Daily Links Archives: May, 2020

The website Treasury & Risk features a piece written by ICD's Justin Brimfield entitled, "Money Fund Madness in March." It explains, "Although markets have now returned to a relatively normal state, movement in money funds bordered on irrational in March of this year. As the impacts of the Covid-19 pandemic began to sink in, volatility reached the highest levels in decades and markets went 'risk off.' Corporate treasurers drew down credit lines and poured cash into the seemingly safest alternatives -- government and Treasury money-market funds (MMFs). The ICD analysis reveals that MMFs, as an asset class, performed flawlessly. They provided corporate investors with daily liquidity at net asset value (NAV), even as those investors' emotions led them to de-risk. Even prime funds, which directly reflect stress in the credit market, maintained market NAVs of $0.99914 at their lowest, only a $0.00086 deviation." The piece quotes Crane Data's Peter Crane, "These funds didn't come close to breaking the buck, and no one triggered gates or fees.... Never was a corporate in jeopardy of failing to get their money back on the same day. Most funds were far more liquid than required. That's a victory for prime and for money funds as a whole." T&R comments, "Another indication of the performance of MMFs as an asset class is its ability to absorb vast amounts of cash. Through the five-week analysis period, the market took in $782 billion in new assets." It also quotes Crane, "I think the reason why prime funds held up so well is because government funds held up so well, and that took the pressure off of prime.... Because investors were bucketing their funds, they didn't have to hit their liquidity so hard and so fast in the prime space. They knew they had government assets, and they were raising more assets. Money was flowing in.... I think it was a confluence of events that caused people to doubt the future and sell off everything in the stock and bond markets.... That happened, and then the same thing happened as in 2008, when even safe investments were scrutinized.... Having diversity between funds and being able to move between them -- regardless of which bucket springs a leak -- is always a good idea." Finally, the article tells us, "For now, the market has stabilized on all fronts. The government has shown its willingness to support money-market funds from a fiscal and monetary policy perspective, and professionals have settled from March's market chaos and the move from office to home. Corporate investment managers are currently finding balance at work, at home, and in their portfolios. The next time chaos engulfs the financial markets, treasury teams would do well to remember the solid performance of money-market funds during the global financial crisis and the current pandemic. Historically, a balanced portfolio has been shown to optimize liquidity, safety, and returns."

A press release entitled, "J.P. Morgan Asset Management partners with Calastone to power Money Market Funds" explains, "J.P. Morgan Asset Management has partnered with Calastone, the largest global funds network, to introduce new levels of automation to money market funds via its 'Morgan Money' trading platform." It tells us that JPMAM "will initially use Calastone to enhance its entire settlements process" and says, "Morgan Money will be the first in the market to offer automated settlements to its users via Calastone's innovative technology. Calastone digitalises the investment and reporting process for money market portals, fund providers and investors. The service enables the highest levels of automation, comprising of trade placement, settlement, reporting and cash balance sweeps." The release continues, "Calastone's solution provides a fully digitalised market ecosystem offering firms greater immediacy, accuracy and certainty of execution through automated workflows. Through this partnership, Morgan Money is able to provide customers with industry leading experience, optimised for current and future market needs." Calastone's Dan Kramer comments, "We are delighted to welcome JP Morgan onto our new suite of Money Markets Services -- and as the first to make automated settlements available to their users. Now more than ever, it is essential for fund providers to stay competitive, attractive and meet the future needs of investors. We are thrilled that, through our technology, we can help JP Morgan provide its users with a market-leading customer experience across Europe, USA, Asia and other global markets." JPMAM's Paul Przybylski adds, "Morgan Money has been designed to deliver a best in class customer experience, centred on seamless integration and operational efficiency. With that in mind, we are excited to partner with Calastone to bring automated settlements to the platform, allowing our users to settle trades in real time, with automated trade workflow."

Morningstar writes, "The Rise and Fall of Bank-Loan Funds," which tells us, "Bank-loan funds have had a difficult time. The Morningstar Category has endured outflows since late 2018, and following the March 2020 sell-off, it has shrunk to its smallest size since 2012. And the category's narrow return spread--a function of loans' ties to rock-bottom short-term interest rates and limited upside because of call risk--means that fees eat up a larger percentage of returns than in many other categories and make it difficult for individual funds to separate themselves from the pack. Meanwhile, the bank-loan market itself has evolved in a direction that has undercut its traditional role as a credit-sensitive asset with more resilience than high-yield bonds. In fact, the bank-loan sector's traditional downside protection versus high-yield has been eroding for some time. More than ever before, bank-loan investors must ask themselves what they want out of their allocation and whether bank-loan funds are still able to deliver it." The piece continues, "Corporate bonds, both investment-grade and high-yield, typically come with call protections or make-whole features that allow them to trade above par value more easily, increasing their potential total return. But callability means that bank-loan upside is typically capped, while bond upside is not, so improving economic fundamentals--which tend to parallel rising short-term rates--can only go so far in terms of driving up a loan's price. For example, roughly 70% of bank-loan issuance activity in 2017 was used to refinance or reprice existing loans." Morningstar adds, "There is also reason to believe that bank loans' traditional downside protection will not hold as strongly going forward. Huge demand for loans has fostered incredible growth over the years.... Of course, massive growth in both supply and demand paved the way for a loosening of credit standards. As a result, a larger and larger percentage of the market is now made up of covenant lite and loan-only capital structures.... All of this means that bank-loan funds are in a tough place. If outflows continue, the category is likely to experience liquidations or mergers as asset managers shut down uneconomic products. Growth in both supply and demand has engendered changes that have weakened the sector's traditional downside protection. And the lack of call protection will remain an impediment to upside performance whenever credit markets rally, especially in a world of near-zero interest rates that neutralizes one of the sector's defining features and return generators. Given the disadvantages that the category faces, only the very highest level of team and approach--and low fees--can be expected to outperform."

