Daily Links Archives: January, 2019
Federated's Cunningham: Cash Is Class
Federated Investors says in their latest monthly update that "Cash is an asset class again." Money Market CIO Deborah Cunningham asks, "Why should investors think of liquidity as an asset class? One word: yield. Cash is no longer just a place to store operating funds until something better shows up or to pay bills and expenses. It's again an important part of a strategic allocation of investor assets. In 2018, government, tax-free and prime money market fund categories all had positive returns, while the lion's share of the investment world fared ... well ... you know.... Many prime money funds currently earn more than inflation, and government and muni funds are not far behind, and they all bring a stable counterbalance to risk assets and even bonds." The piece also asks, "How is liquidity performing in the current volatile market environment? Quite well. Liquidity is generally a flight-to-quality asset class, and the turbulence of the last few months has been no exception.... While obviously not as risk-free as U.S. Treasuries or federally insured accounts, for the better part of 50 years, money markets mutual funds have been stable products." Finally, they write, "What is the outlook and positioning for liquidity strategies over the next 3 to 6 months? We are looking for a data-dependent Federal Reserve to hike rates twice in 2019, with the first most likely coming in June. We think an upward-sloping yield curve will continue to anticipate these moves. That means liquidity strategies should be best positioned to capture those market changes by focusing on variable-rate securities and by shortening weighted average maturity targets. The industry will be closely watching how many of the inflows that came because of volatility stick around simply based on the return now being offered."
Reuters on Fannie Mae SOFR security
In the article, "Money funds buy most of Fannie Mae SOFR bond issue," Reuters reports that U.S. money market funds "bought most of a $2 billion Fannie Mae floating-rate debt offering referenced against the Secured Overnight Financing Rate (SOFR)." "Fannie Mae and other companies have been issuing more floating-rate bonds that are benchmarked against SOFR, which is an alternative to the London interbank offered rate (LIBOR). LIBOR, tarnished by rigging scandals, is expected to be phased out in 2021," Reuters stated. "It is important to maintain momentum in the SOFR market, and Fannie Mae is proud to demonstrate commitment to the Alternative Reference Rate Committee's (ARRC) efforts to develop LIBOR-alternatives," said Fannie Mae Treasurer Nadine Bates. According to Reuters, money funds bought 83.2 percent of the 18-month bond issue. The agency continued, "Commercial banks, insurance companies, and state and local governments bought the rest of the issue, which was priced at a spread of 6 basis points over SOFR, Fannie Mae said. Barclays Capital Inc., Citigroup Global Markets Inc., and Nomura Securities International Inc. were the lead underwriters of the Fannie Mae SOFR transaction. CastleOak Securities and Mischler Financial Group were part of the selling group," Reuters noted.
Semper US Treasury MMF Closes
A filing for the Semper U.S. Treasury Money Market Fund says, "Effective January 15, 2019, the Fund will no longer accept new Share purchases." The fund's info has been removed from the Semper website, and we assume a liquidation is imminent. An earlier filing explained in a "Supplement dated December 17, 2018 to the Prospectus dated April 2, 2018," "Effective December 1, 2018, Semper Capital Management (the "Adviser") has voluntarily agreed to waive its entire advisory fee and reimburse all of the Fund's expenses (excluding all taxes, interest, portfolio transaction expenses, acquired fund fees and expenses, proxy expenses, and extraordinary expenses). The Adviser is not contractually obligated to waive such fees and/or reimburse such expenses and the voluntary agreement may be terminated at any time by the Adviser. This voluntary agreement does not replace or otherwise supersede the contractual expense limitation agreement currently in place for the Fund, which may only be raised or eliminated with the consent of the Board of Trustees." (For more, see our Jan. 31, 2018 News, "New Semper MMF.") In other news, Bond Buyer wrote the story, "Wisconsin seeks transparency with Clarity's VRDO bid platform." It tells us, "Wisconsin intends to use the Clarity Bidrate Alternative Trading System to competitively remarket $60 million of floating-rate paper, a decision cemented by recent lawsuits accusing banks and broker-dealers of widespread fraud in the variable-rate demand obligation market. The lawsuits highlight how 'rates are being established behind the curtain and with the Clarity platform everyone will see how the rate is determined based on orders from investors,' said Wisconsin's capital finance director, David Erdman.... Clarity, a division of Arbor Research & Trading LLC, launched its first issuer deal in November 2016 when Ohio sold $32.3 million of variable rate bonds."
