News Archives: September, 2007

Money Fund Yields Pass Along Just 1/5 of Rate Cut, Rise on Month-End. Since the Federal Reserve reduced the target on its Federal funds benchmark from 5.25% to 4.75% on Sept. 18, money market mutual fund yields have fallen by just 11 basis points (0.11%). Last week, money fund yields stopped falling and fund yields actually rose by one basis point on Friday. Our Crane 100 Money Fund Index fell from 5.06% to 4.94% the week of the Fed cut, stabilized, then rose Friday to 4.95%. Though seasonal upward pressure on rates at quarter-end also contributed, higher yields on LIBOR-indexed floating rate products and asset-backed commercial paper are dramatically reducing the Fed cut's bite on money fund investors. Undoubtedly, more of the Fed cut will get passed through. But at this point it appears very unlikely investors will experience anywhere near the full 1/2 point decline any time soon.

Money Fund Assets Jump $29.5 Billion in Week, August Breaks Record. The latest weekly asset totals from the Investment Company Institute show money market mutual fund assets increasing by $29.51 billion to a record $2.855 trillion. Institutional assets shift into money funds to "ride the lag" following Fed rate cuts, and money fund assets continue to benefit from a massive shift away from lower-yielding and higher-risk alternatives. Money fund assets also posted a record increase in August, gaining $162.5 billion, according to ICI's just-released monthly asset series. Year-to-date through Sept. 26, money fund assets have increased by $473 billion, or 19.9%. Money fund assets YTD in 2007 have already surpassed their previous full-year calendar record asset increase, which was a $440 billion surge in 2001. Over the past 52 weeks money funds have increased by a stunning $638 billion, or 28.8%.

Will Davis vs. Kentucky Case Destroy State Specific Money Funds? Managers of tax free money market funds are discussing the upcoming review of Davis, a Kentucky case that said it's unconstitutional for a state to tax out of state municipal income, by the U.S. Supreme Court on Nov. 6, 2007. Should the Court uphold Davis, state-specific municipal funds could become dinosaurs. But we believe this appears unlikely based upon recent court decisions and based upon the size and political importance of states and municipalities. JPMorgan's Nick Rabiecki tells us, "A small number of funds are thinking about it [Davis].... Some funds are taking it as more of a threat than others. No one knows what's going to happen here.... The lobbyists can't influence it. Some are creating contingency plans." Look for more in the October Money Fund Intelligence.

Citi Online Becomes Latest Portal to Add Offshore Money Market Funds. Money market trading platform Citi Online Investments has added 25 offshore money market mutual funds from 9 different fund providers to its portal in Europe. Mark Beard, Head of EAMA Liquidity and Cash Management Investments, says, "Companies are looking to manage their cash in a comprehensive way, and our portal integrates the investment management process." Citi's Andrew Plenderleith adds, "Few portals directly integrate with an institutional client's cash management processes the way we have." Of the 15 online money fund trading portals tracked by Crane Data, over half now offer "offshore" money fund investment options. "Offshore" money funds or "liquidity" funds are domiciled in Dublin or Luxembourg and most are members of Institutional Money Market Funds Association.

SEC Okays Seven Nationally Recognized Statistical Ratings Organizations. We learned from Investment News yesterday that the Securities & Exchange Commission granted registrations for 7 ratings agencies, or NRSROs. In addition to the "Big 3" -- Standard & Poor's, Moody's and Fitch -- the Commission now allows ratings from A.M. Best, Canadian DBRS, Japan Credit Rating Agency, and Japan's Rating and Investment Information. The expansion holds particular significance for money market funds since Rule 2a-7 of the Investment Company Act of 1940 requires "First Tier" holdings to have at least two top ratings. Money funds may only invest in securities with one of the top two short-term ratings, and must limit investments to 5% for First Tier and 1% for Second Tier (with a 5% total in Second Tier). An expansion in the number of agencies makes the "First Tier" hurdle slightly more obtainable.

