Daily Links Archives: June, 2020

The Wall Street Journal writes that "Money-Market Shifts Are Bad News for Profit-Starved Global Banks." The piece states, "Last week, Fidelity Investments said it would close two institutional prime money-market funds with a total of around $14 billion in net assets. That's an ominous portent for some non-U.S. banks, which have increasingly come to rely on such funds to raise dollars they can't easily acquire at home. Fidelity cited volatile outflows from the funds -- which invest in short-term commercial paper and certificates of deposit issued by companies -- and into government money-market funds during moments of market stress. Fidelity's retail prime money-market funds, whose assets run into the hundreds of billions, will remain open." (See our June 22 News, "Fidelity to Liquidate Prime Instit Money Funds; Cites Investor Behavior.") The Journal explains, "But non-U.S. banks will feel the loss: 20% of the Prime Reserves Portfolio, the larger of the two funds being closed, is invested in certificates of deposit, all issued by Canadian, Japanese and European banks. Many have increasingly strayed into dollar-denominated lending in recent years.... In Japan in particular, the spread between short- and long-term yen-denominated interest rates has been squeezed narrower and narrower over time, making dollar lending far more profitable. To fund that longer-term lending -- in the absence of dollar deposits -- foreign banks have used short-term CDs. The closures don't mean an imminent funding crunch. But they are still bad news for the banks, watching one of their limited avenues for profit in recent years slowly closed off." The article adds, "In March, the surge in borrowing costs for foreign entities trying to obtain dollars using cross-currency basis swaps was a result in no small part of investors pouring out of prime money-market funds, draining them of more than $150 billion. Issuance fell by than half from late February into March. This time, the immediate risk isn't that funding violently dries up again, but that the dollar business foreign banks have engaged in slowly comes to make less and less economic sense. That source of earnings will be sorely missed, given how few other options are available."

Citi's Research's Steve Kang writes about "Stress tests on banks and prime funds" in his latest "Short-End Notes." His piece contains, "Thoughts on Prime fund closures and a possible reform," and tells us, "2016 MMF reform seems to have failed COVID-19 stress test. Prime funds, in essence, are serving as foreign banks' bank for USDs. Foreign banks typically lack stable funding source vs domestics, which are funded with more stable FDIC-insured retail deposits, FHLB advances (backed by stable government MMFs) and closer access to the Fed. Foreign banks rely on less diversified sources including prime funds, which in turn are backed by less sticky cash investors. Prime funds have been prone to runs in times of stress and foreign bank's USD funding prices (USD L/OIS and FX basis) has been pro-cyclical as a result." Kang explains, "Since 2008 financial crisis, as with banks, MMFs have been a target of regulatory reforms to make it less susceptible to runs, with 2016 MMF reform being the most notable effort, where institutional prime funds were mandated to offer VNAV instead of CNAV and both retail and institutional prime funds were mandated to impose gates/fees in times of stress. The liquidity crisis brought by COVID-19 was the first real stress test to see how resilient MMFs have become after the reform. Sadly, the pace of Prime outflow, frozen CD/CP market in March and another intervention directed at MMFs imply that fundamental issue of prime fund runs were not adequately addressed. Moreover, arguably, complex and unclear mandate on gates/fees made the pro-cyclicality worse, as it created first-mover advantage incentive to cash-out prior to others to avoid a possible lockdown of cash -- which initiated a feedback loop of a cheaper paper and lower VNAV, which further reinforced the first-mover incentive to cash out at a higher pricing. We also saw preference of MMFs to use a sponsor support rather than gates/fees to avoid reputational risk. Hence, regulatory mandate on gates/fees were rendered as an inadequate tool at the best and a counter-productive tool at the worst." He adds, "Runnable Prime institutional cash is problematic not only to regulators but also to the fund sponsors via increased sponsor support and a potential for yet another regulation. The industry is already facing challenging prospects as ZLB forced funds to waive management fees to pass along positive yields to clients -- making funds without scale especially unattractive. Two weeks ago, Fidelity Investments, the largest manager of money market funds, decided to liquidate their two institutional prime funds they offered to investors on Aug 12, 2020, citing investor behavior. At first blush, this can seem idiosyncratic, as the two closing funds amount to only $14bn in total, less than 2% of their MMF assets." Finally, the Citi article says, "The larger impact may come on changes in regulation. Very simplistically, the composition of the government is likely to determine the direction of this, a divided government is likely to keep the status quo, whereas a democratic sweep may tilt towards more regulation for this space. As for the latter scenario, we may see re-consideration of proposals that were more fundamental in nature, than what was delivered for the 2016 reform. The previous administration's options included (1) privately-backed emergency lending facilities for MMFs (2) government-backed insurance for MMFs similar to Treasury's Temporary Guarantee program for Money Market Funds (3) regulating CNAVs as special purpose banks.... The fundamental approach seems to be falling into two buckets, with the first kind being a bail-in provisions via private backstops (sponsor or privately-backed lending facilities) and the second kind treating funds like a public utility (such as banks) hence granting an access to a public backstop at a cost with a heavier regulatory burden. It is also possible for regulators to find a solution for foreign banks rather than on prime funds to address the problem of pro-cyclicality.... With the LIBOR reform well-underway for end-2021 target, we think it is unlikely for the regulators to consider implementing anything sweeping before that date. If the reform for Prime funds comes after the LIBOR reform, we expect FX basis to capture the change and move wider instead."

