Daily Links Archives: September, 2020
Barron's on Vanguard Muni Retreat
Barron's writes "Vanguard’s Actions Show Why Muni Money Market Funds Are an ‘Endangered Species’." They tell us, "Say goodbye to your single-state municipal bond money-market fund. That could be the upshot of the announcement last Friday by Vanguard Group, which said it was liquidating its Pennsylvania and New Jersey muni money-market funds.... The truth is, yields are so low for the ultra-short-term, high-quality municipal debt that money markets buy, particularly in high-tax states, that they can't cover their costs." (See Crane Data's Sept. 28 News, "SEC's Blass on Push for More MMF Reforms; Vanguard Liquidating PA, NJ.") They quote our Peter Crane, "Tax exempt money-market funds and particularly state specific ones are on the endangered species list.... The assets are few and far between, and they are going to be hurt most from another zero-yield environment because [muni] tax exemptions don't help you if there's no income." The Barron's piece says, "He notes that there are only 71 single-state money markets today with $34 billion in assets, down from $152 billion in 2008, when interest rates previously dropped to zero because of the financial crisis. Rates have remained low ever since.... Crane said that municipal funds are the most-expensive money markets to manage. 'Unlike, Treasury or even prime [corporate money market] funds, where you have 50 to 100 investments all either issued by the government or giant multinational banks whose balance sheets are relatively open and clear, in the municipal world, you have thousands upon thousands of little line items and tiny municipalities. It takes a lot of work to do your due diligence and make sure they're credit worthy.' That's why he thinks many single-state muni money markets will become extinct. Waiving their fees is the costliest for managers." The piece adds, "One hope is that Vanguard's departure could make the remaining single state-funds more viable. In addition to Vanguard, Crane said there are four main competitors in the muni money market space -- Federated Investors, Fidelity, Charles Schwab and Dreyfus/BNY Mellon. Less demand for state munis from Vanguard means more and cheaper supply for them."
BlackRock to Launch Mischler Shares
A press release entitled, "Mischler Financial and BlackRock to Partner to Provide Dedicated Cash Management Share Class for Mischler Financial Group," tells us, "BlackRock is pleased to announce, in partnership with Mischler Financial Group, a leading disabled veteran-owned broker dealer, that registration statements for Mischler Financial Group Shares, a dedicated share class for clients of Mischler and its affiliates, have been filed with the Securities and Exchange Commission for FedFund, a series of BlackRock Liquidity Funds and for BlackRock Liquid Environmentally Aware Fund (LEAF), a series of BlackRock Funds. Increasingly, we believe clients are looking to maximize their social impact and partner with minority, women and disabled-veteran broker dealers for their debt and equity raises and subsequent cash investment of the proceeds. The partnership between BlackRock and Mischler brings together the investment experience of BlackRock Cash Management and the institutional relationships of Mischler creating a powerful intersection for mutual corporate clients." Mischler's La-Yona Rauls comments, "We are both proud and honored to help advance a groundbreaking initiative that can be embraced by the growing number of investors who are ESG-focused and are determined to engage with emerging, diversity-certified firms such as Mischler Financial Group." BlackRock's Tom Callahan adds, "For over a decade, BlackRock has been working to proactively engage minority, women, and/or disabled-veteran owned broker-dealers to help them emerge as strong liquidity providers to our platform and strong distribution partners of our investment solutions. We are proud to be working with a firm of Mischler's caliber whose dedication to diversity and excellence is on display in all that they do. The distribution of dedicated cash management solutions for our mutual clients is a natural next step." (For more, see Crane Data's August 19 News, "Federated Hermes Files to Enter 'Social' or 'Impact' Money Fund Space.")
BNY Mellon Does Deal with GTreasury
A press release entitled, "BNY Mellon and GTreasury Collaborate to Help Clients Manage and Invest Cash," tells us, "BNY Mellon ... announced a new venture that will enable clients to access the market-leading cash management and payment capabilities of treasury management services provider GTreasury. Under the new collaboration, BNY Mellon clients will have the opportunity to achieve greater visibility into their cash balances and more efficient utilization of these assets. With the enhanced transparency provided by GTreasury's treasury and risk management platform, clients will be able to better identify where balances are located across bank accounts, regions and time zones and then deploy the assets to productive ends." It tells us, "Through a seamless integration with BNY Mellon's LiquidityDirect platform -- one of the world's largest digital portals for investing in money market funds -- those balances can be put to work in a range of cash equivalent vehicles, providing opportunities for clients to earn incremental income as they manage liquidity across short-term investments or determine the best long-term use for their funds. Due to the unprecedented degree of integration that the two firms have been able to achieve, BNY Mellon clients will be able to sweep cash into funds available on LiquidityDirect without leaving the GTreasury environment. Furthermore, treasurers already familiar with the GTreasury ecosystem will not be required to make any changes to their existing infrastructure to take advantage of this new functionality, and the new investment capabilities will be provided to eligible clients at no additional cost." George Maganas, Head of Liquidity Services at BNY Mellon, comments, "We are thrilled to be able to offer clients integrated access to LiquidityDirect through GTreasury's digital treasury management tools, enabling them to streamline their cash management workflow and allocate balances with maximum efficiency.... Connecting those capabilities with LiquidityDirect is a natural fit, as it will enable clients to operate within one ecosystem to manage both their cash and payments while interacting with their global digital liquidity network for short-term investments via BNY Mellon." GTreasury's Terry Beadle adds, "Integrating the GTreasury and LiquidityDirect platforms is a big win for BNY Mellon clients.... The GTreasury ecosystem is purpose-built to seamlessly connect into investment portals like LiquidityDirect. The result is an efficient, immediate, and transparent workflow for maximizing the return of cash on hand. We look forward to seeing all that BNY Mellon clients will be able to accomplish via this new partnership."