"Money Market Funds Intensify Their Focus On Safety And Liquidity". Standards & Poor's says "money fund managers are taking actions that emphasize safety and liquidity" in the current environment. A new report states, "For about the past month, portfolio managers have not invested in many asset-backed securities, and almost all had stopped buying extendible asset-backed commercial paper (XABCP).... Many managers have also put internal restrictions on the purchase of CP offered through collateralized debt obligations (CDOs) and CP offered out of structured investment vehicles (SIVs). Recently, as the market has shown signs of stabilizing, several fund managers have resumed buying some traditional ABCP securities and well-established extendible ABCP with very short maturities." The report says no money funds have been downgraded and no funds have experienced a run on assets.

Prime Money Funds Offer Higher Returns, Less Risk Than Treasury, Bank. A recent study by John Bilson, professor of finance at the Illinois Institute of Technology, supports the push to "allow broker/dealers to use AAA rated money funds" as "qualified securities" under Rule 15c3-3, an initiative spearheaded by Federated Investors and Treasury Strategies. The paper, "Eligible Securities for Customer Segregated Accounts" finds treasury funds generally riskier than prime money funds (the analysis uses statistical returns provided by Crane Data LLC). Bilson also argues for a zero percent "haircut" under Rule 15c3-3. Treasury money funds: offer lower rates of return not due to lower risk but "because of the regulatory demand"; offer more risk due to less "room for diversification" and longer average maturities; and, "may face higher operational risks" than prime funds, Bilson says. Copies of the study were provided to government officials and opinion makers.

Savings Accounts Droppping, Money Fund Yields Inching Downwards. Bank savings account rates and money market deposit accounts have dropped sharply while money funds are slowly digesting the new 4.75% Federal funds target rate. Money fund yields, measured by our Crane 100 Index, have fallen 5 basis points (0.05%) since Tuesday's Fed move, from 5.06% to 5.01%. Banks, on the other hand, wasted no time cutting. Bank Deals reports that, among others, GMAC Bank, AmTrustDirect, and ELoan have reduced savings rates -- GMAC dropped rates from 5.16% to 4.85% (5.30% to 4.90% APY) and AmTrust dropped from 5.19% to 5.09% (5.31% to 5.21%). The Crane Top 10 Bank Savings Index fell from 5.24% to 5.10% this week. Money fund yields are reacting slower than usual to the Fed's cut due to lingering high rates available due to the recent asset-backed commercial paper crisis. Banks, meanwhile, are living up to their reputation for quickly passing lower rates on to consumers.

American Securitization Forum See "Light at the End of the ABCP Tunnel". On Wednesday, the American Securitization Forum, the trade group representing asset-backed commercial paper issuers, held its Global Summit on the State of the Securitization Industry. Over 800 attendees in New York, London and via Webinar listed to a panel of experts give an update on current events. "We are seeing light at the end of the tunnel," said Credit Suisse' Maureen Coen. The ABCP segment covered the crisis timeline and noted that extendible ABCP that has extended made up less than 2% of the ABCP market, SIV-lites made up less than 1/2%, and plain SIV (structured investment vehicles) under duress make up less than 1% of the market. Coen added, "We need to have a broader discussion outside the ABCP community." Another panelist added, "Clearly, we've done a miserable job in explaining why securitization works."

BlackRock Writes "Understanding Enhanced Cash Products" on MF Direct The Bank of New York Mellon's MoneyFunds Direct online money fund trading portal currently features a July 2007 article by BlackRock, "Understanding Enhanced Cash Products". The piece says, "In recent years, the cash management marketplace has seen enhanced cash products become an attractive alternative to traditional money market funds. While not intended as a replacement for money market products, enhanced cash products are designed as an investment alternative for "core" cash and should be used in conjunction with money market funds as part of an overall cash management strategy."