Barron's writes that "TIAA Says Negative Yields Could Soon be a Possibility in Money-Market Products." The piece, based on an e-mail sent out by Independent Adviser for Vanguard Investors' editor Dan Wiener, explains, "Negative yields could be a possibility for U.S. investors sooner than expected -- at least, for investors in a couple of money-market products managed by TIAA. In a notice to investors this week, TIAA said it plans to temporarily waive fees on the CREF Money Market Account and TIAA Access's Money-Market Fund.... But notably, TIAA said it would not renew the waiver after the end of 2020. What's more, it said it could recoup those waived fees as soon as next year, if U.S. interest rates rise far enough to provide a positive yield." (Crane Data Note: These are not money market mutual funds, but variable annuity money market products with big extra layers of fees. We do not expect any true money funds to go negative.) Barron's adds, "TIAA's notice marks a significant change from the way most money-market funds managed near-zero interest rates in the years after the 2008-09 financial crisis. Most funds waived fees as long as interest rates were near zero to avoid negative yields." They quote our Peter Crane, "In the money-fund space, people are thinking seriously about negative yields and how they might handle them. The last go-round we merely saw fee waivers, so yields stayed positive.... People are starting to think about what might happen if yields do go full-scale negative. And with funds, how they pass that through to investors -- and how that's perceived -- will be a big deal." Wiener comments in his update, "When I last wrote you about Vanguard's money market yields plunging I had no idea that other fund complexes were already so close to the zero-yield that they'd have to start waiving fees. But that's what's happening. The attached email from TIAA, shared by a colleague, is shocking not only because TIAA says it will only waive fees on its CREF Money Market Account through the end of 2020 but that the yield on the fund could go negative AND TIAA reserves the right to recoup the waived fees down the road.... TIAA investors should begin looking for a better alternative, and for those stuck in 403(b) plans they should be asking their administrators for better alternatives as well."

Money market mutual fund assets showed gains for the twelfth week in a row, hitting yet another record but just inching up closer the $4.8 trillion level. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets increased by $1.41 billion to $4.79 trillion for the week ended Wednesday, May 20, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $12.85 billion and prime funds increased by $13.84 billion. Tax-exempt money market funds increased by $419 million." ICI's stats show Institutional MMFs falling $8.6 billion and Retail MMFs increasing $10.0 billion. Total Government MMF assets, including Treasury funds, were $3.912 trillion (81.7% of all money funds), while Total Prime MMFs were $742.5 billion (15.5%). Tax Exempt MMFs totaled $135.3 billion, 2.8%. Money fund assets are up an eye-popping $1.157 trillion, or 31.9%, year-to-date in 2020, with Inst MMFs up $950 billion (42.0%) and Retail MMFs up $208 billion (15.2%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.659 trillion, or 53.0%, with Retail MMFs rising by $363 billion (29.8%) and Inst MMFs rising by $1.296 trillion (67.7%). They explain, "Assets of retail money market funds increased by $9.99 billion to $1.58 trillion. Among retail funds, government money market fund assets increased by $5.74 billion to $999.23 billion, prime money market fund assets increased by $4.29 billion to $458.16 billion, and tax-exempt fund assets decreased by $40 million to $120.25 billion." Retail assets account for just under a third of total assets, or 33.0%, and Government Retail assets make up 63.3% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $8.58 billion to $3.21 trillion. Among institutional funds, government money market fund assets decreased by $18.59 billion to $2.91 trillion, prime money market fund assets increased by $9.55 billion to $284.31 billion, and tax-exempt fund assets increased by $459 million to $15.07 billion." Institutional assets accounted for 67.1% of all MMF assets, with Government Institutional assets making up 90.7% of all Institutional MMF totals. (Note: Crane Data has its own separate, and larger, daily and monthly asset series.)

