Daily Links Archives: March, 2018

Vanguard posted an article entitled, "Stashing cash in a bank account? Why you should think about money market funds." They tell us, "You've probably given a lot of thought to the stock and bond investments in your portfolio. But have you stopped to think about how you're managing your cash? ... Cash is a part of a diversified portfolio. How you allocate your investments across stocks, bonds, and cash is one area of investing you can control. In fact, research has shown that, if you have a diversified portfolio, 88% of your experience (the volatility you encounter and the returns you earn) can be traced back to your asset allocation. Cash investments are very short-term investments that can lower the overall risk of your portfolio. Because cash tends to be safer, you can use it as a 'parking lot' if you: Are still deciding how to invest your money, or need to spend your money in the next 3–6 months, for example, for college tuition or a down payment on a house. One popular cash investment is a money market mutual fund." They explain, "Because interest rates are rising, now's a good time to check the yield on your money market funds, savings accounts, certificates of deposit (CDs), and brokerage settlement funds to see how much more you're earning. If you invest in money market funds, you'll likely earn about the same income as, or sometimes more than, other banking products. And while these funds don't have the additional insurance of a banking product, they also offer: Easy access to your money ... [and] a reduction in market risk. Money market funds invest in high-quality, ultra-short-term securities, like Treasury bills and CDs, greatly reducing your market risk compared with stock or bond funds.... With our funds, you'll get: Superior returns. Our funds have produced exceptional returns compared with their peers. In fact, 100% of Vanguard money market funds performed better than their peer-group averages over the past 1-, 3-, 5-, and 10-year periods. Low costs. Since money market funds have lower yields than more aggressive investments, costs play an even bigger factor.... The average expense ratio on Vanguard's money market funds is 57% less than the industry average." Randy Lee, head of fixed income product management at Vanguard, comments, "We've relentlessly focused on maintaining high standards for managing credit in our portfolios, preserving liquidity, and guarding against disruptive redemption activity.... Our money market funds provide high-quality and liquid investments in both stable financial markets and periods of uncertainty, offered at a low cost and managed by a deeply experienced team.... This formula allows us to provide highly competitive yields while maintaining the investment prudence and stability investors seek in a money market product."

While money market strategist have been discussing it for weeks, the jump in LIBOR has finally made it to the mainstream press. The Wall Street Journal writes "Libor's Rise Accelerates, Squeezing Short-Term Borrowers." They tell us, "Companies are paying the most in nearly a decade for some types of short-term borrowing, the latest threat to a long-running U.S. economic expansion and increasingly volatile markets. The three-month London interbank offered rate climbed to 2.29% in the U.S. on Monday, its highest since November 2008. Libor measures the cost for banks to lend to one another and is used to set interest rates on roughly $200 trillion in dollar-based financial contracts globally, from corporate loans to home mortgages. Libor has been rising for the last 2 1/2 years as the Federal Reserve lifts its key policy rate, but recently the pace has picked up. It has climbed nearly a full percentage point in the last six months -- outpacing the Fed -- and could rise further with the approaching end of the quarter, typically a time of elevated demand for short-term funds in the banking sector, analysts say." Bloomberg also writes, "The Rate the Banks Once Rigged Is Jumping -- and Causing Trouble." The article says, "They're calling it 'Libor's Revenge.' After years of drifting close to zero, the London interbank offered rate, a measure of what banks pay to borrow short-term from one another, has suddenly jumped. For three-month debt, it’s risen to 2.29 percent, the highest level since 2008."

