News Archives: November, 2009
Money market mutual funds are bracing for the possible arrival this week of a report from the President's Working Group on Financial Markets, but it appears that the SEC's finalized Money Market Fund Reform Proposals won't be appearing any time soon. The PWG report, which had been originally expected Sept. 15, is expected to comment on the SEC's proposed changes to Rule 2a-7 and on the possibility of a floating NAV and a private liquidity facility. While we've received no word on whether the PWG report is still on schedule, we have heard that the SEC is rolling back its timetable on final 2a-7 amendments to the first quarter of 2010. (Comments from the SEC indicate that there may also be a second round of proposals later in 2010.)
We described the original President's Working Group mandate in our June 18 News, "Treasury's 'Financial Regulatory Reform: A New Foundation' on MMFs," "[The report] says under the section, "Reduce the Susceptibility of Money Market Mutual Funds (MMFs) to Runs," "The SEC should move forward with its plans to strengthen the regulatory framework around MMFs to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole less susceptible to runs.... The President's Working Group on Financial Markets should prepare a report assessing whether more fundamental changes are necessary ... such as eliminating the ability of a MMF to use a stable net asset value or requiring MMFs to obtain access to reliable emergency liquidity facilities from private sources."
We also quoted from the SEC's proposal in our July 2 News, "The severe problems experienced by money market funds since the fall of 2007 and culminating in the fall of 2008 have prompted us to review our regulation of money market funds.... [We] are proposing for public comment a number of significant amendments to rule 2a-7 under the Investment Company Act.... Commission staff has consulted extensively with other members of the President's Working Group on Financial Markets, and in particular the Department of Treasury and the Federal Reserve Board.... We have consulted with managers of money market funds and other experts to develop a deeper understanding of the stresses experienced by funds and the impact of our regulations on the readiness of money market funds to cope with market turbulence and satisfy heavy demand for redemptions.... We have also drawn from our experience as a regulator of money market funds under rule 2a-7 for more than 25 years and particularly since autumn 2007."
As we said in our September Money Fund Intelligence, and still believe, "We're confident that the SEC (and PWG) will reject a floating rate NAV outright, and we think they [the SEC] will modify the maximum WAM to 75 days from 60, will allow government securities to be included in the 1-day and 7-day liquidity buckets, and even will allow some continued investment in illiquid and second tier securities." We haven't heard whether there has been any progress on a "liquidity exchange bank" or liquidity facility, but one person told us that this concept may have hit some roadblocks. We'll keep you posted, but for now, it appears that the regulatory status quo continues to have the upper hand.
Investors in the ill-fated Reserve Primary Fund, which "broke the buck" in September 2008, should soon see their total recovery increase to 99 cents on the dollar after a court okayed the distribution of most of the fund's remaining assets. The SEC released a "Statement of Securities and Exchange Commission Chairman Mary L. Schapiro on the Court's Order Adopting the SEC's Proposed Distribution Plan in the Reserve Primary Fund Case" late Wednesday, which says, "We are pleased with the court's order adopting the SEC's distribution plan in the Reserve Primary Fund case." (See also our "Link of the Day".)
It continues, "From the start, our goal was to return money to investors as quickly and fairly as possible and to avoid the extended quagmire of litigation that would have only served to deplete the finite pool of money used to pay investors. With this goal in mind, the SEC took the lead in proposing a just and equitable resolution and forging a consensus among the vast majority of investors who recognized the benefits of resolving this matter amicably.... The proposal by the SEC advocated a pro-rata distribution plan that provides an equal payout to all shareholders who have not had their redemption requests fulfilled, regardless of when they submitted those redemption requests. It is estimated by the Reserve Fund that the amount to be returned would be 99 cents on the dollar, or more."
