Daily Links Archives: July, 2018

Law firm Shearman & Sterling released a brief entitled, "EU Secondary Legislation for Money Market Funds Published." It tells us, "A Commission Delegated Regulation amending and supplementing the European Money Market Funds Regulation has been published in the Official Journal of the European Union. The MMF Regulation, which applies directly across the EU from July 21, 2018, allows MMFs to invest in securitizations or asset-backed commercial paper and incentivizes the investment in simple, transparent and standardized securitizations. The Delegated Regulation amends the MMF Regulation (or MMFR) by applying the requirements for STS securitizations provided for in the Securitization Regulation (also known as the STS Regulation)." It explains, "The MMF Regulation also allows an MMF to enter into a reverse repurchase agreement provided that certain conditions are met. The assets received by the MMF under that agreement must be money market instruments that meet certain requirements. A derogation from those requirements provides that an MMF may also receive instruments that are either: (i) issued or guaranteed by the EU, a central authority or central bank of a Member State, the European Central Bank, the European Investment Bank, the European Stability Mechanism or the European Financial Stability Facility; or (ii) issued or guaranteed by a central authority or central bank of a third country. The Delegated Regulation supplements the MMF Regulation by providing the quantitative and qualitative liquidity requirements for the assets that an MMF receives under a reverse repurchase agreement where the derogation is being used." Finally, Shearman & Sterling writes, "The MMF Regulation empowers the European Commission to adopt delegated acts that aim to ensure that MMFs are invested in appropriate eligible assets by further specifying the credit quality assessments of money market instruments, securitizations and ABCPs that MMFs may undertake or invest in. The Delegated Regulation includes these provisions by setting out: (i) the criteria for the validation of the credit quality assessment methodology; (ii) the criteria for quantification of the credit risk and of the relative risk of default of an issuer and of the instrument; (iii) the criteria for establishing qualitative indicators on the issuer of the instrument; and (iv) the meaning of 'material change' as referred to in the requirement for an MMF to conduct a new credit quality assessment for a money market instrument, securitization and ABCP when there is a material change that could have an impact on the existing assessment of the instrument. The Delegated Regulation will apply from July 21, 2018, except for the provision cross-referring to the Securitization Regulation, which will apply from January 1, 2019 to align it with the application date of that Regulation."

Bloomberg writes in the St. Louis Post-Dispatch "Money-market funds are getting another look by investors. They tell us, "Money-market fund returns and other cash equivalents haven't looked this attractive since before the global financial crisis. That has some investors rediscovering the once popular destination for parking money during times of uncertainty, especially now with equities flirting with record highs and the Federal Reserve committed to raising short-term interest rates even more. No greater authority than BlackRock Inc.'s Larry Fink pointed out during a Bloomberg Television interview that cash equivalents are an attractive place to camp out. Whether that proves enough of an impetus remains to be seen, according to Peter Crane, who has been following the sector for decades and serves as president of Westborough, Mass.-based Crane Data LLC. The highest-returning funds are yielding about 2.2 percent, compared with about 5 percent before central banks in the U.S., Europe and Japan slashed borrowing costs to zero to revive growth in 2008." The piece quotes Crane, "To hold an allure to cash, 5 percent had been a big psychological level in the past and a lot of investors -- and old guys in Florida and retirees with cash -- are looking at 2 percent and still saying, 'This sucks.' ... They remember that it wasn't long ago that it was 5 percent and their stocks are still doing well. It's coming but it will take more time." The piece adds, "The highest-yielding money-market fund tracked by Crane is the DWS Variable NAV Money Fund, or VNVXX, at 2.2 percent. But with more Fed rate hikes on the horizon, fund yields should top 2.5 percent by the end of the year, he said. Money funds stand to have sizable cash injections over the second half of the year, as later months historically see the biggest inflows, he said." Crane also tells Bloomberg, "People need to be reminded of risk and they haven't been yet.... You still have a broad de-sensitivity to rates on cash, because they were so low for so long that it will take a while for the ostrich to pull its head out of the sand."

