Daily Links Archives: April, 2020

A posting from law firm Morrison & Foerster LLP entitled, "SEC Provides No-Action Relief For Broker-Dealer Sweep Programs," tell us, "On March 30, 2020, the Securities and Exchange Commission (SEC) issued a no-action letter stating that the staff of the SEC's Division of Trading and Markets would not recommend enforcement actions against broker-dealers that treat unsecured receivables related to bank sweep accounts as an allowable asset that is not deducted from net worth under Rule 15c3-1 (the 'Net Capital Rule'). This change should make it easier for broker-dealers to offer cash sweep programs to their customers while continuing to adhere to the requirements of the Net Capital Rule." They explain, "The Net Capital Rule is designed to ensure that broker-dealers maintain adequate liquidity to meet their obligations. To determine its net capital, a broker-dealer must make a number of adjustments to its net worth as calculated in accordance with generally accepted accounting principles (GAAP). Among the adjustments is the deduction of most unsecured receivables. Broker-dealers must ensure that they have sufficient net capital to comply with the Net Capital Rule at all times. Many broker-dealers offer their customers the option to automatically transfer free credit balances from their brokerage accounts to money market funds or to bank accounts insured by the Federal Deposit Insurance Corporation ('FDIC'). The SEC regulates these types of arrangements, often referred to as 'sweep programs,' under Rule 15c3-3 (the 'Customer Protection Rule'). Customers do not have direct access to the funds held at a bank or in a money market fund because sweep accounts are generally held in the name of the broker-dealer acting for the benefit of its customers." Morrison & Foerster adds, "The SEC's recent no-action position facilitates immediate withdrawals by customers by delineating conditions under which a broker-dealer need not deduct the unsecured receivables resulting from a withdrawal request in a bank sweep program. In the no-action letter, the SEC said it would not recommend enforcement if a broker-dealer treats a bank account receivable created as part of a sweep program as an allowable asset that is not deducted from the broker-dealer's net worth for one business day from the date the receivable is created, provided that: A net receivable is created through prefunding a customer's brokerage account as part of an FDIC-insured bank sweep program transaction; The net receivable arises from an FDIC-insured bank receivable for which a sweep program deposit account has been established; The broker-dealer has a legally enforceable right to demand and receive payment of the receivable from that bank; and There is no ability for the customer to access the FDIC-insured bank sweep account directly and/or without going through the broker-dealer." The update concludes, "The SEC's no-action letter allows broker-dealers to in effect provide their customers with immediate access to their funds that are held at FDIC-insured banks pursuant to a sweep program. Customers benefit in that they may withdraw funds immediately and broker-dealers will not be penalized for advancing the funds one day before they are received from the bank. The no-action position will also streamline compliance by not requiring broker-dealers to calculate on a daily basis the value of unsecured receivables representing withdrawal requests from banks participating in a sweep program."

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of April 24) includes Holdings information from 94 money funds (up 14 from a week ago), which represent $2.899 trillion (up from $2.457 trillion) of the $4.561 trillion (63.6%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website. For our latest monthly Holdings, see our April 13 News, "April MF Portfolio Holdings: Govt Securities Skyrocket; CDs, CP Down.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.248 trillion (up from $1.039 trillion a week ago), or 43.0%, Repurchase Agreements (Repo) totaling $822.5 billion (up from $731.4 billion a week ago), or 28.4% and Government Agency securities totaling $556.6 billion (up from $486.2 billion), or 19.2%. Certificates of Deposit (CDs) totaled $79.6 billion (up from $66.4 billion), or 2.7%, and Commercial Paper (CP) totaled $76.5 billion (up from $56.5 billion), or 2.6%. A total of $69.7 billion or 2.4%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $47.0 billion, or 1.6%. Funds in our weekly collection remain short with their maturities -- a massive 47.8% of assets matures in 1-7 days. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.248 trillion (43.0% of total holdings), Federal Home Loan Bank with $369.2B (12.7%), Fixed Income Clearing Co with $157.0B (5.4%), BNP Paribas with $71.2B (2.9%), BNP Paribas with $84.8B (2.9%), Federal Farm Credit Bank with $79.1B (2.7%), JP Morgan with $53.9B (1.9%), Federal Home Loan Mortgage Corp with $53.8B (1.9%), RBC with $53.0B (1.8%) and Federal National Mortgage Association with $51.7B (1.8%). The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($226.7B), Fidelity Inv MM: Govt Port ($192.8B), Goldman Sachs FS Govt ($180.5B), BlackRock Lq FedFund ($160.8B), Federated Govt Oblg ($148.2B), Goldman Sachs FS Treas Instruments ($133.7B), Wells Fargo Govt MM ($133.6B), JP Morgan 100% US Treas MMkt ($126.6B), Morgan Stanley Inst Liq Govt ($106.3B) and State Street Inst US Govt ($94.1B). (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.)