Shapiro continues, "Without this distribution plan, shareholders would have been racing to obtain judgments against the finite pool of funds, possibly leading to conflicting judgments by different courts and tapping into a $3.5 billion pot that had been set aside by the Fund to cover litigation costs. In fact, approximately 30 lawsuits already had been filed across the country at the time we proposed our plan. The SEC plan approved by the court eliminates these claims on the remaining assets, freeing up money to be returned to investors. Today's ruling affirms our approach and should enable all investors to get back their money quickly."
The SEC says on background, "On September 15, 2008, the Reserve Primary Fund, which held $785 million in Lehman-issued securities, became illiquid when the fund was unable to meet investor requests for redemptions. The following day, the Reserve Fund declared it had 'broken the buck' because its net asset value had fallen below $1 per share. On May 5, 2009, the SEC filed fraud charges against several entities and individuals who operate the Reserve Fund for failing to provide key material facts to, and affirmatively misleading, investors and trustees about the fund's vulnerability as Lehman Brothers Holdings, Inc. sought bankruptcy protection. More significantly, in bringing the enforcement action, the SEC sought to expedite the distribution of the fund's remaining assets to investors by proposing a plan of liquidation."
It adds, "In its complaint, the agency asked the court to enter an order compelling a pro rata distribution of remaining fund assets, which would release money that is currently being withheld from investors pending the outcome of approximately 30 lawsuits against the Reserve Fund, the trustees and other officers and directors of the Reserve entities."
In its latest monthly "Trends in Mutual Fund Investing: October 2009," the Investment Company Institute reports that money fund outflows continued but moderated in October. Money fund assets declined by $64.3 billion, or 1.9%, to $3.361 trillion, while bond funds increased $49.5 billion to $2.126 trillion. ICI also reported its "Month-End Portfolio Holdings of Taxable Money Market Funds," which showed sharp declines in Government Agency Securities and Treasury Bills and large increases in Repurchase Agreements and Certificates of Deposits.
ICI's Trends says, "Money market funds had an outflow of $71.80 billion in October, compared with an outflow of $126.91 billion in September. Funds offered primarily to institutions had an outflow of $40.34 billion. Funds offered primarily to individuals had an outflow of $31.46 billion." Year-to-date through Oct. 31, ICI shows money fund assets declining by $471.1 billion, or 12.2%, while bond funds assets have risen a stunning $560.7 billion, or 35.8%. The report also shows that stock funds' cash holdings remain near record lows at 3.9%.
Month-to-date in November, money fund outflows have slowed further with money fund assets showing an increase in the latest week. ICI's latest weekly stats (through Nov. 18) showed money fund assets rising by $3.8 billion; they show assets declining by $30 billion month-to-date. (Crane Data's Money Fund Intelligence XLS shows money fund assets rising by an additional $16.5 billion in the week ended Monday, Nov. 23.)
ICI's monthly "Holdings report (available to subscribers only) shows that CDs, including Eurodollar CDs, remain taxable money funds' largest holding at 22.4%, or $660.78 billion, followed by Governments at 20.3% ($600.1 billion). CDs increased by $10.4 billion in October and have increased by $285.4 billion over the past year, while Governments fell by $48.6 billion in October but have risen by $81.5 billion over the past year.
Repurchase agreements represent the third-largest holding of money funds at 18.1% ($533.9 billion), and CP represents the fourth-largest holding at 17.7% ($522.3 billion). Repos rebounded by $28.4 billion in October, but have decreased by $90.2 billion over 12 months. CP has plunged over the past year (down $117.1 billion) and declined by $1.4 billion in October.
Treasury securities, which dropped by $44.6 billion in October to 13.2% of holdings ($390.9 billion), ranked fifth, followed by Notes (both Corporate and Bank) with 5.6% ($164.1 billion). The final 2.7% of holdings were labelled "Other". The report also showed Average Maturities increasing 2 days to 55, the number of funds rising by 2 to 488, and the number of accounts outstanding declining to 31.11 million.