The Luxembourg magazine Delano writes "New Money Market Fund Regulation now in force," which briefly reviews the new European Money Fund Reforms from the perspective of a major domicile, Luxembourg. They explain, "On 21 July 2018, the Luxembourg financial sector regulator CSSF issued a statement to remind the entities it supervises that Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 had come into force that very day. In other words, the new Money Market Fund Regulation is applicable, now. A stringent regulator, it is not the CSSF's job to provide background information as to what this means on a practical basis to the financial sector for the uninitiated. However, as it will have a significant impact, and will require major investment on the part of providers and other stakeholders, it is worth understanding why. To get some context, Delano talked to Marc-André Bechet, director of legal & tax at the Association of the Luxembourg Fund Industry." The update says, "According to Bechet, 'The MMFR is not an 'opt-in' regulation. The regulator took the view that that all funds that have the characteristics of a money market fund should fall under the scope of the MMFR. Even some funds that were investing in short-term fixed-income instruments, previously not subject to money market fund regulation, will now fall under the scope of the MMFR.' As such, the first step is for asset managers and management companies to, 'Take a look at their fund range and make an assessment to see if they have the criteria that would make MMFR applicable. For new funds, they should apply it immediately and for existing funds, a grandfathering period has been put in place until 21 January 2019 – although supervisory authorities would like to receive applications from funds and their managers ahead of this deadline.'" The Delano piece adds, "Going forward, Bechet believes that MMFR, 'will require significant investments by all players, including: IT platforms and robust processes, especially with regards to risk management and valuation. Beyond this, it is too early to say what its impact will be, but some form of consolidation is expected, and profit margins are likely to be further compressed.' That said, Bechet is positive, confident that, 'the industry will adapt.'"

A press release entitled, "Moody's assigns Aaa-mf ratings to two HSBC US Treasury Funds," states, "Moody's Investors Service, assigns Aaa-mf ratings to the HSBC US Treasury Liquidity Fund and the HSBC Corporate Money Funds Ltd - US Treasury Fund. These newly established money market funds seek to maintain a constant net asset value of $1.00 per share while employing an investment strategy to maximize current income consistent with the preservation of capital and liquidity. The US Treasury Fund will be a feeder fund into the HSBC US Treasury Liquidity Fund, the master fund. As such, the US Treasury Fund carries the same rating as the master fund." The release adds, "The Aaa-mf rating reflects our view of the Funds' very strong ability to meet the dual objectives of preserving capital and providing liquidity. This view is supported by the Funds' high scores across key rating factors including asset profile and liquidity.... [T]he weighted average portfolio maturity will not exceed 60 days, per the Funds' investment policies." (See also, Institutional Asset Manager's "HSBC Global Asset Management launches US Treasury Money Market Fund.") In other fund ratings news, a notice from BlackRock tells us, "[T]he BlackRock Treasury Strategies Institutional Fund and BlackRock Select Treasury Strategies Institutional Fund, each a series of Funds For Institutions Series, were closed to share purchases effective December 1, 2017." They add, "Subsequently, on February 22, 2018, BlackRock informed the Trust's Board of Trustees of our intention to no longer seek a rating from Moody's Investors Service and Standard and Poor's Rating Services (currently Aaa-mf and AAAm, respectively) for each Fund. Effective May 31, 2018, the Funds will no longer be rated by a nationally recognized statistical rating organization."

Crane Data is preparing for its 6th Annual European Money Fund Symposium, the largest money market fund event in Europe, which will be held Sept. 20-21 in London, England. With just under 2 months to go, we'd like to invite you to join us, and we're encouraging European money fund professionals to make hotel reservations ASAP and to register soon. See the latest agenda here, and see hotel information here. (Click here to register.) Last year's EMFS event in Paris attracted 125 attendees, sponsors and speakers and was our largest European event to date. Given the pending money fund regulatory reforms in Europe and possible "repatriation" of assets, we expect our return to the U.K. to attract even more interest this year. "European Money Fund Symposium offers European and "offshore" money market portfolio managers, investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue," says Crane Data President Peter Crane. "Our mission is to deliver the best possible conference content at an affordable price to money market fund professionals," he added. EMFS will be held at the ` Hilton London Tower Bridge <i:http://www.craneeurosymposium.com/hotel-and-travel>`_ hotel. Book your hotel room before Monday, August 6, and receive the discounted room rate of L295. Registration for our 2018 Crane's European Money Fund Symposium is $1,000 (USD). Visit www.euromfs.com to register or contact us to request the PDF brochure, or for Sponsorship pricing and info, and for more details. We hope to see you in London this September! Finally, thanks to those who attended our big show, last month's Money Fund Symposium in Pittsburgh! Next year's event will be June 24-26, 2019, in Boston, Mass. Watch our site or visit www.cranesmfsymposium.com for details in coming months. Also, our next Money Fund University "basic training" event will take place Jan. 17-18, 2019, in Stamford, Conn., and our next Bond Fund Symposium will be held March 25-26, 2019, in Philadelphia, Pa.