Money market fund yields, which fell below the 1.0% level six weeks ago and below the 0.5% level four weeks ago, continued inching lower towards zero in the latest week. Our flagship Crane 100 Money Fund Index was down 4 basis points over the past week (through Friday, 4/24) to 0.29%, according to Money Fund Intelligence Daily. The Crane 100 is down from 1.46% at the start of the year and down 1.94% from the beginning of 2019 (2.23%). Our Crane Brokerage Sweep Index has already hit the floor, at 0.01% (for balances of $100K). It's down 27 bps from the end of 2018 (0.28%). The latest Brokerage Sweep Intelligence, with data as of April 24, shows no rate cuts this past week. All of major brokerages now offer rates of 0.01% for balances of $100K. While some funds have already hit the zero floor, most money funds maintain a yield advantage over sweeps and bank deposits, though perhaps not for much longer. As of Friday, 255 funds (out of 852 total) yielded 0.00% or 0.01% with total assets of $485.2 billion, or 9.7% of total assets. (This is up from 197 funds last week with $439.2B in assets.) There were 117 funds yielding between 0.02% and 0.10%, totaling $866.2B, or 17.3% of assets; 209 funds yielded between 0.11% and 0.25% with $1.964 trillion, or 39.3% of assets; 152 funds yielded between 0.26% and 0.50% with $777.2 billion in assets, or 15.6% ; 113 funds yielded between 0.51% and 0.99% with $900.8 billion in assets or 18.0%; only one fund yielded over 1.00% with $228M or, 0.00005% of total assets. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 674), shows a 7-day yield of 0.23%, down 3 basis points in the week through Friday, April 24. Prime Inst MFs were down 4 bps to 0.50% in the latest week, while Government Inst MFs fell by 3 bps to 0.20% and Treasury Inst MFs dropped by 3 bps to 0.14%. Treasury Retail MFs currently yield 0.02%, (down 1 basis point), Government Retail MFs yield 0.09% (unchanged), and Prime Retail MFs yield 0.43% (down 4 bps), Tax-exempt MF 7-day yields dropped by 13 bps to 0.12%. Yesterday's Brokerage Sweep Intelligence shows rates unchanged. No brokerage sweep rates or money fund yields have dropped to zero or gone negative to date, but this could become a distinct possibility in coming weeks or months. Crane's Brokerage Sweep Index has been flat for the last three weeks, after falling to 0.01% (for balances of $100K). Ameriprise, E*Trade, Fidelity, Merrill Lynch, Morgan Stanley, Raymond James, RW Baird, Schwab, TD Ameritrade, UBS and Wells Fargo all currently have rates of 0.01% for balances at the $100K tier level (and almost every other tier too).

A statement entitled, "Federal Reserve Board announces interim final rule to delete the six-per-month limit on convenient transfers from the 'savings deposit' definition in Regulation D," tells us, "The Federal Reserve Board on Friday announced an interim final rule to amend Regulation D (Reserve Requirements of Depository Institutions) to delete the six-per-month limit on convenient transfers from the "savings deposit" definition. The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent. The regulatory limit in Regulation D was the basis for distinguishing between reservable 'transaction accounts' and non-reservable 'savings deposits.' The Board's recent action reducing all reserve requirement ratios to zero has rendered this regulatory distinction unnecessary." It adds, "Concurrently, the Federal Reserve is making temporary revisions to the FR 2900 series, FR Y-9, and FR 2886b reports to reflect the amendments to Regulation D." See also the Fed's "`Savings Deposits Frequently Asked Questions," which comments, "A 'savings deposit' is a deposit or account, such as an account commonly known as a passbook savings account, a statement savings account, or as a money market deposit account (MMDA), that otherwise meets the requirements of §204.2(d)(1) and from which, under the terms of the deposit contract or by practice of the depository institution, the depositor may be permitted or authorized to make transfers and withdrawals to another account (including a transaction account) of the depositor at the same institution or to a third party, regardless of the number of such transfers and withdrawals or the manner in which such transfers and withdrawals are made."

Charles Schwab made mention of money market funds and cash sweeps briefly in its latest earnings release and earnings call. CFO Peter Crawford comments, "Net interest revenue of $1.6 billion declined 6% year-over-year, due to pressure across the yield curve accelerating late in the quarter, which outweighed the impact of significantly higher levels of client cash sweep balances. Given the rapid accumulation of these balances late in the quarter, we've initially placed a substantial amount in excess reserves at the Fed; such balances totaled $58.7 billion at month-end March, up from $18.8 billion at year-end 2019. Asset management and administration fees of $827 million rose 10% year-over-year, largely due to our clients' sustained utilization of advisory solutions along with increased balances in purchased money funds, which helped offset sharp declines in equity market valuations.... With first quarter market volatility driving a significant influx of client cash, our balance sheet expanded by $77 billion during the quarter to $371 billion at March 31st." Fund news source ignites wrote about Schwab earlier this week in the piece, "Coronavirus Crisis Could Prompt New Money Fund Rules: Schwab CEO." They tell us, "The coronavirus crisis may lead to a significant restructuringing across the industry, and could prompt regulators to create new rules, Charles Schwab's CEO said Tuesday. 'A lot of business models and a lot of revenue sources are likely to be subject to new rules, new oversight,' said CEO Walt Bettinger.... 'You really want to see where all of those things shake out, also, before anyone would look at significant moves around their business model.' The market disruption of recent months could cause regulators to focus on money market funds, he suggested, pointing to the 'second unique governmental support required for money market funds in the last 15 years.'" The ignites article adds, "Money fund sponsors, including Schwab, may also start slapping waivers on to their money funds, said Peter Crawford.... During the financial crisis, the Fed slashed interest rates near zero. After that happened, many companies began waiving fees on their money market funds. But in more recent years, many have abandoned that practice. However, the Fed's move last month to cut interest rates to nearly zero is expected to push more money market funds to add waivers. But Crawford predicted the impact won't be as widespread as last time. 'Fee waivers will not be nearly as big a story this time around as they were in the financial crisis,' he said Tuesday.... Schwab's Treasury and government money funds are likely to see waivers before the firm's prime and muni funds, Crawford added."