The FDIC's Transaction Account Guarantee (TAG) Program, a part of the Treasury's TLGP that temporarily backs non-interest bearing accounts with unlimited insurance coverage, expires in June 2010 (extended from December 2009). But it now appears that most large banks have opted out of the program due to cost, and it appears that the days of institutions earning 0.40 or 0.50% in NOW accounts are fast coming to a close. We quote from the FDIC's "Final Rule regarding Limited Amendment of the Temporary Liquidity Guarantee Program to Extend the Transaction Account Guarantee Program with Modified Fee Structure" and from recent commentary from J.P. Morgan Securities below.
The FDIC's website explains, "Over 7,100 IDIs participate in the TAG program, and the FDIC has guaranteed an estimated $700 billion of deposits in noninterest-bearing transaction accounts that would not otherwise be insured.... At this time, IDIs participating in the TAG program pay quarterly an annualized 10 basis point assessment on any deposit amounts that exceed the existing deposit insurance limit."
JP Morgan's Alex Roever and Cie-Jae Brown wrote last week, "This past week the FDIC released its opt-out list for the extended Transaction Account Guarantee Program (TAG). Covered institutions had until November 2 to decline extended unlimited coverage on non-interest-bearing accounts (for a minimum fee of 15bp, up from 10bp). Recall in late August the FDIC extended the non-interest bearing transaction deposit account guarantee to June 2010; it was originally set to expire at the end of 2009. This guarantee is unlimited, covering most traditional demand deposits, checking and oddly enough, NOW accounts that pay interest at or below 50bp."
They wrote again this week, under the subtitle, "FDIC: to fee or not to fee," "Last week we discussed the expiring FDIC Transaction Account Guarantee (TAG) and the intention of most large institutions to opt out of extending unlimited deposit coverage to June 2010. By not extending coverage, large banks avoid fees associated with the TAG, fees that many institutions had passed on to clients during the past year. As with the three previous quarter-ends, the FDIC assesses this fee on guaranteed deposits that exceed the standard $250k deposit insurance."
Roever and Brown continue, "Operationally, the TAG fee differs from standard deposit fees in that it applies to the level of deposits held in insured accounts as of the final day of the quarter. The basic guarantee fee is assessed on average quarterly balances, however. We expect that as with the previous three quarter-ends, depositors will look to place cash in securities maturing over the turn to avoid the fee, as uninvested cash in excess of the average balance for the quarter would be unwelcome by banks and likely incur the additional charges."
The November issue of our flagship monthly Money Fund Intelligence newsletter ($500/yr) features an article entitled, "Quiet Giant of Cash: Q&A w/Northern Trust." The article, which we excerpt from below, interviews members of Northern Trust's Money Market Fund team, including Steve Everett, Director of Balance Sheet, Assets, and Insurance, Peter Yi, Director of Money Markets, and Investment Strategist David Rothon. Northern manages over $70 billion in money funds, and the company ranks even higher among cash and short-duration managers when bank trust and securities lending pools are counted in the totals.
Q: How long has Northern been running money funds? How important are they? Everett says, "Northern has been running money funds since the beginning of the 1980's. It is a material business for us.... We clearly manage more cash investment products than our money market funds, and that product suite is a meaningful business unto itself. We were also the 4th fund manager to launch offshore funds in Dublin back in the mid 1990's, so we were an early player across the Pond."
Q: What's the biggest challenge in running a money fund? Yi says, "The biggest challenge for a money fund is really finding that balance between principal preservation, liquidity management, and offering a competitive yield. We believe you should also have a conservative, consistent, and unwavering investment philosophy and investment process that will function well in any environment. Another challenge is having the right infrastructure to support your money funds. That's going to include having economists, research analysts, compliance officers, traders, trading support and of course experienced portfolio managers."
Q: What's been the key to Northern's success in the money markets? Yi says, "One has been our investment philosophy. Two has been the benefit of a strong bank parent with a cash management business that is core to its overall corporate strategy. And third has been offering a solutions-based approach to cash management. We've always managed our money funds conservatively. We've always put principal preservation above all else, followed by liquidity, then finally yield. We believe this conservative positioning really defines us as investment managers."