Fitch Ratings published, "Local Government Investment Pools: 1Q20" earlier this week. They explain, "Fitch Ratings expects the economic impact of the downturn for local governments to be largely felt in the second half of this year and in 2021, driven by reduced tax revenues, higher unemployment and inevitable budget cuts. In anticipation of this, local government investment pools (LGIPs) continue to build their near-term liquidity profiles to position themselves defensively for the expectation of increased investor redemptions, less cash inflows and the potential for more market volatility in the months ahead. In 1Q20, liquidity LGIPs reduced allocations to repos, CDs and CP while increasing allocations to deposits, MMFs and asset-backed securities (ABS)." The update continues, "Fitch-rated LGIPs were able to successfully manage through heightened market volatility caused by the coronavirus pandemic by maintaining adequate liquidity to meet redemptions while remaining defensively positioned in higher-quality, shorter-dated securities. LGIPs experienced flows cyclicality consistent with the time period relative to the wave of outflows experienced in the prime money market fund (MMF) sector during the peak of the market sell-off. Cumulative assets for the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index increased to a new high of $320 billion during 1Q20, an increase of $10 billion qoq and $40 billion yoy. Asset flows for both indices in 1Q20 (+6% qoq for the Fitch Liquidity LGIP Index and –3% qoq for the Fitch Short-Term LGIP Index) were on par with observed historical cyclical patterns, highlighting the limited effect on these pools during the recent market dislocation." Lastly, Fitch adds, "Not surprisingly, net yields dropped off significantly during the period as the Fed quickly lowered the Fed funds target rate to a range of 0–25 basis points (a cumulative reduction of 150 basis points [bps]) in March. The Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index ended the quarter with average net yields of 1.03% (a drop of roughly 70 bps from YE19) and 1.69% (down 25 bps from YE19), respectively. As LGIPs' longer dated securities mature within the next few months and proceeds are reinvested at lower rates, Fitch expects LGIP yields to continue declining."

Website RIABiz and Bloomberg covered the news that Fidelity is exiting the Prime Inst MMFs space. (See our June 22 News, "Fidelity to Liquidate Prime Instit Money Funds; Cites Investor Behavior.") Bloomberg's article, "Fidelity to Drop Prime Institutional Money Funds in August," tells us, "Fidelity Investments plans to liquidate its two prime money market funds that cater to institutional investors in August, a decision taken after a market panic in March saw significant withdrawals amid wider distress in short- term credit markets. The funds -- the Fidelity Prime Money Market Portfolio and Fidelity Prime Reserves Portfolio -- hold about $13.9 billion, according to Bloomberg data." The piece continues, "Money funds that cater to retail investors, and those that hold only U.S.-government backed securities, remained largely stable through the panic. [Nancy] Prior said Friday that Fidelity believes its institutional clients' liquidity needs are better addressed by government-only funds. Boston Fed President Eric Rosengren, whose bank oversaw the emergency facility for money funds and who has long called attention to concerns about the money fund industry, welcomed the announcement. 'We should not have to keep creating facilities because of unsound money market fund structures,' he said in an interview. 'So, I'm very pleased from a financial stability standpoint that they're deciding not to have this type of money fund.' Rosengren said he hoped other prime institutional money fund providers would follow Fidelity's lead. Peter Crane, president of Crane Data, said he doubted the rest of the industry would take the same step, but said it 'certainly could cause others to inch away from the segment. It's not good news for the prime space.'" Finally, Bloomberg writes, "Fidelity's Prior said it was too early to say the March panic showed prime institutional funds should have had even tougher rules applied. 'It's too early to draw any conclusions,' she said 'We should do some more analysis around specific funds and how specific funds performed.'" In other news, the Financial Times writes, "Bullish investors pull $105bn from US money market funds in four weeks," and, finally, see also CNBC's "There's nearly $5 trillion parked in money markets as many investors are still afraid of stocks". The latter says, "The stock market's rapid rally from its March lows has brought the Nasdaq Composite back to record highs and the S&P 500 nearly positive for year, but trillions in cash remain parked on the sidelines. The coronavirus sell-off sent investors fleeing into money market funds, which ballooned well above $4 trillion, surpassing the peak of the financial crisis, according to research by LPL Financial."

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 June 19) includes Holdings information from 96 money funds (up 17 from a week ago), which represent $2.932 trillion (down from $2.571 trillion) of the $5.122 trillion (57.2%) 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 June 10 News, "June Portfolio Holdings: Treasuries Skyrocket; Repo, Agencies Plunge.") Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.577 trillion (up from $1.416 trillion a week ago), or 53.8%, Repurchase Agreements (Repo) totaling $598.8 billion (up from $540.2 billion a week ago), or 20.4% and Government Agency securities totaling $470.4 billion (up from $407.4 billion), or 16.0%. Commercial Paper (CP) totaled $95.6 billion (up from $64.0 billion), or 3.3% and Certificates of Deposit (CDs) totaled $93.0 billion (up from $74.2 billion), or 3.2%. The Other category accounted for $50.7 billion or 1.7%, while VRDNs accounted for $46.0 billion, or 1.6%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.577 trillion (53.8% of total holdings), Federal Home Loan Bank with $282.2B (9.6%), Fixed Income Clearing Co with $77.4B (2.6%), Federal Farm Credit Bank with $75.2B (2.6%), BNP Paribas with $71.8B (2.4%), Federal National Mortgage Association with $61.6B (2.1%), Federal Home Loan Mortgage Corp with $48.9B (1.7%), RBC with $46.0B (1.6%), JP Morgan with $45.0B (1.5%) and Citi with $34.2B (1.2%). The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($246.9B), JP Morgan US Govt MMkt ($196.4B), Fidelity Inv MM: Govt Port ($178.3B), BlackRock Lq FedFund ($162.9B), Federated Govt Oblg ($141.5B), Wells Fargo Govt MM ($135.7B), JP Morgan 100% US Treas MMkt ($123.8B), Goldman Sachs FS Treas Instruments ($105.6B), Morgan Stanley Inst Liq Govt ($102.2B), State Street Inst US Govt ($92.8B) and Dreyfus Govt Cash Mgmt ($87.4B). (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.) As a reminder, we will be hosting our second online event, "Crane's Money Fund Webinar: Portfolio Holdings Update," this Thursday, June 25 at 2:00pm (Eastern). The webinar will feature Crane Data's Peter Crane and J.P. Morgan Securities' Teresa Ho, who will give a 45 minute update on the latest trends in the money fund space with a focus on the latest Money Fund Portfolio Holdings data. (To register, click here.)

