Daily Links Archives: February, 2020

J.P. Morgan writes in its "Mid-Week US Short Duration Update" that "Sharp equity market sell-offs are MMFs' friend." The brief explains, "Concerns over the spread and impact of the COVID-19 outbreak remain the primary driver of rates and spreads across the global markets. In the US, Treasury yields reached record lows while equities sold off over 6% the first two days of this week. Credit spreads have also widened, and the weak market backdrop has led to little to no issuance so far this week. Similarly, money markets have also been impacted during this time. Expectations of a Fed rate cut in response to the economic impact of COVID-19 continue to mount. As of the time of writing [Thursday a.m.], `OIS markets are pricing in over an 80% chance of a 25bp cut in April and more than a full cut in June. This has in turn led to declines in Libor yields across the curve, driven by further declines in OIS. The 1m1y Libor curve is now completely flat and has retraced all the steepness we saw in 4Q19." It adds, "Furthermore, large equity market sell-offs have historically been associated with inflows into MMFs, especially retail MMFs. This makes sense as investors want to hold more cash and liquidity on hand while they wait for markets to stabilize, and that cash is often swept into a MMF.... [R]etail government MMFs at Vanguard, Fidelity, and Schwab have often seen outsize inflows in weeks when the S&P 500 sold off sharply. To this end, we have already seen flows into these large retail MMF managers so far this week: government retail MMFs across Vanguard, Fidelity and Schwab gained $2.8bn on Tuesday, their largest single-day inflow YTD. To the degree the sell-off persists, on the margin the demand for money market products, particularly rates product such as bills/discos/repo, could increase."

A release on "2019 UCITS and AIF Results," tells us, "The European Fund and Asset Management Association (EFAMA) ... published its latest monthly Investment Fund Industry Fact Sheet and 2019 overview of net sales data of UCITS and AIFs. After the challenging year 2018, 2019 ended as a good year for the European investment fund industry. The good momentum built in November was confirmed in December with net sales of UCITS and AIFs over the period totaling EUR 70 billion (EUR 71 billion for the previous month) and bringing total net assets to EUR 17,796 billion or a 1% increase over the period. In December, UCITS recorded net inflows of EUR 45 billion (EUR 58 billion in November). A slowdown driven by net outflows in UCITS money market funds of EUR 18 billion, compared to net inflows of EUR 10 billion in November. However, this was counterbalanced by strong inflows in long-term UCITS (UCITS excluding money market funds) with EUR 62 billion of net sales, up from 48 billion in November.... Full year results showed that the abatement of the geopolitical risks and trade tensions during the fall pushed up stock prices, whereas the fall in interest rates boosted the bond market. This resulted in a sharp increase in the value of assets and solid net sales of UCITS." The release continues, "Bond funds had an excellent year, marked by a steep increase in net sales of EUR 299 billion, compared to net outflows of EUR 32 billion in 2018. Central Banks' move towards more dovish monetary policy in response to weaker global growth pushed bond yields downwards and convinced investors that the low interest rate world were there to stay. Turning to low risk assets like bonds in this context appeared as a safe move." EFAMA adds, "Money market funds also recorded strong net sales in 2019 with registered net inflows of EUR 84 billion over the year, compared to net outflows of EUR 10 billion in 2018. Investors seeking for safety and liquidity rather than capital gains considered money market funds as a good investment solution to deal with uncertainty." According to EFAMA's Investment Fund Industry Fact Sheet, UCITS money market net sales were down EUR 17.6 billion in December 2019, but were up EUR 84 billion YTD. AIFs money market net sales fell in December and YTD, down EUR 1.2 billion and EUR 21.6 billion, respectively. Net Sales in UCITS bond funds were up EUR 23.2 billion, while net assets for AIFs bond funds were down EUR 2.7 billion. As of year end 2019, EFAMA counts 682 money market funds in Europe with total net assets of EUR 1,326 billion.