A press release with the unwieldy title, "Fidelity Uses Financial Strength and Scale to Deliver Unmatched Value With First of Its Kind Fidelity Rewards+ Program," tells us, "Fidelity Investments ... today launched Fidelity Rewards+, a new program designed to give eligible Fidelity Wealth Management customers exclusive opportunities to earn and save more. To be eligible, customers must have a minimum $250,000 invested through Fidelity Wealth Services, Fidelity Strategic Disciplines, or a combination of both.... Fidelity Rewards+ features no-cost enrollment, automatic renewal with qualifying assets, and automatic upgrades to higher benefit tiers." Among other benefits, it includes: "Access to Fidelity's Higher-Yielding Money Market Funds -- Fidelity challenged conventional industry practices by automatically investing customers' idle cash into higher yielding cash sweep options available for new retail brokerage and retirement accounts. Now, Rewards+ members can invest in many of our highest yielding money market funds without the typical investment minimums, providing the potential to earn more. " The release explains, "Fidelity Rewards+ includes three levels of benefits based on assets -- Gold, Platinum, and Platinum Plus. Once customers are enrolled in the program, if their eligible assets increase to the next level, Fidelity will boost the rewards automatically." (Website ignites first covered the news in the article, "Fidelity Rolls Out Rewards Program With Money Fund Perks.") Finally, yesterday's CD News piece, "Northern Liquidating Prime Obligs; NY Fed on PDCF; Weekly Port Holds" discussed the liquidation of Northern Prime Obligations. Reueters also writes about the liquidation in, "Northern Trust shutting fund in latest prime money market stress."

Wells Fargo Funds' latest "Overview, strategy, and outlook," tells us, "Money market fund assets continued their upward flight in April, albeit at a slightly more shallow trajectory than in March. With more than $450 billion flowing into the money markets, money fund assets reached an all-time high on April 30 of $5.04 trillion, growing by over 27% since March 1. As was the case last month, government and Treasury money market funds were the primary beneficiaries of these cash flows, amassing $363 billion in April on the heels of March's $790 billion. Total growth in that sector in just the past two months has been slightly under $1.2 trillion, an increase of more than 42%. With lower market volatility and stabilizing net asset values (NAVs), prime and muni funds proved attractive to some investors. The prime sector, which contracted by $160 billion, or 14.6%, in March, experienced four consecutive weeks of positive cash flow through the end of April. With over $82 billion flowing back into the sector, total prime fund attrition since the beginning of March has been cut by more than half to -7.08%, or $78 billion. And muni funds, which shrank 4.2% in March, saw inflows of almost $6 billion, virtually reversing the prior month's outflows. As a result of all these flows, investment activity this month, which usually experiences net outflows due to tax season, was atypically robust." On the U.S. Government sector, the piece adds, "The bottom line is that rates are back at zero. The zero-interest-rate policy (ZIRP) that dominated the past decade is back, and it's hard to see it ending anytime soon. On the one hand, the economic pain is likely just beginning, and the nearly complete lack of visibility on the public health and economic paths forward will have the Fed solely focused on its role as rescuer. Tomorrow's important issues, like the country's unprecedented indebtedness and the unwind of the Fed's rescue efforts, including higher rates, can wait. On the other hand, the Fed has consistently declined to show any affection for negative interest rates, so lower rates seem just as unlikely. In the money markets, then, we're left with small meandering movements in rates within the Fed's target range, somewhere around zero, driven by changes in supply and demand and regulatory and official actions."

Capital Advisors Group published a new report entitled, "Institutional Cash Investments in the Covid-19 New Reality." It tells us, "Extraordinary market volatility from COVID-19 led to a complete reset of portfolio strategies and expectations in cash investments. While liquidity has turned the corner, the path to recovery and a normal investment environment may be a long one. Fighting credit issues on one hand and the risk of negative interest rates on the other, treasury professionals should remain focused on liquidity management, take comfort in the Fed's support programs, and proactively extend portfolio duration." The CAG report continues, "Extraordinary actions were taken by the Federal Reserve and the Trump Administration to provide much-needed lifelines to the financial markets and direct cash payments and loans to keep businesses operating and to support furloughed employees.... Institutional cash portfolios must also contend with a different interest rate and credit landscape from two months ago. While we see plenty of signals to suggest that liquidity has turned the corner, the path to recovery and a normal investment environment may be a long and winding one." It adds, "While medical and economic solutions may be months away, financial markets adjusted swiftly to a lower-for-longer interest rate environment -- which presents a big challenge to treasury professionals. As securities roll off and are replaced with new purchases, portfolio yields are expected to decline precipitously in money market funds and separate accounts. The story is similar in the deposit space, as the Federal Reserve again flushes the banking system with ample reserves that depress deposit rates. Meanwhile, credit conditions may deteriorate further as shutdowns linger, putting more stress on corporate balance sheets and bank loan books. What is a treasury investor to do in this environment? The urge to wait out the yield drought may not work this time, as COVID-19 will likely cast a long shadow on the economy. The possibility of the Fed doing more to help the economy introduces concerns about negative interest rates. Protecting cash portfolios from COVID-related credit issues and principal erosion from negative rates creates tension in portfolio strategies that treasury professionals cannot avoid. To decide where to go from here, it helps to understand where we were and how we came to the current state of the liquidity market."