Reserve Releases "Cash Management Opportunities Amid Rate Changes". The Reserve yesterday released a brief publication that discusses the advantages money market funds have over direct money market securities during periods of falling interest rates. "Federal Reserve policy has a significant effect on investment alternatives used for cash management. Historically, money funds have benefited from a decrease in the federal funds rate: more interest-rate-sensitive money is moved to funds from shorter duration securities such as bank deposits, repurchase agreements (repos), commercial paper and auction-rate securities.... In addition to being the model cash diversification tool, the "lag" in money market fund yields ... [because of their weighted average maturity (WAM)] is an advantage in falling rate scenarios."

Federal Reserve Cuts Rates by 1/2 Percent, Cash Surges Into MM Funds. The Federal Reserve Board of Governors cuts its Federal funds target rate from 5.25% to 4.75% and also reduced the less important discount rate to 5.25%. The Fed statement says, "[T]he tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time." Expect to see unprecedented inflows into money market mutual funds as institutional investors "ride the lag". Money fund yields should fall sharply over coming weeks as they digest the first Fed cut since June 2003 and the first Fed move since June 2006.

Fed Rate Cuts Could Send Money Market Fund Assets Over $3 Trillion. Institutional money market mutual fund assets have increased by an average of 3.4% a month during periods when the Federal Reserve cuts interest rates, according to a study of Federal Reserve data since 1990 done last year by Crane Data and sponsored by The Reserve. Money funds, which have increased by almost $450 billion to a record $2.83 trillion year-to-date through Sept. 12, are on course to break above the $3 trillion level within two months at this pace. Money funds gain assets during rate cuts as institutional money moves from overnight repurchase agreements (repo) and direct money market instruments in an attempt to delay the impact of lower rates.

Failed Auctions Totalling $6 Billion Roil Auction-Rate Securities Market. This week's issue of Financial Week discusses failed auctions in the auction-rate securities market (ARS). Auction-rate securities, which money funds are not allowed to invest in because of the lack of a "hard" interest-rate reset, had been used by a number of corporate investors as higher-yielding "liquid" investments until a 2006 accounting firm ruling that ARS were not "cash equivalents" under FAS-95 (Financial Accounting Standards). Peter Crane tells FW, "At least 60 auctions have failed in recent weeks, which could represent as much as $6 billion" of the estimated $300 billion market. The article adds, "But the inherent risks that have abruptly come to light are scaring some corporate cash managers away."

Recovery Continues in ABCP and Money Markets Despite Northern Rock. The commercial paper and ABCP markets continued their recovery today, despite news of UK-bank Northern Rock being bailed out by the Bank of England. Bloomberg writes, "Asset-backed Paper Yields Fall to One-Month Lows", saying CP yields were the lowest since Aug. 16. The article quotes Peter Crane, "The funds are seeing this as an opportunity to extend themselves.... They were afraid and all they needed was a little courage." Russell's Mark Amberson, cautioned, "The market's still subject to daily news flashes that could trip up this improved tone. Woe be to the investor who forgets the past six weeks." The positive tone was set this morning by a barrage of CP market recovery articles yesterday on Bloomberg, last night in the FT, and today by AP and The Wall Street Journal "Is There Hope for Commercial Paper?".

Money Market Fund Assets Continue Surge After Record August Rise. Money market fund assets rose by $26.73 to a record $2.829 trillion, say the ICI's latest weekly statistics. This marked money funds' ninth consecutive weekly record, a period during which they've grown by $249 billion, or 9.7%. Money fund assets likely set the all-time record for a monthly increase in August with flows up $170 billion; January 2001 was the previous recordholder. Year-to-date inflows of $447 billion, or 18.8%, have funds on pace for to smash 2001's record $440 billion inflow. Over the past 52 weeks, money fund assets have risen by an unbelievable $598 billion, or 26.8%. Money funds are gaining assets at the expense of direct money market investments and overnight repurchase agreements. The Federal Reserve continue to push its overnight funds rate below its 5.25% target, driving investors away from repo and into funds.