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics, which track a shifting subset of our monthly Portfolio Holdings collection, yesterday. The most recent cut (with data as of Feb. 21) includes Holdings information from 92 money funds (up 25 from a week ago), which represent $2.081 trillion (up from $1.450 trillion) of the $3.830 trillion (54.3%) in total money fund assets tracked by Crane Data. (See our Feb. 12 News Feb. MF Portfolio Holdings: Repo, TDs, CDs Jump; Treas, Agencies Fall. Note that our Weekly MFPH are e-mail only and aren't available on the website.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $777.4 billion (up from $549.6 billion a week ago), or 37.4%, Treasury totaling $619.8 billion (up from $481.9 billion a week ago), or 29.8% and Government Agency securities totaling $355.2 billion (up from $237.8 billion), or 17.1%. Certificates of Deposit (CDs) totaled $119.4 billion (up from $65.1 billion), or 5.7%, and Commercial Paper (CP) totaled $103.1 billion (up from $57.4 billion), or 5.0%. A total of $65.6 billion or 3.2%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $40.3 billion, or 1.9%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $619.8 billion (29.8% of total holdings), Federal Home Loan Bank with $254.6B (12.2%), Fixed Income Clearing Co with $135.0B (6.5%), BNP Paribas with $82.8B (4.0%), Federal Farm Credit Bank with $61.3B (2.9%), RBC with $56.4B (2.7%), JP Morgan with $47.1B (2.3%), Credit Agricole with $44.1B (2.1%), Wells Fargo with $35.8B (1.7%) and Mitsubishi UFJ Financial Group with $33.3B (1.6%). The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($151.6B), Fidelity Inv MM: Govt Port ($129.3B), Goldman Sachs FS Govt ($121.8B), BlackRock Lq FedFund ($119.5B), Federated Govt Oblg ($102.6B), Wells Fargo Govt MM ($87.6B), BlackRock Lq T-Fund ($78.7B), Fidelity Inv MM: MM Port ($78.5B), JP Morgan 100% US Treas MMkt ($70.3B) and JP Morgan Prime MMkt ($65.2B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

A Prospectus Supplement for the Miles Funds' Institutional Money Market Fund tells us, "The Addendum to Prospectus supplements the Prospectus of the Institutional Money Market Fund dated July 28, 2019 and constitutes written notice of involuntary redemption. On February 18, 2020 the Board of Directors of the Miles Fund, Inc. ... including all disinterested Directors, at a duly called special meeting of the Board, unanimously voted to approve a plan of involuntary redemption, liquidation and dissolution ... as permitted the by Fund's Articles of Incorporation, as amended. The Plan of Redemption, when implemented, will result in the complete redemption of all shareholder accounts of the Institutional Money Market Fund on or about March 27, 2020, but not later than March 31, 2020, followed by the termination of all IMMF operations, the deregistration of the Fund as an investment company, and dissolution of the Fund. The decision to adopt and implement the Plan of Redemption was taken in anticipation of the sale of substantially all of the assets of Miles Capital. Inc., the Investment Adviser, Transfer Agent and Administrator of the Fund and IMMF to PMA Financial Network, LLC which is expected to close on or about March 31, 2020. As a result of this sale, Miles Capital. Inc. will cease operations as a registered investment advisor, transfer agent and administrator and consequently the Board believes redeeming the shareholders, ceasing operations and terminating of the Fund is in the best interest of all shareholders." It adds, "Effective March 26, 2020, IMMF will no longer accept any new shareholders or any further deposits from any existing shareholders, but will accept all redemption requests according to the procedures described in the Prospectus and past practices until March 27, 2020.... Between now and the Cessation Date, investment assets in the Fund will be transitioned to shorter term securities in compliance with the Fund's investment objectives, policies and restrictions. Although no guarantee can be made, it is Miles Capital's intention to maintain the investment yield of the Fund at a competitive level until the Cessation Date through appropriate investments and through the waiver of fees as needed. Any shareholder accounts in IMMF with positive balances on the Cessation Date will all be redeemed automatically on the Cessation Date without further action by the affected shareholders."

The website ETFdb.com writes "PGIM Ultra Short Bond ETF Moves Into $1 Billion Club." The article explains, "Today's low-yield environment is increasing the allure of high-yielding fixed-income assets, but plenty of investors still like the safety and added income of short-term bond funds. Just look at the PGIM Ultra Short Bond ETF (PULS). The actively managed PULS meets the increased demand for ultra-short-duration debt exposure to allow fixed-income investors gather decent yields with minimal risk. PULS's risk-managed and short duration approach is designed to provide investors a hedge against rising rates and enhance or diversify a cash management strategy. Confirming that advisors and investors are still embracing short-term bond ETFs, PULS has seen nearly $208 million in 2020 inflows, pushing the fund into the exclusive $1 billion in assets under management club." PGIM comments, "The investment objective of PGIM Ultra Short Bond ETF is to seek total return through a combination of current income and capital appreciation, consistent with preservation of capital." The EFTdb piece adds, "PULS, which turns two years old in April, has a duration of just 0.2 years, according to issuer data.... The fund is actively managed and competitively priced at 15 basis points, or 12 basis points lower than the average active ETF in its category.... PULS can include corporate securities, asset-backed securities, mortgage-backed and mortgage-related securities, and high-quality money market instruments such as commercial paper and certificates of deposit. In fact, 56.2% of the fund is currently allocated to fixed and floating corporate bonds."