Fidelity: Volatility Tailwind for MMFs
Fidelity Investments' Money Markets Group published "Outlook for 2019: Growth Slows as Volatility Creates a Tailwind for Money Markets." It explains, "Market volatility should continue to provide a tailwind to money markets as 'safe haven' investors look to benefit from positive real returns." Says Fidelity, "U.S. taxable money market funds (MMFs) have benefited from rising interest rates and the recent heightened volatility in the equity and credit markets. Not surprisingly, inflows into both prime and government money market mutual funds were strong during 2018. Taxable MMFs had net inflows of $182 billion at the end of 2018, far outpacing the average $77 billion in net inflows over the previous five years." Fidelity continues, "Moreover, nine interest rate hikes in the current tightening cycle have resulted in positive real (inflation-adjusted) yields for money market funds -- versus negative returns on many bond and stock portfolios in 2018. For example, the average 7-day yield on prime money market funds and government mutual funds climbed from near zero in 2015 to 2.33% and 2.10%, respectively, by the end of 2018. Prime and government funds now deliver far greater yields than those of bank-administered accounts. We would expect to see continued growth in money market funds and ultrashort bond funds from clients transitioning from lower-yielding bank deposits or reallocating from higher-risk investments." Other takeaways spotlighted that "The U.S. economy remains healthy despite signs of slowing growth as the tightening cycle enters a new phase, with the path of interest rates less clear in 2019" and "Increased Treasury bill supply has impacted market rates." Fidelity maintains that its MMFs are "well-positioned." It adds, "A temporary shutdown does not affect the U.S. government's payments on U.S. Treasury securities or other U.S. government debt securities, which are held in Fidelity mutual funds, including Fidelity money market funds. As one of the largest asset management companies in the industry, Fidelity has the scale and experience to navigate the cyclical rhythms of the markets in an effort to provide stability that our customers are seeking from their investment firms."
Money Fund Assets Flat on Week
ICI's latest "Money Market Fund Assets" report shows that money fund assets were flat in the latest week, though Prime MMFs increased. MMFs have posted gains in 12 out of the past 14 weeks, during which time they've risen by $179.5 billion, or 6.2%. ICI's weekly series shows Retail MMFs decreasing $2.8 billion, or -2.4%, while Institutional MMFs increased $5.2 billion, or 2.8%, since the previous week. They write, "Total money market fund assets increased by $2.40 billion to $3.05 trillion for the week ended Wednesday, January 23, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $379 million and prime funds increased by $4.21 billion. Tax-exempt money market funds decreased by $1.43 billion." Total Government MMF assets, including Treasury funds, stood at $2.313 trillion (75.9% of all money funds), while Total Prime MMFs reached $594.7 billion (19.5%). Tax Exempt MMFs totaled $144.0 billion, or 4.7%. ICI explains, "Assets of retail money market funds decreased by $2.84 billion to $1.19 trillion. Among retail funds, government money market fund assets decreased by $4.09 billion to $699.34 billion, prime money market fund assets increased by $2.90 billion to $356.01 billion, and tax-exempt fund assets decreased by $1.65 billion to $134.63 billion." Retail assets account for over a third of total assets, or 39.0%, and Government Retail assets make up 58.8% of all Retail MMFs. The release adds, "Assets of institutional money market funds increased by $5.24 billion to $1.86 trillion. Among institutional funds, government money market fund assets increased by $3.71 billion to $1.61 trillion, prime money market fund assets increased by $1.31 billion to $238.64 billion, and tax-exempt fund assets increased by $218 million to $9.39 billion." Institutional assets accounted for 61.0% of all MMF assets, with Government Institutional assets making up 86.7% of all Institutional MMF totals.