The Federal Reserve Bank of New York issued a statement entitled, "Reverse repo counterparties list updated," late last week. It said, "The name of the State Street Navigator Securities Lending Trust has been updated to reflect the legal entity name State Street Navigator Securities Lending Government Money Market Portfolio, effective March 23, 2018." The NY Fed's Liberty Street Economics blog also published, "Dealer Trading and Positioning in Floating Rate Notes." This says, "In January 2014, the U.S. Treasury Department made its first sale of floating rate notes (FRNs), securities whose coupon rates vary over time depending on the course of short-term rates. Now that a few years have passed, we have enough data to analyze dealer trading and positioning in FRNs. In this post, we assess the level of trading and positioning, concentration across issues, and auction cycle effects, comparing these properties to those of other types of Treasury securities.... FRNs are fixed-principal securities with original maturities of two years that make quarterly interest payments tied to auction rates on thirteen-week Treasury bills. They were introduced to broaden the Treasury Department's investor base and ultimately lower Treasury borrowing costs, as described in this post. The notes were expected to appeal to investors who want to avoid exposure to longer term interest rates, but who want to stay invested in Treasury securities without having to frequently roll over their maturing bills into new bills. To date, FRNs have offered interest rates higher than thirteen-week bills, with the spread (margin) determined at each FRN's initial auction." It adds, "We analyze data the Fed collects from primary dealers, via FR 2004 reports, on their trading, positioning, financing, and settlement activities in Treasury securities and other fixed income securities, information the Fed aggregates across dealers and releases. Historically, data were only available for broad categories of securities, but the Fed started releasing information for specific Treasury issues in 2013."

BlackRock's Jeff Rosenberg blogs "3 reasons why short-term bonds are finally looking attractive." He writes, "Short-term bonds are looking attractive again after years of near-zero yields. The Federal Reserve's rate increase this week only adds to the appeal. Markets are now pricing in two more hikes this year, in line with what the Fed signaled on Wednesday in its latest Summary of Economic Projections. That market participants have finally come to terms with the Federal Reserve's normalization plans is just one of the reasons short-term bonds are finally looking attractive again after years in the doldrums." Rosenberg continues, "We see short-term U.S. debt offering relatively compelling income, with limited downside risk, now that market participants have greater confidence in the Fed's planned normalization path. In most of the post-crisis normalization period, the bond market significantly discounted Fed expectations for the pace of normalization. The market has now caught up with the Fed's view, with rising short-term interest rates reflecting this greater confidence. Market participants previously had good reason to be skeptical. 2017 was the only year the Fed delivered on its promised pace of normalization. But current economic tailwinds -- tax cuts and plans for more government spending -- suggest the central bank is poised to extend that recent track record." Finally, he adds, "We see rising opportunities at the front end of the curve, where yields finally above inflation levels offer investors a viable alternative to cash. Higher yields favor short over long maturities in government debt. We like floating rate and inflation-linked securities as buffers against rising rates and inflation, and also see opportunities in 15-year mortgages."

Caixin writes, "Tencent Money-Market Fund Triples in Three Years." The article tells us, "Licaitong, Tencent's wealth management platform, saw the assets under its management triple in three years to over 300 billion yuan ($47.4 billion) by the end of January despite regulatory moves last year to restrain the runaway growth of the money-market fund industry. This is the first time Tencent Holdings Ltd. has revealed the size of assets under Licaitong's management in its earnings report, making it difficult to determine how much the fund grew last year." Watch for more on the growth of Chinese money market funds in coming days once the ICI releases its latest "Quarterly Worldwide Mutual Fund Market" data.

Forbes.com writes "A Risk-Free Way To Improve Your Portfolio Return." The contributed article says, "If you are like most investors, you probably have some extra cash sitting in your brokerage account. The cash may come from interest or dividends and may be considered temporary, it may be a result of a short-term asset allocation decisions, or it could be a strategic allocation to get exposure to fluctuating money market rates. Regardless of the amount, it's time to start paying attention to where your unused cash is held. It can be the easiest money you will ever make." The piece continues, "Any cash not invested in a purchased money market fund is likely being swept to an FDIC bank account, either at the bank arm of your brokerage firm or a "participating bank," if your brokerage firm is not affiliated with a bank. These "sweep" accounts are bank deposits, and come with certain benefits -- primarily FDIC insurance up to $250,000. Bank deposits, though, come with a cost-- interest rates well below other alternatives. The Federal Reserve has slowly raised interest rates over the last two years and is expected to continue to do so for the remainder of 2018 and into 2019.... Meanwhile, the interest rate for a bank checking account has not moved at all." It adds, "According to the FDIC, the National Rate on Non-Jumbo Deposits (less than $100,000) for checking accounts is 0.04%.... Unless you proactively take action, most brokerage firms will move your funds into a bank deposit. They will then invest the money in a different short-term instrument and pocket the return. You will get virtually nothing. They will not automatically move cash into a higher-yielding alternative."