Last week, The Wall Street Journal published, "Investors Pull Cash From China's Money-Market Behemoth as Yields Tumble," which tells us, "China's biggest money-market fund is experiencing a pickup in withdrawals following a slide in yields, as people take out more cash to spend and invest in other products with higher returns. Ant Financial Services Group's flagship money-market fund, which has drawn investments from more than a third of China's population, has seen a significant increase in redemptions over the past month.... One of the world's largest mutual funds, the seven-year-old Tianhong Yu'e Bao fund had 1.26 trillion yuan ($178 billion) in assets under management at the end of March." The piece explains, "In early June, the fund's seven-day annualized yield fell below China's official one-year bank-deposit rate for the first time since June 2013, according to Wind, a data provider. Tianhong Yu'e Bao's yield was recently 1.4%, versus the 1.5% benchmark deposit rate. The fund's annualized returns used to be a few percentage points above deposit rates, and its yield once topped 6%. Its assets under management previously peaked at 1.69 trillion yuan in 2018, and Chinese regulators pressured it to cut its holdings of illiquid assets. As its yields fell, many investors shifted money to other funds. The further contraction could be a relief for Chinese officials who previously worried about the giant fund's risk to the financial system. Ant, a financial-technology company controlled by billionaire Jack Ma, owns Alipay, one of China's largest mobile-payments networks with more than 900 million active users. Besides Ant's flagship fund, 28 other money-market funds from other asset managers are sold on an investment platform similarly called Yu'e Bao.... Yields on those other money-market funds have similarly fallen in recent months as China has eased monetary policy to combat a severe economic downturn caused by the coronavirus pandemic." The Journal adds, "The central bank has pumped billions into the domestic financial system and slashed the rate it charges on seven-day repurchase agreements with banks, among other measures to boost liquidity and lower the cost of borrowing for businesses and households. As a result, short-term rates including the Shanghai interbank offered rate fell, affecting the returns of money-market funds that primarily invest in low-risk, short-term assets and securities that are easy to sell. The pandemic has also led fund managers to hold more cash to meet redemptions from people who lost their jobs or received smaller paychecks during business closures or revenue declines caused by the pandemic. Wang Jun, general manager of Ant's wealth-management unit, said some people switched from money-market funds into other wealth-management products offered on its Alipay mobile app."

Late last week, Bloomberg wrote, "A $1 Trillion Cash Pile Holds Key to Fate of Risk Assets." They explain, "The $1 trillion pile of cash that investors amassed amid the pandemic-fueled market turmoil may determine the length of the risk rally. U.S. money-fund assets have started to shrink from a record high. Roughly $105 billion has exited after four weeks of outflows, the longest such streak in more than three years, Investment Company Institute data show. The shift coincided with emerging signs of an economic recovery that drove the S&P 500 Index to the highest since February, and a historic rush into fixed-income exchange-traded funds as the Federal Reserve supported that market." Bloomberg's piece continues, "A lot is riding on whether the move out of cash, where it's earning virtually nothing, continues. On the one hand, it's an obvious potential source of additional fuel for the already-booming rebound in risk assets. But with virus worries mounting yet again, it may be premature to expect a major exodus anytime soon. A Deutsche Bank AG analysis shows that investors on edge over the pandemic have been sticking much more stubbornly to their cash holdings relative to past market crises." They add, "Assets in money-market mutual funds are still at a near-record $4.68 trillion, after soaring from $3.7 trillion in early March as the spreading virus battered stocks. At its peak, more than three-quarters of that was parked in Treasury-only and other government funds.... Even within money funds, there are signs that investors are willing to slowly take on more risk. Assets in prime funds -- which offer slightly more yield because they can also hold corporate obligations -- have risen the past 11 weeks, according to ICI data. Prime funds have added more than $100 billion from a near one-year low in early April, rising to $765 billion. Government funds have declined to about $3.79 trillion, from a record $3.92 trillion in early May." Finally, Bloomberg writes, "The trajectory of the cash stockpile relies on more than just investor confidence, according to JPMorgan Chase & Co. It may also decline in coming weeks because corporate and individual tax payments, delayed until July as part of government support measures, could trigger outflows, and as companies tap the cash to pay down credit lines, say strategists including Alex Roever."