On Tuesday, The Wall Street Journal wrote the piece, "Stress Endures in Market Where Big Companies Turn for Cash," which tells us, "The normally staid corner of Wall Street where companies and banks borrow money for days or weeks at a time was suddenly at the center of a near financial meltdown last month. Some fund managers are concerned that problems remain despite the quick work of central banks to ease the funding strains. Known as commercial paper, this more than $1 trillion market of short-term loans, used by companies to cover expenses such as payroll and paying suppliers, froze during March's coronavirus-induced mayhem." The article explains, "One problem, say market participants: Trading was dominated by a limited cast of big investors who were seeking to sell big slugs of commercial paper through a smaller number of banks that arrange the financing, known as dealers. This led to bottlenecks." It quotes Lombard Odier Investment Managers' David Callahan, "Like eight elephants trying to fit through three small doors." The Journal tells us, "The extent of the freeze shocked money-market fund managers. 'Like: Wait a minute, you don't have a bid on anything?' said Tim Robey, manager of Eaton Vance's in-house money-market fund.... Although trading has restarted, commercial-paper borrowing rates remain elevated." Finally, they write, "Much of that cash instead flowed into an even safer flavor of money-market funds, which invest solely in short-term Treasury bills and other government-backed debt. Those funds have grown by nearly $1 trillion, increasing their total assets by more than a third. Those inflows played havoc with short-term Treasury markets, pushing yields on three-month bills into negative territory on March 26. Fidelity Investments, one of the leading money-market fund managers, closed three of its Treasury-only funds to new investors so that it wasn't forced to keep investing in money-losing paper." See also, the WSJ's "Chinese Investors Stash More Cash in Money-Market Funds During Pandemic," which says, "Individual investors pour more than $141 billion into domestic money-market mutual funds in first quarter."

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 April 17) includes Holdings information from 80 money funds (up 3 from three weeks ago), which represent $2.457 trillion (up from $2.131 trillion) of the $4.561 trillion (53.9%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website. For our latest monthly Holdings, see our April 13 News, "April MF Portfolio Holdings: Govt Securities Skyrocket; CDs, CP Down.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.039 trillion (up from $664.6 billion three weeks ago), or 42.3%, Repurchase Agreements (Repo) totaling $731.4 billion (down from $813.7 billion three weeks ago), or 29.8% and Government Agency securities totaling $486.2 billion (up from $452.8 billion), or 19.8%. Certificates of Deposit (CDs) totaled $66.4 billion (up from $66.3 billion), or 2.7%, and Commercial Paper (CP) totaled $56.5 billion (down from $58.6 billion), or 2.3%. A total of $40.5 billion or 1.6%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $37.3 billion, or 1.5%. Funds in our weekly collection shortened maturities substantially; a massive 55.2% of assets matures in 1-7 days. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.039 trillion (42.3% of total holdings), Federal Home Loan Bank with $320.8B (13.1%), Fixed Income Clearing Co with $158.6B (6.5%), Federal Farm Credit Bank with $71.2B (2.9%), BNP Paribas with $69.5B (2.8%), RBC with $52.2B (2.1%), Federal Home Loan Mortgage Co with $48.7B (2.0%), JP Morgan with $44.3B (1.8%), Federal National Mortgage Association with $42.7B (1.7%) and Citi with $33.4B (1.4%). The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($214.8B), Fidelity Inv MM: Govt Port ($187.1B), Goldman Sachs FS Govt ($174.2B), BlackRock Lq FedFund ($165.2B), JP Morgan 100% US Treas MMkt ($126.2B), Wells Fargo Govt MM ($122.6B), Goldman Sachs FS Treas Instruments ($121.5B), Morgan Stanley Inst Liq Govt ($102.5B), BlackRock Lq T-Fund ($94.1B) and State Street Inst US Govt ($86.5B). (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.)

