Daily Links Archives: March, 2016

A press release entitled, "Saxon Securities to Offer FDIC-Insured Brokered CD Portfolios on Envestnet Platform." It says, "Saxon Securities, a recognized platform provider of separately managed account FDIC-Insured brokered certificates of deposit (CDs) investment management services for Registered Investment Advisers (RIAs), has teamed with Envestnet to offer its product on the Envestnet platform. Envestnet assists investment advisors in providing wealth management technology and services as well as investment solutions and products, including managed account portfolios, to their clients. "Envestnet prides itself on offering a broad set of managed account solutions to over 40,000 advisors who access the over 1,300 Separate Account Portfolios available through the single contract platform. We're pleased to be able to offer Saxon Securities' FDIC-insured CD portfolio solution and believe that the strategy fills a unique space in our managed account offering," said Estee Jimerson, Senior Vice President at Envestnet. The Saxon Securities product, usually accessed only by larger institutions, offers a managed service that provides competitive yields with the protection of the Federal Deposit Insurance Corp of the underlying CDs. In this persisting low yield environment and sovereign debt crisis, clients are looking for a managed government guaranteed fixed income solution that maximizes yield relative to other U.S. government guaranteed securities. Currently, large unprotected cash allocations are being held by investors in money market positions earning as little as 0.01% annually," said Ned Lucia, Managing Partner of Saxon Securities." In other news, the U.S. Treasury's Office of Financial Research <i:https://financialresearch.gov/public-appearances/2016/03/30/financial-data-summit/> Director `Richard Berner commented at this week's "Financial Data Summit," "At last year's summit, I noted our collaboration with the Federal Reserve and Securities and Exchange Commission, or SEC, on a pilot project to fill gaps in data describing repurchase agreements, or repo -- in this case, bilateral repo, which accounts for about half of the $3.4 trillion daily U.S. repo market activity. We have now finished collecting the pilot data from companies on a voluntary basis. In January, we published an OFR brief with aggregated data from the survey to provide greater transparency into the bilateral repo market <b:>`_for participants and policymakers. `We now have a second, related pilot project underway to fill gaps in data related to securities lending, in which securities owners lend stocks or bonds to other parties. We are planning permanent collections based on these pilot projects, in collaboration with FSOC member agencies."

The New York Fed's Liberty Street Economics blog features, "How the Fed Smoothed Quarter-End Volatility in the Fed Funds Market." It reads, "Before the financial crisis, the Federal Reserve implemented monetary policy by targeting the overnight fed funds rate and then adjusting the supply of bank reserves every day to keep the rate close to the target. Before the crisis, reserves were generally in scarce supply, which periodically caused temporary spikes in the fed funds rate during times of high demand, typically at the end of each quarter. In this post, we show that the Fed actively responded to quarter-end volatility by injecting reserves into the banking system around these dates." It adds, "Large fluctuations in the fed funds rate around quarter-end were a feature in the fed funds market in the 1980s and 1990s and remain so today.... This heightened volatility hampered the Fed's ability to keep the fed funds rate on target during quarter-ends. The heightened volatility typically caused the fed funds effective rate to deviate from target." The blog adds, "The ... range of excess reserves was relatively narrow, `between $3 billion and $6 billion on most quarter-end dates. This narrow range suggests that the Fed chose not to eliminate reserve demand shocks completely." It concludes, "The Fed's response to the financial crisis of 2007-09 resulted in large amounts of excess reserves in the banking system. As a consequence, the Fed could no longer significantly influence the fed funds market on quarter-ends by modestly changing the level of reserves. Unlike in the pre-crisis period, the effective fed funds rate has tended to fall on recent quarter-end dates, as money market investors have faced reduced investment opportunities during the quarter-end and have shifted money into reverse repurchase agreements with the Fed instead. While some of the Fed's tools and operating procedures have changed since the crisis, a quarter-end pattern remains evident in the Desk's operations." In other news, the New York Fed also updated its "Reverse Repo Counterparties List." It says, "RBC Prime Money Market Fund is no longer a reverse repo counterparty, effective March 25." RBC is liquidating the fund in September 2016.

The SPARK Institute issued a press release entitled, "SPARK Institute Questions Members On Money Market Fund Reforms." The posting by the retirement plan and insurance industry lobbying group reads, "The SPARK Institute recently surveyed its members on their plans for implementing Money Market Fund reforms. The Securities and Exchange Commission adopted new rules on the way Money Market Funds are managed to address concerns about instability in the market during periods of financial stress. The new rules would require several changes to Non-Governmental [sic] Money Market Funds. First, Money Market Funds would be required to move to a floating NAV, rather than the current stable $1.00 per share used today. Second, during times of extreme volatility, Money Market Fund managers may impose redemption fees and withdrawal restrictions. Other changes include diversification requirements and additional reporting. The SPARK Institute asked its members if they intend to update their defined contribution plan record keeping systems to accommodate the required changes. None of the survey respondents plan to build out the capabilities necessary to impose redemption fees or possible withdrawal gates. Instead, most record keepers are requesting their clients move to Governmental Money Market Funds. When asked how this change was being communicated to plan sponsors, most record keepers said that communication efforts have already begun and that plan sponsors are being given the option to change to a Government Money Market Fund or select a different fund by October of this year. According to one record keeper, plan sponsor reactions have been generally positive. "Most understand that converting to a Government Money Market Fund is easier for participants than trying to educate them about possible redemption fees and withdrawal restrictions during times of financial stress," said one survey respondent." The SPARK Institute represents retirement plan service providers and investment managers, including members that are banks, mutual fund companies, insurance companies, third party administrators, trade clearing firms and benefits consultants.... Collectively, its members serve approximately 85 million participants in 401(k) and other defined contribution plans." In other news, Money magazine's Allan Sloan wrote, "Why I Dumped My Tax-Free Money-Market Fund—and You Should, Too." He states, "I moved a serious slug of money out of tax-free money funds into taxable funds. It's not that I suddenly decided the time had come to pay more to Uncle Sam. It's that, at least for now, the difference in yields between taxable funds and tax-free funds is compelling."