Last week, BlackRock mentioned "cash" and money markets a couple of times on its most recent earnings call. CFO Gary Shedlin commented, "Finally, despite a difficult quarter for the cash management industry driven by both seasonal and repatriated quarterly tax payments, BlackRock's cash management business saw net inflows of $6 billion as our product breadth, scale and technology-first distribution strategy is resonating with clients and leading to differentiated business performance." CEO Larry Fink told analysts on the call, "These rising rates and a flattening curve have made cash not a safe place but now also a more profitable place for investors to stand by and wait. While investors' caution has impacted industry flows, BlackRock continues to benefit from the value of our diverse global investment and technology platform. Revenues increased 11%, operating income increased 16%, and our earnings per share increased 28% year-over-year. We generated $20 billion of total net inflows, positive across active index and cash in the second quarter. We have seen markets and uncertainty like this before. As clients globally grapple with this uncertainty, they're reaching out to BlackRock with more frequency, with more momentum. The dialogues with the clients to date have never been stronger. We believe that the long-term trends at BlackRock is strategically positioned to address -- remain intact." He added, "Cash management is another area where we are gaining share, and we now manage $457 billion in cash assets. The cash strategy is earning between approximately 2 and 2.5% [sic], levels not seen in the past decade. Clients are using cash as not only as a safe asset but one that provides attractive returns, especially in this market environment. BlackRock generated $6 billion in net inflows and cash strategies in the quarter, driven by the benefits of our global scale and tech-enabled distribution. This highlights one of the true benefits and differentiators of BlackRock's diverse business model." He added, "Technology is also a strategic differentiator and one of our largest priorities at BlackRock. Asset managers, wealth managers and custodial banks globally are rethinking their business models and looking for ways to operate more efficiently. Insurers and banks are facing regulatory consolidation in involving regulatory requirements. These changes are driving increased demand for BlackRock's broad-based technology services, and digital tools like Institutional Aladdin, Aladdin Wealth, Provider Aladdin and Cachematrix."

Last week, The Financial Times published the piece, "China money market funds' rush into bank credit worries investors," which tells us, "Investors have warned of growing systemic risks in China's $1.09tn money market fund industry, as funds buy up bank credit despite a surge in bad debt this year. Comparably high yields and low risk at Chinese money market funds in recent years have made the industry a favourite among retail investors in the country. Assets under management have grown from Rmb600bn at the end of 2012 to an estimated Rmb7.3tn ($1.09bn) in March, making it the second-largest market in the world after the US. But in recent months China's central bank has tightened monetary policy and access to credit, forcing down the funds' once-attractive yields. At the biggest funds, average returns have dropped to an annualised to 3.7 per cent from about 4.5 per cent at the start of the year. In response, funds have rushed into bank credit, such as negotiable certificates of deposit, as a means to boost returns and continue attracting retail investments." The piece explains, "A big default at a small bank could send a shock through the money market fund industry, said Ivan Shi, director of data and analytics at Z-Ben Advisors in Shanghai. Exposure to negotiable certificates of deposit have reached high levels among some funds. For example, Shenzhen-based Yinhua Fund, one of China's largest money market funds, has a 60 per cent exposure to negotiable certificates of deposit at the end of March, according to research from Z-Ben Advisors. The exact level of risk associated with these investments is unclear because the funds do not publicly disclose what type of bank credits they have invested in, said Mr Shi. The fear is that many funds have bought into the credit of the small, weak banks." The article quotes him, "It's all based on how much exposure they have to small banks -- which we can't see." (See also, the South China Morning Post's article, "Hong Kong's first money market ETF draws investors with expected 1.5 per cent return, low risk," and the FT's "New Rules for Europe's E1.3tn money market fund sector".)

The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows money fund assets dipped after jumping last week. Money fund assets remain up slightly on a year-to-date basis. They're now up $8 billion, or 0.3%, YTD, and `they've increased by $229 billion, or 8.7%, over 52 weeks. ICI writes, "Total money market fund assets decreased by $5.21 billion to $2.85 trillion for the week ended Wednesday, July 18, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $10.57 billion and prime funds increased by $6.64 billion. Tax-exempt money market funds decreased by $1.28 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.216 trillion (77.9% of all money funds), while Total Prime MMFs stand at $492.5 billion (17.3%). Tax Exempt MMFs total $137.0 billion, or 4.8%. They explain, "Assets of retail money market funds increased by $1.33 billion to $1.04 trillion. Among retail funds, government money market fund assets decreased by $694 million to $630.87 billion, prime money market fund assets increased by $3.29 billion to $280.59 billion, and tax-exempt fund assets decreased by $1.27 billion to $128.05 billion." Retail assets account for over a third of total assets, or 36.5%, and Government Retail assets make up 60.7% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds decreased by $6.54 billion to $1.81 trillion. Among institutional funds, government money market fund assets decreased by $9.88 billion to $1.59 trillion, prime money market fund assets increased by $3.36 billion to $211.89 billion, and tax-exempt fund assets decreased by $14 million to $8.92 billion." Institutional assets account for 63.5% of all MMF assets, with Government Inst assets making up 87.8% of all Institutional MMFs.