The Wall Street Journal writes "Higher Deposit Rates May Finally Be Coming to Your Bank Account." The article, subtitled, "With Fed poised to raise interest rates a sixth time, savers so far have seen few rewards," tells us, "Is the sixth time the charm? The Federal Reserve has raised short-term rates five times since late 2015, but banks largely stood pat on deposit rates for rank-and-file customers. Now, with the Fed expected to lift rates again this week, there are signs this could change. The average rate on a one-year certificate of deposit, or CD, rose to 0.49% last week, according to Bankrate.com, a personal-finance website. While that's peanuts by historical standards, it is the highest in more than seven years, and the march upward has quickened after the most recent Fed moves. Banks over the past year have already raised the interest paid on deposits held by businesses and affluent individuals who demand it. But their tentative foray into higher CD rates is more about trying to get ahead of average customers' demands. It's a tricky calculation. Banks don't want to pay more than they have to, but they also don't want to keep deposit rates so low that customers eventually leave." The Journal quotes, Gerard Cassidy of RBC Capital Markets, "This is the biggest story that investors and bankers are going to talk about for the next two years ... after a period of eight or nine years of not even worrying about it."

The St. Louis Post-Dispatch wrote late last month, "Got cash? Here is what to do with it now." It says, "While there is no return to the 5 percent money market yields savers got a decade ago, there is some relief. If you work at it, you can find money market funds yielding 1.5 percent and two-year certificates of deposit (CDs) or U.S. Treasury bonds yielding more than 2 percent. As investors worried about inflation and rate increases by the Federal Reserve and central banks around the world, the Dow Jones Industrial Average and Standard & Poor's 500 entered a correction of more than 10 percent this month." The piece explains, "After earning only 0.03 percent in early 2011, some money market funds, such as the Vanguard Prime Money Market Fund, are now yielding close to 1.5 percent. The average for the largest 100 money funds is 1.17 percent, said Peter Crane, president of money fund research firm Crane Data. Money fund yields should rise about 0.25 percent with each coming Federal Reserve rate hike, Crane said. Yields could even drift to about 3 percent by the end of 2019 if the Fed raises rates twice this year and three times next year, as is widely expected. A more aggressive Fed could nudge money market yields even higher. Do not confuse money market mutual funds with money market accounts at banks."

Capital Advisors Group posted a brief entitled, "Optimizing Separate Account WAM in a Rising Rate Environment." Author Lance Pan says, "For institutional cash investors unsure of separately managed accounts in a rising interest rate environment, our scenario analysis suggests that a laddered portfolio of agency and corporate securities with a modest WAM could outperform the government money market fund proxy with negligible unrealized loss concerns." The piece explains, "In the two years since the Federal Reserve started raising short-term interest rates, the psyche of the fixed income investor has been oscillating between loving higher rates and worrying about getting too much of them.... [T]he simmering anxiety about the downside of higher rates -- namely unrealized losses -- has given pause to some cash investors who otherwise may have wanted to take advantage of higher income potential. As a manager of institutional separately managed accounts (SMAs), we often counsel investors on the impact of unrealized losses in a portfolio of cash equivalent and short-term securities in a rising rate environment.... To address maximizing return potential and minimizing unrealized losses, we used a scenario analysis of several sample portfolios to show that, even in a rising interest rate environment, it may still pay to extend WAM in an SMA beyond that of typical government money market funds ("MMF"s)." CAG adds, "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 themselves against two to four rate hikes in a 12-month period if today's yield curve to RRP relationship holds constant. A similarly structured credit portfolio may deliver even higher outperformance against the government money market fund alternative.... The challenge for the institutional cash investor is to find a balance between progressively higher expected returns as well as expected unrealized losses with each interest rate hike. Note that if an account liquidates part of the portfolio to satisfy an unplanned cash need, the unrealized losses would turn into real losses. Thus, liquidity planning is a relevant factor."