Money fund assets fell for the third straight week, dropping $14.8 billion, according to ICI's weekly data. The Investment Company Institute's weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $14.76 billion to $2.75 trillion for the week ended Wednesday, March 23, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $1.84 billion and prime funds decreased by $10.42 billion. Tax-exempt money market funds decreased by $6.18 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.270 trillion, while Prime assets are at $1.251 trillion. Government fund assets surged ahead of Prime assets for the first time earlier in March as over $191 billion converted from Prime MMFs to Govt. Another $82 billion is scheduled to switch over the next several months. (Later this year, many expect investors to shift as much as hundreds of billions more in assets from Prime to Government funds as the October 14 deadline for the SEC's floating NAV, and emergency gates and fees, reforms approach. ICI's weekly release explains, "Assets of retail money market funds decreased by $6.18 billion to $996.90 billion. Among retail funds, government money market fund assets increased by $900 million to $379.05 billion, prime money market fund assets decreased by $5.11 billion to $446.28 billion, and tax-exempt fund assets decreased by $1.97 billion to $171.57 billion." It adds, "Assets of institutional money market funds decreased by $8.58 billion to $1.75 trillion. Among institutional funds, government money market fund assets increased by $940 million to $890.90 billion, prime money market fund assets decreased by $5.31 billion to $804.73 billion, and tax-exempt fund assets decreased by $4.21 billion to $59.09 billion." Year-to-date through March 23, MMF assets are down $7 billion; month-to-date assets are down $52 billion. A Footnote to ICI's release adds, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." Also, ICI released a publication, "Profile of Mutual Fund Shareholders, 2015," which looks at mutual fund ownership trends. It states, "Among households that owned mutual funds, median mutual fund holdings were $120,000. The largest percentage of mutual fund–owning households, 88 percent, owned equity funds. Thirty-five percent had invested in balanced funds, 42 percent in bond funds, and 54 percent in money market funds."

Institutional investment advisor Highland Associates published a white paper on "Money Market Reform," which says, "Significant rules changes in the $2.8 trillion money market industry have, and will continue to affect everything from fund manager behaviors to return expectations and yield spreads. Broader macroeconomic forces -- including Federal Reserve policy and government bond issuance -- will also impact risks and opportunities in the cash markets. To cope with these changes, investors must determine the role of cash in their portfolios, including its functions as both a source of liquidity and principal protection. There has already been a substantial shift in assets from institutional prime money market funds to government money market funds in anticipation of these rules changes. Higher costs associated with reform implementation are cited as the primary driver of the shift. Crane Data, which publishes Money Fund Intelligence, estimates that roughly $272 billion in prime money market assets had either 1) liquidated, 2) converted to government money funds, or 3) planned to convert to government funds before October 2016. This accounts for nearly 10% of total money market assets. Roughly $100 billion of this $272 billion in prime assets had not converted as of the end of February, although Crane Data expects nearly half of this amount to convert by the end of May." The Highland paper continues, "Money market fund investors should not expect meaningful increases in yield going forward for several reasons. The aforementioned conversion from prime to government funds is driving strong demand for government securities at a time when supply is quite constrained. Demand may even accelerate as the October deadline for reform compliance nears, with hundreds of billions of dollars potentially moving into government securities. On the supply side, more restrictive regulations are curtailing issuance across short-term debt markets.... Anecdotally, the supply of Treasury bills, agency discount notes, and dealer repo balances have declined by $600 billion, $500 billion, and $300 billion since 2009. Treasury bills currently account for just 11% of total debt outstanding, a record low. In addition, the pace of Fed rate hikes is likely to occur more gradually than originally anticipated.... Investors must begin to consider all of the options available for their cash investments. Both prime and government funds will remain widely available and suitable for many investors, regardless of recent rules changes." The piece concludes, "Investors should carefully consider the role of cash in their portfolios to be properly positioned amid these significant changes in short-term debt markets. Highland believes that cash has historically served two distinct functions for investors: 1) liquidity and 2) principal preservation.... Focusing strictly on liquidity and capital preservation, government money market funds represent an attractive option for investors looking to control risks at all costs. The tradeoff to lower risk is lower yield, and investors should not expect government fund yields to keep up with prime fund yields that can take more risk. Yield spreads between prime and government funds have widened in the last few months as conversions to government funds have depressed yields on those securities. While the yield advantage on prime funds is currently only 15 basis points, this spread could widen another 40-50 basis points by the October reform compliance deadline. Investors must decide if the incremental risk is worth the limited return advantage. Investors with significant cash holdings may consider dividing their positions. Investments in government money market funds represent the best allocation for cash that must remain immediately accessible. For less immediate cash needs, yield driven investments in enhanced cash or short-term debt portfolios should earn a higher yield, although the risk of small losses in principal must be noted."

