Daily Links Archives: November, 2019

The Wall Street Journal writes an odd piece about year end volatility in repo rates in "Some Investors Resolve to Ring In the New Year by Lending Cash." They explain, "Some investors expect a new surge of volatility in short-term money markets at year-end and are preparing to take advantage, gathering cash to lend overnight in the market for repurchase agreements, or repos.... The cost of borrowing overnight using repo has spiked at the end of recent quarters and at the end of 2018, when a scarcity of available cash drove rates as high as 6%.... Though the Federal Reserve has been lending billions of dollars each day in the repo market, some analysts and bankers are concerned that the central bank's method for providing funds limits the benefits of those loans, opening the door to volatility." It adds, "For those who lend in the repo market, such as money-market funds and other investors with available cash, that scenario could present an opportunity. Jeffery Elswick, director of fixed income at Frost Investment Advisors, said he benefited from having an unusually large amount of cash in September available to lend in the market. That experience drove him to plan for another year-end event, even though he acknowledges that the Fed could ramp up its lending programs enough to minimize any spikes." Finally, the WSJ says, "Yet, almost two months after the September repo market disruption—and almost two months of measures to provide liquidity from the Fed-demand for cash isn't subsiding. This month, banks and other borrowers are bidding for an average of about $74 billion in overnight cash loans from the Fed a day -- about a 25% increase from last month. Central bank officials have said they plan to continue offering the loans into the second quarter."

Money fund assets rose for the 4th week in a row, the 10th out of the past 11 weeks, and the 27th of the past 30 weeks. ICI's latest "Money Market Fund Assets" report shows that MMF totals have increased by $525 billion, or 17.2%, year-to-date in 2019. Over the past 52 weeks, ICI's money fund asset series has increased by $652 billion, or 22.3%, with Retail MMFs rising by $254 billion (23.1%) and Inst MMFs rising by $398 billion (21.9%). ICI writes, "Total money market fund assets increased by $16.61 billion to $3.57 trillion for the week ended Wednesday, November 13, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $13.77 billion and prime funds increased by $3.20 billion. Tax-exempt money market funds decreased by $364 million." ICI's weekly series shows Institutional MMFs jumping $11.4 billion and Retail MMFs increasing $5.2 billion. Total Government MMF assets, including Treasury funds, were $2.667 trillion (74.7% of all money funds), while Total Prime MMFs were $766.3 billion (21.5%). Tax Exempt MMFs totaled $138.3 billion, 3.9%. They explain, "Assets of retail money market funds increased by $5.18 billion to $1.35 trillion. Among retail funds, government money market fund assets increased by $2.65 billion to $772.99 billion, prime money market fund assets increased by $3.09 billion to $455.32 billion, and tax-exempt fund assets decreased by $562 million to $125.56 billion." Retail assets account for over a third of total assets, or 37.9%, and Government Retail assets make up 57.1% of all Retail MMFs. The release adds, "Assets of institutional money market funds increased by $11.43 billion to $2.22 trillion. Among institutional funds, government money market fund assets increased by $11.12 billion to $1.89 trillion, prime money market fund assets increased by $110 million to $311.01 billion, and tax-exempt fund assets increased by $198 million to $12.76 billion." Institutional assets accounted for 62.1% of all MMF assets, with Government Institutional assets making up 85.4% of all Institutional MMF totals.