Today's "Link of the Day" again looks back 10 years, when the Subprime Liquidity Crisis was taken up yet another notch with the meltdown and bailout of Bear Stearns. We wrote on March 18, 2008, "Worries Surface Again, But Money Market Funds Safe Say Experts." Our article said, "The near-death experience of Bear Stearns and continued stresses in the short-term funding markets have caused some to ask whether money market mutual funds will see any fallout. We don't think money funds will be impacted by events surrounding Bear, though a series of broker-dealer downgrades and defaults would be cause for concern due to the shrinking supply of quality short-term paper. Today's USA Today writes, "Analysts say quality bond funds should stay safe", saying, "Despite the latest upheaval in the credit markets -- fed by the collapse of Bear Stearns (BSC) -- most investors have little to fear about the safety of their investments in money market funds and high-quality bond funds, analysts say." The piece, and others, note that SIPC insurance covers brokerage accounts, and that money funds should not be impacted. It quotes BankRate's Greg McBride, "These funds will move heaven and Earth to preserve their $1 net asset value... If they break the buck, money would flow out the door to their competitors at the drop of a hat." S&P also said yesterday, "[B]ased on the positive developments regarding Bear Stearns (pending acquisition by JPMorgan A-1+ and support by the Fed), S&P's Fund Ratings Group has determined that rolling overnight repo with Bear Stearns in S&P rated funds is consistent with our money market fund criteria and fund credit quality ratings criteria." Bear Stearns doesn't run money market funds (though BlackRock and others run some for it), but it does offer clearing services for money market "portals", including its own Bear Stearns Corporate Cash. The company has also reportedly placed the launch of its "cash-plus" ETF, Current Yield Fund (YYY), on hold due to events." (See also, our Feb. 5, 2018 Link of the Day, "10 Years Ago: Auction Rate Securities," our Jan. 2, 2018 LOTD, "10 Years Ago: CS MMF Disaster, our Aug. 21, 2017 LOTD, "10 Years Ago: History of MMF Incidents," and our Aug. 8, 2017 LOTD, "10 Years Ago: Subprime Liquidity Crisis Began in Money Markets With ABCP Extensions.")

UBS Asset Management filed a new fund registration statement to launch UBS Ultra Short Income Fund. The fund appears to be a "Conservative Ultra-Short Bond Fund, and will have two share classes, A and P. The filing says, "This fund is not a money market fund and should not be considered to be a money market fund or the equivalent of a money market fund. UBS Asset Management (US) Inc. offers money market funds that are advised by UBS Asset Management (Americas) Inc. Please contact UBS AM (US) if you are interested in investing in money market funds." The fund's investment objective is, "To provide current income while seeking to maintain low volatility of principal." The filing continues, "Under normal circumstances, the fund invests in fixed income securities and money market instruments. The fund's investments in securities may include, but are not limited to, government obligations including agencies, government-sponsored and supranational entities, as well as municipal securities, corporate debt, mortgage-backed, asset-backed, and inflation-linked securities. Investments in money market instruments may include, but are not limited to, commercial paper (including asset-backed commercial paper), certificates of deposit, notes, time deposits, repurchase agreements and other money market securities. The fund may invest in money market funds, including those advised by UBS Asset Management.... The fund may invest in securities of any maturity, but will generally limit its weighted average portfolio duration to one year or less." It adds, "Robert Sabatino, Vice President of UBS Series Funds, David Walczak, Vice President of UBS Series Funds, David Rothweiler, and James Law, have been portfolio managers of the fund." Watch our Bond Fund Intelligence newsletter or visit our Bond Fund Symposium (March 22-23 in Los Angeles) to learn more about "conservative" ultra-short bond funds.