Moody's Affirms AAA/MR1 Rating on Reserve Enhanced Cash Strategies. The Reserve, which recently broke $73 billion in total money fund and "cash-plus" assets, announced that Moody's Investors Service has reaffirmed its AAA/MR1 rating on Reserve Enhanced Cash Strategies Portfolio LLC, a non-2a-7 fund with a stable $1.00 share price. The fund "has been trading at $1.00 and we expect it to continue to trade at $1.00," says Reserve CIO Patrick Ledford. Enhanced cash, cash plus, but particularly European-domiciled "LIBOR Plus" funds, have been under some duress, but funds hewing closely to money fund regulations appear to be fine, as reflected in the recent affirmation of Reserve's offering. For more enhanced cash coverage, see: "Turbulent times for cash plus funds as Libor goes 'haywire'", "European Enhanced Cash Funds and the Current Liquidity Stress", and the current (Sept.) Money Fund Intelligence for more coverage.

ASF and ESF Issue Joint Statement on Asset-Backed Commerical Paper. The American Securitization Forum and the European Securitisation Forum, which represent issuers of asset-backed commercial paper, issued a joint statement on a meeting yesterday with ABCP participants. The release states, "ABCP is an essential and widely used mechanism for raising short-term capital to fund a diverse range of consumer and business needs throughout the world." Participants noted signs of "improved flows" and a "return to proper focus on strong credit fundamentals and structural safeguards". It adds, "Members will continue to reach out to money market mutual fund managers as well as ABCP investors to provide detailed information and education on transaction-specific assets, structural details and liquidity backstops". A Global Summit will be hosted Sept. 19.

Top-Performing MM Funds Ranked by 1-Year Returns Through 8/31/07. Today, we list the top-performing money funds tracked by Crane Data and ranked in Money Fund Intelligence XLS) by 1-year total return as of 8/31/07. The No. 1 Prime Institutional Money Fund is Janus Institutional Cash Mgmt with a return of 5.45%. JCAXX also holds the current No. 1-ranked 7-day yield spot (see table above). The top-performing fund in our Prime Individual category is Fidelity Inst MM: MM Port II (FCIXX) with a return of 5.30%. Alpine Municipal MMF Y ranks No. 1 among Tax-Free Individual funds with a 3.63% return, while Lehman Bros Nat Muni MF Res (LBMXX) ranked first among Tax-Free Institutional with a 3.68% return through Aug. 31. No. 1 Institutional Treasury funds included Barclays Treasury Inst and MS Inst Liq Treas (both 5.28%), and the No. 1 Institutional Government was Janus Inst Govt MM (5.36%). The top Government Individual fund was Vanguard Federal MMF (5.17%) and the top Treasury Individual fund was First American Treas Oblig Inv (5.02%).

News Preview from Money Fund Intelligence's September Issue. The September issue of Crane Data's Money Fund Intelligence is now available. Articles include "Sole Survivors: Money Funds Remain at $1.00", "Fortune Favors the Bold: Managers Buying ABCP", and "Collateral Damage: Will Bankerage Get Blasted"? The issue says, "We believe the worst of the Money Market Panic of '07 is over". One manager is quoted on the ABCP market, "I think there are people looking for some opportunities, and as the market stabilizes people get more confident". For the month ended August 31, our broadest money fund benchmark, the Crane Money Fund Average, returned 0.40% (1-mo), 1.21% (3-mo), 3.25% (YTD), 4.94% (1-yr), 3.70% (3-yr), 2.52% (5-yr) and 3.50% (10-yr). For monthly in-depth news, performance statistics, and the Crane Money Fund Indexes, subscribe to Money Fund Intelligence!