Fitch Ratings announced AAAmmf money fund ratings on two funds recently. A release entitled, "Fitch Assigns New Ratings to Two New Western Asset Money Market Funds," explains, "Fitch Ratings has assigned a 'AAAmmf' rating to the Western Asset Premier Institutional Liquid Reserves fund and the Western Asset Premier Institutional Liquid Reserves, Ltd. fund. Both funds are managed by Legg Mason Partners Fund Advisor, LLC (LMPFA) and are subadvised by Western Asset Management Company (Western Asset), which provides day-to-day portfolio management. Both LMPFA and Western Asset are wholly owned subsidiaries of Legg Mason, Inc. (NYSE: LM)." It says, "The main drivers of the rating are: The funds' overall credit quality and diversification; Low exposure to interest rate and spread risk; Holdings of daily and weekly liquid assets consistent with shareholder profile and concentration; Maturity profile consistent with Fitch's 'AAAmmf' rating criteria; and, The capabilities and resources of Legg Mason and Western Asset." The release adds, "The funds' investment objectives are to provide shareholders with liquidity and as high a level of current income as is consistent with preservation of capital. The Western Asset Premier Institutional Liquid Reserves fund is a US-incorporated MMF and the Western Asset Premier Institutional Liquid Reserves, Ltd. fund is a Cayman Islands-incorporated MMF. Both funds are feeder funds that invest all of their investable assets in the Western Asset Liquid Reserves Master Portfolio." Another release, entitled, "Fitch Assigns 'AAAmmf' Rating to HSBC U.S. Government Money Market Fund," tells us, "Fitch Ratings has assigned a 'AAAmmf' rating to the HSBC U.S. Government Money Market Fund. The main drivers of the rating are: The fund's overall credit quality and diversification; Low exposure to interest rate and spread risk; Holdings of daily and weekly liquid assets consistent with shareholder profile and concentration; Maturity profile consistent with Fitch's 'AAAmmf' rating criteria; and, The capabilities and resources of HSBC Global Asset Management (USA) Inc. as the fund's investment advisor." It adds, "The investment objective of the fund is to provide shareholders with liquidity and as high a level of current income as is consistent with the preservation of capital. The fund is a government MMF managed in accordance with Rule 2a-7 under the Investment Company Act of 1940, as amended."

A press release entitled "RBC Global Asset Management Waives Fee in U.S. Government Money Market Fund Institutional Class 1 Shares," tells us, "RBC Global Asset Management ('RBC GAM') ... announced that it has implemented a voluntary fee waiver of approximately five basis points to Institutional Class 1 Shares in its U.S. Government Money Market Fund (TUGXX).... The fee waiver, effective Oct. 16, allows for a reduction of the Fund's current operating expenses from 19 basis points to 14 basis points. With the fee change, the Fund's yield to shareholders can increase by the amount of the waiver." John Donohue, Head of U.S. Liquidity Management at RBC GAM, comments, "Our firm strives to provide best-in-class liquidity products to our U.S. clients.... We are pleased to announce this initiative to offer even greater value to clients of our U.S. Government Money Market Fund." The release adds, "The Fund invests at least 99.5% of its total assets in U.S. Government securities, cash and repurchase agreements collateralized fully by U.S. Government securities or cash. RBC GAM has more than 36 years of managing short-term fixed income and over $21 billion in short-term fixed income assets under management as of September 30, 2019. For further information regarding this Fund, please visit: https://us.rbcgam.com/mutual-funds/money-market-funds/performance.fs."

We learned from an article on Financial Advisor magazine's website entitled, "SEC Cracks Down on Hybrid RIAs' Sweep Money Market Account," about a recent speech from the Stephanie Avakian, the SEC's Co-Director, Division of Enforcement, that discusses brokerage sweep accounts. She comments in her talk, "What You Don't Know Can Hurt You," "We are also looking at cash sweep arrangements. Cash in advisory accounts is often automatically swept into a money market mutual fund or a bank deposit sweep program. A dually-registered adviser or an adviser with an affiliated broker-dealer may have a financial interest, a conflict, in recommending one cash investment over another. For example, some money market mutual funds carry 12b-1 fees or make revenue sharing payments that may be shared with a dually-registered adviser or an adviser's affiliated broker-dealer, while other money market funds do not carry those fees. Advisers recommending or choosing between different money market funds must make full and fair disclosure of these types of conflicts to their clients. The Commission has brought enforcement actions in the past where advisers have failed to make appropriate disclosure." Avakian adds, "As another example, some clearing brokers offer bank deposit cash sweep programs where an investor's un-invested cash is swept into an interest-bearing bank account. In some cases, the bank, often an affiliate of the clearing broker, agrees to share a portion of the revenue the bank earns on the investor's deposits with the clearing broker. The clearing broker may, in turn, agree to share a portion of the revenue it received with the investor's dually-registered investment adviser or with the adviser's affiliated broker-dealer. In some cases, the revenue received by the adviser or the adviser's affiliate far exceeds the interest earned by the client on its cash. In fact, in some cases, these arrangements may actually lower the interest paid to the client. These types of cash sweep arrangements create an obvious incentive for an adviser to recommend products where revenue sharing will result in larger payments to the adviser and lesser returns for the adviser's client. This is a clear conflict and, without full and fair disclosure, investors cannot make an informed investment decision to agree to the adviser's cash sweep vehicle selection."