Money Fund Assets Inch Lower
Money market fund assets inched down in the latest week, their seventh drop in a row and 15th decline in the past 18 weeks. Assets, which broke below the $4.5 trillion level earlier this month, are at their lowest level since April 1. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $2.11 billion to $44.41 trillion for the week ended Wednesday, September 23, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $8.71 billion and prime funds decreased by $9.38 billion. Tax-exempt money market funds decreased by $1.44 billion." ICI's stats show Institutional MMFs rising $3.1 billion and Retail MMFs decreasing $5.2 billion. Total Government MMF assets, including Treasury funds, were $3.574 trillion (81.0% of all money funds), while Total Prime MMFs were $725.1 billion (16.4%). Tax Exempt MMFs totaled $114.8 billion (2.6%). ICI shows money fund assets up a still massive $782 billion, or 21.5%, year-to-date in 2020, with Inst MMFs up $629 billion (27.8%) and Retail MMFs up $154 billion (11.2%). Over the past 52 weeks, ICI's money fund asset series has increased by $972 billion, or 28.7%, with Retail MMFs rising by $218 billion (16.9%) and Inst MMFs rising by $754 billion (36.0%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets are down $119.2 billion in September (as of 9/23) to $4.791 trillion.) They explain, "Assets of retail money market funds decreased by $5.22 billion to $1.52 trillion. Among retail funds, government money market fund assets decreased by $1.12 billion to $991.86 billion, prime money market fund assets decreased by $3.05 billion to $427.81 billion, and tax-exempt fund assets decreased by $1.05 billion to $103.93 billion." Retail assets account for just over a third of total assets, or 34.5%, and Government Retail assets make up 65.1% of all Retail MMFs. ICI adds, "Assets of institutional money market funds increased by $3.10 billion to $2.89 trillion. Among institutional funds, government money market fund assets increased by $9.82 billion to $2.58 trillion, prime money market fund assets decreased by $6.34 billion to $297.31 billion, and tax-exempt fund assets decreased by $383 million to $10.87 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 last week, accounted for 65.5% of all MMF assets, with Government Institutional assets making up 89.4% of all Institutional MMF totals.
WSJ on Banks, Treasuries and MMFs
Early this week, The Wall Street Journal wrote, "Banks Pile Into Treasurys, Helping to Fund Government Borrowing Spree." The article tells us, "Surging deposits and declining lending are driving banks to dramatically increase their holdings of U.S. Treasurys, offering significant support to the bond market at a time of massive government borrowing.... Larger factors also are helping drag down Treasury yields, which fall when bond prices rise. Inflation has been low for years, investors want a safe place to put their money, and the Federal Reserve has been both buying bonds and promising near-zero short-term interest rates for years to come. Even so, demand from banks and other sources like money-market funds has played a critical role, analysts say, allowing the government to issue more than $3 trillion in debt since February without pushing yields significantly higher, as some had feared. The yield on the benchmark 10-year note settled Friday at 0.694%, down from 1.909% at the end of 2019." The piece continues, "Money-market funds have also received huge inflows as many investors have moved out of riskier investments and into cash. Most of that has gone into government money-market funds, which invest only in Treasurys and other government-backed securities. But managers of prime money-market funds, which can buy a wider range of short-term debt, also have increased their holdings of government debt. Together both types of money-market funds have lifted their holdings of short-term Treasury bills, which carry maturities of up to one year, by more than $1.3 trillion since the end of February." The piece adds, "So much cash flooded into these funds that, for a short time before the Treasury started issuing new debt, yields on Treasury bills actually went negative. Some government money-market funds, such as ones run by Fidelity Investments, stopped taking money from new investors because of concerns about where they could invest it. Blake Gwinn, head of front-end rates strategy at NatWest Markets, said money-market funds' need for short-term bills has helped keep yields in a tight range even as the Treasury began to pump out new bills. These securities made up $2.5 trillion of the $3.3 trillion net Treasury issuance between the end of February and the end of August. Banks and money-market funds have been so important that some have started wondering how the market would respond if either source of demand became less reliable. Bank lending, for example, is expected to increase as the economy improves, likely supplanting some bond purchases. Investors also tend to pull cash from money-market funds once they move on from major market shocks -- a pattern that has shown signs of repeating recently."