Reuters Breakingviews discusses money funds in its piece, "ZIRP's the limit." Regarding negative rates, they tell us, "A major concern, aside from banks, would be money market funds. These are mutual funds that hold mostly safe, short-term debt and, traditionally at least, always maintain their $1 per share net asset value while paying at least a smidgen of interest. Investors, both retail and institutional, tend to treat them as an alternative to bank deposits. Ructions in money market funds can quickly turn into a problem of confidence. When one 'broke the buck' in the wake of Lehman Brothers' collapse in 2008, investors raced for the exits -- a bit like a bank run -- forcing the Fed to intervene." They ask, "Are money market funds that significant, though? In the United States, yes. After two huge months of inflows, their assets just topped $5 trillion for the first time at the end of April, according to Crane Data's tally. The safest variety of the vehicles accounted for nearly $4 trillion, investing in securities like government paper or Treasury repurchase agreements. Repo is one area of financial markets that briefly went bonkers earlier this year." The piece adds, "Some other types of money market funds are, since 2016 reforms, detached from the purity of never 'breaking the buck.' But their assets include a lot of commercial paper, still a significant source of short-term funding for many companies. That's another linkage policymakers worry about. The Fed's coronavirus response includes backing for these funds." Finally, Breakingviews adds, "Investors expect them to hold their value. To cover their costs, they need to make a little money from their ultra-low-risk assets. That becomes increasingly hard if rates go negative. Even if fund managers were willing to forgo fees for a while, these funds could become unsustainable longer term. And if investors withdraw money or managers shut them down in a hurry, there would be a risk of knock-on damage to repo markets and corporate borrowers, among others. Don't these funds exist in Europe too? Yes, albeit in lesser amounts and slightly different forms. Negative rates haven't killed them off so it's not certain that the Fed's worries are justified. Yet the financial systems are different: Europe has a more bank-dependent lending market, for example, while America's money market funds and mountain of mortgage-backed debt are more significant factors than in Europe."

Money market mutual fund assets showed gains for the eleventh week in a row, hitting yet another record and inching closer the $4.8 trillion level. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets increased by $19.77 billion to $4.79 trillion for the week ended Wednesday, May 13, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $6.58 billion and prime funds increased by $14.11 billion. Tax-exempt money market funds decreased by $917 million." ICI's stats show Institutional MMFs rising $15.3 billion and Retail MMFs increasing $4.5 billion. Total Government MMF assets, including Treasury funds, were $3.924 trillion (82.0% of all money funds), while Total Prime MMFs were $728.6 billion (15.2%). Tax Exempt MMFs totaled $134.9 billion, 2.8%. Money fund assets are up an eye-popping $1.156 trillion, or 31.8%, year-to-date in 2020, with Inst MMFs up $958 billion (42.4%) and Retail MMFs up $198 billion (14.4%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.687 trillion, or 54.4%, with Retail MMFs rising by $358 billion (29.6%) and Inst MMFs rising by $1.330 trillion (70.3%). They explain, "Assets of retail money market funds increased by $4.51 billion to $1.57 trillion. Among retail funds, government money market fund assets increased by $233 million to $993.50 billion, prime money market fund assets increased by $5.19 billion to $453.87 billion, and tax-exempt fund assets decreased by $905 million to $120.29 billion." Retail assets account for just under a third of total assets, or 32.7%, and Government Retail assets make up 63.4% of all Retail MMFs. ICI adds, "Assets of institutional money market funds increased by $15.26 billion to $3.22 trillion. Among institutional funds, government money market fund assets increased by $6.35 billion to $2.93 trillion, prime money market fund assets increased by $8.92 billion to $274.76 billion, and tax-exempt fund assets decreased by $12 million to $14.61 billion." Institutional assets accounted for 67.3% of all MMF assets, with Government Institutional assets making up 91.0% of all Institutional MMF totals. (Note: Crane Data has its own separate, and larger, daily and monthly asset series.)

Next Thursday, May 21, Crane Data will host its first ever Webinar event, "Crane's Money Fund Update & Training," at 3:00pm (Eastern). (To register, go here: https://register.gotowebinar.com/register/5005519395474084109.) Our Peter Crane will give a 30 minute update on recent events and trends involving money market mutual funds, and will weigh in on asset flows, yield trends and more. Crane will also spend 15 minutes taking questions and giving a brief tutorial on our Money Fund Intelligence Daily product. (E-mail Pete if you'd like to send in questions or requests beforehand.) Please bear with us as we ramp up our virtual event capabilities over the next couple of months, and mark your calendars for our second event on June 25 at 3pm. Note that the New England Association of Financial Professionals will also be hosting a webinar on May 21 at 12pm (noon) Eastern, entitled, "State of the Liquidity Markets, featuring William Goldthwait of State Street Global Advisors. Finally, we still remain hopeful that travel will resume later this summer and that we'll be able to host our annual Money Fund Symposium and European Money Fund Symposium. Crane's Money Fund Symposium is scheduled for August 24-26, 2020 at the Hyatt Regency Minneapolis. We'll continue to monitor events carefully in coming weeks, and we'll be prepared to move, to cancel, and/or to webcast if our client base deems it unsafe. Meanwhile, we'll be preparing for the show and taking steps to spread out and make the event safer. (Note: We'll offer full refunds or credits for any cancellations.) Our next European Money Fund Symposium is now scheduled for Nov. 19-20, 2020 in Paris, France. Also, mark your calendars for next year's Money Fund University, which is scheduled for Jan. 21-22, 2021, in Pittsburgh, Pa, and our next Bond Fund Symposium, which is scheduled for March 25-26, 2021 in Newport Beach, Calif. Watch for details in coming months, and we'll keep you posted on our upcoming virtual, and live, events.