Money market fund assets fell for the fourth week in a row, their first string of declines (totaling $104.7 billion) following 15 straight weeks of inflows (during which time assets increased by $1.175 trillion). (June 15 was a quarterly corporate tax date.) ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $33.18 billion to $4.68 trillion for the week ended Wednesday, June 17, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $35.43 billion and prime funds increased by $3.36 billion. Tax-exempt money market funds decreased by $1.12 billion." ICI's stats show Institutional MMFs falling $35.1 billion and Retail MMFs increasing $2.0 billion. Total Government MMF assets, including Treasury funds, were $3.787 trillion (80.8% of all money funds), while Total Prime MMFs were $764.7 billion (16.3%). Tax Exempt MMFs totaled $132.7 billion, 2.8%. Money fund assets are up an eye-popping $1.053 trillion, or 29.0%, year-to-date in 2020, with Inst MMFs up $1.159 trillion (59.1%) and Retail MMFs up $193 billion (14.1%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.500 trillion, or 47.1%, with Retail MMFs rising by $341 billion (27.9%) and Inst MMFs rising by $1.159 trillion (59.1%). They explain, "Assets of retail money market funds increased by $1.96 billion to $1.56 trillion. Among retail funds, government money market fund assets increased by $2.89 billion to $984.25 billion, prime money market fund assets decreased by $87 million to $460.70 billion, and tax-exempt fund assets decreased by $843 million to $118.12 billion." Retail assets account for just over a third of total assets, or 33.4%, and Government Retail assets make up 63.0% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $35.14 billion to $3.12 trillion. Among institutional funds, government money market fund assets decreased by $38.31 million to $2.80 trillion, prime money market fund assets increased by $3.45 billion to $304.03 billion, and tax-exempt fund assets decreased by $274 million to $14.54 billion." Institutional assets accounted for 66.6% of all MMF assets, with Government Institutional assets making up 89.8% of all Institutional MMF totals. (Note: Crane Data has its own separate daily and monthly asset series.)

The Federal Deposit Insurance Corporation published its latest "Quarterly Banking Profile," which reviews the first quarter of 2020 in the banking industry in the U.S. It states, "On an annual basis, net interest income declined for the second consecutive quarter, falling by $2 billion (1.4 percent) from a year ago. Less than half (44.6 percent) of all banks reported annual declines in net interest income. The average net interest margin (NIM) for the banking industry was down 29 basis points from a year ago to 3.13 percent, as the decline in average earning asset yields outpaced the decline in average funding costs. The year-over-year compression of the NIM was broad-based, as it declined for all five asset size groups featured in the Quarterly Banking Profile." The FDIC continues, "Total deposit balances grew by $1.2 trillion (8.5 percent) from fourth quarter 2019. Interest-bearing accounts increased by $639.6 billion (6.4 percent) and noninterest-bearing accounts expanded by $446.3 billion (14.1 percent). Domestic deposits in accounts larger than $250,000 increased by $761.4 billion (10.8 percent) from fourth quarter 2019. Deposits held in foreign offices rose by $155.9 billion (11.8 percent). Nondeposit liabilities, which includes fed funds purchased, repurchase agreements, Federal Home Loan Bank (FHLB) advances, and secured and unsecured borrowings, increased by $147.1 billion (11.3 percent) from the previous quarter. The rise in nondeposit liabilities was primarily attributable to FHLB advances, which increased by $130.2 billion (27 percent). On an annual basis, total deposits increased by $1.9 trillion (13.3 percent), the largest year-over-year growth rate ever reported by the Quarterly Banking Profile." Finally, the profile says, "The number of FDIC-insured commercial banks and savings institutions declined from 5,177 to 5,116 during first quarter 2020. Two new banks were added, 57 institutions were absorbed by mergers, and one bank failed. The number of institutions on the FDIC's 'Problem Bank List' increased from 51 in fourth quarter 2019 to 54. Total assets of problem banks declined from $46.2 billion to $44.5 billion."

The Wall Street Journal writes that, "Investors Are Sitting on the Biggest Pile of Cash Ever." They tell us, "Investors have rarely been this flush with cash. Grappling with the most economic uncertainty in decades and a head-spinning stretch of volatility in the U.S. stock market, many investors have rushed into money-market funds. Assets in the funds recently swelled to about $4.6 trillion, the highest level on record, according to data from Refinitiv Lipper going back to 1992." The article quotes, "It is a 'pantry-loading and survival' mentality, said Peter Crane, founder of Crane Data, which tracks the industry. 'It's blown the lid off the previous record high.' Assets in money-market funds are one, but not the only, measure of cash holdings, and investors have socked away cash in other places, too. Other measures, like bank deposits, are also at a high." The piece adds, "Analysts attribute the flight to cash to the coronavirus pandemic, which spurred a rush out of stocks, bonds and commodities. Meanwhile, stimulus checks sent to millions of Americans as part of the economic rescue package helped add to the heap.... Few can agree on what the giant pile of cash means for markets. Many investors, nervous about the economic downturn, are questioning if stocks have soared too far, too fast, and have chosen the safety of cash over investing in the market. Others are keeping cash on the sidelines, ready to deploy when they spot an attractive buying opportunity."

ICI released its latest monthly "Money Market Fund Holdings" summary yesterday, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (For more, see our June 10 News, "June Portfolio Holdings: Treasuries Skyrocket; Repo, Agencies Plunge," and register for the upcoming "Crane's Money Fund Webinar: Portfolio Holdings Update," which features our Peter Crane with JPMorgan's Teresa Ho on June 25 at 2pm.) The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in May, prime money market funds held 41.3 percent of their portfolios in daily liquid assets and 50.0 percent in weekly liquid assets, while government money market funds held 72.9 percent of their portfolios in daily liquid assets and 83.3 percent in weekly liquid assets." Prime DLA increased from 36.2% in April, and Prime WLA increased from 47.0%. Govt MMFs' DLA increased from 67.8% in April and Govt WLA increased from 79.6% from the previous month. ICI explains, "At the end of May, prime funds had a weighted average maturity (WAM) of 48 days and a weighted average life (WAL) of 64 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 43 days and a WAL of 101 days." Prime WAMs were up four days from the previous month and WALs decreased by one day from the previous month. Govt WAMs increased by four days, WALs were up two days from the previous month. Regarding Holdings By Region of Issuer, the release tells us, "Prime money market funds' holdings attributable to the Americas rose from $345.05 billion in April to $402.00 billion in May. Government money market funds' holdings attributable to the Americas rose from $3,426.24 billion in April to $3,487.55 billion in May." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $402.0 billion, or 52.9%; Asia and Pacific at $112.5 billion, or 14.8%; Europe at $235.6 billion, or 31.0%; and, Other (including Supranational) at $9.4 billion, or 1.2%. The Government Money Market Funds by Region of Issuer table shows Americas at $3.488 trillion, or 88.2%; Asia and Pacific at $132.2 billion, or 3.3%; Europe at $315.1 billion, 8.0%, and Other (Including Supranational) at $18.0 billion, or 0.5%."