WSJ Says "In Tight Market, Banks Woo Buyers For Commercial Paper". Today's Wall Street Journal discusses the euro commercial paper market and the pending rollover of $120 billion in CP. The article says, "While there is little sign the market is opening up, a few rays of hope are emerging. In Australia, the central bank has broadened the definition of assets it would accept as collateral for short-term funding.... In the U.S., money-market funds haven't suffered big redemptions and thus still have money to put to work. Investors in these funds also are willing to hold commercial paper for slightly longer time frames, suggesting some stability may be returning, though the funds may find their investors want a limited diet of short-term paper." It adds, "Bank affiliates, known as conduits and structured investment vehicles, ... are seeking to calm investor unease by disclosing an unusual level of information about their holdings, especially their exposure to subprime loan assets.

Fitch Ratings Assigns AAA/VR1+ Ratings to BlackRock Liquidity Funds. Fitch's highest ratings were assigned to six BlackRock Liquidity (money market) Funds: TempFund, FedFund, T-Fund, FedTrust, Treasury Trust, and MuniFund. The release says, "The assigned ratings denote the lowest expectation of credit and market risks, and that each portfolio's capacity to meet its objectives is highly unlikely to be adversely affected by foreseeable events.... First launched in October 1973, TempFund is the oldest operating institutional money market fund that seeks to maintain a stable $1.00 net asset value. Most of the BlackRock Liquidity funds now hold all three AAA ratings; FedFund, TempFund, T-Fund and TreasTrust and MuniFund had already carried both Moody's and S&P AAA labels. Separately, we'd missed a prior August 31 Fitch release entitled "All European Enhanced Cash Funds Are Not Equal.

How Is The Commercial Paper Market Doing Now, and How Does It Work? USA Today's "Commercial paper is still worth a lot of money" explains how commercial paper works and gives an update on the status of the market. "What's the future of the commercial paper market? Most people I speak to say commercial paper sold by strong companies will continue to be healthy. And even asset-backed paper, backed by high-quality assets, will be fine. But the days of mortgage-backed commercial paper sales may be numbered. The commercial paper market is seen as a place only for elite issuers, and mortgage-backed commercial paper has demonstrated that it doesn't fit that definition in many cases," says the piece. See Crane Data's September issue of the monthly Money Fund Intelligence for more on money funds, asset-backed commercial paper, and current market news.

Money Market Fund Assets Break $2.8 Trillion as Record Run Continues. The Investment Company Institute reports that money market mutual fund assets rose by $39.12 billion in the week ended Sept. 5 to a record $2.802 trillion. Retail money funds decreased by $5.27 billion to $1.083 trillion, while institutional money funds increased by $44.39 billion to a record $1.719 trillion. Money market mutual fund assets have increased by $576 billion, or 25.9%, over the past 52 weeks, and have increased by $419.9 billion, or 17.6%, year-to-date. Since June 27, money fund assets have increased by $266 billion, or 10.5%. To date, investors haven't shown concern over exaggerated and erroneous reports about subprime debt in money market funds and over liquidity issues in some isolated sectors of the asset-backed commercial paper market.

Will State and Local Government Investment Pools Get Burned Again? Reports that King County, Washington has taken steps to purchase SIV-lite Mainsail II and SIV Cheyne from the the $4.1 billion King County Investment Pool have raised concerns that some variable NAV state and local government investment pools and corporations, which, like "enhanced cash" funds, sometimes purchase securities that money market funds can't or won't, could be facing small losses. King County (Seattle) says, "Last week, the county took protective steps after learning of downgrades for Mainsail and Cheyne, two commercial paper investments in King County's investment pool portfolio [the ninth largest in the country], which had the potential to impact the pool's high rating. The two investments make up about 2.5% of the investment pool's assets or $103 million," says a release. Concerns have also recently been raised about Orange County's Investment Pool, which went bankrupt in 1994 following a sharp decline in interest-rate sensitive "derivative" securities.