Fitch Ratings issued a press release entitled, "US MMF Exposures To European Banks Drop As Quarters End." It says, "The drop in US money market funds' exposures to European banks at quarter end is becoming increasingly more pronounced, Fitch Ratings says. "Window dressing" by banks to improve regulatory figures at reporting dates is common practice, but recently enacted regulatory rules for European banks combined with MMFs' use of the Fed's reverse repurchase programme are likely exacerbating the quarterly fluctuations. In Europe, the leverage ratio is reported quarterly and was initially calculated using the average of the month-end leverage ratios over a quarter. This was amended effective January 2015 to be calculated using a point-in-time quarter-end basis, to align with solvency reporting. This may have exacerbated intra-quarter fluctuations by incentivising banks to report lower balance sheet volumes on the last day of a quarter than they held during the quarter. Regulators are attuned to "window dressing" and some require their banks to use averages of daily balance sheet exposures when calculating quarter-end ratios. In the US, the supplementary leverage ratio uses daily averages for on-balance sheet items and the average of three month-end calculations for off-balance-sheet items. UK banks will be required to report an additional leverage ratio using daily averages to their regulator starting 2017 and to publicly disclose this in 2018." Fitch continues, "The UK regulator's action could lessen banks' incentives to adjust leverage ratios on any specific date. This may reduce the fluctuations in UK bank funding from US MMFs, so the trend could be more similar to the less volatile exposures of US banks." It adds, "The Fed's reverse repurchase operations (RRP) may also be contributing to the increase in volatility in MMF exposure to European banks. MMFs' growing comfort with this alternative risk-free investment has driven them to increase allocations to the RRP, especially at quarter ends, when bank demand for dollar funding from MMFs ebbed. RRP assets at prime and government funds have topped or roughly equalled allocations to European banks each quarter end since December 2014. Quarterly dips in the top 10 prime US MMFs' exposures to European banks emerged at end-2012… The swings have become sharper, maybe as disclosure requirements for European banks became clearer in the lead-up to the public disclosure of the leverage ratio starting 1 January 2015. Demand and supply-side dynamics will continue to contribute to shifts in MMF asset allocations, likely away from European banks and toward the Fed's RRP facility at quarter ends."

Fixed-income software firm Investortools posted a blog entry entitled, "Smart 2a-7 Compliance Updated for Money Market Funds." It says, "Money fund managers must adapt to the SEC's changes to rule 2a-7 or exit the business. Funds that can't comply by the deadlines for two major sets of changes that take effect in 2016 will no longer be able to call themselves "money market funds." However, updates to Investortools' Smart software make it easy to monitor compliance with the SEC's new diversification limits and stress testing rules as part of an integrated portfolio management and compliance solution. One of the most substantive changes to rule 2a-7 involves revised diversification limits. The key changes are a difference in how guarantees are treated and the elimination of the "25 percent basket" not subject to diversification requirements. Funds used to be able to get around the diversification limits on issuers by diversifying their guarantee providers. That's no longer true. With the elimination of the "25 percent basket," the 10 percent diversification limit now applies across the board for non-municipal money market funds. Municipal money market funds are cut back to a 15 percent diversification limit. These changes were adopted by the SEC in July 2014 and take effect April 2016, as part of the SEC's broader response to the role of money funds in 2008 financial crisis. Money market funds must ratchet up their stress testing under changes adopted by the SEC in July 2014 and taking effect in October 2016. Prior to the rule change, stress testing could be done on each of the following factors in isolation: changes in interest rates, downgrades and defaults, changes in credit spreads, and redemptions. Now the SEC says each of the first three factors must be viewed together with redemptions. To avoid problems with risk-limiting conditions, Smart's revised interface now alerts users when a proposed trade would put the portfolio out of regulatory compliance. This automates a feature that was previously available upon clicking a button to run the rules. In addition, Smart's compliance feature tests at the new, lower diversification limits." It continues, "Smart's stress testing feature has been rebuilt to meet the new compliance standards and provide more transparent results. Unlike other solutions, Smart is not a black box. It lets you analyze the role of every security in your stress tests, which is helpful if your fund board questions your stress test results. Smart also accommodates both constant-NAV and floating-NAV funds, which helps funds adapt to the October start of floating NAVs for institutional money market funds."

The Wall Street Journal published, "Retirement Plans Take Different Tack on Money Funds." It says, "People saving for retirement in workplace 401(k) plans may soon see changes to the lowest-risk choices on their investment menus. The adjustments -- which have occurred already at some plans but are under consideration at many more, consultants said -- are in response to new rules for money-market mutual funds that will take effect in October. "Prime" money funds that buy both corporate and government debt will be required to charge redemption fees if they are swamped by withdrawals amid market turmoil. They also will be required to set up procedures to suspend redemptions in some cases. As a result, many 401(k) plans are looking at shifting to money funds that buy only government debt, which aren't required to have redemption fees or set up "gates" to block withdrawals. "Plan sponsors do not want to be exposed to a situation where plan participants can't get their money, regardless of how remote that possibility is," said Philip Suess, a partner at investment consulting firm Mercer LLC in Chicago. Some other plans are considering replacing money funds altogether with other low-risk alternatives, principally with "stable-value" funds, which are diversified portfolios of highly rated bonds. Whatever plan sponsors decide, "I would expect a fair amount of change," said Lynn Dudley, a senior vice president at the American Benefits Council.... About 47% of defined-contribution retirement plans offered money funds or other cash equivalents in 2014, according to the latest data available from the Plan Sponsor Council of America." The piece continues, "Government-debt-only money funds will have the option to impose redemption fees or put up gates. But many asset managers said they won't do that, making those funds more attractive to many plan sponsors, said Peter Crane of Crane Data LLC, which tracks the money-fund industry.... From Nov. 1 through the end of February, 61 prime money funds with $272 billion in assets converted to government-debt funds or declared that they would do so, according to Crane Data.... Lockton Retirement Services in Kansas City, Mo., is helping 401(k) plans move away from prime money funds, and the majority are choosing stable value, said Samuel Henson, the firm's director of compliance services. Of the 1,200 retirement plans Lockton works with, 44% offer a money fund, 55% offer stable value and just 1% offer both.... An index of stable-value funds compiled by researcher Hueler Cos. returned an average 3% a year over the 10 years through February. Still, there are environments in which savers might be sorry to be in a stable-value fund rather than a money fund. When interest rates rise, the yield on stable-value funds generally lags behind that of money-market funds."