The New York Times published the piece, "You Now Get Almost Nothing for Your Money, but It Could Be Worse," which tells us, "In this crisis, money is priceless, yet banks and money market funds will pay you close to zero in interest for years. That's if everything turns out well." Columnist Jeff Sommer writes, "Having enough cash on hand to pay the bills is always a good idea. But in an economic crisis like this one, with millions unemployed and thousands of businesses in trouble, it's more desirable than ever. Plenty of people don't have a stash of cash. But for those fortunate enough to have salted away some extra money, a pressing question is: Where should you keep it? The standard answer is somewhere safe, like a bank or a money market fund. But don't expect much in return." The article quotes our Peter Crane, "Investors like to say 'cash is king,' ... In the coronavirus crisis, I'd say, cash is bigger than that; it's the emperor of all things. If you ever doubted whether you needed some emergency savings, you probably believe it now." Sommer comments, "I spoke with Mr. Crane a decade ago, in the aftermath of the great financial crisis of 2007 to 2009, about the extraordinarily low yields on money market funds. Those rock-bottom, near-zero rates were expected to be temporary but they lasted for years. Now, he said: 'We're right back where we were then. The economy is in trouble, the Fed has responded and money market funds are paying almost nothing.'" The piece adds, "What's more, many fund companies are already waiving fees. If they didn't, money market yields would be plunging below zero -- in effect, into negative territory. In that event, investors would be paying fund companies for the privilege of holding their money, an absurdity that major mutual funds generally want to avoid." They quote T. Rowe Price's Joseph Lynagh, "That wouldn’t be attractive to investors, to say the least." Finally, the Times tells us, "But he [Lynagh] expects that the company will swallow those deficits and won't let its money market yields fall below zero, just as it didn't during the long period of near-zero short-term rates from 2008 to 2015. The Fed says it intends to avoid negative rates if it can, and so will the money market funds. After all, money market funds are a competitive $5.2 trillion business, Mr. Crane said. Deep-pocketed companies like T. Rowe Price, Vanguard, Fidelity, BlackRock and others are playing a long game. 'Even if they are technically entitled to charge investors -- or recoup waived fees later -- they generally don't want to do it,' he said. 'It would hurt their reputation too much.'"

Money market fund assets fell for the third week in a row, their first declines after 15 straight weeks of inflows (during which time assets increased by $1.175 trillion). ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $34.05 billion to $4.72 trillion for the week ended Wednesday, June 10, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $37.32 billion and prime funds increased by $3.85 billion. Tax-exempt money market funds decreased by $580 million." ICI's stats show Institutional MMFs falling $27.5 billion and Retail MMFs decreasing $6.5 billion. Total Government MMF assets, including Treasury funds, were $3.823 trillion (81.0% of all money funds), while Total Prime MMFs were $761.4 billion (16.1%). Tax Exempt MMFs totaled $133.8 billion, 2.8%. Money fund assets are up an eye-popping $1.086 trillion, or 29.9%, year-to-date in 2020, with Inst MMFs up $895 billion (39.6%) and Retail MMFs up $191 billion (13.9%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.546 trillion, or 48.8%, with Retail MMFs rising by $339 billion (27.7%) and Inst MMFs rising by $1.207 trillion (61.9%). They explain, "Assets of retail money market funds decreased by $6.54 billion to $1.56 trillion. Among retail funds, government money market fund assets decreased by $6.37 billion to $981.36 billion, prime money market fund assets increased by $104 million to $460.78 billion, and tax-exempt fund assets decreased by $282 million to $118.96 billion." Retail assets account for just under a third of total assets, or 33.1%, and Government Retail assets make up 62.9% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $27.50 billion to $3.16 trillion. Among institutional funds, government money market fund assets decreased by $30.96 million to $2.84 trillion, prime money market fund assets increased by $3.75 billion to $300.58 billion, and tax-exempt fund assets decreased by $298 million to $14.82 billion." Institutional assets accounted for 66.9% of all MMF assets, with Government Institutional assets making up 90.0% of all Institutional MMF totals. (Note: Crane Data has its own separate daily and monthly asset series.)

Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary" explains, "Industry flows in May slowed markedly from the previous two months, though funds still continue to draw assets. The industry attracted a meager $81 billion in new assets during this month, compared with $451 billion in April and $625 billion in March. Inflows in the prime money market funds of more than $87 billion far outpaced those into government and Treasury money market funds, which, in a reversal from March and April, saw balances shrink by $5.5 billion. Since March 1, $1.2 trillion has flowed into money market funds, bringing industry assets to a record $5.12 trillion, after crossing the $5 trillion threshold last month. Even after the relatively small (in comparison to total asset class balances) outflows, balances in government and Treasury money market funds remained relatively flat at $3.9 trillion. Prime fund assets, however, set a new post-reform record at $1.1 trillion after experiencing inflows in all but two trading days during the month. And finally, municipal money market funds ended the month essentially flat at $139 billion after experiencing withdrawals of $360 million." Wells adds, "The big question on the minds of many money market professionals is, 'What happens now?' Do assets continue to flow into the funds? Or will we see assets flow out? In the very short term, two tax payment dates will be coming up -- the regular June 15 corporate tax payment due date and the July 15 pandemic-extended 2019 tax payment deadline -- both of which seem to indicate that we will see some outflows from funds over the next two months. However, those flows are not likely to rise to the same level that we saw with inflows. Inflows over the past few months have come from a variety of sources: capital markets proceeds, liquidations of risk assets, liquidity raises for general corporate purposes, and proceeds from recent fiscal stimulus and safety net programs, to name a few. It seems reasonable to expect then that outflows from funds will occur gradually as we recover from recent dislocations and proceeds are deployed for general and specific economic purposes. Until we, as an industry, begin to see more clarity on the longevity of recent cash flows, we may continue to see funds carry elevated levels of liquidity to ensure cash is there to meet investor needs."

Bloomberg Law published the oddly-titled, "Dearth of Dollars Exposes Flaws in Rebooted Money-Fund Rules." It tells us, "Groundbreaking reforms to safeguard a major source of short-term borrowing are again under scrutiny after the pandemic-related dollar liquidity crunch that prompted Federal Reserve intervention. U.S. money-market funds -- which provide a lot of the cash that companies and governments borrow on a short-term basis -- underwent a major regulatory overhaul in 2016 to prevent a repeat of a damaging run on these funds that took place during the 2008 meltdown. But a coronavirus-related exodus of cash earlier this year from so-called prime funds -- those that are able to buy short-term company paper -- showed that this risk remains. And that has some suggesting that further tweaks may be warranted to shore up dollar funding markets." They quote Barclays' Joseph Abate, "People saw that the liquidity levels in these funds were declining.... They didn't know what the outcome would be if the funds' seven-day liquidity buffer breached 30%.... Rather than take the chance that funds might impose additional fees or suspend withdrawals, there was a 'preemptive run' from investors." Bloomberg writes, "The prospect of a regulatory reassessment isn't confined to the sphere of money-market funds. The upheaval which convulsed markets earlier this year has prompted many to question whether changes made to rules for banks and other markets in the wake of the 2008 crisis might require further tinkering.... In U.S. funding markets, conditions have eased since the crisis reached its apex several months ago, but questions remain about whether regulators ought to alter money-fund rules -- for example by increasing the amount of extra cash they are required to keep on hand for redemptions before they need to sell assets. Other possible changes that might be considered, according to Barclays' Abate, include putting limits on what proportion of prime fund cash is parked in commercial paper, or eliminating the so-called liquidity fees and gates that were introduced in the 2016 reforms.... Abate believes the Securities and Exchange Commission could revisit money-market reforms once the pandemic has calmed, but some fund managers are skeptical that changes will be made. Mandating a cap on how much funds allocate to commercial paper, for example, would be a hindrance to corporate borrowers, as these types of funds account for up to a quarter of their investor base, according Deborah Cunningham, chief investment officer for global money markets at Federated Hermes Inc. in Pittsburgh. Although there's always the ability to make minor adjustments, she doesn't see recent events as drastic enough to prompt major changes." The article adds, "An SEC spokesperson declined to comment, but Dalia Blass, a director in the SEC's Division of Investment Management, said at a meeting last month that she would hesitate to make recommendations for regulatory changes to address potential impacts discerned so far. 'Doing so risks being premature as we are still in the middle of the pandemic and its evolving impact on the U.S. and global markets,' she said." Finally, the piece says, "While the Fed's swift implementation of new facilities helped unfreeze the short-term credit markets, 'policy wonks' will still be on the lookout for regulatory changes, according to Abate. 'Fund managers handled the redemptions and handled their liquidity,' said Fitch's [Greg] Fayvilevich. '`But the fact is that the Fed needed to intervene in the market and specifically set up the facility to provide money funds with liquidity, clearly something needs to be addressed there.'"

Money market fund yields continue to bottom out in the latest week, with our Crane 100 Money Fund Index inching down a basis point to 0.13%. The Crane 100 fell below the 1.0% level in mid-March and below the 0.5% level in late March, and is down from 1.46% at the start of the year and down from 2.23% at the beginning of 2019. Almost half of all money funds and over one quarter of MMF assets have already hit the zero floor, though many continue to show some yield. According to our Money Fund Intelligence Daily, as of Friday, 6/5, 432 funds (out of 852 total) yield 0.00% or 0.01% with assets of $1.393 trillion, or 27.4% of the total. There are 181 funds yielding between 0.02% and 0.10%, totaling $1.432 trillion, or 28.1% of assets; 132 funds yielded between 0.11% and 0.25% with $1.372 trillion, or 26.9% of assets; 92 funds yielded between 0.26% and 0.50% with $658.3 billion in assets, or 12.9%; and just 10 funds yield between 0.51% and 0.99% with $236.6 billion in assets or 4.6% (no funds yield 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 0.10%, down a basis point in the week through Friday, 6/5. The Crane Money Fund Average is down 37 bps from 0.47% at the beginning of April. Prime Inst MFs were down 3 bps to 0.25% in the latest week and Government Inst MFs were flat at 0.08%. Treasury Inst MFs dropped by 1 basis point to 0.06%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.03% (flat in the last week), and Prime Retail MFs yield 0.16% (down 2 bps for the week), Tax-exempt MF 7-day yields dropped by 1 basis point to 0.04%. (Let us know if you'd like to see our latest MFI Daily.) Our Crane Brokerage Sweep Index, which hit the zero floor two months ago, remains at 0.01%. The latest Brokerage Sweep Intelligence, with data as of June 5, shows no changes in the last week. All of the major brokerages now offer rates of 0.01% for balances of $100K. No brokerage sweep rates or money fund yields have 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 eight 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). Monday's MFI Daily, with data as of June 5, shows Prime assets continuing their rebound with $13.6 billion of inflows, increasing their asset total to $1.119 trillion in the latest week. Government assets again experienced outflows decreasing by $45.1B to $3.834 trillion. Tax-Exempt MMFs increased $391 million. Month-to-date money fund assets have fallen $31.1 billion. Prime assets are up $13.6 billion MTD, while Government assets are down by $45.1 billion. Tax-Exempt MMFs increased by $391 million.