U.S. Bank Launches Cash Solutions Money Fund Trading Portal. Minneapolis-based U.S. Bancorp is now officially live with its U.S. Bank Cash Solutions Portal, an online money market fund trading platform. The new website is powered by technology from CacheMatrix Holdings LLC. "With corporate cash reserves at historic levels, U.S. Bank Cash Solutions Portal provides treasury professionals with a terrific fund management solution," said CacheMatrix Founder & CEO George Hagerman. AFP recently released a survey showing the number of corporate users of money fund "portal" technology plateauing, 23% of companies in the 2007 survey "use an electronic, multi-family trading portal to execute" some short-term investment trades vs. 24% in the 2006 survey.

Fidelity Money Market Fund Moves Into Number One Retail Ranking. Fidelity Money Market Fund, formerly Fidelity Spartan MM, has seen its yield jump over the past week from 5.07% to a current 7-day yield (annualized) of 5.17% and an effective (compound) yield of 5.30%. Its guargantuan companion, the $105 billion Fidelity Cash Reserves, has also seen its yield surge to 5.12%/5.25% (simple/compound). Money market fund yields overall continue to rise in response to the jump in asset-backed commercial paper yields, a higher LIBOR rate (the London Interbank Offered Rate), which is used to price some floating rate securities, and a most volatile money market which is presenting rarely-seen opportunities for the bold and the swift. In the past week, our Crane 100 Money Fund Index has risen 13 basis points, from 4.94% to 5.07%. Note also that the top institutional money funds now all offer yields over 5.5%.

Money Fund Yields Surge on Higher CP, ABCP Levels, Treasury Bounce. August's credit crisis in sectors of the asset-backed commercial paper market and wild swings in Treasury yields are now being reflected in money market mutual fund rankings and averages. Our Crane 100 Money Fund Index, the average 7-day current yield of the 100 largest money funds, fell from 5.01% to 4.89% from August 10 through August 24, but then surged 15 bps to 5.04% in the week ended 8/31. A recovery in Treasury and government yields, coupled with a surge in LIBOR (used to price some floating rate notes) and some near 6.0% yields on selected ABCP securities, has pushed fund yields higher across the board and has caused rare movement in the top-rankings tables. The top-ranked funds are yielding over 1/4% more than they were prior to the crisis. (See daily "Top 5" above). While expenses normally account for over half of the difference in money fund returns, recent volatility has allowed the swift and the bold to outperform their competitors. Expect to see more movement in coming days too, as these yields continue to work their way through fund portfolios, which have an average maturity profile of 33 days.

MarketWatch Features Latest in Wave of 'Money Funds Are Safe' Articles. In apparent penance for the initial wave of negative press, money funds are now the subject of a series of glowing, nothing-to-worry about articles. The latest is MarketWatch columnist Chuck Jaffe's "Safe passage: Any concerns about money-market funds are overblown". Jaffe quotes Pete Crane, "[B]y the time you figure out if that [securities raising concerns] is something your fund was holding, that paper is gone; the funds change their allocations every day. They [money funds] don't sell anything; they just stop buying anything that's bad news so that, pretty soon, the fund has moved away from whatever paper it had that might have been considered dangerous." Additional recent articles vouching for the absolute safety of money funds include: CNNMoney, USA Today, MSNBC, and Reuters. See also CNBC and Bloomberg.

Checking Acct Wars: E*Trade Changes Max-Rate Account Rate to 4.00%. Bank Deals reports that E*Trade Financial has just raised the rate on its Max-Rate Checking from 3.25% to 4%. Investors need over $5,000 for this rate, while balances under $5K will earn 0.5%. We recently reported about Fidelity launching 3.5% checking, Schwab's 4.25% checking offer, and ING Direct's 4.0% Orange checking. High-yield checking is the latest fad in "bankerage", the combination of brokerage and banking. These offers are often temporary and move frequently, so buyer beware.