidation on or around August 26, 2015 (the "Liquidation Date"). On the Liquidation Date, the Fund will distribute pro rata to its respective shareholders of record all of the assets of the Fund in complete cancellation and redemption of all of the outstanding shares of beneficial interest, except for cash, bank deposits or cash equivalents in an estimated amount necessary to (i) discharge any unpaid liabilities and obligations of the Fund on the Fund's books on the Liquidation Date, including, but not limited to, income dividends and capital gains distributions, if any, payable through the Liquidation Date, and (ii) pay such contingent liabilities as the officers of the Trust deem appropriate." We also learned from MutualFundWire.com that Eaton Vance will liquidate its Eaton Vance U.S. Government Money Fund. Its filing says, "Eaton Vance U.S. Government Money Market Fund (the “Fund”) is no longer offered for sale or exchange and the Fund will be liquidated on or about October 29, 2015 ("Liquidation Date")." Finally, Dreyfus recently liquidated its Dreyfus Basic Municipal Money Market Fund, and reported that its $95 million Dreyfus Basic New York Municipal MMF and the $92 million Dreyfus New York AMT-Free Municipal MMF will be liquidated on October 28, 2015. Further, the Dreyfus AMT-Free Municipal Reserves and its various share classes were renamed Dreyfus General AMT-Free Municipal MMF.

Money market mutual fund assets decreased for the first time in 5 weeks, according to ICI's latest "Money Market Mutual Fund Assets" report. It says, "Total money market fund assets decreased by $16.10 billion to $2.68 trillion for the week ended Wednesday, September 2, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $18.60 billion and prime funds increased by $1.22 billion. Tax-exempt money market funds increased by $1.28 billion. Assets of retail money market funds increased by $6.44 billion to $894.41 billion. Among retail funds, Treasury money market fund assets increased by $2.16 billion to $202.87 billion, prime money market fund assets increased by $3.14 billion to $510.29 billion, and tax-exempt fund assets increased by $1.14 billion to $181.25 billion. Assets of institutional money market funds decreased by $22.54 billion to $1.78 trillion. Among institutional funds, Treasury money market fund assets decreased by $20.76 billion to $788.05 billion, prime money market fund assets decreased by $1.92 billion to $927.25 billion, and tax-exempt fund assets increased by $140 million to $68.47 billion." Year-to-date, money fund assets are down $55 billion, or 2.0%. Month-to-date, from July 29 through September 2, assets are up $30 billion. In other news, a press release entitled, "Fitch Assigns New Ratings to Four Deutsche Money Funds" says, "Fitch has assigned new 'AAAmmf' to four money market funds managed by Deutsche Asset & Wealth Management under the Ireland-domiciled Deutsche Global Liquidity Series plc umbrella fund: Deutsche Managed Euro Fund: 'AAAmmf', Deutsche Managed Sterling Fund: 'AAAmmf', Deutsche Managed Dollar Fund: 'AAAmmf', and Deutsche Managed Dollar Treasury Fund: 'AAAmmf(EXP)'." It continues, "The 'AAAmmf' money market fund ratings reflect the funds' extremely strong capacity to achieve the investment objectives of preserving principal and providing shareholder liquidity through limiting credit, market and liquidity risk.... The funds had approximately EUR6.3bn, GBP8.1bn and USD15.6bn respectively in assets under management as of 18 August 2015."

Morgan Stanley Investment Management posted commentary recently entitled, "Slowing Chinese Economy Increases Potential for Headline Risk in Some Money Market Funds." It says, "While some money market fund (MMF) managers continue to hold short-term debt of large Chinese institutions, Morgan Stanley Investment Management continues its steadfast approach of not utilizing Chinese credits in our MMF portfolios. In three prior articles in this series, we discussed the reasons why investing in Chinese debt is not consistent with conservative MMF management. We believe that the added compensation for holding these securities does not outweigh the increasing potential for negative headline risk. Over the past two years, some MMF managers have been enticed by the high yields offered for securities of Chinese institutions -- yields that are rarely found elsewhere in the investable money market universe. Particularly of note, the Chinese debt holdings in Euro MMFs have been increasing in the midst of an extremely challenging interest rate environment with money market fund yields approaching zero." The piece concludes, "Given the mounting economic strains, the lack of transparency and the rising debt burden, we can be even more confident in our decision not to invest our clients' money in Chinese debt. We continuously monitor the various developments and significant events affecting the financial markets and we modify our positions as conditions warrant." Note: According to Crane Data's latest Money Fund Portfolio Holdings (as of 7/31/15), Chinese related holdings accounted for just $8 billion of U.S. domestic money market funds' $2.55 trillion. The largest issuers include: China Construction Bank Co (32.7% of all China-related holdings, $2.6 billion), Industrial & Commercial Bank of China Ltd (17.1%, $1.3B), Agricultural Bank of China Limited (11.9%, $0.9B), and CNPC (11.4%, $0.9B).