MarketWatch published the article, "Here's a $4 trillion reason why the U.S. is unlikely to have negative interest rates." It tell us, "Don't bet on negative interest rates in the U.S. anytime soon. Even as some traders speculate the Federal Reserve will push interest rates below zero by year end, analysts say the intense pain that the policy would inflict on the crucial $4 trillion money-market fund industry would ultimately give Fed officials second thought.... Based on trading in the fed fund futures market where traders can bet on changes in the central bank's benchmark interest rate, some see the chance of interest-rates turning negative next year. Yet Fed officials have publicly pushed back against the use of subzero rates, amid worries how it could upend parts of the U.S. financial system. In particular, money-market funds are seen as vulnerable to negative interest rates and bond yields." The MarketWatch piece explains, "A cornerstone of Wall Street's infrastructure, money-market mutual funds will buy very short-term debt from highly rated companies, banks, governments and municipalities, providing them with a key source of cash. In return, investors of money-market funds get to put their cash in a highly liquid and safe asset which should hold its value throughout the ups and downs of financial markets. Yet negative interest rates can erode the yield earned in such funds as they invest in safe debt securities that carry skimpy yields. Taking fees into account, investors could, in theory, end up losing a small but insubstantial part of the original funds they had put in.... But some veterans of the industry feel negative interest rates were a manageable issue. They point out that overall European money market fund industry grew throughout the European Central Bank's experiment with negative rates after the eurozone crisis." They quote Peter Crane, "It would be uncomfortable, but money market funds could operate with negative rates." The piece explains, "If money market funds felt negative interest rate policy was temporary, they could waive fees to ensure returns earned from the funds stayed positive while waiting for the economy to recover. Fidelity, for example, says it would waive certain fund fees to prevent returns from money market funds falling below zero. And in the aftermath of the financial crisis of 2008, funds did just that when interest rates fell to rock-bottom.... 'Anyone suggesting cash in the mattress clearly hasn't thought through that option. Holding physical cash is not an option for IBM,' said Crane.... Crane warned, however, there would need to be regulatory tweaks and changes to how money market funds operated for the industry to adjust to a new normal of negative rates." See also, Bloomberg's "Cash havens with $4.8 trillion fret unthinkable negative returns."

Money market fund yields, which fell below the 1.0% level eight weeks ago and below the 0.5% level six weeks ago, continued inching lower in the latest week. Our flagship Crane 100 Money Fund Index was down 4 basis points over the past week (through Friday, May 8) to 0.22%. The Crane 100 is down from 1.46% at the start of the year and down 2.01% from the beginning of 2019 (2.23%). While some funds have already hit the zero floor, most money funds maintain stubbornly high (given the Fed funds target), and they still maintain a yield advantage over sweeps and bank deposits, albeit a thinner one. According to our Money Fund Intelligence Daily, as of Friday, 5/8, 334 funds (out of 852 total) yielded 0.00% or 0.01% with total assets of $882.5 billion, or 17.4% of total assets. There were 131 funds yielding between 0.02% and 0.10%, totaling $682.3B, or 13.5% of assets; 198 funds yielded between 0.11% and 0.25% with $2.193 trillion, or 43.3% of assets; 105 funds yielded between 0.26% and 0.50% with $602.0 billion in assets, or 11.9% ; 79 funds yielded between 0.51% and 0.99% with $704.5 billion in assets or 13.9%; no funds yielded over 1.00%. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 674), shows a 7-day yield of 0.17%, down 3 basis points in the week through Friday, 5/8. The Crane Money Fund Average is down 30 bps from 0.47% at the beginning of April. Prime Inst MFs were down 6 bps to 0.42% in the latest week and Government Inst MFs fell by 4 bps to 0.14%. Treasury Inst MFs dropped by 2 bps to 0.09%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.04% (down 3 bps for the week), and Prime Retail MFs yield 0.32% (down 6 bps for the week), Tax-exempt MF 7-day yields dropped by 2 bps to 0.09%. As we've mentioned in previous weeks, our Crane Brokerage Sweep Index, the average rate for brokerage sweep clients, has already hit the floor at 0.01%. It's down 27 bps from the end of 2018 (0.28%). The latest Brokerage Sweep Intelligence, with data as of May 8, shows no rate changes over the past week. All of major brokerages now offer rates of 0.01% for balances of $100K. 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 five weeks at 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).