He tells MFI, "With the new money market proposals likely to be passed and implemented in some form, I think it's realistic to believe that our approach will now become standard. We don't expect these new proposals to affect our day-to-day management of our money market funds. Where we see real benefit is in continuing to be a leader in a stronger and more stable industry. Given our more stringent practices and investment process that emphasizes credit research and risk management, we will be positioned well when these proposals are adopted."
Finally, Everett adds, "Our investment philosophy is not a reaction to what has happened in the markets. That is the way we've always been ... and we don't waver from that approach. Our consistent philosophy and approach has been an important ingredient in how the firm has become successful over time. Maybe a few years ago, people may have thought we were too risk averse and an underperformer, and now they think we're brilliant.... We're really neither. It's more our strategy and our philosophy that we stick to and believe is appropriate in delivering competitive returns in a risk controlled environment for our clients."
To see the full MFI interview, ask Pete for a copy of MFI, or see the reprint version on Northern's website.
Bond guru Bill Gross writes about money market mutual funds and cash in his latest Investment Outlook in a piece entitled "Anything but .01%". He introduces the piece by quoting Will Rogers' famous line, "I'm not so much concerned about the return ON my money as the return OF my money."
Gross says, "With the global financial system apparently stabilized, returns 'on' your money are back in vogue, and conservative investors who perhaps appropriately donned a Will Rogers mask nary a fortmonth ago are suddenly waking up to the opportunity cost of 0% cash versus appreciated assets at renewed double-digit annual rates. That 0% yield is not a joke. Almost all money market accounts -- totaling over $4 trillion dollars, shown in Chart 1 [his chart includes small CDs too] -- yield close to nothing, so close to nothing that I mistakenly did a double take when reviewing my monthly portfolio statement."
The piece continues, "Well now, I say to myself, this is very interesting from a number of different angles. If I was hoping to double my money, it would take approximately 6,932 years to get there at that rate!" He says, "Yet, as Will Rogers knew, and Lehman Brothers demonstrated to another generation, the pain of the foxhole can immediately transition to the dodging of real bullets on the investment battlefield. Moving out on the risk asset spectrum has worked wonders since March of this year, but it comes with the risk of principal loss -- failing to receive the return of your money."
Gross adds, "OK, so where does that leave you, the individual investor, the small saver who is paying the price of the .01%? Damned if you do, damned if you don't. Do you buy the investment grade bond market with its average yield of 3.75% (less than 3% after upfront fees and annual expenses at most run-of-the-mill bond funds)? Do you buy high yield bonds at 8% and assume the risk of default bullets whizzing at you? Or 2% yielding stocks that have already appreciated 65% from the recent bottom, which according to some estimates are now well above their long-term PE average on a cyclically adjusted basis? ... [A]s emphasized in prior Investment Outlooks, the New Normal is likely to be a significantly lower-returning world."
A statement posted late Tuesday on Columbia Management's website announced, "Bank of America to Retain Columbia Management's Cash Business." It says, "After a review of various options, Bank of America has decided to retain Columbia Management's cash business. This business is an important complement to the suite of banking, treasury and credit products currently offered to its corporate and individual clients." (See also our Oct. 1 Crane Data News article, "Bank of America Sells Half of Columbia, Keeps Money Funds For Now".)
Columbia's statement continues, "Bank of America's ownership of the cash management platform allows for strategic advantages in the marketplace and provides integral services to its distinguished client base. The cash business will remain part of Bank of America's Global Wealth & Investment Management organization."
"During the transition, the portfolio management team will continue to align with Paul Quistberg, head of liquidity strategies, reporting directly to Colin Moore, Columbia Management's chief investment officer. This investment team's disciplined investment process is unchanged and remains focused on preserving capital, maintaining liquidity and providing competitive yields. Every effort will be made to ensure a seamless transition for fund shareholders, advisers, institutional clients, consultants and business partners," BoA says.
