Daily Links Archives: May, 2021

Barron's writes, "`Money-Market Funds Face New Rules After Covid Stumble. Here's What Could Happen." They comment, "During the race into cash that happened at the start of the pandemic, investors pulled cash from money-market funds that invest in short-term corporate and municipal debt. That has regulators worried about the stability of the sector again, and they’re considering more rule changes to help shore it up.... As the regulatory process marches forward, strategists at Bank of America are handicapping the likelihood of different changes. U.S. officials proposed a list of 10 potential reforms in their December report, and in a May 6 note, the bank's analysts group them into three main categories." Barron's explains, "The first group would loosen the threshold where funds would have the option of penalizing investor redemptions.... The second group of proposals are meant to encourage either fund-management companies or investors to pay to offset the risk of future runs. For example, officials are considering new rules that would govern exactly when and how a fund's parent company would be required to support their funds, for example, by providing liquidity to meet investor withdrawals. And third, regulators are considering a group of ideas that are meant to reduce the likelihood investors will run to withdraw their cash in the first place. One of the options in this category would be a new rule that would reduce the incentive for an investor to try to pull their money out of a fund first. In essence, the rule would create a delay before an investor could cash out a certain proportion of their shares. That means that if there was a run on a fund, an investor who withdrew early would still share in the losses." They add, "While most money-market fund managers didn't support that idea, Bank of America said, 'it has some potential,' though it 'could reduce the attractiveness' of investing in prime or tax-exempt money-market funds.... In short, 'prime and tax-exempt MMF changes are coming,' Bank of America wrote, 'which we think are likely to weaken investor interest in these funds.'"

ICI's latest weekly "Money Market Fund Assets" report shows MMFs decreasing, following two weeks of increases. Money fund assets are up $215 billion, or 5.0%, year-to-date in 2021. Inst MMFs are up $281 billion (10.1%), while Retail MMFs are down $66 billion (-4.3%). Over the past 52 weeks, money fund assets have decreased by $256 billion, or -6.8%, with Retail MMFs falling by $103 billion (-7.2%) and Inst MMFs falling by $153 billion (-6.5%). ICI's "Assets" release says, "Total money market fund assets decreased by $17.18 billion to $4.51 trillion for the week ended Wednesday, May 5.... Among taxable money market funds, government funds decreased by $11.93 billion and prime funds decreased by $4.75 billion. Tax-exempt money market funds decreased by $504 million." ICI's stats show Institutional MMFs decreasing $10.6 billion and Retail MMFs decreasing $6.6 billion. Total Government MMF assets, including Treasury funds, were $3.916 trillion (86.8% of all money funds), while Total Prime MMFs were $500.0 billion (11.1%). Tax Exempt MMFs totaled $96.1 billion (2.1%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than our asset series.) It explains, "Assets of retail money market funds decreased by $6.63 billion to $1.46 trillion. Among retail funds, government money market fund assets decreased by $4.20 billion to $1.13 trillion, prime money market fund assets decreased by $2.10 billion to $243.00 billion, and tax-exempt fund assets decreased by $324 million to $85.54 billion." Retail assets account for just under a third of total assets, or 32.4%, and Government Retail assets make up 77.5% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $10.56 billion to $3.05 trillion. Among institutional funds, government money market fund assets decreased by $7.73 billion to $2.78 trillion, prime money market fund assets decreased by $2.64 billion to $257.01 billion, and tax-exempt fund assets decreased by $180 million to $10.55 billion." Institutional assets accounted for 67.6% of all MMF assets, with Government Institutional assets making up 91.2% of all Institutional MMF totals.

The ICI released its 2021 Investment Company Fact Book this morning, which contains a wealth of statistics on money market (and other) mutual funds, and which reviews major fund trends of 2020. The introductory letter, from ICI Chief Economist Sean Collins, states, "2020. What a year. I'm writing this letter sitting in my basement, which has served as my office this past year. It's March 15, 2021, almost one year to the day from March 13, 2020, when vast swathes of the US economy began shutting down because of the COVID-19 pandemic. How things have changed from that fateful Friday the 13th! ... Some things, of course, remain much the same. Throughout this challenging period, ICI's Research Department -- as with all ICI departments -- maintained its intense focus on supporting registered investment companies and the more than 105 million shareholders they serve. As the crisis unfolded, market participants rightly became deeply concerned -- and highly uncertain -- about the effects of the economywide shutdown on businesses, households, and governments. In this environment, all types of investors around the world scrambled to raise cash, a development that quickly morphed into a liquidity crisis. During this time, ICI Research worked tirelessly to provide critical perspective and data to policymakers to help them navigate and respond to the rapidly moving events." He explains, "As the financial markets began to settle, we turned to providing more in-depth analyses of funds' experiences during March 2020, in no small part to help ensure that emerging narratives were based on facts, not supposition. For example, in late May, I was invited to present a detailed analysis to the Securities and Exchange Commission's Asset Management Advisory Committee on funds' experiences in March. In addition, under the guidance and assistance of senior leaders from throughout the fund industry, ICI published the Report of the COVID-19 Market Impact Working Group -- a series of papers discussing developments in the spring of 2020 in the financial markets broadly, as well as in ETFs, money market funds, and UCITS. We also produced a series of blog posts discussing the experiences of bond mutual funds in March 2020. The preface in this year's Fact Book summarizes some of that work and provides a link to the full suite of COVID-19 papers and blog posts. The key theme of this work is that the March 2020 turmoil was driven not by the actions of individual market participants or market sectors, but by uncertainty about how the virus and the shuttering of world economies would play out. In light of the COVID-19 turmoil, regulators are now pondering reforms for many sectors of the financial markets, including ours. As they do so, they must keep the true drivers of the March 2020 turmoil at the forefront of their minds, and must remain cognizant of the benefits regulated funds provide to the world's economies. Funds are an important source of financing -- to businesses, consumers, and governments at all levels -- and a chief way that tens of millions of investors save for long-term goals." Finally, Collins adds, "All of this extraordinary work over the past year is built on the solid foundation ICI Research has built over decades, which is also reflected in the data and analysis we offer throughout the entire Fact Book. For example, Fact Book chapters 1 to 6 provide detail on the remarkable range of products our industry has created to help investors save for their goals, on how our industry is evolving (both in the United States and in other jurisdictions) to meet investors' changing demands, and on the substantial declines in fund fees Main Street investors incur to gain exposure to stocks and bonds through pooled, professionally managed funds. The many figures, tables, and analyses you will find here reflect the efforts of Shelly Antoniewicz and her staff." Watch for more excerpts from the new ICI Fact Book in coming days, and in the May issue of Money Fund Intelligence (which ships tomorrow). ICI also kicks off its 2021 Virtual General Membership Meeting at 1pm EDT today, so watch for coverage of this in coming days too.