Money fund assets rose for the 26th week out of the past 29, surging towards the $3.6 trillion level. Assets broke $3.5 trillion last week, their first time above that level September 2009. ICI's latest "Money Market Fund Assets" report shows that MMF totals have increased by $508.0 billion, or 16.7%, year-to-date. Over the past 52 weeks, ICI's money fund asset series has increased by $648 billion, or 22.3%, with Retail MMFs rising by $248 billion (22.5%) and Inst MMFs rising by $400 billion (22.2%). ICI writes, "Total money market fund assets increased by $42.50 billion to $3.56 trillion for the week ended Wednesday, November 6, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $28.11 billion and prime funds increased by $13.05 billion. Tax-exempt money market funds increased by $1.35 billion." ICI's weekly series shows Institutional MMFs jumping $33.6 billion and Retail MMFs increasing $8.9 billion. Total Government MMF assets, including Treasury funds, were $2.654 trillion (74.7% of all money funds), while Total Prime MMFs were $763.1 billion (21.5%). Tax Exempt MMFs totaled $138.7 billion, 3.9%. They explain, "Assets of retail money market funds increased by $8.87 billion to $1.35 trillion. Among retail funds, government money market fund assets increased by $4.72 billion to $770.34 billion, prime money market fund assets increased by $3.46 billion to $452.22 billion, and tax-exempt fund assets increased by $686 million to $126.12 billion." Retail assets account for over a third of total assets, or 37.9%, and Government Retail assets make up 57.1% of all Retail MMFs. The release adds, "Assets of institutional money market funds increased by $33.63 billion to $2.21 trillion. Among institutional funds, government money market fund assets increased by $23.39 billion to $1.88 trillion, prime money market fund assets increased by $9.58 billion to $310.90 billion, and tax-exempt fund assets increased by $662 million to $12.56 billion." Institutional assets accounted for 62.1% of all MMF assets, with Government Institutional assets making up 85.3% of all Institutional MMF totals.

A press release entitled, "AB Government Money Market Portfolio Surpasses $10 Billion in Assets," tells us, "AllianceBernstein L.P. (AB), a leading investment management and research firm, announced today that the AB Government Money Market Portfolio (GMOXX) has achieved a significant milestone, reaching assets of $10,980,557,487, a year-to-date increase of more than 38%, as of November 4, 2019. The Government Money Market Portfolio is designed to create maximum current income while consistently offering the safety of maintaining principal and liquidity. The portfolio provides income in the form of a dividend that generally reflects short-term interest rates, which is accrued daily and paid out monthly. The portfolio currently invests in U.S. government securities and/or repurchase agreements related to government securities that are fully collateralized alongside cash." Zak Green, Global Head of Liquidity Sales at AB, comments, "In today's volatile environment, liquidity management strategies are even more important to investors seeking better returns and stability in their asset allocation. Our flagship Government Money Market Portfolio offers investors diversification, stability, liquidity and a solution that ensures they are not overly dependent on a single banking relationship. Additionally, the fund's socially-conscious investment approach (adding 19 veteran, minority, women, and disabled-owned specialty broker dealers to our approved list) and diversified portfolio management team have served as unique differentiators in a space largely devoid of such solutions."