Money market fund yields, which fell below the 1.0% level five weeks ago and below the 0.5% level three weeks ago, continued their march downwards towards zero in the latest week. Our flagship Crane 100 Money Fund Index was down 2 basis points over the past week (through Friday, 4/17) to 0.32%, according to Money Fund Intelligence Daily. The Crane 100 is down from 1.46% at the start of the year and down 1.91% from the beginning of 2019 (2.23%). Our Crane Brokerage Sweep Index has already hit the floor, at 0.01% (for balances of $100K). It's down 27 bps from the end of 2018 (0.28%). The latest Brokerage Sweep Intelligence, with data as of April 17, shows no rate cuts this past week. All of major brokerages now offer rates of 0.01% for balances of $100K. While some funds have already hit the zero floor, most money funds maintain a yield advantage over sweeps and bank deposits, though perhaps not for much longer. As of Friday, 197 funds (out of 852 total) yielded 0.00% or 0.01% with total assets of $439.2 billion, or 9.0% of total assets. (This is up from 155 funds last week with $217.3B in assets.) There were 100 funds yielding between 0.02% and 0.10%, totaling $618.8B, or 12.7% of assets; 178 funds yielded between 0.11% and 0.25% with $1.085 trillion, or 22.3% of assets; 226 funds yielded between 0.26% and 0.50% with $1.588 trillion in assets, or 32.6% ; 145 funds yielded between 0.51% and 0.99% with $1.139 trillion in assets or 23.4%; only one fund yielded over 1.00% with $2.7B or, 0.6% of total assets. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 674), shows a 7-day yield of 0.26%, down 3 basis points in the week through Friday, April 17. Prime Inst MFs were down 4 bps to 0.54% in the latest week, while Government Inst MFs fell by 3 bps to 0.23% and Treasury Inst MFs dropped by 3 bps to 0.17%. Treasury Retail MFs currently yield 0.03%, (down 1 basis point), Government Retail MFs yield 0.10% (down 2 bps), and Prime Retail MFs yield 0.46% (down 7 bps), Tax-exempt MF 7-day yields dropped by 55 bps to 0.25%. Yesterday's Brokerage Sweep Intelligence shows rates unchanged. No brokerage sweep rates or money fund yields have dropped to zero or gone negative to date, but this could become a distinct possibility in coming weeks or months. Crane's Brokerage Sweep Index has been flat for the last two weeks, after falling to 0.01% (for balances of $100K). Ameriprise, E*Trade, Fidelity, Merrill Lynch, Morgan Stanley, Raymond James, RW Baird, Schwab, TD Ameritrade, UBS and Wells Fargo all currently have rates of 0.01% for balances at the $100K tier level (and almost every other tier too).

We learned from mutual fund news source ignites that BNY Mellon disclosed additional support for non-affiliated money funds in its latest earnings release. BNY Mellon's latest transcript says its earnings, "Includes $651 million funded by borrowings from the Federal Reserve Bank under its Money Market Mutual Fund Liquidity Facility ('MMLF') program at March 31, 2020." CEO Todd Gibbons comments, "Given our strong capital and liquidity position, we have used our balance sheet to support our clients. That means accommodating their elevated deposits and funding about $3 billion in incremental draws on committed facilities. In March, we also purchased more than $3 billion in assets from money market funds, including our own, to help create liquidity for fundholders and we have continued to do so in April.... We have a high-quality liquid portfolio. Much of it is in U.S. government agency securities, U.S. treasuries and sovereign debt. The portfolio increased as we deployed more cash into securities, including the commercial paper and CDs we purchased from our affiliated and third-party money market funds." Next, State Street says in its recent earnings, "Average deposits of $180 billion up 16% year-on-year, reflecting March inflows." It also comments that the firm, "Provided liquidity to clients by facilitating more than 50% of Money Market Mutual Fund Liquidity Facility (MMLF) usage and providing administrative and custodial services to the Federal Reserve's Commercial Paper Funding Facility (CPFF)." They add, "Investment Management net inflows in 1Q20 of $39 billion were driven by cash and institutional inflows, partially offset by ETF outflows.... Management fees increased 7% compared to 1Q19, mainly due to higher average equity market levels and net inflows from ETF and cash, partially offset by mix changes away from higher fee institutional products." In State Street's '1Q 2020 Financial Highlights', they add, "Money Market Mutual Fund Liquidity Facility (MMLF) contributed ~$27B to the investment portfolio in 1Q20. Excluding MMLF, the investment portfolio size would be ~$97B, with a duration of 2.7 years and 42% HTM." Also, J.P. Morgan's earnings release comments, "As of March 31, 2020, the capital measures reflect the revised CECL capital transition provisions and the removal of assets purchased pursuant to a non-recourse loan provided under the Money Market Liquidity Facility ('MMLF'), as provided by the U.S. banking agencies. Refer to page 29 for further information on the revised CECL capital transition provisions and Capital Risk Management on pages 85-92 of the Firm’s 2019 Form 10-K for additional information on these capital measures." We weren't able to find any disclosures naming any non-bank affiliated funds that may have utilized the Fed's MMLF facility. Finally, a couple other earnings releases briefly mentioned money fund assets. Wells Fargo's 1Q20 Quarterly Supplement adds, "Total AUM of $518 billion, up 9% YoY primarily driven by higher money market fund net inflows, partially offset by equity and fixed income net outflows." On its earnings call, BlackRock's Larry Fink said, "Our cash management business captured over $50 billion in net inflows as clients sought to de-risk rapidly."