They add, "The money market funds sponsored by Columbia Management will be rebranded on or about the closing of the long-term business transaction with Ameriprise, which is expected to occur in the spring of 2010 pending all required approvals. We are committed to communicating more information as soon as possible regarding branding, personnel decisions and other transition updates. For now, our cash clients continue to benefit from an experienced investment team and the strength and resources of Bank of America. If you have any questions, please call your relationship manager, dedicated service team or representative."
Elizabeth Warren, chairman of the Congressional Oversight Panel for the Troubled Asset Relief Program, spoke last week at the Bloomberg Washington Summit (see video here) and briefly discussed money market mutual funds and the government's supposed "implied guarantee."
She told Bloomberg, "The big question with the guarantees [is] what do we do about the implicit guarantees? Look right now at money market funds. We rushed in on September 19, a year ago, when the money market funds were about to 'break the buck.' We took a deep breath and suddenly realized, if it breaks the buck and people flee money market funds, we don't have enough liquidity in our system. So, I understand the reason, but we jumped in on money market funds."
Warren continued, "They paid a substantial fee and ... made a profit. We guaranteed those funds. We didn't have to pay out on them and we got fees from the companies that had the money markets. But that guarantee expired on September 18 of this year, very quietly. Is there anyone in left America who doesn't believe that if money market funds threaten to break the buck again that the Federal government will not come rushing back in?"
She said, "So there's, in my view, an implicit guarantee for which those money market funds pay nothing, and we as taxpayers have no protection. But we're operating now with a new implicit guarantee. It distorts the market and changes risk-taking behavior, and that can't be right."
See also the Congressional Oversight Panel's "Guarantees and Contingent Payments in TARP and Related Programs" report, which discusses the Treasury's Temporary Guarantee Program for Money Market Funds (TGPMMF). (Look for more coverage on this report in coming days.)
Today, PIMCO enters the "enhanced cash" ETF marketplace with the launch of PIMCO Enhanced Short Maturity Strategy Fund. Portfolio Manager and Executive VP Jerome Schneider and PIMCO Senior VP and Product Manager Paul Reisz explain the ETF launch in an article entitled, "The Effects of the New Normal Environment on Cash and Short Duration Investing," "Simply put, we feel the pickup in yield potential from 'pure cash' to 'enhanced cash' investments is very attractive."
The company's press release, says, "PIMCO, a leading global investment management firm, has launched the PIMCO Enhanced Short Maturity Strategy Fund (NYSE: MINT), an actively managed Exchange Traded Fund (ETF) that employs the firm's proven investment process and cash management expertise. The new fund aims to preserve capital while also looking to offer more attractive yields than investors earn from money market funds." The company also has a Government Limited Maturity Strategy Fund (GOVY) ETF and a Prime Limited Maturity Strategy Fund (PPRM) ETF pending launch.
The release continues, "The post-crisis market environment has increased the need for suitable cash investments, as many individuals, corporations, pensions and other institutions are insisting on stringent risk controls and ready access to their cash -- yet paying the price in the form of money market returns that hover near zero. MINT may invest in similar high quality short-term instruments as money markets, as well as longer maturity bonds and a broader universe of investment-grade fixed income securities. This strategy, along with the transparency and intraday liquidity of the ETF format, makes MINT a potentially attractive solution for investors who want to preserve capital while seeking higher yields."
Schneider says, "Investors are holding a lot of cash, and are compelled to look for something beyond the near-zero yields that money market funds offer. MINT aims to maximize investors' current income by accessing PIMCO's discipline, risk management and market expertise within a highly liquid and transparent ETF."
Finally, the release adds, "Along with providing the daily portfolio transparency required by ETFs, PIMCO aims to deliver superior returns by employing the firm's market depth and execution ability as well as trading strategies that take the transparency into account.... PIMCO is owned by Allianz Global Investors, a subsidiary of the Munich-based Allianz Group, a leading global insurance company."