ICI's latest weekly "Money Market Fund Assets" report shows a modest increase for the second week in a row following two weeks of declines. It explains, "Total money market fund assets increased by $8.34 billion to $3.63 trillion for the week ended Wednesday, February 19, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $4.14 billion and prime funds increased by $3.47 billion. Tax-exempt money market funds increased by $734 million." ICI's weekly series shows Institutional MMFs rising $3.8 billion and Retail MMFs increasing $4.5 billion. Total Government MMF assets, including Treasury funds, were $2.688 trillion (74.0% of all money funds), while Total Prime MMFs were $809.5 billion (22.3%). Tax Exempt MMFs totaled $136.1 billion, 3.7%. Money fund assets are now up fractionally year-to-date in 2020 (up $2B, or 0.0%), but they've increased in 13 out of the last 18 weeks. Over the past 52 weeks, ICI's money fund asset series has increased by $561 billion, or 18.3%, with Retail MMFs rising by $194 billion (16.2%) and Inst MMFs rising by $367 billion (19.6%). ICI explains, "Assets of retail money market funds increased by $4.53 billion to $1.39 trillion. Among retail funds, government money market fund assets increased by $2.98 billion to $788.24 billion, prime money market fund assets increased by $1.44 billion to $479.00 billion, and tax-exempt fund assets increased by $118 million to $123.81 billion." Retail assets account for over a third of total assets, or 38.3%, and Government Retail assets make up 56.7% of all Retail MMFs. The release adds, "Assets of institutional money market funds increased by $3.81 billion to $2.24 trillion. Among institutional funds, government money market fund assets increased by $1.16 billion to $1.90 trillion, prime money market fund assets increased by $2.03 billion to $330.53 billion, and tax-exempt fund assets increased by $617 million to $12.29 billion." Institutional assets accounted for 61.7% of all MMF assets, with Government Institutional assets making up 84.7% of all Institutional MMF totals.

ICI released its monthly "Money Market Fund Holdings" summary earlier this week, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (For more, see our Feb. 12 News, "Feb. MF Portfolio Holdings: Repo, TDs, CDs Jump; Treas, Agencies Fall.) The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in January, prime money market funds held 26.9 percent of their portfolios in daily liquid assets and 41.1 percent in weekly liquid assets, while government money market funds held 61.6 percent of their portfolios in daily liquid assets and 78.8 percent in weekly liquid assets." Prime DLA increased from 25.5% in December, and Prime WLA was unchanged from 40.9%. Govt MMFs' DLA increased from 59.3% in December and Govt WLA increased from 76.6% from the previous month. ICI explains, "At the end of January, prime funds had a weighted average maturity (WAM) of 33 days and a weighted average life (WAL) of 72 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 33 days and a WAL of 94 days." Prime WAMs decreased by two days and WALs decreased by one day from the previous month. Govt WAMs decreased by five days while WALs decreased by three from the previous month. Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas declined from $372.93 billion in December to $332.60 billion in January. Government money market funds' holdings attributable to the Americas declined from $2,350.29 billion in December to $2,198.77 billion in January." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $332.6 billion, or 42.0%; Asia and Pacific at $161.7 billion, or 20.4%; Europe at $288.8 billion, or 36.5%; and, Other (including Supranational) at $8.1 billion, or 1.0%. The Government Money Market Funds by Region of Issuer table shows Americas at $2.199 trillion, or 81.3%; Asia and Pacific at $148.0 billion, or 5.5%; Europe at $342.1 billion, or 12.7%, and Other (Including Supranational) at $14.6 billion, or 0.5%."