The Federal Reserve Bank of New York's Liberty Street Economics blog posted a piece, entitled, "The Premium for Money-Like Assets." Written by Marco Cipriani and Gabriele La Spada, it says, "Several academic papers have documented investors' willingness to pay a premium to hold money-like assets and focused on its implications for financial stability. In a New York Fed staff report, we estimate such premium using a quasi-natural experiment, the recent reform of the money market fund (MMF) industry by the Securities and Exchange Commission (SEC).... As discussed in a previous Liberty Street Economics blog post, the reform, which went into effect in October 2016, affected different segments of the MMF industry differently. In particular, prime MMFs were forced to adopt a system of gates and fees; moreover, prime MMFs catering to institutional investors were forced to float their net asset values. In contrast, government MMFs were unaffected by the new regulation." The blog asks, "Why can the effects of the MMF reform help us understand investors' preference for money-like assets?" It explains, "A salient characteristic of money-like assets is their information insensitivity: for an asset to be used in transactions, agents must not worry about its future value. For this reason, money-like assets are usually short-term, liquid, debt like securities. Before the SEC reform, MMF shares were the typical example of a money like asset: they were callable, redeemable at par, and had very little (at least, in investors' perception) credit risk. This applied equally to government funds, which can only invest in Treasuries, agency debt, and repos collateralized by these securities, and to prime funds, which can also invest in high-quality, privately-issued unsecured debt. It also applied equally to funds with a retail clientele (retail funds) and those with an institutional clientele (institutional funds)." The NY Fed economists tells us, "By forcing prime MMFs to adopt a system of gates and fees, the SEC made prime funds less money-like than government funds. And by forcing prime institutional MMFs to adopt a floating net asset value, the reform made institutional prime funds even less money-like.... In our paper, we exploit the differential impact of the SEC reform on the different segments of the MMF industry as a quasi-natural experiment to estimate the premium investors are willing to pay for money-likeness. In particular, we look at the difference between the net yield offered by prime MMFs and that offered by government MMFs (the net-yield spread) and test whether such difference increased around the implementation of the reform (that is, we employ a difference-in-differences approach). Holding everything else constant, if investors value the money-likeness of their MMF shares, we expect the net-yield spread between prime and government MMFs to widen, and to do so to a greater extent for institutional funds." The blog concludes, "The post-crisis SEC reform of the MMF industry affected the various segments of the MMF industry differently, providing researchers with a unique opportunity to estimate the premium that investors are willing to pay to hold money-like assets through a quasi-natural experiment. The increase in the spread between prime and government MMFs around the regulatory change shows that such premium is statistically significant and quantitatively important."

The Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of June 29, 2018) Monday. This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See also Crane Data's July 12 News, "July Money Fund Portfolio Holdings: Repo Falls, But Fed RRP Rebounds.") The ICI MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in June, prime money market funds held 24.0 percent of their portfolios in daily liquid assets and 42.6 percent in weekly liquid assets, while government money market funds held 59.0% of their portfolios in daily liquid assets and 76.0 percent in weekly liquid assets." Prime DLA decreased from 26.6% in May, and Prime WLA decreased from 43.3% in May. Govt MMFs' DLA decreased from 59.9% in May and Govt WLA increased from 75.6% last month. ICI explains, "At the end of June, prime funds had a weighted average maturity (WAM) of 30 days and a weighted average life (WAL) of 65 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 32 days and a WAL of 88 days." Prime WAMs were up two days from last month, and WALs stayed the same. Govt WAMs were up three days from May and Govt WALs were up by two days from last month. Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas rose from $188.22 billion in May to $198.80 billion in June. Government money market funds' holdings attributable to the Americas rose from $1,722.18 billion in May to $1,765.20 billion in June." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $198.8 billion, or 42.3%; Asia and Pacific at $98.4 billion, or 20.9%; Europe at $169.4 billion, or 36.0%; and, Other (including Supranational) at $3.6 billion, or 0.8%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.765 trillion, or 80.3%; Asia and Pacific at $117.7 billion, or 5.4%; and Europe at $309.6 billion, or 14.1%.