Fitch Ratings published, "LGIP Liquidity to be Pressured Due to Coronavirus." The brief tells us, "The economic impact of the coronavirus will test local government investment pools' (LGIPs) cash management and forecasting in the near term as higher redemptions and lower inflows pressure liquidity according to the latest LGIP dashboard from Fitch Ratings. Municipal entities will see reduced economically sensitive revenues from sales and income taxes, which will lead to smaller than expected inflows into LGIPs during the tax collection season starting in April. Additionally, certain LGIP investors such as healthcare providers are likely to have unexpected expenditures (e.g. replenishing medical equipment and supplies)." Fitch's Greg Fayvilevich comments, "Liquidity could become an issue for some LGIPs as redemption requests mount and inflows slide.... In anticipation, LGIP managers are shifting to more defensive allocations, shortening exposures and focusing investments in high credit quality issuers.... LGIP ratings could be adversely affected in the event of meaningful portfolio credit deterioration." The update explains, "The most liquid asset types in LGIP portfolios are money funds, treasuries, and reverse repurchase agreements, while commercial paper and asset backed securities have exhibited meaningfully reduced liquidity during the recent market volatility. While the Federal Reserve's Money Market Mutual Fund Liquidity Facility (MMLF) and other recent central bank measures have helped restore some liquidity to short-term markets, LGIPs are not directly eligible to participate in the MMLF." Fitch adds, "During the fourth quarter, the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index both reached new record asset levels, increasing by 8% and 18%, respectively, quarter-over-quarter. Assets for both indices stood at approximately $310 billion to close out 2019, an increase of roughly $42 billion from the prior year. Conversely, net yields for both indices fell for the third consecutive quarter as the Federal Reserve cut the federal funds target rate by another 25bps in October. Average net yields fell by a larger margin for the Fitch Liquidity LGIP Index (down 35bps to 1.72%) than for the Fitch Short-Term LGIP Index (down 20bps to 1.94%)." Fitch also published, "Liquidity Positions Improved but Credit Stress Increased." It says, "European money market funds (MMFs) of all currencies experienced inflows during the weeks ending 3 April and 9 April 2020, following a turbulent second half of March."

A press release entitled, "Gabelli U.S. Treasury Money Market Fund Exceeds $3 Billion In AUM," tells us, "Gabelli Funds, LLC is pleased to announce that the Gabelli U.S. Treasury Money Market Fund (GABXX) exceeded $3 billion in assets under management on April 9, 2020. This achievement marks a significant new milestone in reinforcing the Fund's reputation in the money market space as it continues to grow while providing shareholders with outstanding tax advantaged returns. The Gabelli U.S. Treasury Money Market Fund is among the most attractive money market funds in its class. The quality of U.S. Treasury securities coupled with total expenses capped at 0.08% and the exemption from state and local income taxes of its dividends, translates into an effective after-tax yield competitive with any fund in the industry." It adds, "The Gabelli U.S. Treasury Money Market Fund is a money market mutual fund managed by Gabelli Funds, LLC, a wholly owned subsidiary of GAMCO Investors, Inc. (GBL). The Fund invests exclusively in U.S. Treasury securities and its primary objective is high current income consistent with the preservation of principal and liquidity."

Last week, Fitch Ratings published a brief entitled, "Fed's Intervention Stems U.S. Prime MMF Liquidity Strains." It tells us, "The Federal Reserve Bank's (Fed) Money Market Fund Facility (MMLF) program has significantly improved liquidity in U.S. prime money market funds (MMFs) by providing an avenue for securities dealers to purchase longer dated assets from funds otherwise challenged to meet increased redemptions. Prime institutional MMFs saw $94.68 billion in outflows (14.8% of assets) between Feb. 19 and March 18, 2020, with some funds losing up to 55% of assets during this period.... The high level of redemptions brought many funds close to the 30% regulatory requirement for weekly liquidity; in one case, the threshold temporarily breached despite liquidity cushions that the funds held before the outflows. Since the Fed introduced the MMLF, weekly liquidity has risen above pre-volatility levels for many funds. The MMLF provides loans to eligible borrowers secured by certain types of assets bought from prime MMFs, and the list of eligible collateral has steadily expanded since the program's launch, encompassing a large portion of MMF assets. According to the Fed balance sheet, the MMLF has $52.67 billion outstanding in loans as of April 1, 2020." Fitch continues, "The MMLF's direct impact of higher MMF liquidity has also improved investor confidence and indirectly slowed redemptions in prime institutional funds, with small inflows seen in recent days.... The MMLF intervention was driven by market illiquidity that challenged MMFs' ability to meet redemptions, not by imminent credit issues in fund portfolios. Collateral eligibility requirements for the MMLF include high credit quality (in the top short-term rating category, such as 'F1' by Fitch Ratings) and maturities of up to 12 months." The report adds, "There were also two instances of MMF sponsors (BNY and Goldman) providing liquidity support to their funds, buying out high credit quality collateral that was then not eligible for the Fed's MMLF. Examples of the types of securities that sponsors purchased out of their funds include commercial paper issued by Swedbank AB (rated A+/F1 by Fitch, maturing July 28, 2020) and a certificate of deposit issued by Natixis S.A. (rated A+/F1 Rating Watch Negative by Fitch, maturing June 5, 2020). Fitch views the types of liquidity support provided by sponsors and the Fed differs from that provided during the 2008 financial crisis, when a number of MMF sponsors bought highly distressed or defaulted securities out of their funds at prices above fair market value (such as debt issued by Lehman Brothers and different Structured Investment Vehicles) and the government ultimately provided a blanket guarantee of MMFs." Finally, it says, "Despite the stabilizing effects of recent Fed intervention, Fitch maintains a negative outlook on the U.S. prime MMF sector given continued market volatility and the potential for credit issues to emerge." See also Fitch's "ESG Adoption Increases Burden of Proof on Money Market Funds."