On Friday, an ignites article entitled, "Down to Zero: 48% of Money Funds Likely Waiving Fees" tells us, "As money market funds digest the Federal Reserve's two March interest rate cuts, their yields are steadily dropping, data shows. Nearly half of U.S. money funds had zero- or 1-basis-point yields as of May 29, representing 26% of assets in the products, according to Crane Data. Meanwhile, the yields on another 20% of money fund assets were between 2 and 10 bps. A big swath of assets -- 35% -- were yielding between 11 bps and 25 bps. The remainder notched yields between 26 and 100 bps." The piece continues, "Funds with zero- or 1-bp yields are likely to be waiving a portion of their fees to maintain zero or positive yields for investors, says Peter Crane, CEO of Crane Data. 'The important question is how much you're waiving,' Crane says. 'And that we don't know.... It's likely the fee waivers aren't really biting [profits] just yet'.... During the prolonged period of near-zero interest rates from 2008 to 2015, waivers resulted in fees being essentially cut in half from 0.30% to 0.15%, and funds will likely see a similar impact during the current low-rate environment, Crane says. But if rates remain where they are for long, some firms may take other steps. 'Certain types of funds may not want to stay in business at those levels,' he says." The article adds, "The markets have calmed since the tumult of March, when the government intervened to restore liquidity. But some now fear that money fund yields could dip below zero. This scenario is most likely for Treasury and government money funds because they hold large amounts of low-yielding securities. Negative yields are unlikely to be the result of monetary policy, several investment commentaries say. Although President Donald Trump has voiced support for negative interest rates, Federal Reserve chair Jerome Powell has said that the central bank is not considering taking rates below zero.... Market dynamics would be more likely than Fed policy to push money fund yields into negative territory, money fund executives say.... Some Treasury funds have taken measures to avoid buying negative-yielding debt. Fidelity, American Beacon and Gabelli, for example, have each since March closed Treasury funds to new investors. Negative money fund yields seem less likely to become a reality right now because of Treasury's huge issuance of bonds, which has driven down prices and pushed yields up. However, the market mayhem in March and general uncertainty about how the pandemic will play out have pushed shops to prepare for negative rates." (See also our Crane Data News from Friday, "June MFI: MMF Fee Waivers; Invesco's Laurie Brignac; NY Fed Blogs" and our June MFI issue.)

Money market fund assets fell for the second week in a row, their first declines after 15 straight weeks of inflows (during which time assets increased by $1.175 trillion). ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $36.30 billion to $4.75 trillion for the week ended Wednesday, June 3, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $43.16 billion and prime funds increased by $6.99 billion. Tax-exempt money market funds decreased by $126 million." ICI's stats show Institutional MMFs falling $33.9 billion and Retail MMFs decreasing $2.4 billion. Total Government MMF assets, including Treasury funds, were $3.860 trillion (81.2% of all money funds), while Total Prime MMFs were $757.7 billion (15.9%). Tax Exempt MMFs totaled $134.4 billion, 2.8%. Money fund assets are up an eye-popping $1.120 trillion, or 30.8%, year-to-date in 2020, with Inst MMFs up $922 billion (40.8%) and Retail MMFs up $198 billion (14.4%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.589 trillion, or 50.2%, with Retail MMFs rising by $346 billion (28.3%) and Inst MMFs rising by $1.243 trillion (64.1%). They explain, "Assets of retail money market funds decreased by $2.38 billion to $1.57 trillion. Among retail funds, government money market fund assets decreased by $3.79 billion to $987.73 billion, prime money market fund assets increased by $1.98 billion to $460.68 billion, and tax-exempt fund assets decreased by $562 million to $119.25 billion." Retail assets account for just under a third of total assets, or 33.0%, and Government Retail assets make up 63.0% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $33.93 billion to $3.18 trillion. Among institutional funds, government money market fund assets decreased by $39.37 million to $2.87 trillion, prime money market fund assets increased by $5.01 billion to $296.83 billion, and tax-exempt fund assets increased by $436 million to $15.11 billion." Institutional assets accounted for 67.0% of all MMF assets, with Government Institutional assets making up 90.2% of all Institutional MMF totals. (Note: Crane Data has its own separate daily and monthly asset series.)