Weekly MF Portfolio Holdings
Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Wednesday, which tracks a shifting subset of our monthly Portfolio Holdings collection. The latest cut, with data as of Friday, Jan. 18, 2019, includes Holdings information from 46 money funds (down from 59 on Jan. 11, 2019), representing $850.0 billion, compared to $985.98 billion in the prior week. That represents 27.2% of the $3.124 trillion in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our Jan. 11 News, "Jan. MF Portfolio Holdings: Treasuries, Repo Jump; FICC Biggest Repo.") Our latest Weekly MFPH Composition summary shows Government assets once again dominated the holdings list with Repurchase Agreements (Repo) totaling $314.8 billion (a decline from $370.9 billion on Jan. 11), or 37.0% of holdings, Treasury debt totaling $273.1 billion (down from $320.5 billion), or 32.1%, and Government Agency securities totaling $160.1 billion (down from $188.1 billion, or 18.8%. Commercial Paper (CP) totaled $40.4 billion (down from $43.8 billion), or 4.7%, and Certificates of Deposit (CDs) totaled $34.2 billion (down slightly from $34.6 billion), or 4.0%. A total of $15.7 billion or 1.8% was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $11.9 billion, or 1.4%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $273.1 billion (32.1% of total holdings), Federal Home Loan Bank with $111.5B (13.1%), RBC with $43.3 billion (5.1%), BNP Paribas with $34.3B (4.0%), Federal Farm Credit Bank with $33.6B (4.0%), Fixed Income Clearing Co with $20.1B (2.4%), Credit Agricole with $19.7B (2.3%), ING Bank with $19.1B (2.2%), Fidelity with $15.4B (1.8%), and Mitsubishi UFJ Financial Group Inc with $15.3B (1.8%). The Ten Largest Funds tracked in our latest Weekly Holdings update include: Fidelity Inv MM: Govt Port ($113.3B), Goldman Sachs FS Govt ($99.3B), Wells Fargo Govt MMkt ($76.0B), Goldman Sachs FS Trs Instruments ($59.5B), Morgan Stanley Inst Liq Govt ($55.8B), Fidelity Inv MM: MMkt Port ($48.3B), First American Govt Oblig ($41.0B), State Street Inst US Govt ($39.7B), Fidelity Inv MM: Treasury Port ($25.6B), and Invesco Treasury ($23.1B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
WSJ Says Investors Adding Cash
Yesterday's Wall Street Journal warns that "More dollars shifting to money funds is [a] bad omen for longevity of [a] market rebound" in its article, "Cash Run Threatens Pickup in Stocks." They comment, "Investors are increasing their cash holdings at the fastest pace in a decade, highlighting doubts about the durability of the stock market's early 2019 rebound. Assets in money-market funds, which are generally used as a proxy for net new cash flows, have grown by more than $2 billion this month, according to Lipper data through Thursday. That comes on top of the $190 billion investors added to the funds in the final three months of last year, their biggest deposit since 2008." The Journal continues, "Cash allocations had been trending downward throughout most of the decade since the financial crisis, reflecting negative 'real' interest rates that meant holders lost money after inflation. Now, cash is competitive again following rate increases that have pushed real, inflation-adjusted rates into positive territory, and have brought bond yields into line with stock-dividend yields." Meanwhile, Morningstar also comments on money markets in their piece, "Investors, We Need to Talk About Your Cash." They explain, "Just a few short years ago, many investors were feeling lackadaisical about their cash holdings, and it was hard to blame them: Yields on most cash products fell somewhere between zero and abysmal. But now that the Federal Reserve has been lifting short-term rates for several years running, cash yields have begun to compel again -- at least relative to other investment types. Many money market mutual funds are yielding well over 2% these days, while longer-term CD yields are closing in on or over the 3% mark. When you consider the kind of volatility that both stock and bond investors were forced to endure in 2018, it's little wonder that many investors yanked dollars from long-term mutual funds toward the end of last year and steered the money to cash instead." The article recommends "right-sizing cash holdings," warns about holding too much cash or holding more than needed in low-yielding accounts, and urges folks to shop around for higher payouts.