The Wall Street Journal writes "Ready to Boost Stocks: Investors' Multitrillion Cash Hoard." The article tells us, "Nervous investors have socked $3.4 trillion away in cash. But stocks are rising and their nerves are calming, leading bulls to view the huge cash pile as a sign that markets have room to go higher. Assets in money-market funds have grown by $1 trillion over the last three years to their highest level in around a decade, according to Lipper data. A variety of factors are fueling the flows, from higher money-market rates to concerns over the health of the 10-year economic expansion and an aging bull market." It explains, "Rising yields in money markets have been another key factor. Money-market funds through October offered an average annual return of around 1.6% this year, up from 0.02% in 2011, according to Crane Data. Sweep accounts at brokerages, the main reservoir where these firms hold clients' cash, paid about 0.2% on average through September. When interest rates fell in the years after the financial crisis, bank deposits gained market share from money-market funds because the gap between the yields on both had narrowed so much, said Peter Crane, president and publisher of Crane Data. Money-market rates rose in response to the Fed's nine interest rate increases since 2015 and have declined in recent months to reflect the central bank's rate reductions this year. Higher rates, together with a comparatively high degree of liquidity, has increased money markets' allure for investors looking to park their cash for a comparatively short period." The piece adds, "The difference between combined flows into cash and bond funds relative to stocks over the past year is the greatest since 2012, after adjusting for assets under management, according to Goldman Sachs."

Website SustainableInvest.com published the piece, "Money Market Funds and Sustainable Investing: Happy Together." They write, "Additional money market funds have jumped onto the sustainable investing parade by launching or converting existing money market funds to reflect the adoption of various sustainable investing approaches, ranging from negative screening (exclusions) to ESG integration, engagement, and even some variations of impact investing. In the last five months or so, a total of 15 funds comprised of 87 share classes, a mix of prime, government and municipal money funds with constant and fluctuating net asset values (NAVs), were added to an already expanding universe of sustainable money market funds. These 15 investment vehicles, which added a combined total of $267.5 billion in net assets, consist of both existing funds whose mandates have been updated via prospectus amendments or newly launched funds offered by J.P. Morgan, Morgan Stanley, Goldman Sachs and State Street. On top of the three funds available from GuideStone, BlackRock and DWS that were already in operation, this brings the total number of sustainable money market funds currently offered to institutional investors and, to a lesser extent, retail investors, to 18 funds with about $269.5 billion in net assets as of September 30, 2019.... Additional money market fund entrants into the sustainable investing landscape is expected." The website adds, "The approaches vary across the seven firms. Even as their methodologies vary, only two firms have adopted a strictly ESG integration approach. The other five firms have each adopted varying approaches that combine one or more strategies, with two firms implementing a unique impact investing tactic either alone or in combination with other approaches. In the end, five firms have incorporated the consideration of ESG risks and opportunities into the investment decision process. This, even as the impact of environmental (E) and social (S) factors on credit and liquidity risks, on top of fundamental financial considerations, are likely to have limited impact and no upside effect given the short-term tenor of money market eligible securities, especially when such securities are held to maturity." For more on ESG MMFs, see these CD News articles: UBS Asset Mgmt Files to Launch Select ESG Prime Institutional Fund (11/4/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19), Money Fund Assets Up 13th Week Straight; Fitch on ESG in Money Funds (7/19/19), SSGA Goes Live with ESG Money Market Fund; Fitch on Prime MF Inflows (7/3/19) and Cap Advisors Group Demystifies ESG Investing; Weekly Portfolio Holdings (6/19/19).