Despite decreases in Government and Tax Exempt funds, total money market fund assets continued to rise through the end of May; they were up $81.5 billion through May 29 to $5.123 trillion. Government funds fell $5.5 billion in May to $3.879 trillion (assets jumped $363.0 billion in April and skyrocketed $790.4 billion in March). Prime fund assets increased $87.3 billion to $1.105 trillion in May. Tax-Exempt assets decreased $364 million to finish May at $139.3 billion. Yesterday's MFI Daily, with data as of June 2, shows money fund assets seeing some outflows in the latest week. Prime assets continued their rebound with $4.9 billion of inflows increasing their asset total to $1.109 trillion in the latest week, while Government assets dropped $32.4B to $3.865 trillion. Tax-Exempt MMFs decreased $265 million. Month-to-date, money fund assets have fallen $9.5 billion. Prime assets are up $3.7 billion MTD, while Government assets are down by $14.1 billion. Tax-Exempt MMFs increased by $877 million.

American Banker writes "Banks have a mountain of deposits, so they don't need PPP funding," explaining that, "A record surge in bank deposits has given U.S. lenders more cash than they know what to do with. One thing they don't need: help from the Federal Reserve to fund the government-backed loans they made to small businesses.... That's largely because lenders are sitting on $1.8 trillion of new deposits that have flooded in since March 11 -- a 13% increase, and the biggest two-month jump since at least 1973, when comparable data is available." They quote Keefe, Bruyette & Woods' Brian Klock, "It looks like this excess liquidity in the banking system is going to stick around much longer. So if you don't really need it, why get the Fed loan?" The article explains, "Deposits have surged as drops in securities markets and interest rates for bonds and money market funds pushed savers and investors to banks. Also, a jump in corporate borrowing amid the pandemic has ended up as deposits back at the banks. The Fed loans are pretty cheap at 0.35%, but then deposit costs have gone down considerably as well. Interest-bearing deposits cost JPMorgan Chase 0.52% in the first quarter, and Bank of America paid 0.47% while the average was around 1% for smaller lenders. Meanwhile, non-interest-bearing accounts made up about 30% of all deposits at the four biggest banks, giving them cheaper funding than the Fed's rate. Among the top U.S. firms, only Citigroup's name showed up on the list of 574 banks that used the Fed's lending facility as of May 6.... It had the highest deposit cost among the four biggest banks in the first quarter at 1.1%, and the smallest deposit base."

Federated Hermes' Debbie Cunningham writes in her latest commentary about "Less of zero." She tells us, "Investors have been given plenty of alphabet soup since the onset of the coronavirus. Among the first servings were special purpose vehicles such as the Money Market Mutual Fund Liquidity Facility (MMLF), Commercial Paper Funding Facility (CPFF) and Primary Dealer Credit Facility (PDCF). Then came Congress' CARES Act and a slew of others." Cunningham explains, "More recently, new letters have turned up to forecast the shape of the GDP curve as the U.S. economy recovers from recession. They range from an optimistic prediction of a V-shaped curve to the pessimistic L-shaped one. Our base case is for a U. As communities continue to lower restrictions, we think the economy can recover sooner than many expect. If there are too many hiccups or false starts -- or if we see a resurgence of Covid-19 infections -- the bottom of the U will be longer. But what we have seen in the last month as the U.S. and other countries begin to open up is encouraging." She continues, "No matter the shape of the curve, we aren't expecting a return to the extended zero-rate time frame of 2008 to 2016, but one best measured in quarters, adding up to a couple of years at most. The minutes of the April Federal Open Market Committee revealed this was the Fed's consensus. If anything, the Fed seems to be quietly formulating a withdrawal strategy." Cunningham also writes, "The Fed has been anything but quiet in its pushback on negative rates. In May, policymakers repeated many times they are satisfied that their present tools, such as forward guidance, quantitative easing and lending programs, are effective and that pushing rates below zero is not on the table. Unlike the novel nature of many of its new facilities, there is plenty of evidence of the ineffectiveness of negative rates from the European Central Bank and the Bank of Japan. Fed officials know the score. But many in the marketplace simply aren't listening (don't fight the Fed!) as seen in the recent trading of the fed funds futures contracts in negative territory for early 2021. If you know anything about cash managers, you know we are a conservative bunch, so it should come as no surprise the money fund industry has been exploring what operational changes would be needed if rates did slip below zero."

USAToday.com posted "Negative interest rates: What they are, how they work and whether they are coming to the U.S.," which tells us, "Negative interest rates, in the unlikely event that they become pervasive, would drastically alter the playing field for savers as well as borrowers. Here are some things consumers should know.... Everyone is accustomed to paying interest to borrow money and earning interest when depositing money. Negative interest rates would reverse that. A bank might not actually charge savers a negative rate, but it might levy a 'storage fee' that exceeds any positive interest earned, said Dennis Hoffman, an economics professor at Arizona State University. This scenario would represent a 'penalty for holding cash,' he said. By pushing rates ever lower, economic policymakers would be 'encouraging you to rid yourself of cash by spending money and hence stimulating economic activity,' he said." The piece explains, "With deposit accounts, money-market funds and other ultraconservative investments already paying next to nothing, it doesn't take many additional fees, or much inflation, for real returns to slip into negative territory, Hoffman said. But as a practical matter, he considers it more realistic to think about negative interest rates as ‘really low rates.'" The article adds, "For savers, today's ultra-low rate environment makes it more important to shop around for better deals and be wary of fees that can erode returns even further. Many types of fees, including account-maintenance and overdraft fees and ATM charges, were slowly rising at many banks anyway, even before the coronavirus pandemic hit, [BankRate’s Greg] McBride said. Conversely, he noted that it's still possible to obtain fee-free checking accounts at roughly 40% of banks and 80% of credit unions, especially if you sign up for direct deposit. Economists continue to debate how quickly and with what intensity the recovery will materialize, but most see the economy growing again by early next year at the latest. With an economic rebound, interest rates could start pushing higher, relegating further speculation about negative rates to the background."