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics, which track a shifting subset of our monthly Portfolio Holdings collection, Tuesday. The most recent cut (with data as of Feb. 14) includes Holdings information from 67 money funds (down 4 from two weeks ago), which represent $1.450 trillion (down from $1.779 trillion) of the $3.830 trillion (37.9%) in total money fund assets tracked by Crane Data. (See our Feb. 12 monthly Money Fund Portfolio Holdings update, Feb. MF Portfolio Holdings: Repo, TDs, CDs Jump; Treas, Agencies Fall. Note that our Weekly MFPH are e-mail only and aren't available on the website.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $549.6 billion (down from $652.9 billion two weeks ago), or 37.9%, Treasury totaling $481.9 billion (down from $568.4 billion two weeks ago), or 33.2% and Government Agency securities totaling $237.8 billion (down from $315.1 billion), or 16.4%. Certificates of Deposit (CDs) totaled $65.1 billion (down from $94.2 billion), or 4.5%, and Commercial Paper (CP) totaled $57.4 billion (down from $76.0 billion), or 4.0%. A total of $34.1 billion or 2.4%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $23.7 billion, or 1.6%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $481.9 billion (33.2% of total holdings), Federal Home Loan Bank with $167.2B (11.5%), Fixed Income Clearing Co with $114.5B (7.9%), BNP Paribas with $57.8B (4.0%), Federal Farm Credit Bank with $46.2B (3.2%), JP Morgan with $37.5B (2.6%), RBC with $35.4B (2.4%), Credit Agricole with $27.6B (1.9%), Wells Fargo with $26.6B (1.8%) and HSBC with $24.2B (1.7%). The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($154.8B), Goldman Sachs FS Govt ($123.1B), BlackRock Lq FedFund ($119.1B), Wells Fargo Govt MM ($86.5B), BlackRock Lq T-Fund ($79.2B), JP Morgan 100% US Treas MMkt ($69.5B), Goldman Sachs FS Treas Instruments ($65.6B), JP Morgan Prime MMkt ($64.1B), Morgan Stanley Inst Liq Govt ($62.0B) and Dreyfus Govt Cash Mgmt ($59.6B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

Invesco Fixed Income's latest "Global Fixed Income Strategy," contains a Q&A on recent repo market volatility with Portfolio Manager Justin Mandeville and Head of Government Portfolio Management Marques Mercier. They write, "Last fall's volatility in the market for repurchase agreements (repos) raised concerns about potential market action at year-end, when pressures are often amplified. We ask the Global Liquidity team to review how year-end 2019 played out and share what they expect in the coming months regarding repo market volatility and the Fed’s ability to control it." It asks, "Following volatility last fall, there was concern about a year-end spike in repo rates. Did it materialize?" Marques answers, "The overnight repo markets were calm over year-end and the anticipated volatility never materialized. Overnight funding rates remained within the Fed's target range, even though the term repo markets had priced in higher repo rates leading up to year-end. This market action dispelled concerns about the Fed's capacity to control rates at the short-end of the yield curve." The piece continues, "What helped mitigate funding pressures at year-end?" Mandeville explains, "The Fed's injection of liquidity into the banking system via USD255 billion in temporary open market operations (TOMO), including overnight and term repo operations, conducted with primary dealers, and USD157 billion in Treasury bill purchases. The preparedness of market participants, who appeared sufficiently funded approaching year-end. In addition, banks adjusted their repo balance sheets toward the end of December, reducing leverage while maintaining sufficient capacity to participate in the overnight funding markets. Finally, the Fed lowered the rate on its foreign repo facility to match the overnight repo rate offered to domestic institutions. This rate adjustment incentivized foreign institutions to reallocate their cash into alternatives such as Treasury bills, putting downward pressure on interest rates at the front-end of the curve." When asked "Now that year-end is behind us, will the Fed continue to provide liquidity to the market through open market operations?" Mandeville says, "Ideally, the Fed would like to remove itself from the repo markets, which we anticipate will occur in a timely and gradual process to avoid market disruption and maintain stability in the funding markets. On Jan. 14 the Fed released an updated schedule of its TOMO, which shows that the facility will remain in place for at least a few more months, but with a reduction in the size of the 14-day term operations by USD5 billion beginning in February." The brief also asks, "What do you expect in terms of market action and Fed moves in the coming months?" Marques answers, "The supply/demand imbalance dilemma within the overnight funding market has been recalibrated primarily due to the Fed's liquidity injections. We expect volatility to remain muted in the coming months, as these injections have also provided psychological assurance to market participants that the stabilization of the overnight funding market is a priority. The Fed has committed to maintaining permanent open market operations of USD60 billion a month through the second quarter, and would gradually reduce temporary open market operations after the April 15 tax deadline. By then, we believe a sufficient level of reserves will have accumulated in the banking system." Finally, Invesco asks, "What has been the biggest takeaway from the September spike in repo rates?" Mandeville answers, "We believe the most important lesson from this experience has been understanding the systemic importance of reserve management and the maintenance of adequate liquidity in the repo market. When the dislocation in repo rates occurred, the biggest concern centered on the Fed's ability to provide sufficient liquidity to the market and the ability of bank reserves to make their way to institutions that do not have direct access to the Fed. We believe the Fed has demonstrated that it has the necessary tools to inject liquidity and return stability to the markets. The Fed's task ahead is to determine the appropriate level of reserves to maintain in the system to avoid a repeat of September's events."