Carfang on Corporate Cash Surge
The Carfang Group published a release entitled, "Corporate Cash Surges by $1.1 Trillion to $3.9 Trillion," which reviews the Federal Reserve's recent Z.1 Flow of funds data. (See yesterday's Crane Data News, "Fed's Z.1 Shows Household and Business MMFs, Treasuries Surge in Q2.") The release explains, "Corporations in the U.S. added $1.1 trillion or 38.5% to their cash holdings in the first half of 2020 according to recent data Federal Reserve data analyzed by The Carfang Group. For the second quarter, cash is up $424B or 12% and now stands at $3.9T. According to Anthony J. Carfang, Managing Director at The Carfang Group, 'The Covid pandemic led to a global flight to liquidity. Corporations drew down their bank credit lines. Those who could, issued commercial paper or other debt. Central banks intervened. Corporate cash soared.' The Fed's balance sheet grew from $4.1T to $7.0T during the first half. Even currency in circulation set a record as it rose 10% from $1.8T to $2.0T. As a result of these factors, corporate treasurers substantially increased their cash holdings. All major cash categories increased significantly this year. Cash + checkable deposits grew by $488B, time deposits by $96B and money funds grew by $404B. Corporate cash holdings were equivalent to an historic 20.1% of U.S. GDP and 3.5X the level of the early 1990s. Cash levels soared as US GDP plunged. There had been a three-decade long upward trend in this ratio, but the current leap is well above that trendline. As this is unprecedented, the macroeconomic effects remain to be seen." The release adds, "Corporate holdings of checkable deposits + currency grew 38% YTD and time deposits grew by 49%. However, their holdings of money market funds jumped by 72%. Checkable deposits and currency remained at 45% of corporate cash, after increasing from 35% following the SEC's tighter rules on money market funds. Time deposits now account for 7.5% of corporate cash, sitting at the same plateau where they have been range-bound for a several years. Money funds, at 25% corporate cash, pulled back slightly during the quarter, but still remain near their highest level since mid-2016 when the SEC instituted new regulations. That's still less than half the 59% level of December 2008."
Money Fund Yields Flat Again
Money market fund yields continue to bottom out just above zero; our flagship Crane 100 was flat again on the last week at 0.04%. The Crane 100 Money Fund Index fell below the 1.0% level in mid-March and below the 0.5% level in late March. It is down from 1.46% at the start of the year and down from 2.23% at the beginning of 2019. Just over two-thirds all money funds and over a third of MMF assets have since landed on the zero yield floor, though many continue to show some yield. According to our Money Fund Intelligence Daily, as of Friday, 9/18, 591 funds (out of 846 total) yield 0.00% or 0.01% with assets of $2.077 trillion, or 43.5% of the total. There are 196 funds yielding between 0.02% and 0.10%, totaling $2.036 trillion, or 42.6% of assets; 55 funds yielded between 0.11% and 0.25% with $578.6 billion, or 12.1% of assets; only 3 funds yielded between 0.26% and 0.50% with $82.7 billion in assets. No funds yield over 0.37%. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 667), shows a 7-day yield of 0.03%, unchanged in the week through Friday, 9/18. The Crane Money Fund Average is down 44 bps from 0.47% at the beginning of April. Prime Inst MFs were flat at 0.08% in the latest week and Government Inst MFs were flat at 0.03%. Treasury Inst MFs were unchanged at 0.02%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.01% (unchanged in the last week), and Prime Retail MFs yield 0.03% (unchanged), Tax-exempt MF 7-day yields were also unchanged at 0.02%. (Let us know if you'd like to see our latest MFI Daily.) Our Crane Brokerage Sweep Index, which hit the zero floor five and a half months ago, remains at 0.01%. The latest Brokerage Sweep Intelligence, with data as of September 18, 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 22 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).
Reuters on BIS Quarterly and MMFs
Last week, Reuters wrote, "COVID-19 market turmoil raises questions about central bank liquidity strategy, says BIS," which is based on a recent Bank For International Settlements' "BIS Quarterly Review." The article says, "Market turmoil due to coronavirus lockdowns in March raises questions about whether central banks should offer access to liquidity more widely in future shocks, the Bank for International Settlements (BIS) said.... The BIS, a forum for the world's central banks, said in a quarterly review article that banks' cross-border claims on so-called non-banks -- like insurers, clearing houses, money market funds and hedge funds -- rocketed by 63% to $7.5 trillion between the first quarter of 2015 and the end of March this year. The increase in links with non-banks was concentrated at lenders in the United States, Britain, the Cayman Islands, and Japan." The BIS piece comments, "The market turmoil unleashed by the COVID-19 shock brought to the fore vulnerabilities associated with these links." Reuters continues, "It also showed that money market funds, used by banks and companies for day-to-day cash management, can be 'fickle' funding providers, it added. The sheer size of non-banks and their links to lenders warrants continued monitoring by the authorities, the BIS said." The BIS Quarterly adds, "The fact that some non-bank financial institutions face a substantially different regulatory environment compared with banks -- as well as no or limited formal access to central bank liquidity or public sector credit guarantees -- only heightens this need." Finally, the article tells us, "Central banks have said that money market funds, meant to be low risk places to hold cash, would have had to suspend themselves without central banks like the Federal Reserve providing emergency liquidity. The article bolsters the case made by central banks that regulatory reforms may be needed to ensure that non-banks hold enough liquidity to cope better in market shocks and avoid undermining the wider financial system but stops short of specifying any measures. Securities regulators, which directly supervise funds, have been more cautious about jumping to reforms, with broad consensus needed for a global sector. Claudio Borio, the head of BIS Monetary and Economic Department, said it was clear there can be tension between regulators over market finance, but the question of whether additional rules were needed and possible will be looked at very closely."