The New York Times wrote last week that "China Investors Flock to Money Market Funds Despite Record Low Yield." The article tells us, "Chinese investors have poured cash into money market funds despite falling yields on the low-risk instruments as authorities enact powerful monetary easing to combat the impact of the coronavirus epidemic. China's biggest money market mutual fund, overseen by billionaire Jack Ma's Ant Financial Group, has seen its yield falling to the lowest since it was launched in 2013. Tianhong Yu'e Bao's 7-day annualized yield dipped below 2% this week and eased further to 1.9670% on Tuesday, according to Tianhong Asset Management Co, the fund's manager." It continues, "But the yield has been steadily declining since the beginning of the year as authorities ensured the banking system had sufficient funds to lower financing costs as they support the slowing economy. But the lower yield has not driven investors away.... Data from the Asset Management Association of China (AMAC), which is supervised by China's securities regulator, showed the value of China's money market mutual funds at 8.08 trillion yuan ($1.14 trillion) at the end of February, accounting for 49.37% of the total size of mutual funds and up about 960 billion yuan from the end of 2019." The Times adds, "China's primary repo rates fell sharply, with the overnight borrowing cost hitting a record low on Tuesday as liquidity in the system remained ample and the central bank unexpectedly lowered the interest rate on financial institutions' excess reserves for the first time since the global financial crisis.... Many market participants expect yields on money market funds to fall further in the short term."

Money market mutual fund assets jumped to a record level for the fourth week in a row, though the inflows slowed from their massive $175.3 billion inflow last week (and $285.7 billion inflow two weeks ago). ICI's latest weekly "Money Market Fund Assets" report explains, "Total money market fund assets increased by $76.31 billion to $4.47 trillion for the week ended Wednesday, April 8, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $63.16 billion and prime funds increased by $7.06 billion. Tax-exempt money market funds increased by $6.09 billion." ICI's stats show Institutional MMFs rising $62.1 billion and Retail MMFs increasing $14.2 billion. Total Government MMF assets, including Treasury funds, were $3.676 trillion (82.2% of all money funds), while Total Prime MMFs were $661.4 billion (14.8%). Tax Exempt MMFs totaled $136.0 billion, 3.0%. Money fund assets are up $841 billion, or 23.2%, year-to-date in 2020. They've increased for 9 weeks in a row and have increased by $839.1 billion over the past 6 weeks. Over the past 52 weeks, ICI's money fund asset series has increased by $1.375 trillion, or 44.1%, with Retail MMFs rising by $322 billion (26.5%) and Inst MMFs rising by $1.053 trillion (55.9%). They explain, "Assets of retail money market funds increased by $14.18 billion to $1.54 trillion. Among retail funds, government money market fund assets increased by $9.15 billion to $985.44 billion, prime money market fund assets were unchanged at $430.84 billion, and tax-exempt fund assets increased by $5.04 billion to $121.92 billion." Retail assets account for over a third of total assets, or 34.4%, and Government Retail assets make up 64.1% of all Retail MMFs. ICI adds, "Assets of institutional money market funds increased by $62.13 billion to $2.94 trillion. Among institutional funds, government money market fund assets increased by $54.02 billion to $2.69 trillion, prime money market fund assets increased by $7.06 billion to $230.52 billion, and tax-exempt fund assets increased by $1.05 billion to $14.11 billion." Institutional assets accounted for 65.6% of all MMF assets, with Government Institutional assets making up 91.7% of all Institutional MMF totals.

DTCC announced the launch of a "Money Market Kinetics Weekly Snapshot. The website explains, "In times of unprecedented market volatility, providing market transparency is critical. Our new DTCC Money Market Kinetics Weekly Snapshot, derived from the DTCC Money Market Kinetics product, offers insights into the 3.1 trillion dollar money markets. The report, which will be published to this page each week, derives its insights from DTCC Money Market Kinetics. The service offers daily anonymized CP and institutional CD transaction data." The inaugural update comments, "Liquidity in Corporate Commercial Paper (CP) and Institutional Certificates of Deposit (CD) has decreased precipitously in recent weeks. Last month, the Federal Reserve responded by creating a new funding facility to ensure liquidity and free up short-term lending." DTCC's report features weekly and monthly charts and "Data Insights." They write, "For the week of March 30-April 3: Fixed-rate CD settlements increased from $18 billion the prior week to $36 billion, but remain lower than the prior 52-week average which was $44 billion prior to March 16, 2020. Variable-rate CD settlements increased to $2.641 billion from $748 million the prior week. The rate remains significantly lower than the prior 52 weeks, which averaged $12 billion per week. Fixed-rate CP settlements declined from over $600 billion to $530 billion, and remain above the prior year weekly average. Variable-rate CP settlements declined to $1.6 billion, compared to a weekly average of $7 billion. For the month of March 2020: Below are the total settlement amounts and the percentage change as compared to the prior 12-month averages. Fixed-rate CD: $133B, down 32% from $195B; Variable-rate CD: $14B, down 76% from $58B; Fixed-rate CP: $2.1T, up 19% from $1.8T; Variable-rate CP: $13B, down 60% from $32B."