Citi Research's Steve Kang writes about "Negative rates and money markets" this week, explaining, "NIRP was implemented by the ECB and BoJ in June 2014 and January 2016, respectively.... MMFs in both regions seems to have weathered the storm -- with AUM dropping only briefly and then recovering later.... However, the US requires more caution, as it is much more reliant on MMFs than other areas -- US MMF AUM is 21% of nominal GDP, 4% for Euro (EUR ccy), and 2% for Japan. Also, US MMF is much more government focused -- 82% of total notional is government-only versus mostly credit in Europe and Japan." Kang continues, "Once the ECB instituted ZIRP in 2012, major EUR MMF providers closed their funds to new investments. In response to NIRP in 2014, the community initially responded by instituting a reverse distribution mechanism (RDM) whereby the funds [sell shares to cover expenses] rather than lower $1/share CNAV as a way to pass through negative rates to end users. In January 2018, the EC ruled that RDM is not compatible with the EUR MMF reform -- which made keeping CNAV untenable for negative rates, forcing EUR-denominated MMFs to convert into Variable NAVs (VNAV) instead." He adds, "The NAV stability has traditionally been an important attribute for US investors for accounting/operational reasons. With VNAV unlikely to be a palatable option for US cash investors in the near term, US MMFs are likely to resort to RDM to keep CNAV, and the Fed is likely to allow it to avoid disruption in this market. RDM doesn't seem to be explicitly banned in the US for now -- but it is possible to be reviewed at a later date once things are calmer. Even if RDM is allowed and MMFs are ready, some lead time is necessary for end users of MMFs for a smoother transition. In general, the conversation around negative rates still seems preliminary between MMFs and cash investors. There are also likely to be other frictions that we are not aware of on payment flows. As discussed earlier, the size of the UST supply warrants ample caution on the changing MMF landscape. In other words, though it is a solvable friction, MMF logistics wouldn’t allow the negative rates to be implemented this year." Goldman Sachs Asset Management's Patrick O'Callaghan also was asked about negative rates during a webinar recently. He replied, "[I]t's definitely something that we're hearing a lot from clients.... We've already seen negative rates here through the month of March with T-bill offers in the secondary market going negative.... Our base case is that the Fed will not take policy rates negative.... The fact that they're leaving policy rates at the zero lower bound right now signals to us that they are most likely going to keep them there.... I think if the Fed wanted to be below zero we would be there already.... Can market rates go negative even if the Fed doesn't take policy rates negative? ... Obviously yes, because we saw it happen at the end of March. That has [now] largely reversed itself.... We have a tremendous amount of supply coming into the market. Now, that supply is being met with demand because of this huge influx into government and treasury funds. We'll see how long both of those things last." O'Callaghan adds, "Then there are other things that fund companies can do and we have seen some of that already.... You have seen soft closures to new investors, which would obviously limit transactions at rates below the fund's net yield. You will probably see, if we get into a world in which we continue to migrate closer to the zero-lower bound, fee waivers. Then potentially you can see hard closures of purchases, not redemptions, in Government or Treasury products to again limit dilution of the fund's yield to that negative yield standpoint.... But I think with the backdrop of ever-increasing T-bill supply market rates should stay on the plus side of the equation for quite some time."

Money market mutual fund assets showed gains for the tenth week in a row, hitting yet another record and inching closer the $4.8 trillion level. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets increased by $34.28 billion to $4.77 trillion for the week ended Wednesday, May 6, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $19.20 billion and prime funds increased by $15.55 billion. Tax-exempt money market funds decreased by $480 million." ICI's stats show Institutional MMFs rising $25.2 billion and Retail MMFs increasing $9.1 billion. Total Government MMF assets, including Treasury funds, were $3.918 trillion (82.2% of all money funds), while Total Prime MMFs were $714.5 billion (15.0%). Tax Exempt MMFs totaled $135.8 billion, 2.8%. Money fund assets are up an eye-popping $1.136 trillion, or 31.3%, year-to-date in 2020, with Inst MMFs up $943 billion (41.7%) and Retail MMFs up $193 billion (14.1%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.684 trillion, or 54.6%, with Retail MMFs rising by $357 billion (29.6%) and Inst MMFs rising by $1.327 trillion (70.7%). They explain, "Assets of retail money market funds increased by $9.06 billion to $1.56 trillion. Among retail funds, government money market fund assets increased by $4.46 billion to $993.26 billion, prime money market fund assets increased by $5.76 billion to $448.68 billion, and tax-exempt fund assets decreased by $1.17 billion to $121.19 billion." Retail assets account for just under a third of total assets, or 32.8%, and Government Retail assets make up 63.5% of all Retail MMFs. ICI adds, "Assets of institutional money market funds increased by $25.22 billion to $3.21 trillion. Among institutional funds, government money market fund assets increased by $14.74 billion to $2.92 trillion, prime money market fund assets increased by $9.79 billion to $265.84 billion, and tax-exempt fund assets increased by $689 million to $14.62 billion." Institutional assets accounted for 67.2% of all MMF assets, with Government Institutional assets making up 91.3% of all Institutional MMF totals. (Note: Crane Data has its own separate, and larger, daily and monthly asset series.)