Subscribers to our Money Fund Intelligence Daily product will notice a big jump in assets in today's file. Note that this is mainly because Crane Data added over $63.0 billion in new funds -- this is not due to a massive jump in MMF assets yesterday. Over the past couple of years, we've added batches of money funds that we hadn't previously tracked to our collections. These funds report to the SEC via Form N-MFP, and a number are internal funds. It's been over a year since we added a major batch of new funds, but we wanted to get the last large block added and over with. (These funds are already included in our monthly MFI XLS product.) We apologize for the disruption in the asset series, and we list the largest of these new funds below. (See our Jan. 5, 2017 News, "Internal and Private Money Funds Revealed" or contact us for more details.) Funds added to our MFI Daily today include (ranked by assets): Fidelity Sec Lending Cash Central Fund (FID05, $23.1B), Columbia Short-Term Cash Fund (COL01, $14.0B), BlackRock Lq T-Fund Cap (BCHXX, $10.2B), BlackRock Lq FedFund Cap (BFCXX, $6.1B), JPMorgan US Trs Plus MM IM (MJPXX, $2.5B), JPMorgan Prime MM IM (JIMXX $2.0B), Schwab US Treasury MF Investor (SNSXX, $1.5B), AB Govt Money Market 1 (AGRXX, $519M), and American Funds US Govt MMF C (AFCXX, $159M), and Semper US Treasury MMF (SEMXX, $120M).

Last week, The Boston Globe wrote the article, "Banks are offering higher interest rates for savings accounts. But you still need to be smart." It says, "For a long time, it hardly seemed worth putting money in the bank. With the country mired in a deep recession a decade ago, the Federal Reserve slashed interest rates to near zero in an attempt to 'stimulate' the economy. In recent years -- amid jobs growth, healthy corporate earnings, and surging stock markets -- the Fed has incrementally raised rates for borrowing. Consumer savings rates, however, have remained stubbornly low. That's starting to change. Risk-averse people who have the means to sock away some cash are now able to earn a decent -- if not exactly generous — guaranteed return from bank savings, money market, and CD accounts. Some banks and credit unions are aggressively competing for their business with a flurry of promotional rates that can be as confusing as they are enticing. How much money you'll make can vary widely, depending on where you put it."

The Federal Reserve Bank of New York's Liberty Street Economics published a blog piece entitled "Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics." They tell us, "As a consequence of the Federal Reserve's large-scale asset purchases from 2008-14, banks’ reserve balances at the Fed have increased dramatically, rising from $10 billion in March 2008 to more than $2 trillion currently. In that new environment of abundant reserves, the FOMC put in place a framework for controlling the fed funds rate, using the interest rate that it offered to banks and a different, lower interest rate that it offered to non-banks (and banks). Now that the Fed has begun to gradually reduce its asset holdings, aggregate reserves are shrinking as well, and an important question becomes: How does a change in the level of aggregate reserves affect trading in the fed funds market? In our recent paper, we show that the answer depends not just on the aggregate size of reserve balances, as is sometimes assumed, but also on how reserves are distributed among banks. In particular, we show that a measure of the typical trade in the market known as the effective fed funds rate (EFFR) could rise above the rate paid on banks' reserve balances if reserves remain heavily concentrated at just a few banks." The piece concludes, "To summarize, our analysis reveals that the answer to the question on how changes in the level of aggregate reserves affect trading in the fed funds market is more subtle than it might seem, as one needs to know both the total reserves held by banks and the distribution of those reserves across banks. More generally, this exercise highlights the importance of studying these questions within the context of a model, where the behavior of market participants will respond to changes in the economic environment."

A press release entitled "Office of Financial Research Requests Comment on Proposed Data Collection Rule" tells us, "The Treasury Department's Office of Financial Research is requesting comment on a proposed rule to establish a data collection covering centrally cleared funding transactions in the U.S. repurchase agreement (repo) market. The proposed data collection would enhance the ability of the Financial Stability Oversight Council to identify and monitor potential risks to U.S. financial stability by closing the data gap on centrally cleared repo transactions." It discusses the "Secured Overnight Financing Rate (SOFR)" and explains, "Cleared repo data from the proposed collection would be used to enhance the production of the SOFR." Acting OFR Director Ken Phelan comments, "The proposed rule is important to inform U.S. financial regulators and market participants and will strengthen financial markets with minimal regulatory burden. A well-functioning repo market is critical to U.S. financial markets and financial stability." The OFR statement adds, "The proposed rule would require the submission of information by central counterparties with average daily total open repo commitments of at least $50 billion. Although the Fixed Income Clearing Corporation would be the only market participant required to report if the rule went into effect today, other firms could meet the eligibility criteria for reporting in the future. In drafting the proposed rule published today in the Federal Register, the OFR worked closely with the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, and others. The Federal Reserve Board is expected to act as the OFR's data collection agent, with required data to be submitted directly to the Federal Reserve Bank of New York."