MMF Assets Plunge on 9/15 Tax Date
Money market fund assets plummeted in the latest week as the Sept. 15 tax payment date sucked assets out. This is the sixth decrease in a row for MMFs, and their 14th decrease over the past 17 weeks. Assets broke below the $4.5 trillion level earlier this month for the first time since April 15. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $51.89 billion to $4.42 trillion for the week ended Wednesday, September 16, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $43.24 billion and prime funds decreased by $7.17 billion. Tax-exempt money market funds decreased by $1.48 billion." ICI's stats show Institutional MMFs dropping $50.5 billion and Retail MMFs decreasing $1.4 billion. Total Government MMF assets, including Treasury funds, were $3.566 trillion (80.7% of all money funds), while Total Prime MMFs were $734.5 billion (16.6%). Tax Exempt MMFs totaled $116.2 billion (2.6%). ICI shows money fund assets up a still massive $784 billion, or 21.6%, year-to-date in 2020, with Inst MMFs up $626 billion (27.7%) and Retail MMFs up $159 billion (11.6%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.014 trillion, or 30.0%, with Retail MMFs rising by $227 billion (17.6%) and Inst MMFs rising by $787 billion (37.6%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets are down $118.8 billion in September (as of 9/16) to $4.791 trillion.) They explain, "Assets of retail money market funds decreased by $1.35 billion to $1.53 trillion. Among retail funds, government money market fund assets increased by $3.10 billion to $992.98 billion, prime money market fund assets decreased by $3.28 billion to $430.85 billion, and tax-exempt fund assets decreased by $1.17 billion to $104.99 billion." Retail assets account for just over a third of total assets, or 34.6%, and Government Retail assets make up 65.0% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $50.54 billion to $2.89 trillion. Among institutional funds, government money market fund assets decreased by $46.34 billion to $2.57 trillion, prime money market fund assets decreased by $3.88 billion to $303.64 billion, and tax-exempt fund assets decreased by $316 million to $11.26 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22, accounted for 65.4% of all MMF assets, with Government Institutional assets making up 89.1% of all Institutional MMF totals.
Crane's Bond Fund Webinar (9/24)
Please join us next week for our latest virtual event, Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash, which will take place Thursday, Sept. 24 from 1-2pm Eastern. Crane Data's Peter Crane will give a brief update on the ultra-short bond fund and "enhanced cash" market, and will host a panel including J.P. Morgan Asset Management's Cecilia Junker, UBS Asset Management's David Walczak and J.P. Morgan Securities' Alex Roever. Also, mark your calendars and register for our Money Fund Symposium Online, which will take place Oct. 27 from 1-4:30pmET and will feature a full afternoon of money fund discussions; and our "European Money Fund Symposium Online," which will be Nov. 19 from 10am-12pmET. While we're still developing the agenda, Money Fund Symposium Online is expected to feature keynotes from ICI's Paul Schott Stevens and the U.S. Treasury's Tom Katzenbach, Ratings Agency and Dealer panels, a Future of Money Funds session with Crane and Federated Hermes' Deborah Cunningham, and virtual cocktail party. (Watch for the official agenda in coming days.) As a reminder, we've officially cancelled this year's live Money Fund Symposium which had been scheduled for October 26-28, 2020 at The Hyatt Regency Minneapolis. We're still in the process of scheduling our next big show for 2021 (it's tentatively June 23-25, 2021 in Philadelphia), but we'll let you know once we have an official date and location. We will refund or credit any registration or sponsor fees, and we hope we're able to resume our physical conference schedule as we get into 2021. Finally, mark your calendars for our 2021 conferences (and keep your fingers crossed): Money Fund University, scheduled for Jan. 21-22, 2021 in Pittsburgh, Pa.; Bond Fund Symposium, scheduled for March 25-26, 2021, in Newport Beach, Calif.; and European Money Fund Symposium, scheduled for October 21-22, 2021 in Paris. We hope to see you on a webinar, or at a physical event, soon!
JPMAM's Gatch on MMF Reforms
Yesterday, the Investment Company Institute hosted a webinar entitled, "After the Pandemic: The Future of the Global Fund Industry." Led by the ICI's Paul Schott Stevens, it featured George Gatch of J.P. Morgan Asset Management, Lisa Jones of Amundi Pioneer Asset Management and Brad Vogt of the Capital Group. The only mention of money funds was at the end, when Gatch fielded a question on potential money market reforms in the aftermath of March 2020. He commented, "I think this is going to be an important question, and one that regulators are going to look very closely at, European regulators as well as the U.S. I think that the question is around the [2a-7] reforms for money market funds from the last crisis, and what adjustments, if any, should be made to that. There is no doubt that the weekly liquidity requirements and the reporting of those requirements became a new hair trigger for institutional investors. Funds had, in most cases, over 30 percent weekly liquidity to deal with, but because investors saw that as the potential that a fund would gate and/or add fees, that became the new reason for institutional investors to leave funds. I think there is an entire question around whether there are better ways to ensure that funds continue to have large positions in liquidity and government securities to handle redemption activity, but not lead to a point where you're encouraging investors to be first movers. I think that's where the debate is going to be." Gatch added, "Now there are some asset managers who have decided to exit the prime money fund business. I think these products provided an extraordinary service to investors; they enhance returns. The previous reforms, 2a-7, have strengthened money funds, but this question about the 30 percent liquidity becoming the trigger is one that we need to look very closely at." In other news, see Bloomberg's bearish article, "The $1 Trillion Commercial-Paper Market Is Fading Into Obscurity."