Bloomberg published the article, "Fed May Look to Cut Money Fund Program Rate, Strategists Say." They tell us, "The Federal Reserve may lower the rate on its support facility for money market funds to help ease ongoing pressures in short-end credit markets, according to strategists. While the Money Market Mutual Fund Liquidity Facility has been up and running for two weeks as part of a suite of measures to unclog markets, some signs of tension persist. The London interbank offered rate for dollars -- a benchmark for trillions of dollars of financial products -- remains at elevated levels, despite some easing." Bloomberg explains, "Signs of strain are also evident in the commercial paper market that's awaiting the launch of a support program on April 14, with Friday marking the sixth straight day of zero issuance of longer-term AA financial paper. Until then, prime funds may remain concerned about redemptions and their liquidity positions due to the freeze in CP activity. Bank of America Strategist Mark Cabana expects the central bank to lower the MMLF rate in coming weeks, while TD Securities strategists Priya Misra and Gennadiy Goldberg have noted issues around the rate and access to the program. 'We believe that the Fed should lower the MMLF rate to make it more attractive' and facilitate more secondary activity in commercial paper, Misra and Goldberg wrote."

Crane Data's Peter Crane will be featured on two upcoming webinars. The first is today (Tuesday, March 7) at 2pm hosted by TD Securities, while the second is Wednesday at 11am hosted by online money fund trading portal ICD. ICD's LinkedIn post tells us, "Institutional Cash Distributors (ICD), UBS Asset Management and Crane Data LLC have teamed up to deliver insights on the latest market developments as COVID-19 continues to impact how the world does business. Register today for this ICD Insight Spotlight Series." The description says, "In this segment of ICD's Spotlight Series, hosted by ICD VP Business Development Jason Owen, investors will hear from UBS Asset Management's Global Head of Liquidity Portfolio Management Robert Sabatino, and from President & Publisher of Crane Data Peter Crane. Join us for this brief teleconference designed to keep you in-the-know." The webinar begins at 11:00am Eastern on Wednesday, April 8. TD Securities is also hosting a conference call, entitled "Finding Relative Value in Short Duration US Spread Products." The call will be hosted by Michael Watt, Co-Head of US Cross Asset Sales at TD Securities, and will feature Peter Crane, President of Crane Data, Steve Shulman, Managing Director & Head of US Spread Product Trading at TD Securities, Matt Lachance, Director, US Rates Trading at TD Securities, Sarah Classen, Director & Senior Credit Trader at TD Securities, Scott Mooney, Director, MBS Trading at TD Securities and Declan Shea, Director, CMO Trading at TD Securities.

In a case of bad timing, Kiplinger's Personal Finance published the piece "BBH Limited Duration: More Income, a Bit More Risk." (The fund has been crushed in the last month, declining 4.07% over the past month vs. a gain of 0.20% for its peers. See here.) The piece tells us, "Money that you need at your fingertips in the very short term should be stashed in federally insured accounts, period. But if you've got some money that you don't want to lock up long-term and that can stand a little volatility -- perhaps you've sold some stocks and you're waiting to redeploy the proceeds -- then consider an ultrashort bond mutual fund. Bonds in these funds, which typically yield more than cash accounts for a little more risk, usually come with maturities of a year or less.... BBH Limited Duration (symbol BBBMX) currently yields 1.9% -- a bit less than Standard & Poor's 500-stock index and about the same as Bloomberg Barclays U.S. Aggregate Bond index, a benchmark for the broad bond market. To build the portfolio, managers Andrew Hofer and Neil Hohmann start by screening the broad bond universe, including corporate and municipal bonds as well as bundles of loans known as securitized debt, to hunt for undervalued issues." The article adds, "Over the past decade, Limited Duration has been about 25% more volatile than the average ultrashort bond fund, but 75% less volatile than the broad bond market. The fund posted a positive return in each of the past 10 calendar years. Over the past 15 years, its 2.7% annualized return led all ultrashort bond funds." Watch for more coverage of the ugliness in the ultra-short sector in the April issue of our Bond Fund Intelligence, which ships early next week.