The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary yesterday. (The summary was delayed due to technical issues.) It shows that total money fund assets rose by $45.6 billion in May to $3.150 trillion, with most of the increase coming from Government & Treasury Funds. Prime MMF assets rose by $0.7 billion to $686.0 billion. Government money funds increased by $38.1 billion, while Tax Exempt MMFs rose by $6.8 billion. Gross yields rose again for Prime and Government & Treasury Funds, but Tax Exempt Funds fell in the latest month. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review their latest numbers below. Overall assets increased by $45.6 billion in May, after increasing by $31.0 billion in April, decreasing $48.2 billion in March, and increasing $40.7 billion in February. Over the 12 months through 5/31/18, total MMF assets increased $233.3 billion, or 7.3%. (Note that the SEC's series includes a number of private and internal money funds not reported to ICI or others, though Crane Data tracks many of these.) Prime MMFs increased by $22.1 billion in April, decreased by $3.4 billion in March, and decreased $2.8 billion in February. Prime funds represented 21.8% of total assets at the end of May. They've increased by $74.6 billion, or 10.9%, over the past 12 months. But they've decreased by $717.3 billion over the past 2 years. (Over $1.1 trillion shifted from Prime to Government money market funds in the year leading up to October 2016's Money Fund Reforms.) Government & Treasury funds totaled $2.322 billion, or 73.7% of assets. They were up $1.0 billion in April, down $41.7 billion in March, but up $44.9 billion in February. Govt & Treas MMFs are up $146.0 billion over 12 months (6.3%). Tax Exempt Funds increased $6.8B to $142.8 billion, or 4.5% of all assets. The number of money funds was 381 in May, the same as April. Yields moved higher again in May, after moving higher in April, jumping in March and increasing in February, January, and December. The Weighted Average Gross 7-Day Yield for Prime Funds on May 31 was 2.02%, up 6 basis points from the previous month and up 0.93% from May 2017. Gross yields increased to 1.80% for Government/Treasury funds, up 0.06% from the previous month, and up from 0.96% from May 2017. Tax Exempt Weighted Average Gross Yields dropped 47 bps in May to 1.71%; they've increased by 40 bps since 5/31/17. The Weighted Average Net Prime Yield was 1.84%, up 0.05% from the previous month and up 1.57% since 5/31/17. The Weighted Average Prime Expense Ratio was 0.18% in May (the same as the previous month). Prime expense ratios are down by 4 bps over the past year. (Note: These averages are asset-weighted.) WALs and WAMs were down across all categories in May. The average Weighted Average Life, or WAL, was 55.6 days (down 1.1 days from last month) for Prime funds, 85.0 days (down 2.6 days) for Government/Treasury funds, and 22.9 days (no change) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 26.1 days (down 0.8 days from the previous month) for Prime funds, 29.1 days (down 1.3 days) for Govt/Treasury funds, and 20.4 days (up 0.3 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 29.2% in May (down 3.1% from previous month). Total Weekly Liquidity was 49.6% (up 0.6%) for Prime MMFs. In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $89.5 billion, followed by the US with $68.1 billion, Japan with $63.9B, France with $56.6B, and The UK with $41.5B. Sweden ($39.0B), Germany ($34.4B), Australia/New Zealand ($32.4B), the Netherlands ($29.1B) and Switzerland ($25.3B) rounded out the top 10 countries. The gainers among Prime MMF bank related securities for the month included: Japan (up $6.2B), Canada (up $4.6B), Germany (up $3.2B), the UK (up $2.8B), the US (up $2.1M), China (up $1.3B), the Netherlands (up $986M) and Spain (up $642M). The biggest drops came from Singapore (down $762M), Norway (down $1.4B), Other (down $1.7B), Belgium (down $3.3B), Australia/New Zealand (down $4.3B), France (down $4.8B), Sweden (down $4.9B), and Switzerland (down $5.2B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $242.8B (down $12.1B from last month), while the Eurozone subset had $127.4B billion (down $3.2B). The Americas had $158.4 billion (up $6.9B), while Asia Pacific had $109.1 billion (up $6.1B). Of the $682.2 billion in Prime MMF Portfolios as of May 31, $227.3B (33.3%) was in CDs (down from $242.6B), $161.9B (23.7%) was in Government securities (including direct and repo), down from $163.5B, $104.6B (15.3%) was held in Non-Financial CP and Other Short Term Securities (up from $97.6B), $146.7B (21.5%) was in Financial Company CP (up from $142.4B), and $41.7B (6.1%) was in ABCP (up from $38.0B). The Proportion of Non-Government Securities in All Taxable Funds was 17.5% at month-end, down from 17.7% the previous month. All MMF Repo with the Federal Reserve rose to $21.5B in May from $13.7B (the lowest level ever) the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 33.9% were in maturities of 60 days and over (down from 35.1%), while 6.1% were in maturities of 180 days and over (down from 7.0%).