ICI's latest weekly "Money Market Fund Assets" report shows money fund assets increasing in the latest week following two weeks of declines. It explains, "Total money market fund assets increased by $7.92 billion to $3.63 trillion for the week ended Wednesday, February 12, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $1.06 billion and prime funds increased by $8.20 billion. Tax-exempt money market funds decreased by $1.34 billion." ICI's weekly series shows Institutional MMFs rising $5.9 billion and Retail MMFs increasing $2.0 billion. Total Government MMF assets, including Treasury funds, were $2.684 trillion (74.0% of all money funds), while Total Prime MMFs were $806.1 billion (22.2%). Tax Exempt MMFs totaled $135.4 billion, 3.7%. Money fund assets are now down year-to-date in 2020 (down $7B, or -0.2%), but they've increased in 12 out of the last 17 weeks. Over the past 52 weeks, ICI's money fund asset series has increased by $545 billion, or 17.7%, with Retail MMFs rising by $196 billion (16.4%) and Inst MMFs rising by $349 billion (18.5%). ICI explains, "Assets of retail money market funds increased by $2.04 billion to $1.39 trillion. Among retail funds, government money market fund assets increased by $402 million to $785.26 billion, prime money market fund assets increased by $2.48 billion to $477.56 billion, and tax-exempt fund assets decreased by $845 million to $123.69 billion." Retail assets account for over a third of total assets, or 38.3%, and Government Retail assets make up 56.6% of all Retail MMFs. The release adds, "Assets of institutional money market funds increased by $5.88 billion to $2.24 trillion. Among institutional funds, government money market fund assets increased by $658 million to $1.90 trillion, prime money market fund assets increased by $5.72 billion to $328.50 billion, and tax-exempt fund assets decreased by $493 million to $11.67 billion." Institutional assets accounted for 61.8% of all MMF assets, with Government Institutional assets making up 84.8% of all Institutional MMF totals.

A press release, "Moody's assigns Aaa-mf rating to Aviva Investors USD Liquidity Fund" explains, "Moody's Investors Service has assigned a Aaa-mf to Aviva Investors USD Liquidity Fund (the "Fund"), a Low Volatility Net Asset Value (LVNAV) money market fund, domiciled in Ireland and managed by Aviva Investors Luxembourg S.A. (Aviva Investors). The Fund's primary investment objective is to achieve a return in line with money market rates while preserving capital and providing daily liquidity." The release continues, "The Aaa-mf rating reflects Moody's view that the Fund will have a very strong ability to meet its objectives of providing liquidity and preserving capital. This view is supported by the model portfolio's high scores for each of the key rating factors, including credit quality, asset profile, liquidity and exposure to market risk. The Fund intends to invest in high credit quality securities, primarily short-dated commercial paper and deposit securities as well as short-dated bonds from government, agency, corporate and financial issuers. The Fund's weighted average maturity (WAM) is expected to be below 60 days and we expect the Fund to maintain a strong liquidity profile supported by high levels of overnight and weekly liquidity in the portfolio. As a result, we expect the Fund to have a low exposure to market risk. During the ramp-up period, Moody's expects that the Fund will have some shareholder concentration risk, that is expected to decrease within 6 months as the Fund grows and its shareholder base diversifies. The rating agency expects the Fund to be managed in line with the model portfolio. However, Moody's notes that if the Fund's investment portfolio was to deviate materially from the model portfolio and its shareholder base remains concentrated, the Fund's rating could be changed. Aviva Investors is an investment asset manager with GBP356 billion assets under management as of end of December 2019." See to: "Fitch Rates Aviva US Dollar Liquidity Fund 'AAAmmf'."

A press release entitled, "R. Seelaus & Co., LLC Expands into Money Markets with Key Hires and Federal Home Loan Bank Approval," tells us, "R. Seelaus & Co., LLC, a wholly-owned subsidiary of R. Seelaus & Co., Inc. and a SEC/FINRA-registered broker/dealer and Women-Owned Business Enterprise announced today a significant push into Money Market sales and trading in both the agency product, commercial paper and CD product areas. In the agency space, Seelaus is pleased to announce it was named to Federal Home Loan Bank's Authorized Diversity Dealer Group which will give the firm access to its discount note offerings through both the discount window and direct access to its auctions." CEO Annie Seelaus comments, "We are grateful that Federal Home Loan Bank takes its commitment to diversity and working with Women-Owned broker/dealers so seriously. By supporting us through this program, Home Loan Bank ensures we can better serve our institutional client base and most importantly further our mission around providing opportunities for women in finance." The release adds, "In addition, the firm has added Erik Schiele formerly of Bank of New York, to trade commercial paper and Yankee CDs." Schiele tells us, "It is amazing for me to see the wide array of products and professionals here at Seelaus. My hope is to bring my experience in trading, strong relationships with issuers and deep knowledge of the commercial paper and Yankee CD arena to enhance Seelaus' product offering." COO Ben Seelaus adds, "Both of these events are great milestones for R. Seelaus in our continued growth. The short-end of the curve is a place where many of our competitors have thrived and we felt was a logical next step in the evolution of our business offering."

Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary" discusses a number of topics, but we focus on their "Municipal Sector" comments. They tell us "New Year's Eve, marking the close of one decade and the debut of another, was a celebration worthy of fireworks, but they were conspicuously absent in the money markets. Just as yearend came and went without a hint of dislocation, January also passed with barely a whisper of volatility, demonstrating the effectiveness of a Federal Reserve (Fed) committed to reining in the repo market.... The short end of the municipal money market space continued to exhibit a high level of volatility as seasonal flows resulted in a roller-coaster ride for rates on variable-rate demand notes (VRDNs) and tender option bonds (TOBs). The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index, which had spiked to 1.61% (99% of 1-week LIBOR) to close out 2019, quickly fell to 0.80% (51% of 1-week LIBOR) as strong seasonal demand overwhelmed available supply during the first two weeks of the new year. Yields on overnight high-grade paper fell even more dramatically, falling from roughly 1.65% to as low as 0.45%." Wells explains, "Municipal money market funds were the recipients of approximately $4 billion in inflows during the first week of the month, according to Crane Data. However, as the month progressed, municipal money market funds eventually experienced consistent outflows that erased the early-month gains. Accordingly, rates began to normalize, with the SIFMA Index gradually rising before closing out the month at 0.94% (60% of 1-week LIBOR). Overnight rates spiked to as high as 1.15% at month-end, more than double levels seen earlier in the month. Further out on the curve, strong demand for high-grade one-year paper carried over into the new year, exerting consistent downward pressure on rates. Yields in the one-year space closed out the month at roughly 0.95%, down from roughly 1.15% at the end of December. Continued strong inflows into municipal bond funds are still contributing to downward pressure on rates across the curve." The piece adds, "During the month, we continued to focus our purchases primarily in VRDNs and TOBs with daily and weekly puts in order to emphasize principal preservation and fund liquidity. The municipal money market yield curve remains relatively flat, and we have remained highly selective in deploying cash for investments further out on the curve. We continue to feel that the short end of the municipal yield curve offers value in terms of attractive nominal and after-tax returns for municipal investors."

Fidelity Investments published a Money Markets brief, entitled, "Fed Likely to Remain on Hold in 2020." While mostly on general economic issues, the piece does have a couple of mentions of interest to money market funds. Author Kerry Pope comments, "While the Fed does not consider open market operations and bill buying to be quantitative easing, the impact of the $414 billion increase in the Fed's balance sheet in such a short period of time has been to suppress money market rates and volatility. Indeed, year-end funding pressures were muted due to the abundant liquidity in the system, which resulted in 45 counterparties using the Fed's overnight reverse repo facility for a total of $64.1 billion, a much lower amount than in years past.... Significant growth in repo agreements sponsored by the Fixed Income Clearing Corporation (FICC) has also been credited with suppressing year-end rate volatility. The year-end growth highlights the balance sheet-friendly flexibility the program offers to absorb funding needs (given that the repos move onto the FICC balance sheet). For money market funds (MMFs) with access to sponsored repo, FICC has become an important source of supply at a competitive rate. While most MMFs engage in sponsored repo with the three largest custodians, there are now a total of 12 approved sponsors suggesting further FICC-sponsored repo growth in the months ahead." Fidelity adds, "Assets into money market funds have been robust in the years following money market reform. In 2019 alone, assets under management in institutional and retail funds rose by $593 billion to end the year at more than $3.4 trillion.... Retail investors have turned to money market funds to counter elevated valuations and heightened equity and bond market volatility. On the institutional side, fund flows have benefited from tax law changes allowing the corporate repatriation of cash at favorable rates. Institutional investors with strategic liquidity have started to make greater use of prime MMFs in an effort to benefit from higher yields in comparison to government funds."