Yields Flat in Latest Week
Money market fund yields continue to bottom out just above zero; our flagship Crane 100 was flat in the last week at 0.04%. The Crane 100 Money Fund Index fell below the 1.0% level in mid-March and below the 0.5% level in late March. It is down from 1.46% at the start of the year and down from 2.23% at the beginning of 2019. Just over two-thirds all money funds and over a third of MMF assets have since landed on the zero yield floor, though many continue to show some yield. According to our Money Fund Intelligence Daily, as of Friday, 9/11, 595 funds (out of 846 total) yield 0.00% or 0.01% with assets of $2.106 trillion, or 43.6% of the total. There are 189 funds yielding between 0.02% and 0.10%, totaling $2.059 trillion, or 42.6% of assets; 59 funds yielded between 0.11% and 0.25% with $584.1 billion, or 12.1% of assets; only 3 funds yielded between 0.26% and 0.50% with $82.6 billion in assets. No funds yield over funds yield over 0.38% <b:>`_. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 667), shows a 7-day yield of 0.03%, unchanged in the week through Friday, 9/11. The Crane Money Fund Average is down 44 bps from 0.47% at the beginning of April. Prime Inst MFs were flat at 0.08% in the latest week and Government Inst MFs were flat at 0.03%. Treasury Inst MFs were unchanged at 0.02%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.01% (unchanged in the last week), and Prime Retail MFs yield 0.04% (unchanged), Tax-exempt MF 7-day yields were also unchanged at 0.01%. (Let us know if you'd like to see our latest MFI Daily.) Our Crane Brokerage Sweep Index, which hit the zero floor five months ago, remains at 0.01%. The latest Brokerage Sweep Intelligence, with data as of September 11, 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 21 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).
PIMCO: Be Conscious of Your Cash
AssetTV published a video entitled, "Straight from PIMCO: Time to Be Conscious of Your Cash." It features PIMCO's Jerome Schneider, who explains, "Today's economic environment is one fraught with uncertainty, where being selective in risk taking will likely prove to be beneficial. Focusing on the defense is important, in fact, we've had over $800 billion year-to-date and over $2 trillion the past three years into money market funds as investors have grown more defensive. Although the Fed's policy response, really cutting rates as well as providing liquidity through its various programs has resulted in money market funds really being a safe haven, the cost to investors is growing. Money market funds currently yield about zero percent, just over, and as a result, it's going to have a dramatic impact on savers for the foreseeable future." He continues, "Interest rates are expected to remain depressed for years, versus the prior recovery periods we've seen. In fact, if you compare 2012 to 2015, another zero percent interest rate cycle, we see that the expectation for interest rates was actually going to be moving higher over the foreseeable future. Today, we see the exact opposite, with interest rates remaining at or low near zero for the foreseeable future. Truly a secular phenomenon that we’re going to have to contend with." Schneider explains, "It's time for investors to be conscious with their cash. A broader opportunity set affords potential for additional yields beyond money market funds for modest increase in risk. Investors can do better than those immediate liquidity solutions if they're time horizon is beyond a few weeks or even a few months, by stepping out of those restrictive money market funds and capturing the premiums that exist today, and will likely exist into the future." He adds, "At PIMCO we aim to benefit from these higher yields and these structural premiums, at the same time focusing on downside protection and most of all liquidity management and capital preservation. So, despite the zero rate environment that we're seeing at this point in time, clients should be focused on opportunities which are diverse enough, high in quality and most importantly, can actively adapt to the changing landscapes to help produce positive total returns over secular horizons."
Money Fund Asset Slide Continues
Money market fund assets fell for the fifth week in a row, their 13th decrease over the past 16 weeks. Assets broke below the $4.5 trillion level last week for the first time since April 15. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $26.45 billion to $4.47 trillion for the week ended Wednesday, September 9, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $19.52 billion and prime funds decreased by $5.75 billion. Tax-exempt money market funds decreased by $1.19 billion." ICI's stats show Institutional MMFs decreasing $29.9 billion and Retail MMFs increasing $3.5 billion. Total Government MMF assets, including Treasury funds, were $3.609 trillion (80.8% of all money funds), while Total Prime MMFs were $741.6 billion (16.6%). Tax Exempt MMFs totaled $117.7 billion (2.6%). ICI shows Money fund assets up a still massive $836 billion, or 23.0%, year-to-date in 2020, with Inst MMFs up $676 billion (29.9%) and Retail MMFs up $160 billion (11.7%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.071 trillion, or 31.5%, with Retail MMFs rising by $236 billion (18.2%) and Inst MMFs rising by $835 billion (39.7%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets are down $33.7 billion in September (as of 9/9) to $4.847 trillion.) They explain, "Assets of retail money market funds increased by $3.48 billion to $1.53 trillion. Among retail funds, government money market fund assets increased by $6.62 billion to $989.88 billion, prime money market fund assets decreased by $2.40 billion to $434.14 billion, and tax-exempt fund assets decreased by $737 million to $106.15 billion." Retail assets account for just over a third of total assets, or 33.2%, and Government Retail assets make up 64.7% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $29.93 billion to $2.94 trillion. Among institutional funds, government money market fund assets decreased by $26.14 billion to $2.62 trillion, prime money market fund assets decreased by $3.35 billion to $307.48 billion, and tax-exempt fund assets decreased by $448 million to $11.57 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22, accounted for 65.8% of all MMF assets, with Government Institutional assets making up 89.1% of all Institutional MMF totals.