JP Morgan Securities says demand for "Money market floaters" has "surged" recently in its latest "Short Term Fixed Income." It explains, "Over the past several months in the 2a-7 space, demand for floating rate CP/CDs has surged. Short-term floaters are a means for MMF managers to participate in a potential rise in rates. Furthermore, floaters have also offered a slight yield pickup over their matched maturity fixed rate counterparts, and have not substantially impacted portfolio WAMs. These factors combined have made floaters an attractive option for money market investors. That said, we thought that it would be worth providing some color around the current state of the market below. Year to date, the primary issuers of money market floaters have been high credit quality banks. Indeed, nearly 50% of the $319bn printed in floating rate CP/CDs this year has come from Canadian, Australian, and Japanese banks. With heavy investor demand for high quality credits, these issuers have been able to price floaters at reactively tight spreads to 1m Libor. In contrast, lower tier banks have not been large issuers in the floater market, as MMFs have generally kept their exposures to these banks short for credit purposes. From a maturity perspective, issuance in floating rate CP and CDs has predominantly been concentrated in 6m paper. This has become even more so the case in recent months, with issuance in 6's growing in tandem with Fed expectations. Conversely, issuance in 1yr paper has fallen this year, while 9m paper has not seen significant interest so far. We suspect that poor liquidity in the 9m-1y space is due in large part to money market reform coming into play -- investors are avoiding going out too long in order to maintain ample liquidity, whether it be for meeting potential redemptions or due to plans of converting from prime to government fund status." JPM continues, "Looking forward, with a Fed tightening cycle on the horizon, we expect demand for floaters to remain strong throughout the remainder of the year. Regardless of when the first rate hike actually occurs, it is likely that money funds continue to prefer the rate protection and WAM benefits received from buying floaters. Furthermore, we suspect that the sweet spot for issuance could creep in from the 6m space as the effects of money fund reform take greater hold during late 2015/early 2016. As this occurs, pricing in the 6m-1yr sectors will likely cheapen up relative to respective fair values, within spread compression in shorter tenors."

PIMCO Portfolio Manager Jerome Schneider posted commentary recently called "The B Side of Capital Preservation." He writes, "Vinyl single records have two sides: The A-side is always the well-known hit song by the musician, and the other, called the "B-side," is often a lesser known (or unknown) work. When it comes to cash management, the hit song on the A-side -- "Capital Preservation Is King" -- has been played over and over since the financial crisis. Amid episodes of stress and illiquidity, continuing central bank action and changing regulatory frameworks, investors sought refuge through three traditional avenues to capital preservation: investing cash with depository banks, buying U.S. Treasury bills directly and buying shares in regulated 2a-7 money market funds. Until now, these strategies mostly succeeded in preserving capital. However, regulatory and market forces are changing the landscape, and these traditional schemes have become less appealing or simply less available. In addition, many have failed to preserve purchasing power: Their near-zero returns have trailed even recent modest levels of inflation. As monetary stimulus in the U.S. winds down, global investors need to consider turning the record over to the B-side and listening to the new tune for cash management: "Purchasing Power Preservation." Of the three traditional strategies, regulated money market funds have been the vehicle of choice for investors looking to manage liquidity while preserving capital. Over the past few years, investors have even forgone attractive returns, with money funds yielding a mere 0.01% at the end of June, according to Crane's Money Fund Index. With bond yields low overall and inflation expectations benign, the opportunity cost of this strategy has been small over the past five years. But things are changing." Schneider concludes, "We suggest investors begin to listen closely to capital preservation's "B-side." We are on the brink of a New Normal for liquidity management and conscientious capital preservation. In our view, all investors -- retail and institutional -- can benefit from an active approach that not only takes into account changes to portfolio and market liquidity but also aims to offer enough capital return to protect purchasing power.... Ahead of the Fed's rate actions and the implementation of the Securities and Exchange Commission money market fund reform in 2016, we believe now is the time for investors to consider active approaches for capital preservation and look beyond money market funds."