A press release from London-based Institutional Money Market Funds Association, entitled, "New Member for IMMFA," tells us, "IMMFA has today announced that Aviva Investors has re-joined IMMA as a Full member. Jane Lowe, Secretary General of IMMFA, commented: "We are delighted that Aviva Investors has chosen to join IMMFA as a Full Member. Now that IMMFA has widened its remit to cover all types of Money Market Fund regulated under the new European Regulation, we are very pleased to have them back." Footnotes to the release tell us, "IMMFA is the trade association which represents money market funds domiciled in Europe. It was established on 14 June 2000, and currently has 18 Full members who manage investment funds, and a number of Associate members. Money fund assets managed by IMMFA members were E636 billion as at 31 January 2018, making up more than 50% of money fund assets under management in Europe. The new European Regulation is Regulation (EU) 2017/1131 on money market funds. The Regulation applies directly to all money market funds domiciled or promoted in the European Union and will be implemented in full by 21 January 2019. It recognises 4 types of money market fund: Public Debt CNAV MMF, Low Volatility NAV MMF, Short Term VNAV MMF and Standard VNAV MMF. From 1 January 2018, IMMFA has amended its constitution to permit firms promoting any of the new types of money funds domiciled in Europe to join IMMFA, subject to compliance with new IMMFA Principles of Best Practice and to disclosure of funds data."

As spring approaches, the first leg of the annual Treasury and cash conference season draws near. Crane Data, money fund providers, and various segments of the cash marketplace are preparing for a number of conferences over the coming months. Below, we review a couple that we'll be speaking at, attending, and/or hosting. First is next week's Crane's Bond Fund Symposium, which we've written about and mentioned. Our second annual bond fund event will be March 22-23 in Los Angeles, and will again focus on ultra-short bond funds. (Feel free to drop by the LA InterContinental Downtown.) In April, Crane Data will be exhibiting (and Peter Crane will be speaking) at the New England AFP 2018 Annual Conference event, which is April 18-20 in Boston. The NEAFP agenda is packed with money market fund content, including speakers from RBC, Fitch, Treasury Strategies, ICD, Goldman, Fidelity and State Street. Also, in May, we'll be speaking at the SIFMA AMA Roundtable. This event, which attracts around 100 brokerage sweep providers and professionals, will be May 6-8 in Phoenix, Arizona. Our Peter Crane will speak on "Money Fund Trends and Statistics" with Brian Ronayne of Federated Investors. Crane will also host a "Panel Discussion - Brokerage Sweep and Bank Deposit Issues <b:>`_," which will feature Sunil Kothapalli of Wells Fargo Advisors, Eric Lansky of StoneCastle Partners, and Ted Hamilton of Promontory Interfinancial. The SIFMA AMA Roundtable involves Brokerage product and sweep professionals and is run in conjunction with the SIFMA Ops Conference. (Contact Crane Data or SIFMA's Charles DeSimone to ask about attending or to see the agenda.)