The ICI released its Investment Company Fact Book 2020 yesterday, which contains a wealth of statistics on money market (and other) mutual funds, and which reviews major fund trends of 2019. The introductory letter, from ICI President & CEO Paul Schott Stevens, states, "For almost 80 years, collecting and communicating statistics on registered investment companies have been critically important to the Investment Company Institute fulfilling its mission to promote public understanding of funds and fund investing. Our first statistical collections date back to the 1940s, and we launched our Fact Book publication -- then titled Investment Companies, a Statistical Summary -- in 1958. But the modern era of ICI Research dates back more than 25 years, when the Institute decided to expand and deepen its research capabilities and output." He explains, "When I was general counsel of ICI in the mid-1990s, ICI President Matthew P. Fink tapped me to lead the effort to build our Research Department. Adding to our statistical collection and basic surveys, we first began by conducting an annual analysis of trends in fund fees and expenses that continues to this day. In subsequent years, we've expanded our work across many dimensions -- including the breadth of our statistical collection and reporting, the reach of our longitudinal and specialized surveys, and the depth of our analysis of industry and market trends in good times and bad. We have conducted groundbreaking research into the US retirement system in which funds play an important part and empirical work on a wide variety of regulatory and other policy issues. And with the launch of ICI Global in 2011, our research entered a whole new phase to serve a global membership and mission." Stevens adds, "All those years ago, we understood that ICI's reputation would stand or fall on the accuracy, integrity, relevance, and timeliness of our research and analysis. Our commitment to these values has been the foundation of all our research activities since. It is therefore a source of some satisfaction that ICI today is regarded as an important source for understanding our industry.... This 2020 Investment Company Fact Book -- the 60th edition -- is just one example of the critically important work produced by ICI Research. After eight decades of data collection and six decades of the Fact Book resource, ICI Research will continue to carry on this great tradition. And I will always take tremendous pleasure and pride in having helped to lay that foundation for the benefit of funds and investors for decades to come." Watch for more excerpts from the new ICI Fact Book in coming days, and in our latest Money Fund Intelligence, which also has an interview with ICI's Paul Stevens.

Since the coronavirus lockdown began 7 weeks ago, we haven't heard a word about ESG investing, which previously had been one of the hottest topics in the money markets. While not the most timely topic, online money fund trading "portal" ICD nonetheless hosted a webinar this week entitled, "ESG For Short Term Investing." Hosted by ICD's Justin Brimfield and featuring BlackRock's Eric Hiatt and Principals for Responsible Investment's Ophir Bruck. On the drivers of ESG, Bruck comments, "There are a few prominent drivers.... The first is what we refer to as materiality, which refers to the increasing recognition within the financial community that ESG factors play a financially material role in determining the risk and return characteristics of investments.... The third driver is market demand. So, whether that's changing investment preference among millennials, pension beneficiaries calling on funds to address issues like climate change, or asset owners incorporating ESG criteria into RFPs and manager mandates, there's a growing demand for greater transparency about how and where money is being invested.... The fourth and final primary driver for ESG adoption is growing policy and regulation. Globally, the number of regulations that have come online to either mandate or encourage investors to incorporate ESG factors into investment decisions, and we see that in the U.S. as well with the Sustainable Investment Act passed in Illinois." Discussing corporate cash, Hiatt explains, "There's really been a tremendous interest on the investor side, and an increasing percentage of professionally managed assets which pay some consideration to ESG -- upwards of 25 percent. When we think of cash.... it's really just a natural extension of this. Cash investors tend to be focused on minimizing ... risk. So, if we can take a company or industry and develop conviction that sustainability related factors are material then we really should be looking at these risks in addition to the traditional financial analysis that we're performing." He adds, "There are some challenges that we have in cash, such as, we have no investable benchmarks, it's a more limited investable universe, and then obviously a shorter investment horizon. So, I think materiality and relevance might take on a slightly different meaning.... For any commingled cash products we feel that they should have really three attributes. One is broad appeal, two are innovative features and then three, attractive performance, because we don't think investors are ready to sacrifice much in the way of performance for access to ESG. They really have to maintain all of the utility of the cash product. " Hiatt also says, "We've had discussions with corporate clients around different options that we, at BlackRock, might offer clients to invest some of their balance sheet cash in various ESG efforts. Many clients have really come to recognize that the ESG factors tend to play out over a longer term, but many provide useful insights as well to cash investors.... Cash is really an unexpected, but simple way at the same time, to gain exposure at middle or very little cost to assets or products that might be forward looking with respect to ESG."

The latest "Independent Advisor for Vanguard Investors" newsletter features an article on Vanguard Ultra-Short-Term Bond Fund entitled, "Almost Cash, But Better." Dan Wiener explains, "It isn't a money market fund and never has been, but Ultra-Short-Term Bond has been a steady and reliable performer over its first five years with small price swings, low risk and better-than-cash returns. As Jeff and I postulated at the fund's introduction in 2015, 'Risk should be low, and investors who can handle small changes in NAV may indeed find this fund a good alternative to a money market, one that likely will provide more yield and greater returns over time.' In fact, Ultra-Short-Term Bond has lived up to that prediction, and then some." He continues, "Ultra-Short-Term Bond's returns have been very, very steady. It nearly matched Short-Term Federal's return with less volatility, and it easily outpaced Vanguard's best cash option, Prime Money Market. Only Short-Term Investment-Grade outperformed by any relevant margin. While expenses for the Investor shares have held steady at 0.20%, the Admiral shares saw expenses shaved from 0.12% to 0.10% after a couple of years." Wiener adds, "[O]ver the full first five years, small as the difference may be, the Admiral shares' 1.82% annualized return was higher than the Investor shares' 1.73% compounded gain. As I said, volatility has been low. When you consider drawdowns, UltraShort-Term Bond barely saw a month of negative returns. In fact, in its first five years, the fund only lost money in four months, with the largest loss a 0.13% decline in November 2015. Not surprisingly, Ultra-Short-Term Bond's yield has remained substantially better than cash.... [I]t's also typically out-yielded short-term funds like Short-Term Treasury and Short-Term Federal. Daily price volatility has also been low. Since its introduction at a $10 net asset value, the lowest the fund's price has ever gone is $9.95, and the highest price it's seen is $10.07." Finally, the piece adds, "Ultra-Short-Term Bond's NAV hit a record high in March and then fell out of its 'zone'--hitting a new low of $9.92 at month's end. As a result, the fund's 1.2% loss in March clocked in as its worst month by a wide margin. Does this concern me? Absolutely not.... [Y]ou can see that the fund's NAV has already rebounded. The fund's 0.8% return in April is its best on record and pulled its year-to-date return into positive territory. Plus, if there's one thing I'm sure of, it's that Vanguard's bond department is keeping an eye on risks and on the diversification of this fund’s portfolio -- making sure no single position puts the fund in jeopardy.... Do I recommend this fund today? Absolutely. Furthermore, I completely expect that when the bond markets settle down, Ultra-Short-Term Bond will remain one of the best non-cash substitutes for a money market that money can buy."