Money fund assets dropped sharply in the latest week, likely due to quarterly corporate tax payments on March 15; they dropped back below the $2.8 trillion level in the week ended March 16. It was the 2nd straight week of asset declines. The Investment Company Institute's weekly "Money Market Fund Assets statistics also show that Government fund totals climbed back ahead of Prime MMF assets. (Three weeks ago, Government MMF assets surpassed Prime last week for the first time ever.) The report says, "Total money market fund assets decreased by $39.99 billion to $2.76 trillion for the week ended Wednesday, March 16, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $14.79 billion and prime funds decreased by $23.31 billion. Tax-exempt money market funds decreased by $1.89 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.268 trillion, while Prime assets are at $1.258 trillion. Since November, over $191 billion has converted from Prime MMFs to Govt, and another $82 billion is scheduled to switch over the next several months. (Later this year, many expect investors to shift as much as hundreds of billions more in assets from Prime to Government funds as the October 14 deadline for the SEC's floating NAV, and emergency gates and fees, reforms approach. ICI's weekly release explains, "Assets of retail money market funds decreased by $7.38 billion to $1.00 trillion. Among retail funds, government money market fund assets decreased by $1.07 billion to $378.15 billion, prime money market fund assets decreased by $5.68 billion to $451.39 billion, and tax-exempt fund assets decreased by $630 million to $173.54 billion." It adds, "Assets of institutional money market funds decreased by $32.60 billion to $1.76 trillion. Among institutional funds, government money market fund assets decreased by $13.72 billion to $889.96 billion, prime money market fund assets decreased by $17.62 billion to $806.30 billion, and tax-exempt fund assets decreased by $1.26 billion to $63.30 billion." Year-to-date through March 16, MMF assets are up $4 billion and month-to-date assets are up $11 billion. A Footnote to ICI's release adds, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline."

The Federal Reserve met Wednesday, and, as expected, did not raise interest rates. But the Fed's "dot plot" and outlook still calls for 2 more hikes this year. The FOMC's statement reads, "Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months.... A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.... However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.... Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.... The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data." The new "Summary of Economic Projections" calls for two rate hikes in 2016 with a projected median Federal Funds Rate of 0.9% at the end of 2016, 1.9% at the end of 2017, 3.0% at the end of 2018, and 3.25% in the longer run. In a press conference that followed, Fed Chair Janet Yellen said, "The paths that the participants' project for the Federal Funds Rate and how it will evolve are not a preset plan or commitment or promise of the committee. The median should not be interpreted as a committee endorsed forecast. There's a lot of uncertainty around each participants' projection and they will evolve." When asked about negative rates, she said, "What I'd like to make clear is [negative rates] is not actively a subject that we're considering or discussing. The committee continues to feel we are on a course where the economy is improving and inflation is moving back up. If events continue to unfold in that way, we're likely to gradually raise rates over time."

CNBC posted an article, "Fed policy has cost savers $7.5 billion: Study." It says, "The past 10 years have been very good for investors, but not so much for savers. Since 2006, the S&P 500 stock market benchmark has surged more than 60 percent (and more than 200 percent if you count from the time the bull market began in 2009). In the same period, however, folks squirreling away their money in savings accounts have lost nearly $8 billion. Both results are due in large part to a Fed policy that has sought to push money out of zero-yielding savings and money market accounts and into riskier assets, particularly stocks. (Households have about $8.4 trillion in time and savings deposits, along with another $1.05 trillion in money market funds, according to Fed data.) The goal is to create a "wealth effect" that spreads through the economy, though economic growth throughout the post-financial crisis recovery has been mired in the 2 to 2.5 percent range. Various academic studies have shown that the low interest rates have pushed even more money into mattresses as savers have sought to make up for not getting returns by putting away more money. The overall savings rate went from 3.3 percent in 2006 to 5.2 percent in 2016, according to research from NerdWallet, a personal finance information site. NerdWallet took those rates, then applied them to average disposable personal incomes and used as a baseline a $25,000 high-yielding account to figure how much savers have lost in the periods. All totaled, the site figures savers have lost about $7.7 billion during the decade, and those calculations include 2006, a year when the Fed was still actually raising rates. The trend is unlikely to change soon. Even if the Fed gets back on the path to normalization, it probably will be years before savers see significant rewards." It continues, "This week's Federal Open Market Committee meeting is likely to see little action. At its December gathering, the committee hiked its interest rate target a quarter point, the first such move since June 29, 2006. However, financial market volatility and inflation that remains below the Fed's target likely will preclude any action at the March meeting. Market participants, however, are bracing for action at some points this year, though when and how aggressive the moves will be remain matters of debate." In other news, Plan Sponsor published an article, "Participants Flocking to Fixed Income in 2016." It says, "As stocks tumbled in January, defined contribution (DC) plan participants were busy making trades, according to the Aon Hewitt 401(k) Index.... GIC/stable value funds, Bond funds, and Money Market funds saw the most inflows at $348 million, $172 million and $106 million, respectively.... In February, Bond funds took in $191 million of DC participants' assets, while GIC/stable value funds and Money Market funds saw inflows of $91 million and $29 million, respectively."

Capital Advisors Group released yet another white paper, "Optimizing Separate Account WAM in a Rising Rate Environment." The introduction says, "Faced with the challenges of banks turning away non-operating deposits and prime money market funds subject to redemption fees and gates, institutional cash investors increasingly turn to separately managed accounts (SMAs) as a viable cash management alternative. SMAs benefit from a customized and stable liquidity profile, wider investment selections, easy monitoring and direct control of credit risk, and higher return potential. In a rising interest rate environment, however, SMAs may experience unrealized losses. How does one optimize portfolio weighted average maturity (WAM) to maximize return potential and minimize unrealized losses? We plan to tackle this question with a scenario analysis of several model portfolios to show that, even in a rising interest rate environment, it still pays to extend the WAM in an SMA beyond that of typical prime money market funds.... For our experiment, we designed two sets of model portfolios with laddered maturities.... The WAMs for the two sets of three portfolios are 1.5 months, 3 months, and 6 months, respectively. The portfolios reinvest maturity proceeds at the end of each month for the same maturity at prevailing yield levels so that the WAMs return to the beginning levels for the subsequent month." It concludes, "For institutional cash investors unsure of the SMA approach in a rising interest rate environment, our scenario analysis suggests that despite, or because of, a rising rate environment, a laddered portfolio of agency and corporate securities of modest WAM could outperform the government money market fund alternative on income returns with negligible unrealized loss concerns. For accounts that do not accept credit exposures, agency portfolios may sufficiently defend against rising interest rates up to three rate hikes in a 12-month period if today's yield curve to RRP relationship holds constant. A corporate credit portfolio may outperform the government money market fund alternative if interest rates were to increase by up to 1.00% in the next 12 months."