The weekend Wsll Street Journal features the piece, "Don't Sweep Cash Under Brokerage's Rug." Author Jason Zweig writes, "Interest rates are on the rise, but customers of brokerage firms aren't going along for the ride. The Federal Reserve has driven short-term interest rates up a full percentage point since late 2016; one-month Treasury bills were yielding 1.6% this week. But you'd never know any of that from looking at the returns on the cash in your brokerage account. Consider the rates major brokers are paying on so-called sweep accounts, the main reservoir where they hold clients' cash. As of March 2, according to Crane Data, a firm that monitors money-market funds and other cash investments, yields on sweep accounts ranged from as low as 0.01% at eTrade and 0.05% at TD Ameritrade up to -- if "up" is the right word -- 0.25% at UBS and 0.27% at Fidelity Investments. Those rates are for clients carrying cash balances between $100,000 and $250,000. Yields can be even lower for the great unwashed." The Journal article continues, "In fairness, brokerage firms aren't the only skinflints in the financial industry. Yields on savings accounts at the biggest retail banks range from 0.00% to 0.13%, says Ken Tumin, founding editor of DepositAccounts.com. Rates on checking accounts have inched up only about a quarter of a point since late 2016. Many money-market mutual funds have also dragged their heels. Even so, brokerage firms stand out for how little they pay on clients' cash. That's partly because commissions and trading volume continue to wither. By paying paltry interest on the money they take in and then investing it at market rates, brokers can pocket the difference as a welcome and low-risk source of profit." Zweig's column adds, "Since the Fed began raising rates, yield differences of 'only a fraction of a percent haven't seemed to matter,' says Peter Crane, president and publisher at Crane Data. 'Brokerage firms have basically been betting on the laziness of their investors.' Charles Schwab is even taking its yields down as market rates go up. It is replacing a money-market sweep fund that has been earning about 0.8% -- one of the highest rates among brokerage firms -- with a bank sweep yielding 0.12%, squarely at the average for the industry. According to the Financial Industry Regulatory Authority, free credit balances -- one partial measure of uninvested cash in brokerage accounts -- totaled $350.2 billion at the end of January. Assuming the average yield of 0.12% that Crane Data estimates for brokerage sweep accounts, investors would earn an aggregate of only $420 million in income on that money over the next year. If, instead, investors shopped around to improve their yield and earned an average of 1% on that cash, they would pocket $3.5 billion in income. Overall, then, the cost of that inertia is roughly $3.1 billion. If you don't shop around for better yields on your cash, you're handing your broker another 1% a year."

S&P Global Ratings published a release entitled, "ABCP Highlights from the 2018 SFIG Vegas Conference," which says, "We recently attended the Structured Finance Industry Group (SFIG) conference in Las Vegas (Feb 25–28) where we co-hosted an ABS/ABCP investor round table, spoke with market participants and attended panels and lectures on a wide array of topics." Their Key Take-Aways include: "ABCP will remain a relevant product for years to come because of its significance in funding the 'Real Economy'. ABCP has reshaped itself in the years following the financial crisis, overcoming major regulatory hurdles including Risk Retention, Money Market reforms, and Basel III. ABCP sponsors have satisfied the Risk Retention regulatory requirements, typically by purchasing 5% of their conduits' outstanding ABCP. A recent court ruling that exempts CLOs from holding 5% capital for every transaction could potentially extend to ABCP, freeing some sponsors from the capital burden." They add, "Due to Money Market reforms, the ABCP investor base has shifted dramatically from the prime institutional funds to non-2a7 funds, such as private liquidity and government funds.... Overall lending has evolved substantially, with issuers becoming more comfortable with existing regulation and technology contributing to the proliferation of new market entrants including FinTech companies and global alternative asset managers whose appetite for shorter term products, such as ABCP, has grown considerably. Repatriation of money in the wake of tax reform could give a temporary lift to the ABCP market as corporate treasurers, with new cash on hand, explore available short-term investment opportunities."