Washington Post Column on Sweeps
Columnist Allan Sloan discusses sweep accounts and gives a shout-out to Crane Data in his latest piece, which appears in The Washington Post. Entitled, "Have index funds or brokerage account? Two simple tips could be worth money," it says, "I'll also show you how to avoid being lowballed by profit-hungry brokerage houses on the cash that you have in 'sweep accounts.' Those are the accounts where brokerage houses put the proceeds from holdings that you sell or hold cash that you deposit." Sloan explains, "I'm certainly not the first journalist to suggest lately that you move money out of brokerage sweep accounts into money market funds. But it's something that bears repeating. I've got two motivations here. First, I've got an account at Charles Schwab where moving my cash to a money market fund from my sweep account increased my earnings about 500 percent. Second, I read the January issue of Money Fund Intelligence, published by my friend Peter Crane, and happened upon a table showing what investors were earning on sweep account cash as of Dec. 31 and what the firms' money market funds were paying." The column adds, "[T]he yield difference between sweep account and money funds is preposterous, verging on obscene. Take Merrill Lynch, whose sweep account was yielding 0.14 percent at year-end, less than one-fourteenth of the 1.99 percent the Merrill money fund was yielding. Or take Morgan Stanley (0.14 versus 2.00) or Ameriprise (0.20 versus 2.01) or E-Trade (0.20 versus 1.52) or Schwab (0.33 versus 1.94)." (Let Crane Data know if you'd like to see a recent copy of our Brokerage Sweep Intelligence, which tracks these rates.)
Weekly Portfolio Holdings Update
Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Wednesday, which tracks a shifting subset of our monthly Portfolio Holdings collection. The latest cut, with data as of Jan. 11, 2019, includes Holdings information from 59 money funds (up from 43 on Dec. 28, 2018), and representing $985.98 billion, compared to $718.4 billion in our final December report. That represents 31.6% of the $3.124 trillion in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our Jan. 11 News, "Jan. MF Portfolio Holdings: Treasuries, Repo Jump; FICC Biggest Repo.") Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $370.89 billion (up from $271.0 billion on Dec. 28), or 37.6% of holdings, Treasury debt totaling $320.45 billion (up from $195.4 billion), or 32.5%, and Government Agency securities totaling $188.06 billion (up from $162.0 billion), or 19.1%. Commercial Paper (CP) totaled $43.83 billion (up from $37.3 billion), or 4.4%, and Certificates of Deposit (CDs) totaled $34.61 billion (up from $28.6 billion), or 3.5%. A total of $18.06 billion or 1.8% was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $10.1 billion, or 1.0%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $320.4 billion (32.5% of total holdings), Federal Home Loan Bank with $132.6B (13.4%), RBC with $53.8 billion (5.5%), Federal Farm Credit Bank with $39.3B (4.0%), BNP Paribas with $33.0B (3.3%), Fixed Income Clearing Co with $32.4B (3.3%), Credit Agricole with $21.5B (2.2%), Mitsubishi UFJ Financial Group Inc with $19.1B (1.9%), Barclays PLC with $17.8B (1.8%), and ING Bank with $17.6B (1.8%). The Ten Largest Funds tracked in our latest Weekly Holdings update include: Fidelity Inv MM: Govt Port ($112.5B), Goldman Sachs FS Govt ($100.0B), Wells Fargo Govt MMkt ($76.8B), Goldman Sachs FS Trs Instruments ($59.3B), Dreyfus Govt Cash Mgmt ($56.5B), Morgan Stanley Inst Liq Govt ($54.1B), Fidelity Inv MM: MMkt Port ($46.7B), First American Govt Oblig ($40.4B), State Street Inst US Govt ($39.8B), and Dreyfus Treas Sec Cash Mg ($29.7B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