Fitch Ratings published its "U.S. Money Market Fund Dashboard: March 2020," which is subtitled, "Government Responds to Liquidity Strains; Risks Remain Elevated." They explain, "U.S. prime money market fund (MMF) flows turned negative in February 2020, driven by investors' increasing risk aversion due to the coronavirus pandemic. Prime MMF assets were down $145 billion between Feb. 20 and March 24, 2020, after rising $432 billion between Nov. 1, 2016 and Feb. 20, 2020, according to iMoneyNet." Fitch writes, "Until the recent support mechanisms introduced by the Federal Reserve, outflows from prime MMFs had challenged fund managers’ ability to manage liquidity. Funds are utilizing the Fed’s new Money Market Liquidity Facility (MMLF) to sell longer-dated assets to meet redemptions, while maintaining their weekly liquidity above regulatory thresholds." They add, "While the Fed facilities were crucial in maintaining liquidity and stability in the prime MMF space, Fitch Ratings revised its sector outlook to negative from stable on March 23. This revision reflects continued investor risk aversion and unprecedented market volatility, combined with increased credit risks facing banks and corporate entities, which could pressure the funds' underlying investment portfolios."

Fidelity Investments recently published a brief entitled, "Understanding Liquidity in Money Market Mutual Funds," which tells us, "For a money market mutual fund, 'liquidity' refers to the extent to which the fund's holdings can be quickly converted to cash. Liquidity is a particularly important attribute of a money market mutual fund, as it measures the fund's ability to meet near-term shareholder redemptions. The SEC defines 'liquid assets' in Rule 2a-7. This rule defines the categories of daily liquid assets and weekly liquid assets by identifying specific types of fund holdings that can be readily converted to cash within one or five business days, respectively." They explain, "In addition to these general requirements, the SEC rules impose specific minimum requirements on the amounts of daily and weekly liquid assets a money market mutual fund must hold, as well as specific remedies for restoring liquidity in cases where these minimum levels are breached. In particular, whenever a fund's daily liquid assets account for less than 10 percent of its total assets, the fund is prohibited from acquiring any new asset other than a daily liquid asset. Similarly, if a fund's weekly liquid assets make up less than 30 percent of its total assets, the fund cannot acquire any new asset other than a weekly liquid asset. These conditional restrictions on fund management are designed to help rebuild a fund's daily and weekly liquidity levels whenever these levels become too low.... The SEC's rules permit some money market mutual funds to limit redemptions under certain conditions. Specifically, if a fund's weekly liquid assets were to fall below 30%, the board of directors of a prime (general purpose) fund or a municipal fund may either charge a liquidity fee of up to 2% on shareholder redemptions or impose a halt on all shareholder redemptions (known as a 'gate') for no longer than 10 days. Additionally, if weekly liquid assets were to fall below 10%, a prime or municipal fund must impose a liquidity fee of 1%, unless the fund's board determines that such a fee is not in the fund's best interests." (Note: Crane Data publishes the DLA and WLA numbers in our MFI Daily product.) Fidelity writes, "The SEC's intent in imposing a fee is to transfer the costs of liquidating fund securities from the shareholders who remain in the fund to those who leave the fund during periods when liquidity is scarce. In April 2016, each money market mutual fund began disclosing daily on its website the daily and weekly liquid assets as a percentage of the fund's total assets as well as net shareholder flows from the previous business day. The imposition or removal of a liquidity fee, as well as a discussion of the board's analysis in determining whether or not to impose a fee, must be disclosed promptly and publicly by a money market mutual fund.... At Fidelity, we determine the appropriate margin of safety for each money market mutual fund by conducting a quantitative analysis of such factors as historical shareholder redemption patterns, shareholder composition and concentration, and overall financial market conditions." Finally, they add, "Our experience in managing money market mutual funds has taught us that readily available liquidity is a primary goal of our shareholders. We therefore consider the management of liquidity a critical priority in our investment process, and we dedicate a significant proportion of our time and resources to ensure that we understand, monitor, and mitigate liquidity risks appropriately within our funds."

Recently, the Association for Financial Professionals' posted a video on the "Impact of the Fed's MMF Liquidity Facility." The intro explains, "In this special interview, Tom Hunt, CTP, AFP's Director of Treasury Services, discusses the Federal Reserve's new Money Market Mutual Fund Liquidity Facility with Peter Crane, President of Crane Data. This interview is part of a new a series that focuses on how treasury and finance professionals manage the upheaval caused by the coronavirus pandemic. For further insights, visit AFP's Coronavirus Resource Center." In related news, James Kaitz, President and CEO of the AFP sent a letter to Secretary of Treasury Steve Mnuchin and Federal Reserve Chair Jerome Powell requesting that the Commercial Paper Funding Facility (CPFF) and the Money Market Mutual Fund Liquidity Facility (MMLF) expand eligibility to include Tier 2 CP. Kaitz says of the $90 billion market, "We believe that these expansions will help alleviate constrained credit access for these Tier 2 issuers.... The market for Tier 2 CP is largely frozen at present, with rates at two to three times their historical average -- if an issuer can even find any investors. As the Tier 2 CP market is diminished or completely frozen, these high-quality Tier 2 issuers will draw on their credit lines as an alternative source of liquidity. This change will put increased pressure on banks to find funding. As a result, banks are already limiting new loans and dramatically increasing rates above revolver pricing for any new loans.... Similarly, expanding the eligible collateral under the MMLF to include Tier 2 CP will help to restore demand and normalize rates on this high-quality paper."