J.P. Morgan Asset Management has filed a Form N-1A Registration Statement to launch JPMorgan Securities Lending Money Market Fund. The preliminary prospectus filing says, "The Fund seeks current income while seeking to maintain liquidity and a low volatility of principal." No ticker or expense information is available yet for the fund's "Agency SL Share class." It will charge a 0.08% management fee and 0.15% in Other expenses, but will waive and reimburse 0.17% in fees for a net expense ratio of 0.06%. A waiver footnote says, "The Fund's adviser and/or its affiliates have contractually agreed to waive fees and/or reimburse expenses to the extent Total Annual Fund Operating Expenses of Agency SL Class Shares ... exceed 0.06% of their average daily net assets. This waiver is in effect through X/X/19, at which time the adviser and/or its affiliates will determine whether to renew or revise it." The filing also says, "Agency SL Class Shares of the Fund are currently not available for sale to any investors other than securities lending agents that invest securities lending cash collateral in Shares of the Fund." It adds, "The Fund is a money market fund managed in the following manner: The Fund calculates its net asset value to four decimals (e.g., $1.0000) using market-based pricing and operates with a floating net asset value. The dollar-weighted average maturity of the Fund will be 60 days or less and the dollar-weighted average life to maturity will be 120 days or less. The Fund will only buy securities that have remaining maturities of 397 days or less or securities otherwise permitted to be purchased because of maturity shortening provisions under applicable regulation. The Fund invests only in U.S. dollar-denominated securities. The Fund seeks to invest in securities that present minimal credit risk."

"Saving starts to pay again" writes the Pueblo Chieftain. The Tribune News piece tells us, "With interest rates rising and the stock market cooling from its big gains last year, some savers and investors are putting more money into long-dormant safe investments such as money market funds, bank certificates of deposit and Treasury securities. The net assets of money market mutual funds totaled $2.89 trillion as of June 6, the most since the financial crisis in 2008-09, according to the Investment Company Institute, a mutual fund trade group. At Vanguard Group, one of the nation's largest mutual fund providers, net cash flows into money market funds totaled $10.5 billion in the first four months of this year -- nearly twice the $5.3-billion inflow during the same period last year -- to $238 billion." The article explains, "Money funds and other cash-related products were paid scant notice during the post-recession stock market rally because they paid so little, carrying interest rates not much above zero. That was largely due to the Federal Reserve Board's monetary stimulus policy, in which it kept its benchmark short-term rates at nearly zero in a bid to help the country recover from the financial collapse. Stocks soared after the Fed's move. The stock market enjoyed a nine-year bull run and investors were disinclined to keep much money in cash. That was true even for the middle class, which poured most of its money, including 401(k) retirement money, into stock mutual funds rather than low-yielding money funds. The scenario changed starting in December 2015, when the Fed began nudging interest rates higher once again. The central bank has done so several times since then -- most recently on June 13, when it lifted its key rate to a range of 1.75 percent to 2 percent -- and two more increased are expected this year. In response, yields on a variety of fixed-income cash products also rose."

ICI's latest "Money Market Fund Assets" report shows money fund assets inched lower at quarter-end. Money fund assets remain almost flat, decreased by $16 billion, or -0.6%, but they've increased by $190 billion, or 7.2%, over 52 weeks. ICI writes, "Total money market fund assets decreased by $3.27 billion to $2.82 trillion for the six-day period ended Tuesday, July 3, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $5.25 billion and prime funds decreased by $549 million. Tax-exempt money market funds increased by $2.53 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.208 trillion (78.2% of all money funds), while Total Prime MMFs stand at $475.9 billion (16.9%). Tax Exempt MMFs total $138.3 billion, or 4.9%. They explain, "Assets of retail money market funds increased by $5.56 billion to $1.03 trillion. Among retail funds, government money market fund assets increased by $1.94 billion to $629.26 billion, prime money market fund assets increased by $2.00 billion to $274.57 billion, and tax-exempt fund assets increased by $1.63 billion to $129.19 billion." Retail assets account for over a third of total assets, or 36.6%, and Government Retail assets make up 60.9% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds decreased by $8.83 billion to $1.79 trillion. Among institutional funds, government money market fund assets decreased by $7.18 billion to $1.58 trillion, prime money market fund assets decreased by $2.54 billion to $201.33 billion, and tax-exempt fund assets increased by $895 million to $9.08 billion." Institutional assets account for 63.4% of all MMF assets, with Government Inst assets making up 88.2% of all Institutional MMFs.