A press release entitled, "Moody's affirms Goldman Sachs US$ Treasury Liquid Reserves Fund following merger," tells us, "Moody's Investors Service has affirmed the Aaa-mf rating of Goldman Sachs US$ Treasury Liquid Reserves Fund following its merger with the Goldman Sachs USD Treasury Instruments Liquid Reserves Fund. The rating of the Goldman Sachs USD Treasury Instruments Liquid Reserves Fund has been withdrawn. The funds are managed similarly by Goldman Sachs Asset Management except for the use of reverse repurchase agreements by the USD Treasury Liquid Reserves Fund. Under the looming EU regulatory regime for money market funds, certain liquidity provisions make it impractical to manage a public debt constant net asset value (CNAV) money market fund without exposure to cash, deposits, or reverse repurchase agreements." Another release, titled, "Moody's Assigns Aaa-mf Rating to BlackRock ICS Euro Assets Liquidity Fund," explains, "Moody's Investors Service has assigned a Aaa-mf rating to the BlackRock ICS Euro Assets Liquidity Fund, a prime money market fund (MMF). The fund is domiciled in Ireland and complies with the European Union's new money market fund rules." It adds, "The fund, created in 2013, was operating as a Constant Net Asset Value (CNAV) MMF and has now transitioned to a short term variable net asset value (VNAV) structure. It offers a t+1 settlement. The fund had 2.7 billion of AUM as of 2 January 2019.... We expect the Fund to maintain a strong liquidity profile supported by high levels of overnight and weekly liquidity in the portfolio, in excess of the regulatory requirements. The investor base is made of internal funds as well as institutional investors such as multinational corporations, insurance companies, and sovereign wealth funds."
CNBC: Investors Hiding in Cash
CNBC writes "Investors are hiding out in cash: Assets in money market funds surge past $3 trillion," which tells us, "Cash is becoming the king as investors flee volatile stock markets. Assets in money market mutual funds have swollen to $3.066 trillion, their highest level since March 2010, driven by retail investors. The money fund assets had spent much of the last decade in the $2 trillion range but tracked above $3 trillion again in mid-December, coinciding with a late-2018 market downturn that resulted in the S&P 500 posting a 6.2 percent drop for the year, it's worst showing in a decade." The article continues, "Sean Collins, chief economist at the Investment Company Institute, which tracks the data, said the move could reflect a combination of factors: Investors are wary about the stock market volatility, but higher short-term interest rates are also making money market funds more attractive for those who want a short-term asset. Money market funds have long been considered as safe as cash savings accounts at banks.... Nearly three-quarters of the $183 billion that has flowed into money market funds since the end of the third quarter of last year was to retail funds, not institutional, according to ICI data."
Moody's Tweaks MMF Methodology
A release entitled, "Moody's updates its money market funds methodology tells us, "Moody's Investors Service has published an updated money market funds (MMF) methodology, replacing the version from December 21, 2016. No changes to outstanding MMF ratings are expected to result from this update. The update includes a change in how Moody's calculates the impact of 50% redemption on a fund's adjusted net asset value under a stress scenario in cases where the regulation of the jurisdiction of operations for the fund requires it to hold a minimum level of weekly liquidity. The update further clarifies the mapping between obligations and the reference points we use as inputs into the credit matrix and NAV stress scenarios. It also provides more details about the mechanics of the credit matrix." The release adds, "MMF ratings are not credit ratings and are considered Other Permissible Services (OPS).... For a full explanation, please consult the updated report called "Money Market Funds" now available on www.moodys.com and accessible at: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147802." The full report comments, "In this methodology, we explain our general approach to assessing the investment quality of money market funds globally, including the qualitative and quantitative factors that are likely to affect money market fund (MMF) rating outcomes. MMF ratings are not credit ratings; they are opinions of the investment quality of shares in mutual funds and similar investment vehicles that principally invest in short-term fixed income obligations."