First American Money Market Funds writes in their latest "Quarterly Portfolio Manager Commentary," "The third quarter delivered softer economic data, trade war uncertainty and general market volatility that forced the Fed to deliver rate cuts in July and September and maintain a dovish rate outlook. We believe the remainder of 2019 will most likely bring additional accommodation. The inverted yield curve, breadth of Fed cut scenarios indicated by the market and the emergence of repo volatility brought a challenging investment environment for money fund managers." They tell us, "With the credit environment stable, our main goal was to enhance portfolio yield while judiciously extending the portfolio weighted average maturity (WAM) and weighted average life (WAL) based on our credit, economic, investor cash flow and interest rate outlook. Third quarter fund yields reflected the decrease in LIBOR rates and the inversion of the yield curve. Even with the market projecting additional Fed rate cuts in 2019, the overall investment environment for prime funds remained attractive. We believe relative funds yields will be sustainable and credit environment will remain stable making the sector an attractive short-term cash option for retail and institutional investors." The update explains, "Treasury, agency and dealer repo supply have been plentiful and kept government money market fund yields robust. Toward the end of the quarter, the market experienced dislocation in the repo markets resulting from a cumulation of events that caused repo yields to spike significantly. While the Fed addressed the issue with temporary open market operations, intermittent repo yield volatility continued, resulting in short-term yield spikes in money market funds, benefitting investors overweight overnight Treasury and agency repo. Aside from the repo sector, with rates falling and market sentiment typically dovish, we found opportunities for value added WAM extension elusive, but capitalized on market volatility to buy fixed-rate securities when it made economic sense." First American adds, "In the coming quarters, we anticipate yields on non-government debt will compress due to a dovish Fed, tightening LIBOR levels, positive credit conditions and simple supply/demand dynamics. However, we believe both the institutional and retail prime obligations funds will remain attractive short-term investment options for investors seeking higher yields on cash positions while assuming minimal credit risk. Yields in the GSE and Treasury space will remain influenced by Fed policy and Treasury bill/note supply. Post-quarter end, the Fed announced balance sheet expansion to inject reserves into the banking sector, which we anticipate should create a more normalized repo market and lessened repo volatility. We will continue to seek opportunities – in all asset classes – that arise from market volatility based on domestic and global economic market data as well as changes in our Fed rate expectations."

A Prospectus Supplement filing for Invesco Tax-Exempt Cash Fund says, "On September 18, 2019, the Board of Trustees of AIM Tax-Exempt Funds (Invesco Tax-Exempt Funds) (the 'Board') approved a Plan of Liquidation and Dissolution (the 'Plan'), which authorizes the termination, liquidation and dissolution of the Fund. In order to effect such liquidation, the Fund will close to investments by new accounts after the close of business on September 20, 2019. Existing shareholders will continue to be able to invest in the Fund until the Fund is liquidated as described below. The Plan is not subject to the approval of shareholders of the Fund." It adds, "To prepare for the closing and liquidation of the Fund, the Fund's portfolio managers will likely increase the Fund's assets held in cash and similar instruments in order to pay for Fund expenses and meet redemption requests. As a result, the Fund is expected to deviate from its stated investment strategies and policies and will no longer be managed to meet its investment objective. The Fund will be liquidated on or before October 30, 2019 (the 'Liquidation Date'). On or promptly after the Liquidation Date, the Fund will make a liquidating distribution to each remaining shareholder equal to the shareholder’s proportionate interest in the net assets of the Fund, in complete redemption and cancellation of the Fund’s shares held by the shareholder, and the Fund will be dissolved. If necessary, the Fund will declare and pay a dividend to distribute to the Fund's shareholders all of the Fund's remaining investment company taxable income and all of the Fund's net capital gain, if any (after reduction for any capital loss carry-forward) and any additional amounts necessary to avoid any excise tax. Alternatively, the Fund may treat the amounts distributed pursuant to the Plan as being paid as dividends as part of the liquidating distributions. The liquidation may be a taxable event to shareholders. Please consult your tax advisor about the potential tax consequences. Shareholders of the Fund may redeem their shares at any time prior to the Liquidation Date." For more, see: "Oppenheimer Funds Now Invesco Oppenheimer; Dreyfus Keeping Name" (6/3/19), "Aberdeen, Fido Make European Reform Changes; Oppenheimer Merging" (3/1/19) and "Invesco Buying OppenheimerFunds; DWS ESG, Northern's RAVI Advertise" (10/22/18).