Invesco analyst Lucas Simmons posted a blog called, "Three reasons why US banks are still strong despite current market turbulence." It says, "The Invesco Global Liquidity team believes the markets' sharp price movement is largely driven by sentiment and is not indicative of overall weakness in the US banking sector. In fact, we believe the US banking sector is likely to strengthen over the next few years. Below are three key reasons why we believe the US banking sector is strong and warrants further participation. 1. Increased domestic and international regulation.... Such regulation has led to improvements in bank capital and liquidity levels, funding profiles, reduced debt, as well as to a significant increase in the capital that banks hold to absorb losses in times of extraordinary financial stress. As a result, US commercial banks have substantially increased the amount of capital held on their books since the latter half of 2008.... 2. Improved funding structures.... This is important because during the financial crisis many of the banks that were experiencing severe stress -- and in the end, failed or received a bail-out -- were those that borrowed money in the open market with promises to repay these debts back in a very short time period.... 3. Solid loan quality." It concludes, "Based on these broad-based fundamental improvements and new regulatory requirements (some of which have yet to be implemented), we believe the positive trends in the US banking sector are as strong as those of any US industry, if not stronger. Therefore, we see counterparty risk as significantly diminished when compared with the crisis period, and we believe it is most likely isolated to only those banks with idiosyncratic issues. Our investment strategy is to proceed with caution while looking for opportunities to arise." In other news, The Wall Street Journal's Jason Zweig writes, "Cash Is Now a Sin," which says, "Once upon a time, fund managers kept plenty of cash in reserve in case the stock market tanked. Those days are gone. When stocks are overpriced, as many analysts believe they are now, your fund manager is just going to keep right on buying them. And when the market drops, your fund manager will have barely any cash with which to scoop up bargains. The job of deciding when to hoard cash and when to invest it is all yours now -- much as the shift from pension plans to 401(k)s has made workers, instead of employers, responsible for funding retirement. Until the late 1990s, fund managers kept much more set aside for a rainy day; between 1986 and 1995, stock funds held an average of 9% in cash. But, as of this Jan. 31, the average U.S. stock fund had only 2.9% of its assets in "liquid assets" (cash and other readily saleable securities), according to the Investment Company Institute, a trade group for the fund industry."

Money fund assets decreased for the first time in 5 weeks, but remained above the $2.8 trillion level in the week ended Wednesday. The Investment Company Institute's weekly "Money Market Fund Assets statistics also show that Prime fund totals climbed back ahead of Government MMFs. (Two weeks ago, Government MMF assets surpassed Prime last week for the first time ever.) The report says, "Total money market fund assets decreased by $1.21 billion to $2.80 trillion for the week ended Wednesday, March 9, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $6.26 billion and prime funds increased by $7.15 billion. Tax-exempt money market funds decreased by $2.10 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.280 trillion, while Prime assets are at $1.284 trillion. Since November, over $172 billion has converted from Prime MMFs to Govt, and another $100 billion is scheduled to switch over the next several months. (Later this year, many expect investors to shift several hundred billion more in assets from Prime to Government funds as the October 14 deadline for the SEC's floating NAV, and emergency gates and fees, reforms approach. ICI's weekly release explains, "Assets of retail money market funds decreased by $3.43 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $120 million to $376.43 billion, prime money market fund assets decreased by $2.01 billion to $459.86 billion, and tax-exempt fund assets decreased by $1.54 billion to $174.17 billion." It adds, "Assets of institutional money market funds increased by $2.23 billion to $1.79 trillion. Among institutional funds, government money market fund assets decreased by $6.38 billion to $903.68 billion, prime money market fund assets increased by $9.17 billion to $823.92 billion, and tax-exempt fund assets decreased by $560 million to $64.56 billion." Year-to-date through March 9, MMF assets are up $44 billion. A Footnote to ICI's release adds, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." In other news, Bloomberg wrote, "Nomura Undecided on Shutting Money-Market Fund as Yields Tumble." It says, "Nomura Holdings Inc. said it hasn't made a decision to close its money-market fund, following a report it was among Japanese asset managers returning cash to investors amid a plunge in yields. All 11 of the country's managers running such funds plan to shut them rather than risk their value falling below par following pressure from the Bank of Japan's negative interest-rate policy, the Nikkei newspaper reported. Nomura Asset Management Co. plans to repay investors in August and Daiwa Asset Management Co. will do so in October, Nikkei said."