ICI: Prime Inst MMF Assets Jump
The Investment Company Institute released its latest "Money Market Fund Assets" report, which shows that MMF assets jumped again in the latest week led by Prime Institutional assets. MMFs posted their 11th week of gains out of the past 12 weeks, during which time they've risen by $194.5 billion, or 6.7%. Government, Prime and Tax Exempt MMFs all increased. Overall fund assets grew $209 billion, or 7.4% in 2018, according to ICI, or $230 billion, or 7.6%, according to Crane Data, the strongest showing in 10 years. ICI's weekly series showed Retail MMFs increasing $179 billion, or 17.6%, while Institutional MMFs grew $31 billion, or 1.7%, on the year. ICI writes, "Total money market fund assets increased by $19.08 billion to $3.07 trillion for the week ended Wednesday, January 9, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $2.55 billion and prime funds increased by $16.36 billion. Tax-exempt money market funds increased by $165 million." Total Government MMF assets, including Treasury funds, stood at $2.334 trillion (76.1% of all money funds), while Total Prime MMFs reached $585.9 billion (19.1%). Tax Exempt MMFs totaled $146.9 billion, or 4.8%. They explain, "Assets of retail money market funds increased by $4.11 billion to $1.20 trillion. Among retail funds, government money market fund assets increased by $813 million to $707.16 billion, prime money market fund assets increased by $3.87 billion to $351.83 billion, and tax-exempt fund assets decreased by $576 million to $137.39 billion." Retail assets account for over a third of total assets, or 39.0%, and Government Retail assets make up 59.1% of all Retail MMFs. The ICI release adds, "Assets of institutional money market funds increased by $14.97 billion to $1.87 trillion. Among institutional funds, government money market fund assets increased by $1.74 billion to $1.63 trillion, prime money market fund assets increased by $12.49 billion to $234.06 billion, and tax-exempt fund assets increased by $741 million to $9.53 billion." Institutional assets accounted for 61.0% of all MMF assets, with Government Institutional assets making up 87.0% of all Institutional MMF totals.
Reuters: Cash Returns Psychological
Reuters writes "Cash can beat stocks in returns and happiness." The article says, "How bad was 2018 for investors? They pulled a record amount of money from stock and bond funds late in 2018 and tucked it into safe havens such as CDs, money market funds or U.S. Treasuries that mature in a year or less. If history is any indication, investors worried about bad times recover faster if they stay the course in a typical diversified portfolio.... Nevertheless, people often find it more comfortable to increase their cash during uncertain times. Even when the markets are not going through major gyrations, research shows cash has a powerful soothing effect on people." The Reuters piece adds, "Sonja Lyubomirsky, a happiness researcher and psychology professor at the University of California Riverside, along with Joe Gladstone, of University College London, surveyed British bank customers in 2016 and found that being able to see cash sitting in accounts and easily accessible gave people a feeling of comfort."
Invesco Pushes European Reform Date
Invesco Global Liquidity previously announced that it will convert its Short-Term Investment Company (Global Series) plc "STIC Global" constant-NAV money market funds to LVNAV funds beginning Jan. 14, 2019, but they now tell us that they are "converting our fund range to LVNAV Funds on 11th March 2019." While European Money Fund Reforms are scheduled to go live on January 21, firms have apparently been given extra time by regulators. (We haven't seen any official communications on this yet though.) A recent "Investor's Guide" produced by Invesco noted that "the majority of existing CNAV MMFs are converting to the LVNAV fund category." Conversions to Low Volatility NAV operation involve STIC Global US Dollar Liquidity Portfolio (with reported assets of $4.92 billion as of Jan. 7), STIC Global Euro Liquidity Portfolio (E1.35B) and STIC Global Sterling Liquidity Portfolio (L1.57B). Invesco ranks as the 18th-largest complex reporting to Crane Data's Money Fund Intelligence International with total assets of $8.57 billion, when converted to U.S. dollars. Its communication to investors observed that local Invesco offices will be providing updates in light of a recent ruling against use of a share-redemption mechanism for funds operating with negative yields, which applies to the Euro Liquidity Portfolio. The Invesco piece assured investors that it is highly unlikely that the recategorized LVNAV funds will break the 20-basis point "collar," comparing the daily amortized-cost derived NAV to the mark-to-market valuation, allowing them to continue to transact at E/L/$1 per share. "There has not been a single occasion where we broke the 20-bps collar" over the past 10 years, it stated. "Whilst the reforms introduce key new elements to MMFs, we believe there should be very little change seen by Sterling and U.S. Dollar investors from an operational standpoint on a day to day basis. Further details on the changes to the Euro Portfolio will be communicated to investors in due course. Invesco has the benefit of having already successfully transitioned our U.S. MMF business in line with the SEC's reforms in October 2016. Investors can be assured Invesco Global Liquidity will continue to be a core business for Invesco. We will continue to strive to deliver a range of liquidity products with the same unwavering objectives of preservation of principal, liquidity and then yield, in that order."