Cunningham Defends Prime MMFs
Federated Hermes' Deborah Cunningham writes on, "Prime reasons for money markets." She explains, "For more than 40 years, the cash management sector has been a pillar of the American financial system. Be it money market funds, investment pools or other structures, it has offered liquidity, stability and convenience for millions of investors both small and large. Throughout the pandemic-induced volatility this year, these vehicles have aided businesses, banks and governments on every level. In the best and worst of times, liquidity products have provided much of the short-term funding that lubricate the gears of the American economy." She continues, "It's no coincidence that Federated Hermes also can count more than 40 years in the cash management industry. We have been a pioneer here and want to be clear that we remain committed to it -- particularly prime. We have no intention of diminishing our dedication to this space. In fact, we are as enthusiastic about the broad prime markets as we ever have been as a firm." Cunningham tells us, "Prime funds and like vehicles help corporations be nimble during volatile times by purchasing commercial paper that aids their cash flow and productivity. They offer investors a solid regulatory framework, daily liquidity, diligent credit analysis, broad diversification and historically higher yields than many competing products. Prime funds spread out risk by investing in different securities across business types, asset classes and geography." She concludes, "Lastly, when the Federal Reserve slashes rates, every penny counts. Any potential yield advantage provided by prime could add up to needed returns for investors of all stripes -- from individuals to nonprofits to municipalities to corporations. The acknowledgment of this can be seen in the substantial industry inflows to the space after March. As the U.S. economy recovers in a post-coronavirus world, when neighborhood restaurants fully open, people travel again, live entertainment and 'un-bubbled' sporting events flourish, and the labor market strengthens, the nearly $5 trillion money fund industry will be there."
Bloomberg Bearish on Prime MMFs
Bloomberg wrote, "Money Markets Have a $750 Billion Problem in Zero-Rate World," which explains, "A $750 billion industry still struggling to bounce back from the last crisis is cracking under the Federal Reserve's lower-for-longer mantra on U.S. interest rates. Prime money-market funds -- a long-time favorite for anyone seeking a cash-like investment with a little extra yield -- are facing an existential challenge, just four years after a regulatory overhaul to restore confidence in the wake of the global financial crisis. Assets in these vehicles dropped 20% in just six weeks earlier this year, spurring talk of new reforms. But some of the industry's leaders are opting for another solution: Shutting them down." The article explains, "Vanguard Group, the world's second-largest asset manager, is converting a $125 billion fund to buy government debt rather than the short-term corporate notes it's invested in for decades, and Northern Trust Corp. and Fidelity Investments have recently axed funds with a similar focus altogether. The decisions entrench a prolonged decline for prime funds, and could hurt a market that thousands of companies rely on for funding. The strategies are collateral damage from the Fed's aggressive approach to suppressing rates for years to come. The realization that these funds, which are supposed to provide an edge over more-conservative alternatives, aren’t going to get much more attractive any time soon is a grim prospect for investors who must often stomach limits on redemptions -- known as gates -- to buy them. Asset managers are in turn finding their fees increasingly difficult to justify." Bloomberg adds, "While the latest turmoil for money-market funds fell far short of 2008's mayhem, the re-emergence of fears around redemptions suggests another overhaul is likely.... BlackRock Inc. wants to create a new platform to trade commercial paper to bolster the liquidity of these holdings. That would leave prime funds less reliant on skittish secondary markets and potentially strained dealer balance sheets, according to Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes in Pittsburgh.... Fewer funds could ultimately reduce demand for commercial paper and push rates higher, but yields are currently only a fraction of where they were before the Fed slashed its target policy rate to near zero."
IMMFA: LVNAVs Didn't Breach Collars
The Institutional Money Market Funds Association, a "trade association which represents, promotes and supports the development of the European money market fund (MMF) industry," published "IMMFA Position Paper on Money Market Funds last month. They explain, "This IMMFA Position Paper outlines the impact of the COVID-19 pandemic on the European Money Market Funds (MMFs) sector. Focusing in particular on IMMFA MMFs, the paper highlights that while MMFs, like many other fund sectors, were adversely affected by the market-wide lack of liquidity, the reforms introduced under the 2017 European Money Market Fund Regulation ensured that MMFs remained resilient in these challenging circumstances." The paper tells us, "IMMFA Member funds consist primarily of Low Volatility Net Asset Value (LVNAV) and Public Debt Constant Net Asset Value (PDCNAV) MMFs which are AAA rated by one or more credit rating agency.... As the COVID-19 virus rose to pandemic proportions in March 2020 financial markets experienced unprecedented volatility that put pressure on all segments of the financial system, including MMFs. Despite the exceptional challenges caused by these exogenous factors, LVNAV and PDCNAV MMFs remained resilient under testing market circumstances, demonstrating their robust structure and the effectiveness of the enhanced investor protection mechanisms introduced in European Money Market Fund Regulation (MMFR). Funds met redemptions in full and no fund was required to take any further action under the Regulations. The sizeable increase in assets under