Pensions & Investments writes "Europeans hope to avoid outflows as new money market rules loom." The article tells us, "Regulatory changes to money market funds in Europe are expected to carry fewer implications for investors and managers than similar reforms did for their U.S. counterparts, but asset owners still need to adjust their policies, observers said. One key task before July 21, when the new pan-European law comes into force, will be for European investors to change their investment policies to include new categories of money market funds, such as instruments with a variable, or floating, net asset value.... Investors globally instead have preferred constant net asset value funds. But under the new regulations, those no longer will be available for prime money market funds." The piece adds, "In the U.S., $1.2 trillion worth of investments left prime money market funds when a 2016 reform required them to have a floating NAV. To avoid this outcome on the Continent, the European Commission has allowed another type of money market fund, called low-volatility NAV funds. These funds would trade similarly to the constant NAV funds as long as certain criteria are met. However, they would convert into a variable NAV money market fund under certain circumstances. For this reason, sources said, investors need to allow variable NAV funds in their policies. Most investors now have policies in place that allow them to buy constant NAV funds, without any mention of floating-value funds, said Dennis Gepp, senior vice president, managing director and chief investment officer, cash, at Federated Investors (FII) (UK) LLP in London."

The Financial Stability Board published a release entitled, "FSB publishes Global Shadow Banking Monitoring Report 2017." It tells us, "The Financial Stability Board (FSB) today published the Global Shadow Banking Monitoring Report 2017. The Report presents the results of the FSB's seventh annual monitoring exercise to assess global trends and risks from shadow banking activities. The 2017 monitoring exercise covers data up to end-2016 from 29 jurisdictions, which together represent over 80% of global GDP, including, for the first time, Luxembourg. Also for the first time, the Report assesses the involvement of non-bank financial entities in China in credit intermediation that may pose financial stability risks from shadow banking, such as maturity/liquidity mismatches and leverage. The global monitoring of developments in the shadow banking system is part of the FSB's strategy to transform shadow banking into resilient market-based finance. The monitoring exercise adopts an activity-based approach, focusing on those parts of the non-bank financial sector that perform economic functions which may give rise to financial stability risks from shadow banking." The update adds, "The main findings from the 2017 monitoring exercise are as follows: The activity-based, narrow measure of shadow banking grew by 7.6% in 2016 to $45.2 trillion for the 29 jurisdictions. This represents 13% of total financial system assets of these jurisdictions. China contributed $7.0 trillion to the narrow measure (15.5%), and Luxembourg $3.2 trillion (7.2%). Collective investment vehicles with features that make them susceptible to runs (eg open-ended fixed income funds, credit hedge funds and money market funds), which represent 72% of the narrow measure, grew by 11% in 2016. The considerable trend growth of these collective investment vehicles - 13% on average over the past five years - has been accompanied by a relatively high degree of investment in credit products and some liquidity and maturity transformation. This highlights the importance of implementing the FSB policy recommendations on structural vulnerabilities from asset management activities published in January 2017."

Federated Investors' latest "Month in Cash," entitled, "Don't confuse Powell's optimism with hawkishness," tells us, "The Jerome Powell era at the Federal Reserve essentially began this week with the new chairman's high-profile testimony before Congress. You could, for the sake of brevity, summarize the entire event with that sentence. He didn't offer any opinion or statement that was unexpected or materially different than the Fed's outlook under Janet Yellen. But the risk markets had a sour reaction to his enthusiasm about the improvement of the U.S. economy since December, which caused a stir. We think it was an overreaction. Powell's optimism might have been slightly ... somewhat ... a tad ... a touch too strongly articulated, but Yellen probably wouldn't had gotten any such response if she had said the same.... It is no surprise, however, that his optimism nudged the fed funds futures market to expect four 25 basis-point moves this year instead of three." Money market CIO Deborah Cunningham writes, "In the end, what matters the most from a cash manager perspective is always the next opportunity for a rate increase, and it is a virtual lock now that policymakers will raise the range from 1.25-1.50% to 1.50-1.75% at the Federal Open Market Committee meeting at the end of this month. Short rates are higher but the glut of government issuance this month also is playing a role, as the Treasury scrambles to fund the additions to the national debt that tax cuts and budget proposals likely will create. The London interbank offered rate (Libor), which Powell took the time to admonish everyone to abandon asap, has priced in most of the March move, with 1-month rising from 1.57% to 1.65%, 3-month from 1.77% to 1.99% and 6-month from 1.97% to 2.20%. Therefore, nothing has altered our preference for shorter-dated paper and variable-rate instruments as rates rise."