JP Morgan on Year-End Repo Spike
J.P. Morgan's latest "Short-Term Fixed Income" update, entitled, "What happened to repo at year-end?" tells us, "While it's common to see repo rates spike around year ends as dealer balance sheets shrink, the repo markets experienced an extra dose of volatility this year. On 12/31, overnight GCF Treasury repo rates surged to an all-time high of 5.149%, increasing by 260bp from the day prior. Relative to previous year ends, this is the single biggest one-day jump in overnight GCF repo rates by far.... A similar, but smaller, spike occurred in the tri-party repo and GC repo market as well, and because these transactions are components of SOFR, SOFR also increased by 54bp to 3.00%. In part, regulations contributed to what transpired as they tend to dampen overall market activity at key moments, like year-end. In particular, the calculation of G-SIB surcharges is based on year-end score snapshots which incentivizes US systemically important banks to temporarily reduce their balance sheet intensive activities like repo. This is especially true for those that are close to entering into the next higher G-SIB surcharge bucket or moving down into the next lower G-SIB surcharge bucket.... As a consequence, borrowers often find themselves paying up for funding during a time when there is already little liquidity and ultimately bearing the costs of banks trying to manage/optimize their balance sheets for regulatory purposes." The update explains, "With all that said, the repo markets have normalized since year-end. As of COB Friday, overnight GC repo rates have settled around 2.80%, much lower than where they were at year-end. Reflecting on this, the events of the past few days reminded us that for as liquid as the repo market is relative to Libor, there are also vagaries in the repo market that make SOFR a much more volatile benchmark day to day. In this instance, regulations seem to have played a large role in reducing liquidity at a time when market depth is already expected to fall as trading desks thin out for the holidays.... Tack on the current environment where dealers are heavy with collateral and banks are on their way to reducing their excess reserve balances (not so much because of Fed normalization but more because they're rotating into other higher yielding asset classes), repo rates and consequently SOFR will likely only become more volatile in the near future. While developments like sponsored repo and the newly issued Basel proposal to report banks' total leverage exposure measure on a daily average basis will help temper this volatility, it's unclear to what degree.... Until then, we wouldn't be surprised if we see more volatility in repo rates, especially around quarter-ends or on days when there is less liquidity generally (e.g., the national day of mourning of former US President George H.W. Bush) as the markets adjust to shifts in financing availability on those days." JPM adds, "Even so, it's worth mentioning that the dislocations we've seen in repo rates recently are not reflective of funding stress in the fixed income markets such as the one in 2008. As we discussed in our 2019 Outlook, over the past few years the repo market has grown larger, broader, and deeper. Usage at the Federal Reserve's RRP facility has greatly declined and innovative uses of sponsored repo have provided both lenders and borrowers new opportunities. Overall, there has been more financing in the repo markets, even if there are temporary spikes in repo rates."
Bond Fund Outflows Continue
Bond mutual funds and ETFs continued to see big outflows in the latest week, though not as large as the prior week, according to ICI's "Combined Estimated Long-Term Fund Flows and ETF Net Issuance". The January 2, 2019 release, with data as of Dec. 26, 2018, says, "Total estimated outflows from long-term mutual funds and exchange-traded funds (ETFs) were $37.84 billion for the week ended December 26, 2018, the Investment Company Institute reported today. Estimated mutual fund outflows were $46.20 billion while estimated net issuance for ETFs was $8.36 billion. Reports of long-term flow estimates and ETF net issuance are available on the ICI website." The release adds, "Bond funds had estimated outflows of $9.23 billion for the week, compared to estimated outflows of $12.22 billion during the previous week. Taxable bond funds saw estimated outflows of $10.14 billion, and municipal bond funds had estimated inflows of $913 million." Crane Data, which has begun "beta" testing a new Bond Fund Intelligence Daily product, estimates that bond fund outflows almost ceased in the week ended January 2, 2019, as assets declined a mere $3.9 billion. (Let us know if you'd like to see a copy of our new product, which tracks daily assets, yields and NAVs on a subset of the bond fund and ETF universe.)