The July issue of the "Independent Adviser for Vanguard Investors" newsletter writes, "Speaking of yields, [Vanguard] Prime Money Market's yield hit 2.00% on June 21. Strangely, though, Treasury Money Market's yield, currently 1.82%, has often been higher than Federal Money Market's (also 1.82% at month end) -- no doubt due in part to the fact that the Federal fund is Vanguard's required 'sweep' account for investors, meaning demand for paper that fits the fund's profile gets harder to find. The spread between the two money funds' yields has been shrinking since late January 2016 and went negative (Federal's yield being lower than Treasury's yield) about a year ago, with occasional reversions back to 'normal.' The bond market, including ultrashort debt like that used to build Vanguard's money funds, is enormous and tells many tales about the state of the investment markets by virtue of its size and the number of participants trading in it. If you believe in the wisdom of the crowds, then it's worth paying attention to yields, but not without using a critical eye." Note: Crane Data's Money Fund Intelligence Daily still reflects this inversion, primarily due to the longer WAMs (weighted average maturities) of Treasury funds and the massive increase in T-bill issuance this year. We show Treasury Retail MMFs yielding 1.33% on average vs. Government Retail MMFs' yield of 1.24%. Treasury Inst MMFs yield 1.61% vs. 1.65% for Govt Inst MMFs though, as of July 2.

Federated Investors writes in its latest "Month in Cash," a brief entitled, "No more normal?" Money market CIO Deborah Cunningham comments, "For the Federal Reserve over the last 2 1/2 years, business as normal has been the business of normalizing policy. It looks as if the Fed has finally shifted to tightening. In mid-June, it raised rates to a target range of 1.75-2%, closer than the Fed has been in more than a decade to its comfort zone. With its summary of economic projections now indicating two more hikes in 2018 (our house call, as well) and three in 2019, quantitative tapering (QT) set to expand to $40 billion per month in July and Chair Jerome Powell's upbeat assessment of the economy, it appears expansionary policy will soon run its course. We likely are near a bona-fide tightening cycle.... Powell announced that starting in July, he would be holding press conferences after every Federal Open Market Committee (FOMC) meeting instead of every other one.... As the Fed tightens, hikes will become more and more critical and Fedspeak more and more scrutinized because too many hikes might precipitate a recession. The "plain-spoken" Powell will need to choose his words carefully. In June, the 1-month London interbank offered rate (Libor) rose from 1.98% to 2.09%; 3-month increased from 2.31% to 2.34%; and 6-month rose from 2.47% to 2.50%. The bump in the short end made floating-rate securities attractive for cash managers. The prime space saw a substantial supply of these and other short-term instruments, such as commercial and bank paper, and even Treasuries fit because of their still attractive yields on elevated supply. We kept the weighted average maturity (WAM) of our prime funds in a 30-40 day range, and at the short end of that for good measure." Federated adds, "In June, institutional prime products industry-wide continued to show only minor net asset value (NAV) movement. This stability played a large part in investors returning cash to the sector, as the appeal of the additional 25-30 basis points in spread over government funds with next-to-no concern of loss of principal. Lastly, the spread between 3-month Libor and the Overnight Index Swap (OIS) remained wide in the month, not due to poor bank credit but excess short-term Treasury issuance from the Treasury Department and supply coming from Fed QT."

Citi's Steve Kang writes in a new "Short-End Notes," "Don't fight the Fed yet." He explains, "We discussed the Fed's potential course of action and its market implications, from simple sterilization of reserves to a multi-floor system1 and a 'shadow' QE.2 What exactly, is the condition for the Fed to act? Technically, the Fed is not necessarily worried about the level of IOER/FF. Instead, they are worried about the correlation between IOER/FF and reserves, i.e. the slope of the FF demand curve. We have used Figure 2 repeatedly to show that the current correlation seems low enough for the Fed to hold tight for now, in our view. As the Fed has two competing objectives on their B/S – (1) achieve the minimal B/S and reserve amount while (2) keeping control of the FF market – the trajectory of the B/S hinges on the maximum slope (i.e. correlation between reserves to FF) that the Fed is comfortable with." Citi adds, "We continue to think the Fed is not comfortable going back to the corridor system (i.e. operating at the steep part of the FF demand curve) as they are not always on the drivers seats for reserves. However, it is possible that the demand curve can sufficiently flat for the Fed, even at FF>IOER. In other words, we are seeing more scenarios of the Fed continuing with the B/S normalization even with higher levels of FF. In Fed we trust, we like fading the market expectation of the Fed losing control of the fed funds and ending the normalization pre-maturely. We maintain tightening bias on FV OIS spreads."

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