This weekend's Wall Street Journal featured a brief entitled, "Libor's Climb Past 2% is Unnerving Some Investors." They write, "A benchmark used to set borrowing costs on trillions of dollars worth of loans is on the rise, stirring concerns about the effect of higher U.S. interest rates on consumers and businesses. The three-month U.S. dollar London Interbank Offered Rate, or Libor, surpassed 2% this week for the first time since 2008. That will lift rates on more than $100 trillion in debt and derivative contracts that are linked to the U.S. benchmark, from business and student loans to home mortgages." The piece explains, "Libor has been rising for the last two years as the Federal Reserve has tightened interest rates. But gains have accelerated in recent months, according to RBC Capital Markets strategist Michael Cloherty, because of changes to the U.S. tax code that have encouraged companies to reshuffle bond holdings. One recent source of worry among strategists and investors has been the growing gap between Libor, which is set amongst banks, and the overnight index swap rate, which is determined by central bank rates. That spread has widened sharply recently and this week was at its highest level since 2009. Back then, the sudden widening in the Libor-OIS spread signaled mounting stress within the financial system as a liquidity crunch made it more expensive for banks to lend to each other."

The Federal Reserve Bank of New York published a brief entitled, "Statement Regarding the Initial Publication of Treasury Repo Reference Rates." It tells us, "In November 2016, the Federal Reserve Bank of New York, in cooperation with the Treasury Department's Office of Financial Research (OFR), announced that it was considering publishing three reference rates based on overnight repurchase agreement (repo) transactions collateralized by Treasury securities. In December 2017, following a public comment period, the Federal Reserve Board announced final plans for the production of three rates: the Secured Overnight Financing Rate (SOFR), the Broad General Collateral Rate (BGCR) and the Tri-Party General Collateral Rate (TGCR). The SOFR was identified by the Alternative Reference Rates Committee in June 2017 as its recommended alternative to U.S. dollar LIBOR for use in certain new U.S. dollar derivatives and other financial contracts." They explain, "The New York Fed plans to begin publication of the Treasury repo reference rates on April 3, 2018, reflecting the SOFR, the BGCR, and the TGCR from April 2, 2018.... In the production of the Treasury repo reference rates, the New York Fed has endeavored to adopt policies and procedures consistent with best practices for financial benchmarks, including the IOSCO Principles for Financial Benchmarks."

Aviva Investors recently posted a summary on "EU Money Market Fund Reform." They explain about "Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on Money Market Funds," "This regulation sets out rules for money market funds (MMFs) established, managed or marketed in the European Union. It lays out provisions regarding the financial instruments eligible for investment by a MMF, the portfolio of an MMF, the valuation of the assets of an MMF, and the reporting requirements in relation to an MMF. This regulation applies to collective investment undertakings that: (a) require authorisation as UCITS or are authorised as UCITS under Directive 2009/65/EC or are AIFs under Directive 2011/61/EU; (b) invest in short-term assets; and (c) have distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment." The changes impact, "All money market funds established, managed and or/marketed in the EU. The regulation intends to provide investors with a wider degree of choice for investing their short-term cash, providing for two types of MMFs: Short-term MMFs and Standard MMFs. In addition, three structural options: 1. Public Debt Constant NAV (CNAV) MMFs 2. Low Volatility NAV (LVNAV) MMFs 3. Variable NAV (VNAV) MMFs." They add, "We welcome the regulations and believe they are in the best interests of our clients. We are already well positioned to conform to the new guidelines with minimal operational impact. For the last decade we have operated our AAA rated, same day, off shore MMF's as a VNAV well ahead of these new requirements. Aviva Investors Liquidity Funds intend to be fully compliant ahead of the deadline and will be implementing the new LVNAV structure for a selection of our funds on 1st September 2018."

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