ICI's latest weekly "Money Market Fund Assets" report shows money fund assets declining in the latest week. It explains, "Total money market fund assets decreased by $3.90 billion to $3.62 trillion for the week ended Wednesday, February 5, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $6.81 billion and prime funds increased by $3.11 billion. Tax-exempt money market funds decreased by $212 million." ICI's weekly series shows Institutional MMFs falling $11.7 billion and Retail MMFs increasing $7.8 billion. Total Government MMF assets, including Treasury funds, were $2.683 trillion (74.2% of all money funds), while Total Prime MMFs were $797.9 billion (22.1%). Tax Exempt MMFs totaled $136.7 billion, 3.8%. Money fund assets are now down year-to-date in 2020 (down $11B, or -0.3%), but they've increased in 11 out of the last 16 weeks. Over the past 52 weeks, ICI's money fund asset series has increased by $554 billion, or 18.1%, with Retail MMFs rising by $190 billion (16.0%) and Inst MMFs rising by $393 billion (21.2%). ICI explains, "Assets of retail money market funds increased by $7.75 billion to $1.38 trillion. Among retail funds, government money market fund assets increased by $5.27 billion to $784.86 billion, prime money market fund assets increased by $2.92 billion to $475.09 billion, and tax-exempt fund assets decreased by $443 million to $124.54 billion." Retail assets account for over a third of total assets, or 38.3%, and Government Retail assets make up 56.7% of all Retail MMFs. The release adds, "Assets of institutional money market funds decreased by $11.65 billion to $2.23 trillion. Among institutional funds, government money market fund assets decreased by $12.07 billion to $1.90 trillion, prime money market fund assets increased by $190 million to $322.78 billion, and tax-exempt fund assets increased by $231 million to $12.17 billion." Institutional assets accounted for 61.7% of all MMF assets, with Government Institutional assets making up 85.0% of all Institutional MMF totals. Money fund assets ended 2019 with their fastest growth rate and biggest asset increase since 2008. Assets increased by more than 2 1/2 times 2018's 7.2% gain.

A press release entitled, "Morningstar Acquires Hueler Analytics' Stable Value Data and Index" tells us, "Morningstar, Inc. (MORN), a leading provider of independent investment research, ... announced its acquisition of Hueler Analytics' Stable Value Comparative Universe Data and Stable Value Index. Terms of the transaction were not disclosed. Founded in 1987 in Minneapolis, Minn., Hueler is the premiere independent data and research firm providing reporting and systems designed for the annuity and stable-value marketplace. Hueler Analytics' distribution encompasses advisors, investment managers, product providers, plan fiduciaries, and consultants. Hueler Analytics' Stable Value Comparative Universe Data provides broad market coverage of stable-value investments, including stable-value pooled funds, insurance company separate accounts, and general account products. Hueler's Stable Value Index is the only industry Index derived from aggregate returns of contributing stable-value product providers and dates back to 1983. Asset managers, fiduciaries, advisors, and consultants rely on Hueler products for due diligence, performance measurement, and investment selection. Hueler's stable-value data and reporting products have allowed for seamless comparability of pooled funds and insurance-company-sponsored products across standardized data elements." Morningstar's Joscelyn MacKay comments, "Stable-value funds have long played an important role in helping retirement plan participants accumulate ­retirement savings and already account for 10 percent of assets in defined-contribution plans. While largely invested in fixed-income securities, stable-value funds are designed to provide steady, predictable returns that exceed money market investments over time and are protected from any loss of capital or interest through contracts from an insurance company or bank." Kelli Hueler adds, "We are proud of the reputation Hueler Analytics has built for exceptional data integrity and reporting on stable-value funds. It's gratifying to see these products we've developed with strong industry support over the past 30 years move into the capable hands of the Morningstar team."

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics, which track a shifting subset of our monthly Portfolio Holdings collection, Tuesday. The most recent cut (with data as of Jan. 31) includes Holdings information from 71 money funds (down 13 from a week ago), which represent $1.779 trillion (down from $1.841 trillion) of the $3.811 trillion (46.7%) in total money fund assets tracked by Crane Data. (See our Jan. 13 monthly Money Fund Portfolio Holdings update, "Jan MF Portfolio Holdings: Big FICC Repo, Agency Rebound; CDs, CP Drop." Note that our Weekly MFPH are e-mail only and aren't available on the website.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $652.9 billion (up from $640.4 billion a week ago), or 36.7%, Treasury totaling $568.4 billion (up from $545.9 billion a week ago), or 32.0% and Government Agency securities totaling $315.1 billion (down from $335.9 billion), or 17.7%. Certificates of Deposit (CDs) totaled $94.2 billion (down from $108.7 billion), or 5.3%, and Commercial Paper (CP) totaled $76.0 billion (down from $95.2 billion), or 4.3%. A total of $40.8 billion or 2.3%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $31.2 billion, or 1.8%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $568.4 billion (32.0% of total holdings), Federal Home Loan Bank with $218.5B (12.3%), Fixed Income Clearing Co with $141.5B (8.0%), BNP Paribas with $61.9B (3.5%), Federal Farm Credit Bank with $58.1B (3.3%), RBC with $42.2B (2.4%), Mitsubishi UFJ Financial Group with $33.3B (1.9%), Credit Agricole with $31.6B (1.8%), Federal Home Loan Mortgage Co with $30.4B (1.7%) and Wells Fargo with $29.0B (1.6%). The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($152.7B), Fidelity Inv MM: Govt Port ($130.7B), Goldman Sachs FS Govt ($126.4B), BlackRock Lq FedFund ($116.7B), Wells Fargo Govt MM ($86.5B), BlackRock Lq T-Fund ($78.8B), JP Morgan 100% US Treas MMkt ($77.3B), Fidelity Inv MM: MM Port ($76.9B), Morgan Stanley Inst Liq Govt ($65.1B) and JP Morgan Prime MMkt ($63.2B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