Ten years ago this week (on May 7, 2010) we featured the `Crane Data News story, "Geithner, ICI Panels Mention Money Funds, President's Working Group," which reviewed discussions of regulatory changes in the wake of the great financial crisis. Our piece said, "U.S. Treasury Secretary Timothy Geithner gave Testimony before the Financial Crisis Inquiry Commission yesterday on "Causes of the Financial Crisis and the Case for Reform" and briefly mentioned money market funds and the pending President's Working Group report. Money funds and regulations were also a brief topic at the ICI's General Membership Meeting in Washington.... Geithner said of the "parallel banking system," "A large parallel financial system emerged outside of the framework of protections established for traditional banks.... This parallel system came in many shapes and sizes. Independent investment banks like Lehman Brothers and Bear Stearns grew in size and financed themselves in the overnight repurchase agreement, or 'repo' markets, which rely on assets or securities as collateral. Asset-backed commercial paper (ABCP) conduits and structured investment vehicles (SIVs) were used by banks and a broad range of other financial institutions as funding vehicles for different types of assets.... These institutions and funds were financed by institutional investors and by money market mutual funds, which purchased their short term commercial paper, or lent to them overnight in the repo markets secured by various forms of collateral." He then said, "These reforms will give the Federal Reserve the authority to build a more stable funding system, take action to address the unstable aspects of the short-term repo markets, and ensure that these markets are used much more conservatively in the future. These steps will give clear authority to set risk management requirements for these markets, including capital standards, set standards for collateral requirements, and to help ensure that settlement procedures are robust. They will also create enforcement authority to compel corrective actions as risks build up, or when risk-management is inadequate. These authorities will also reinforce stability and liquidity even in times of market stress such as a terrorist attack or acute financial crisis." Finally, Geithner mentioned "Higher Standards for Money Market Mutual Funds," saying, "The SEC recently enacted new rules to strengthen liquidity, credit standards and disclosure in the money fund industry. More work remains to be done in this area, and the President's Working Group on Financial Markets is preparing a report setting forth options to reduce the susceptibility of money funds to runs." Members of the mutual fund industry were also discussing money market funds yesterday at the Investment Company Institute's 2010 General Membership Meeting. The ICI's "Highlights" page says, "In a wide-ranging conversation at ICI's GMM, a leadership panel discussed the way forward for the fund industry and investors. Among the topics covered were key lessons of the recent financial crisis, the stable net asset value (NAV) for money market funds, and creating a fiduciary standard for brokers.... [Greg] Johnson [of Franklin Resources] mentioned that in the larger financial reform debate, the stable net asset value (NAV) had been questioned. McNabb, Johnson, and Walters stressed that the stable NAV must be retained. A stable NAV provides investors with the stability they crave and funds short-term lending for corporate America."

S&P Global Ratings published a release entitled, "U.S. Money Market Funds Saw Record Flows In March, Report Says," which tells us, "During the first quarter of 2020, as the COVID-19 pandemic spread through the U.S. and the country broadly implemented social distancing measures, S&P Global Ratings observed extraordinary investment activity within the money market sector, according to the report "U.S. 'AAAm' Fund Risk Metrics (March 2020)," published today. Both government and prime funds saw record flows. Following sell-offs in U.S. equity markets, a flight to quality saw government and Treasury money market funds (MMFs) receive $620 billion in assets in March, a 32% rise for the month, while prime MMFs lost $83 billion, a 16% decline. U.S. MMFs' total assets ended March slightly above $3 trillion." S&P's Joseph Giarratano comments, "In our view, the outflows from prime MMFs generally did not reflect fundamental credit concerns, but rather stemmed largely from liquidity pressures in March." The ratings agency adds, "Some prime MMFs faced liquidity issues as heavy redemption activity threatened their ability to maintain daily and weekly liquidity levels above regulatory thresholds. To raise additional liquidity and support net asset values (NAVs), some funds utilized external tools, including the Federal Reserve's Money Market Mutual Fund Liquidity Facility and parental capital support. Despite observable deterioration in NAVs, caused by larger-than-normal outflows and liquidity pressures, prime funds maintained principal stability, and all S&P Global Ratings rated MMFs maintained NAVs of at least 0.9975, the lowest deviation point for the 'AAAm' rating."