Federated Hermes' Deborah Cunningham writes, "Not so smooth. It's time for the Fed to raise overnight rates." She tells us, "With the recent surge in retail sales and jump in gross domestic product growth, you would think the commercial paper market would be robust. But issuance has been flat, which tells us that the spike in bonds many companies offered in 2020 for insurance as the economy tanked has left them flush with cash. As the recovery gains more steam and inflation creeps up, we anticipate more paper to be issued. Concerning inflation, it is curious how the market keeps trying to lead the Fed. While price pressures are increasing and many consumers are itching to spend stimulus checks, the Fed has been deflecting every suggestion of tightening. Investors don't seem to believe that the Fed wants the economy to be piping hot and that it considers the recent rise in activity as lukewarm. We think it could start to taper purchases this year, but no indication yet. These days, the Fed seems happy to make everyone wait." Cunningham adds, "One note on the new Bloomberg Short-Term Bank Yield Index (BSBY). The industry has been waiting for a firm to issue a security tied to it, and Bank of America did so in April. No money funds bought it, but it was taken up by a Local Government Investment Pool and some other lenders. As the index grows in usage, our expectation is that we and the industry will participate regularly. The International Organization of Securities Commissions blessed it last month, so it is chugging along on the track to becoming the index that prime funds will use to replace the London interbank offered rate (Libor). Industry-wide, government money markets grew slightly in April, while prime and tax-free funds faced modest outflows. We kept the weighted average maturities of our money funds in target ranges of 35-45 days for government and 40-50 days for prime and municipal."

A new SEC fund filing announces the pending launch of BNY Mellon Ultra Short ETF. It tells us, "The fund seeks high current income consistent with the maintenance of liquidity and low volatility of principal.... To pursue its goal, the fund normally invests in investment grade, U.S. dollar denominated fixed, variable, and floating rate debt or cash equivalents, including the following: Corporate securities; Asset-backed securities; Repurchase agreements; High quality money market instruments, such as commercial paper, certificates of deposit, time deposits and bankers' acceptances; U.S. Treasury securities; Securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, or government-sponsored enterprises (U.S. government securities); Obligations issued or guaranteed by one or more foreign governments or any of their political subdivisions or agencies; Securities issued by foreign corporations or a U.S. affiliate of a foreign corporation; and Securities subject to purchase and sale restrictions that are offered pursuant to Rule 144A under the Securities Act of 1933, as amended." BNY Mellon writes, "The fund's portfolio, under normal market conditions, will have an average credit rating of A or equivalent. The fund's investments, at the time of purchase, will have a minimum short-term credit rating of P-2, A-2 or F2 or better by Moody's Investors Service Inc. (Moody's), Standard & Poor's Corporation (S&P), or Fitch Ratings (Fitch) ... or a minimum long-term credit rating of Baa3, BBB-, or BBB-." It adds, "`The fund's portfolio managers seek to achieve what they believe provides the optimal portfolio for the fund in terms of preservation of principal, liquidity and producing high current income." For more, see these CD News pieces: Vanguard Debuts Ultra-Short Bond ETF (4/8/21); BFS Short vs. Shorter: JPMAM's Martucci and PIMCO's Schneider Speak (4/6/21); Bond Fund Symposium Highlights: Davis, Driscoll, Rothweiler Comment (4/1/21); Federated Hermes Enters Conservative Ultra-Short BF Market; ICD; CAG; and Vanguard Launching Ultra-Short Bond ETF; Weekly MF Portfolio Holdings (1/21/21).

The Federal Reserve Bank of New York issued a "Statement Regarding Reverse Repurchase Transaction Counterparties," which says, "The New York Fed is making the following adjustments to the reverse repurchase (RRP) counterparty eligibility criteria: For SEC registered 2a-7 funds, the existing requirement to have, for the past six months, either net assets of at least $5 billion or an average outstanding amount of RRP transactions of at least $1 billion is reduced to $2 billion and $500 million, respectively. For government sponsored enterprises, the existing requirement to have either an average daily outstanding amount of RRP transactions of no less than $1 billion for the past three months, or an average daily amount outstanding of overnight money market transactions of no less than $100 million over the past three months, is removed. These changes are designed to make the ON RRP facility more accessible, in line with the New York Fed's efforts to ensure that its counterparty policies support effective policy implementation and promote a fair and competitive marketplace. The New York Fed will consider further adjustments of the 2a-7 fund eligibility requirements over time as appropriate. All other eligibility criteria and expectations remain the same."