Fidelity Investments published a brief paper, entitled, "New life for money markets." It says, "Money market yields flatlined over the last few years. With the Fed's short term borrowing rates pegged near zero, little yield was to be found for investors looking for the easy access to their funds that money markets provide. But recently, money market funds have shown signs of life -- since the market began to price in a Fed move, yields have crept higher on government funds and also on prime funds, which invest in corporate debt securities." It continues, "Since the Fed took its key interest rate, the Fed funds rate, down to near 0% in 2008, money market funds have been barely breaking even. In fact, at times some mutual fund companies have reduced investor fees to keep returns positive. But last year, the Fed began preparing to raise interest rates. Even the anticipation of the rate hike caused rates in some prime money market funds to move higher. Then, in December, the central bank raised its target for rates by 0.25 percentage points. Since then, government money market funds have risen to an average of 0.06% as of February 9, and prime funds have seen yields rise to an average of 0.14%, with some top-yielding funds paying more than 0.30%. "The difference in yields for prime and government funds moved closer to its historic average following the Fed's decision to increase the Federal funds target rate to a range of 0.25% to 0.50%," says Michael Morin, director of institutional portfolio management at Fidelity. Yields are still low historically, but the pickup has been meaningful, and perhaps more importantly, it shows the potential for money market funds to adjust yields rapidly as rates change -- a feature that could be useful if rates continue to tick higher." It goes on, "The biggest move in rates has been in prime funds. But, before jumping in, investors should note that the rules for both prime funds and municipal money market funds are changing. [N]ew rules are changing how some money market funds work. Government money market funds won't be affected, so those can still provide the same easy access to cash that they have historically. But, in a time of market stress, prime and municipal money market funds could charge a fee for withdrawals or impose a temporary halt on withdrawals. So they may no longer be as liquid as U.S. Treasury or government money market funds. To comply with these new rules, some money market funds have changed their approach. What does that mean for you? If you rely on money market funds for short-term cash needs ... you may not want to keep all your cash in a prime or municipal money market fund. For cash that truly must be liquid, you may want to consider Treasury or government funds. If you can tolerate the risk of the fees or temporary withdrawal restrictions, prime funds may offer higher yields and municipal funds may offer tax-shielded income."

Wells Fargo Funds has released a series of updates over the past few months in its "Money Market Fund Regulatory Resource Center." We missed some of these when they first came out, including one entitled, "Tax relief for floating-NAV money market fund." But Wells Fargo's Twitter account, @WFAssetMgmt, "tweeted" links to them over the past several days to remind us. (Note: Crane Data's Twitter account is @cranedata -- we normally "tweet" when we update the News on www.cranedata.com and invite you to "follow" us!) The Tax relief piece says, "To reduce the burden of tax compliance, the U.S. Treasury and the IRS issued guidance that will simplify the tax accounting for floating-NAV money market funds (MMFs). This guidance applies to institutional money market funds, both prime and tax exempt. Government and retail money market funds will not be affected because they will continue to transact at a stable $1.00 NAV. An overview of the IRS guidance is provided below.... Under the IRS guidance, simplified accounting, known as the NAV method, will allow shareholders in floating-NAV money market funds to measure net gains and losses rather than calculate transaction-by-transaction gains and losses." Another Wells piece, entitled, "Enhanced stress tests for money market funds," states, "As part of the new money market rules scheduled to take effect in 2016, the Securities and Exchange Commission (SEC) will require money market funds to conduct enhanced stress tests by April 2016. These stress tests will be more robust than the current requirements -- which have been in place since 2010 -- because the SEC wants to not only further minimize the risk of runs but also reduce disparities in the quality and comprehensiveness of stress tests across money market funds.... Wells Fargo Asset Management already conducts enhanced stress tests Since September 2015 -- seven months before the April deadline -- Wells Fargo Asset Management has been meeting the enhanced stress-testing requirements.... Three points worth remembering 1. Our stress tests have always been more comprehensive than the SEC requirements, and we continue to be at the forefront of risk management with more rigorous-than-required stress tests. 2. Our money market funds have never breached the 30% weekly liquidity threshold that the SEC put in place in 2010. 3. Our focus on liquidity and capital preservation will remain in place in all of our Wells Fargo Money Market Funds." Finally, Wells released its latest monthly "Overview, Strategy, and Outlook" Portfolio Manager commentary. It says, "Although improving somewhat in recent weeks, credit quality has been under pressure, as evidenced by spreads widening significantly since mid-2014."

Federated Investors' CIO of Global Money Markets Deborah Cunningham writes "Market predicting instead of listening to Fed" in her latest "Month in Cash commentary. She says, "Divining the future monetary policy maneuvers of the Federal Reserve can be frustration personified, but that doesn't stop the market from trying.... But as futures go, the market's predictions for the fed funds rate are not particularly reliable. I think they are off now, and the market is underestimating the Fed's willingness to hike.... More than a few Fed officials have said not to assume the hike in December was a one-and-done move (the minutes of the January policy-setting meeting were balanced -- not dovish or hawkish). The Fed has gone to considerable length for several years now to let the market know it is data dependent and if anything, the U.S. economy has been steady to slightly positive.... I am not saying the U.S. is running on all cylinders, but we are certainly not in any way, shape or form close to a situation that would indicate negative rates. Let's not forget that the Fed is the global leader. While the world’s central banks don't have to follow it, the Fed certainly doesn't have to follow them. That divergence applies to another issue, as well—one that has also been getting much too much attention: negative rates. With the Bank of Japan's recent move to negative rates, the question was bound to be raised when Fed Chair Janet Yellen had her semiannual Humphrey-Hawkins testimony last month. While the Chair acknowledged that as a matter of prudent planning a negative rate policy could not be ruled out entirely, she did not give any indication that the Fed was contemplating such a drastic move. Yellen does not shy away from addressing issues that are concerning to the markets, so it is telling that she didn't have any mention of negative rates in her prepared remarks. The media has given this much more attention than it ever deserved." She adds, "Another reason for my confidence is more technical. As firms have been preparing for the upcoming SEC money fund rules by converting some products to government funds, there's been concern that the additional demand will drive rates negative. But a substantial portion of the shift has already occurred, and we have not seen any impact on rates. Even though the government money fund assets have passed prime money fund assets for the first time, there is plenty of supply. And just as significant, the Reverse Repo Program's floor of 25 basis points has hardly been used, and market repo rates haven't been below 30 basis points more than a handful of times this whole year. While it is good that investors and media are more engaged on monetary policy, it is unfortunate that negative rates have unnecessarily colored the discourse."