Five years ago, we wrote "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt," which marked the start of what we termed "The Big Sort," a massive shift of Prime money market funds into Government money funds ahead of 2016's Money Fund Reforms. The massive transitions of Prime and Tax Exempt MMFs into Government MMFs eventually totaled $1.2 trillion. Our Feb. 2, 2015 article said, "The first major strategic shift following the Security and Exchange Commission's money market fund reform occurred Friday as the world's largest manager of money funds, Fidelity, announced major changes to its money market fund lineup. The shifts are to comply with pending reforms and to meet investor needs, with the most noteworthy being a move to convert some of its prime funds into government funds, including the largest money market fund in the world, the $114 billion Fidelity Cash Reserves. (See Fidelity Cash Reserves' Prospectus Supplement filing here.) Nancy Prior, President of Fidelity's Fixed Income Division, tells Crane Data, "We're fully committed to the money market fund business.... We're going to have a robust product lineup covering all of the categories, including retail and institutional prime and municipal funds, along with government and Treasury funds, because we want to make sure we can meet all of our customers' investment needs. But we're making these changes now in response to the preferences that we've heard back from several segments of our customer base that would like to continue to have a money market fund with a stable NAV and without gates and fees." (See also Fidelity's "Update on money market fund regulations" and "Fidelity Money Market Mutual Fund Changes.") Prior announced the 4 key changes as part of "Phase 1" of its changes to its money fund lineup. The first is to amend the investment policies their government and U.S. Treasury money market mutual funds to reflect that these funds already meet the new SEC requirement to invest at least 99.5% of their assets in cash, government securities, and/or repurchase agreements that are fully collateralized. Second, Fidelity plans to convert several of its prime money market mutual funds to government money market mutual funds. Specifically, the Fidelity Cash Reserves Fund will be converted into the Fidelity Government Cash Reserves Fund; the FMMT Retirement Money Market Portfolio will be converted to the FMMT Retirement Government Money Market Portfolio II, and the VIP Money Market Portfolio will be converted to the VIP Government Money Market Portfolio. All are subject to shareholder approvals via a March proxy vote. Third, the company is proposing to merge several funds that have similar investment strategies. The Fidelity Treasury Money Market Fund (U.S. Treasury) will be merged into the CMF Treasury Fund to form the Fidelity Treasury Money Market Fund (U.S. Treasury). The CMF Government Fund (Government) will be merged into the Fidelity Government Money Market Fund to form the Fidelity Government Money Market Fund (Government). The AMT Tax-Free Money Fund (Municipal) will be merged into the CMF Tax-Exempt Fund to form the Fidelity Tax-Exempt Money Market Fund (Municipal). No shareholder action is required and these changes will take place in the first quarter."

This weekend's Barron's magazine writes, "How to Protect Your Bond Investments From Inflation and Interest-Rate Threats," which is almost more about money markets than bond funds. They write, "Many financial advisors do that with a cash stash—certificates of deposit, money-market funds, high-yield savings accounts, and sometimes ultrashort bond funds. Although earning less than 2% interest isn't ideal, the idea is to make sure that any near-term income a retiree will need besides Social Security and guaranteed sources like pensions and annuities doesn't get wiped out in either a stock or bond shock." Barron's also tells us, "Short-term bonds are often the most resilient during periods when interest rates are rising, because they typically mature in one to three years and allow investors to get their money out and reinvest it at higher rates relatively quickly.... Paying attention to duration is especially important for retirees who plan to make withdrawals from bond funds.... For short-term bond funds, Morningstar's top-rated exchange-traded funds are Vanguard Short-Term Treasury(VGSH), Schwab Short-Term Treasury(SCHO), and iShares 1-3 Year Treasury Bond(SHY)."