management since March, in the LVNAV sector in particular, demonstrates continued confidence in the MMF sector and the fundamental soundness of the LVNAV fund category." The brief continues, "Following the introduction of the MMFR, assets under management (AUM) in LVNAV and PDCNAV (i.e. constant NAV) funds continued to climb, demonstrating the value of the regulatory framework to investors around the globe. The total European MMF market was €1.279bn at the end of the first quarter of 2020, of which IMMFA funds constituted 56% and VNAV funds 44%." It adds, "While the fundamentals of MMFs remained unchanged in relation to their structure and the high-quality of assets in which they invest, the sector was tested by the almost complete lack of market-wide liquidity in secondary markets. Despite the unprecedented and exceptional pressure, LVNAV MMFs remained robust, highlighting the effectiveness of the framework provided by the MMFR. In addition, the MMFR sets out a strict threshold for LVNAV funds in the form of a NAV collar. In the event that an LVNAV breaches the collar (i.e. its marked-to-market NAV deviates by more than 20 basis points from the constant NAV), the MMFR requires the fund to value its assets using variable pricing and the pricing convention to move to 4 decimal places for the purposes of the next redemption or subscription. Despite the market volatility caused by COVID-19, all IMMFA LVNAV funds remained within their 20 basis point collars. This is a further example not only of the robust performance of LVNAVs, but also of the enhanced protections codified under the MMFR, for the interests of investors." IMMFA's paper concludes, "The system wide liquidity crisis caused by the COVID-19 pandemic presented significant challenges for financial markets. Whilst MMFs were impacted by this, they were neither the source of market dysfunctionality, nor did they directly contribute to it, since, as shown, they continued to serve their purpose and to meet investors' needs for cash. The data and analysis undertaken reflect the resilience of MMFs, particularly LVNAV and PDCNAV funds, and the effectiveness of the EU MMF Regulation. The enhanced investor protection provisions of the MMFR ensured that funds continued to provide liquidity and full transparency to investors on a daily basis, including a full mark-to-market valuation of the LVNAV and PDCNAV portfolios. As highlighted, LVNAV and PDCNAV MMFs were tested during the recent crisis but continued to fulfil their regulatory obligations and were able to satisfy all investor redemption requests in full. In Europe, the operational effectiveness of MMFs was maintained without recourse to various asset purchase facilities implemented by Central Banks, given the lack of asset eligibility. The growth of total European AUM, which now exceeds pre-crisis levels, demonstrates that investors continue to have confidence in MMFs, in particular the LVNAV category which continues to grow."
Federated to Liquidate State Muni MFs
A Prospectus Supplement for Federated Hermes Money Market Obligations Trust and for Federated Hermes Georgia Municipal Cash Trust (GAMXX), Federated Hermes Massachusetts Municipal Cash Trust, Federated Hermes Pennsylvania Municipal Cash Trust and Federated Hermes Virginia Municipal Cash Trust tells us, "On August 14, 2020, the Board of Trustees of Federated Hermes Money Market Obligations Trust approved a Plan of Liquidation for the above-named funds pursuant to which the Funds will be liquidated on or about the close of business on February 19, 2021. In approving the Liquidation, the Board determined that the liquidations of the Funds are in the best interests of each of the Funds and their respective shareholders." The filing adds, "Accordingly, on August 28, 2020, Federated Investment Management Company will begin positioning the portfolios of the Funds for liquidation, which may cause the Funds to deviate from their stated investment objectives and strategies. It is anticipated that each Fund's portfolio will be positioned into cash on or some time prior to the Liquidation Date. Effective as of the start of business on November 2, 2020, the Funds will be closed to new investors and new accounts. Effective as of the start of business on February 5, 2021, the Funds will be closed to new investments by existing shareholders including exchanges but excluding sweep investments and reinvestment of dividends and capital gains (if any). Only redemptions and sweep investments will be permitted after the close of business on February 4, 2021." Federated Hermes also tells us, "Any shares outstanding at the close of business on the Liquidation Date will be automatically redeemed. Such redemption shall follow the procedures set forth in each Fund's Plan of Liquidation. Any net capital gains will be distributed to shareholders, if necessary, prior to the Liquidation. Final dividends will be included with the liquidation proceeds. At any time prior to the Liquidation Date, the shareholders of the Funds may redeem their shares of the Funds pursuant to the procedures set forth in each Fund's prospectus. Shareholders of each Fund may exchange their Shares of the Fund for shares of any Federated Hermes fund or share class that does not have a stated sales charge or contingent deferred sales charge if the shareholder meets the eligibility criteria and investment minimum for the Federated Hermes fund for which the shareholder is exchanging, except shares of Federated Hermes Institutional Money Market Management, Federated Hermes Institutional Tax-Free Cash Trust, Federated Hermes Institutional Prime Obligations Fund, Federated Hermes Institutional Prime Value Obligations Fund, and no-load Class A Shares and Class R Shares of any Federated Hermes fund. If you are a taxable shareholder, the Liquidation of the Funds will be a recognition event. In addition, any income or capital gains distributed to shareholders prior to the Liquidation Date or as part of the liquidation proceeds may also be subject to taxation. All investors should consult with their tax advisor regarding the tax consequences of this Liquidation."