BlackRock released a white paper entitled, "Insights to Act On: Adapting Cash Investment Policies for Money Fund Reform." The summary says, "Fund providers, investment platforms, and industry groups are rapidly preparing for the implementation of structural U.S. money market fund reforms in October 2016 focusing on fund changes, operational issues and the like. Investors should be preparing as well. This starts, we believe, with the review or creation of a strong investment policy. We believe that a cash policy should be all encompassing and should outline acceptable investments from money market funds to short duration investments and individual bonds. As October 2016 approaches, we expect that most investment policies will need to be altered to comply with the new money market fund rules, particularly with respect to language requirements around preservation of capital, liquidity and yield. A flexible approach to this exercise can provide the diversification, stability and income needed in today's landscape and prepare the investor for the environment of tomorrow. In this paper, we provide actionable ideas to evolve your policy to help meet the demands of the cash markets—today and tomorrow." BlackRock's piece urges investors to: "Define investment objectives and portfolio goals, with clear liquidity needs and risk tolerances; Explore total return as a measurement of cash performance; and, Understand the hidden cost of liquidity associated with restrictive investment policy language." It continues, "For the institutional cash investor, the investment policy is the driver behind the acceptable strategies and investment options agreed upon by the company. It serves as a roadmap that in-house investors and external managers follow in making cash investment decisions. This changing investment environment is a great opportunity to assess the investment policy and evaluate its efficacy. A strong investment policy starts with clear investment objectives and portfolio goals. Liquidity needs, risk tolerances and performance requirements will shape the way investment policies are designed, and, in our opinion, should be the first areas considered in the development of meaningful investment policies. We recommend an active segmentation strategy for cash based upon your cash forecasts and the time horizon for their use. Here are a few steps to take when looking at your cash investment policy and forming investment objectives and goals." BlackRock says to, "Conduct a thorough evaluation of your cash needs.... Develop an investment policy (or policies) for each component of your cash.... Align the risk profile of each cash segment with the investment objectives, including performance or the need for capital preservation [and] Clearly define the appropriate investment solutions permissible for each cash bucket.... The investment universe for cash investors is expanding in the wake of reform and it will be important to consider new alternatives that may be suitable for varying cash needs. For example, many investors may use money market funds (MMFs) with constant net asset values for operating cash post reform and may consider floating net asset value (FNAV) MMFs for core cash in the new world." Finally, the piece adds, "In the current environment and in the future environment, we believe cash investors must sharpen their focus on their specific objectives and make sure their cash allocations are flexible, able to mitigate risk, and adaptable as market circumstances change. Evaluating your investment policy against the changing money market fund landscape is a critical first step."

Dreyfus changed the name of its Citizens Select Funds on March 1. Dreyfus CitizensSelect Prime Money Market Fund changed its name to Dreyfus Prime Money Market Fund. The filing says, "The fund's Class A shares will be redesignated as Citizens shares.... The fund's Class C shares will be converted into Class B shares, and Class D shares will be redesignated as Class C shares. The existing administrative services fees and omnibus account services fees for the Class B and Class C shares will be eliminated." Also, Dreyfus CitizensSelect Treasury Money Market Fund changed its name to Dreyfus Institutional Preferred Treasury Money Market Fund. The prospectus supplement adds, "The fund's Class A shares will be redesignated as Hamilton shares. The fund's Class C shares and Class D shares will be converted into Class B shares. Following such conversion, Class B shares will be redesignated as Premier shares." Also, Federated filed with the SEC to change the name of its Federated Tax-Free Trust to Federated Institutional Tax-Free Trust. This filing says, "The Fund is expected to operate as an institutional money market fund and will be required to transact at a floating NAV.... Effective March 31, 2016, the Fund will change its name to Federated Institutional Tax-Free Cash Trust. As an institutional money market fund, the Fund will not be limited to institutional investors, but will continue to be available to retail investors as well." We initially reported on this change in our Nov. 17 News, "Federated Designates Inst MMFs; Wells, Goldman, BlackRock Gain in Oct.." Finally, the NY Fed posted a piece on its Liberty Street Economics blog, entitled, "Would Monetary Tightening Increase Bank Wholesale Funding?."

The U.S. Treasury's Office of Financial Research released a posting on its, "Bilateral Repo Data Collection Pilot Project." It says, "The OFR has a partnership with the Federal Reserve and the Securities and Exchange Commission to fill gaps in data about repurchase agreements, or repo. A repo is essentially a collateralized loan, when one party sells a security to another party with an agreement to repurchase it later at an agreed price. The project promises to improve our understanding of a short-term funding market that is instrumental in providing liquidity -- the lubrication that helps to keep the global financial system operating. Repos are an important source of short-term funding for the financial industry. The U.S. repo market provides more than $3 trillion in funding every day. However, the repo market can also contribute to risks to financial stability. Obtaining more information about these transactions will be filling an important data gap. The repo market is divided into two parts: (1) the triparty repo market, in which transactions are centrally settled by two large clearing banks (this market includes the general collateral financing [GCF] repo market, in which participants' transactions are conducted through a central counterparty); and (2) the bilateral repo market, where the parties themselves are responsible for settling the transactions. Information and data on the triparty and GCF repo markets are published regularly, but information about bilateral repos is scant. In the pilot project, we are focusing on the bilateral repo market, which represents half of the total market. The bilateral market is not only opaque, but also vulnerable to runs and fire sales. The project marks the first time the OFR went directly to industry to collect financial market information. But participation in the pilot project was voluntary, and participating companies provided input on what data should be gathered. The OFR appreciates the input of the participating firms: Bank of America, Barclays PLC, Deutsche Bank AG, The Goldman Sachs Group Inc., HSBC Holdings PLC, JP Morgan Chase & Co, Morgan Stanley, RBS Americas, and UBS AG. In an OFR brief ("The U.S. Bilateral Repo Market: Lessons from a New Survey"), we published aggregated data from the survey to provide greater transparency into the bilateral repo market for participants and policymakers." (See our Jan. 14 Link of the Day, "Reuters: Chinese Investors Flee to Money Funds; OFR Paper on Bilateral Repo.")