MarketWatch Has More on Robinhood
MarketWatch writes "Robinhood quietly stops users from signing up for cash accounts amid scrutiny from regulators." It comments, "Robinhood, the no-commission stock trading platform, is no longer letting users sign up for its new cash management accounts. A section of the Robinhood app where users could put their name on a waitlist for the cash management accounts disappeared after some users updated the app over the past week. The change, which Robinhood did not announce, frustrated some users, who complained on Twitter and Reddit that were worried they would lose their spots on the waitlist for the cash management accounts." The article adds, "The change also raised more questions about the future of Robinhood's cash management accounts, which attracted the attention of U.S. senators after it was revealed that Robinhood had not consulted federal regulators about insuring the cash accounts." An earlier MarketWatch article said, "A bipartisan group of senators has raised concerns over Robinhood's so-called 'cash management' accounts. The senators wrote a letter Thursday to the heads of the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corp. (FDIC) and the Securities Investor Protection Corp. (SIPC), detailing their worries that Robinhood’s accounts and the marketing around them could 'mislead' consumers." (See also our Jan. 2 News, "Barron's Hits FinTech Money Markets; MarketWatch Slaps Wall of Cash.")
TD MMFs File N-CR Pre-Liquidation
The SEC's 2016 Money Market Fund Reforms included a mandate to file Form N-CR whenever financial support is provided to a money fund. While we still have yet to see any true money fund bailouts, we have seen a handful of filings to "top-up" money fund NAVs before liquidations or mergers. The latest filings we've found are from the TD Money Market Funds, which provided small capital contributions before they were liquidated. (See our Aug. 2, 2018 News, "MFS U.S. Govt MMF Files Form N-CR," and our Oct. 15, 2018 Link of the Day, "TDAM Liquidating Money Funds.") Separate but similar filings for the TD Money Market Portfolio, TD U.S. Government Portfolio, TD Municipal Portfolio, TD California Municipal Money Market Portfolio, and TD New York Municipal Money Market Portfolio tell us, "Description of nature of support: Provision of capital contribution to increase the net asset value per share to $1.0000 in connection with the upcoming liquidation of TD U.S. Government Portfolio, a series of the Registrant.... Person providing support: TDAM USA Inc.... TDAM USA Inc. is the investment adviser to the Portfolio.... Date support provided: November 16, 2018.... Amount of support: $82,028.28. Item C.6 Security supported (if applicable). Disclose the name of the issuer, the title of the issue (including coupon or yield, if applicable) and at least two identifiers, if available (e.g., CUSIP, ISIN, CIK, LEI): Not Applicable. Item C.7 Value of the security supported on date support was initiated (if applicable): Not Applicable. Item C.8 Brief description of reason for support: The support related to the upcoming liquidation of the Portfolio, and was made to offset the historical losses previously realized by the Portfolio. The amount of the financial support is equal to the difference between the Portfolio’s net assets and the net asset value per share of $1.0000 multiplied by the number of shares outstanding so that shareholder interests are not diluted and all shareholders receive the same value upon the Portfolio's liquidation or in redemptions made following the financial support, but prior to the liquidation." TD's previous Prospectus Supplements said, "On September 26, 2018, the Board of Directors (the 'Board') of TD Asset Management USA Funds Inc. (the 'Company') approved the liquidation of each of the TD Money Market Portfolio, TD U.S. Government Portfolio, TD Municipal Portfolio, TD California Municipal Money Market Portfolio and TD New York Municipal Money Market Portfolio, each a series of the Company, pursuant to the terms of a Plan of Liquidation for each Portfolio. The approval by the Board of the liquidations was based on the recommendation of TDAM USA Inc., the Portfolios' investment adviser ('TDAM'), which has determined that the Portfolios are no longer viable from a business and economic perspective. Under its Plan of Liquidation, each Portfolio will be liquidated on or about November 19, 2018 (the 'Liquidation Date')."