Fewer Reverse Repo Counterparties
The Federal Reserve Bank of New York has twice revised its "Reverse Repo Counterparties" list over the past two and a half weeks. A note entitled, "Reverse repo counterparties list updated says, "The following money market funds are no longer reverse repo counterparties, effective August 27." These include: Federated Hermes Capital Reserves Fund, Federated Hermes Institutional Money Market Management, Federated Hermes Tax-Free Obligations Fund, General Money Market Fund (BNY Mellon Investment Adviser, Inc.), Goldman Sachs Investor Tax-Exempt Money Market Fund, Master Treasury Strategies Institutional Portfolio (BlackRock Advisors, LLC), PFM Funds Government Select Series, Premier Portfolio, a series of the AIM Treasurer's Series Trust (Invesco Treasurer's Series Trust), STIT Liquid Assets Portfolio (Invesco Advisers, Inc.), T. Rowe Price Cash Reserves Fund and Wells Fargo Cash Investment Money Market Fund. Earlier in August, the NY Fed wrote, "Fidelity Colchester Street Trust: Prime Money Market Portfolio and Fidelity Colchester Street Trust: Prime Reserves Portfolio are no longer reverse repo counterparties, effective August 14." See the Fed's "Revised List of Counterparties here."
Weekly Money Fund Portfolio Holdings
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 August 28) includes Holdings information from 77 money funds (down 8 from a week ago), which represent $2.360 trillion (down from $2.477 trillion) of the $4.879 trillion (48.4%) 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 August 12 News, "August MF Portfolio Holdings: Treasury Bender Ends; Repo, TDs Jump.") Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.282 trillion (up from $1.273 trillion a week ago), or 54.3%, Repurchase Agreements (Repo) totaling $527.5 billion (down from $564.5 billion a week ago), or 22.3% and Government Agency securities totaling $337.4 billion (down from $361.5 billion), or 14.3%. Certificates of Deposit (CDs) totaled $75.2 billion (down from $87.3 billion), or 3.2%, and Commercial Paper (CP) totaled $65.0 billion (down from $92.4 billion), or 2.8%. The Other category accounted for $39.7 billion or 1.7%, while VRDNs accounted for $33.7 billion, or 1.4%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.282 trillion (54.3% of total holdings), Federal Home Loan Bank with $185.1B (7.8%), BNP Paribas with $67.3B (2.9%), Federal Farm Credit Bank with $60.6B (2.6%), Fixed Income Clearing Corp with $58.1B (2.5%), Federal National Mortgage Association with $53.3B (2.3%), RBC with $44.2B (1.9%), Federal Home Loan Mortgage Corp with $36.3B (1.5%), JP Morgan with $34.6B (1.5%) and Mitsubishi UFJ Financial Group Inc with $32.9B (1.4%). The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($222.7B), JP Morgan US Govt MM ($179.8B), Fidelity Inv MM: Govt Port ($164.1B), Wells Fargo Govt MM ($152.4B), BlackRock Lq FedFund ($131.1B), JP Morgan 100% US Treas MMkt ($111.7B), BlackRock Lq T-Fund ($90.0B), Goldman Sachs FS Treas Instruments ($88.4B), JP Morgan Prime MM ($87.6B) and Dreyfus Govt cash Mgmt ($85.1B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
Western on Prime MMF Breakevens
Western Asset published the brief, "Breakeven Forecasting for Prime Money Market Funds." Written by Jason Straker, the piece explains, "When evaluating a money market fund, investors tend to look at characteristics that help them judge the attractiveness of a fund (e.g., cut-off time, yields and returns), including risk (e.g., weighted average maturity and life) and even the liquidity (e.g., size of the fund), but one factor often overlooked is the Net Asset Value per share, or NAV. For government and Treasury funds, and also retail prime and municipal styles of money market funds, the NAV per share remains constant at $1.00. However, there is also a 'shadow' NAV that fund managers publish so that investors can track the market value of the underlying fund portfolio without impacting the value of an investor's share position, which remains stable at $1.00. Conversely, for Floating Net Asset Value (FNAV) institutional prime or municipal money market funds, shares are priced to four decimal places (i.e., $1.0000) and may fluctuate in small movements above and below the $1.0000 mark. For these funds, the NAV has a much more elevated role, as it can directly impact the total return of a fund investment. It should therefore be an integral component of the prime money market fund decision-making process. Although an additional step, the consideration of the NAV should not in isolation be enough to walk away from the yield advantage that institutional FNAV prime money market funds may offer. By carefully considering the simple relationship between NAV movements and yield, a suitable breakeven investment period can be calculated to help avoid breaking the key objective for all money market fund investors -- the preservation of principle." The update, which includes a formula for calculating the breakeven, continues, "Both of the considerations of yield and NAV movements are particularly heightened in today's market environment. First, yields have been falling considerably as the world's central banks have cut interest rates in reaction to the economic crisis brought about by COVID-19. As yields have fallen, the amount of potential income from prime money market funds available to offset the loss from a drop in NAV has decreased. Similarly, as the economy initially recoiled from crisis then subsequently began to heal when accommodative central bank monetary policies took effect, bond yields rose and fell while credit spreads widened then tightened, respectively, considerably increasing the volatility of the market value of securities and therefore also the NAVs of institutional prime money market funds." Finally, it adds, "Using the information presented here, investors can apply a rational and methodical approach to evaluating the NAV of prime money market funds in order to make a suitable investment decision based on their expected investment horizon. Although the yield advantage between prime and government style money market funds has come down in recent months, the potential for greater returns still remains as long as an adequate investment period can be forecast. Overall, we believe investors should consider institutional FNAV prime funds as a useful component of their liquidity portfolios. Investors may benefit from taking a slightly longer investment horizon than offered by Constant NAV (CNAV) government funds, given the potential for relatively higher yields combined with periodic NAV fluctuations."