A press release entitled, "Northern Trust and Total Bank Solutions Collaborate to Provide Extended FDIC Insurance for Cash Sweeps," says, "Today Northern Trust and Total Bank Solutions (TBS) announced the immediate availability of the Insured Deposit Program, providing clients the benefit of extended FDIC insurance, daily liquidity, a diversified source of stable funding and the opportunity for improved returns. "We are very excited to be able to offer a compelling alternative for investors who require principal protection, same-day liquidity and operational convenience for their cash. We believe the combination of our proprietary technology platform and large bank network with Northern Trust's legacy of strong client-service and innovative custodial services will set the industry standard for Insured Deposit Programs," said Kevin Bannerton, Managing Director of TBS. Northern Trust and TBS will be at the American Bankers Association annual conference today to officially launch the program.... "We are pleased to offer our clients the ability to maximize their returns while having the security of extended FDIC insurance coverage and daily liquidity with the Insured Deposit Program," said Pete Cherecwich, Americas head of Corporate & Institutional Services at Northern Trust. "The strength and stability of our custody offering combined with our extensive cash management expertise makes this a significant value-add." The Northern Trust and TBS supported Insured Deposit Program is available immediately with plans for integration to be completed across most major trust platforms beginning in April 2016.... Leveraging proprietary technology, TBS' FDIC Insured Deposit Program, currently with over $30 billion in assets under administration, is designed to provide their clients with the benefit of extended FDIC insurance and for participating banks, a stable, diversified and cost-effective source of deposit funding." In other news, the Cato Institute posted a strange blog entry entitled, "Money-Market Mutual Funds: Restrictions, Run-Proofing, and Regulatory Pretense." Author Lawrence White writes, "Many regulators and economic analysts have inferred from these events that money-market mutual funds (MMMFs) are inherently run-prone. The fact that this was the first run in MMMF history, however, should give us pause. There is a more plausible reading of the evidence."

The SEC released its latest "Money Market Fund Statistics" report, with data as of Jan. 31, 2016. The report, produced by the SEC's Division of Investment Management, summarizes monthly Form N-MFP data and includes totals on assets, yields, liquidity, WAM, WAL, holdings, and other money market fund trends. The SEC's report shows total money market fund assets stood at $3.064 trillion overall at the end of January, down $21.5 billion, after jumping $6.0 billion in December, dropping $6.6 billion in November, and rising $62.3 billion in October, according to the SEC's broad total. (This series includes many private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Of the $3.064 trillion in assets, $1.565 trillion was in Prime funds, down $6.3 billion in January, while $1.242 was in Government and Treasury funds, down $7.1 billion. Tax Exempt Funds were down $8.0 billion to $255.9 billion. The number of money funds was 497, down 5 for the month. The Weighted Average Gross 7-Day Yield for Prime Funds on Jan. 31 was 0.49% (up 0.08% from the previous month), 0.34% for Government/Treasury funds (up 0.06% from last month), and 0.07% for Tax-Exempt funds (unchanged). The Weighted Average Net Prime Yield was 0.29% (up 7 basis points). The Weighted Average Prime Expense Ratio was 0.20% (up 1 basis point from the previous month). The average Weighted Average Life, or WAL, was 60.4 days (up 2.4 days from last month) for Prime funds, 88.9 days (up 3.7 days) for Government/Treasury funds, and 28.1 days (down 1.3 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 34.5 days up 3.9 days from the previous month) for Prime funds, 39.4 days (down 0.9 days) for Govt/Treasury funds, and 26.1 days (down 1.3 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 27.8% in January (down 4.5% from last month). Total Weekly Liquidity was 42.5% (down 2.8%). In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, the United States topped the list with $182.1 billion, followed by France with $181.8 billion, and Canada with $177.6 billion. Japan was fourth with $161.6 billion, followed by Sweden ($116.0B), Australia/New Zealand ($84.3B), UK ($77.1B), The Netherlands ($50.0B), Germany ($43.5B), and Switzerland ($41.9B). The biggest gainers for the month were France (up 77.3B), Sweden (up $63.7B), Norway (up $26.4B), UK (up $19.4B), Belgium (up $11.1B), Germany (up $10.7B), Switzerland (up $10.2B), and The Netherlands (up $6.5B). The biggest drops came from US (down $5.6B), Canada (down $5.6B), Singapore (down $4.2B), Aust/NZ (down $3.1B), and Japan (down $635M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $564.9 billion (up from $339.2B from last month), while its subset, the Eurozone, had $291.9 billion (up from $186.6B). The Americas had $361.7 billion (down from $373.2B), while Asia and Pacific had $272.2 billion (down from $279.3B). Of the $1.565 trillion in Prime MMF Portfolios as of Jan. 31, $502.5B (32.1%) was in CDs (up from $448.0B), $338.2B (21.6%) was in Government (including direct and repo) (down from $511.3B), $393.3B (25.1%) was held in Non-Financial CP and Other Short term Securities (up from $284.5B), $233.4B (14.9%) was in Financial Company CP (up from $212.0B), and $97.2B (6.2%) was in ABCP (down from $100.0B). Also, the Proportion of Non-Government Securities in All Taxable Funds was 44.0% at month-end, up from 37.4% the previous month. All MMF Repo with Federal Reserve was $104.0 billion on Jan. 31, down big from $398.0B. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 37.3% were in maturities of 60 days and over (up from 35.4%), while 5.2% were in maturities of 180 days and over (unchanged).