PIMCO's MINT offering joins SSgA's BIL (SPDR Barclays Capital 1-3 Month T-Bill ETF) and VRD (SPDR S&P VRDO Municipal Bond ETF), Invesco Powershares PVI (VRDO Tax-Free Weekly Portfolio, iShares SHY (1-3 Year Treasury), and the extinct Bear Stearns YYY (Current Yield) as one of the earliest entrants in the "near-cash" space. (See our previous News articles, "Near-Cash ETFs Rising; PowerShares VRDO PVI Breaks $1 Billion", "IndexUniverse: More on 'Cash' ETFs", "'Money Market ETFs' Not True Money Markets But Enhanced Cash", and "'Dreyfus Lends Its Clout to Foreign Bond, Cash ETFs' writes WSJ".)
In a speech Friday, "More Lessons from the Crisis," at the Center for Economic Policy Studies (CEPS) Symposium in Princeton, Federal Reserve Bank of New York President and CEO William C. Dudley discussed "the extraordinary liquidity events that played out during this crisis." He described "how funding dried up rapidly for firms such as Bear Stearns, Lehman Brothers, and AIG" and suggested "some concrete steps we might take toward making the financial system more resilient -- cautioning that there are no magic bullets."
Dudley says, "At its most fundamental level, this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.... Commercial paper outstanding grew from $1.3 trillion at the end of 2003 to a peak of about $2.3 trillion. Repo funding by dealers to nonbank financial institutions -- as measured by the reverse repos on primary dealer balance sheets -- grew from less than $1.3 trillion to a peak of nearly $2.8 trillion over this period."
He continues, "Like the traditional banking system, the shadow banking system engaged in the maturity transformation process in which structured investment vehicles (SIVs), conduits, dealers, and hedge funds financed long-term assets with short-term funding. However, much of the maturity transformation in the shadow system occurred without the types of stabilizing backstops that are in place in the traditional banking sector."
Dudley comments, "A key vulnerability turned out to be the misplaced assumption that securities dealers and others would be able to obtain very large amounts of short-term funding even in times of stress.... The second factor contributing to the liquidity crisis was the dependence of dealers on short-term funding to finance illiquid assets. This short-term funding came mainly from two sources, the tri-party repo system and customer balances in prime brokerage accounts. By relying on these sources of funding, dealers were much more vulnerable to runs than was generally appreciated. Consider first tri-party repo, a market in which money market funds, securities lending operations, and other institutions finance assets mainly on an overnight basis."
He adds, "However, once Lehman Brothers failed, many commercial banks and other financial institutions encountered significant funding difficulties. News that the Reserve Fund -- a large money market mutual fund -- had 'broken the buck' due to its holdings of Lehman Brothers paper led panicked investors to withdraw their funds from money market mutual funds. This caused the commercial paper market to virtually shut down.... The extreme market illiquidity did not abate until a number of extraordinary actions were taken by the Federal Reserve and others [including] the Commercial Paper Funding Facility (CPFF) ... the TAF and associated foreign exchange swap programs; the Treasury guaranteed money market mutual fund assets; and the FDIC increased deposit insurance limits and set up the Temporary Liquidity Guarantee Program (TLPG)."
He concludes, "Fortunately, there are ways to mitigate the risk of a cascade. First, we can require that financial intermediaries hold more capital.... Second, regulators could require greater liquidity buffers.... Third, regulators could implement changes that would reduce the degree of dispersion in the potential value of a firm.... Fourth, the central bank could provide a liquidity backstop to solvent firms. For example, the central bank could commit to being the lender of last resort as long as it judged the firm to be solvent and with sufficient collateral."
Finally, Dudley says, "Many of these suggestions are already in the process of being implemented. For example, the Basel Committee is in the process of strengthening bank capital ... [and is] moving forward with its work in establishing liquidity standards for large, complex financial institutions.... [T]he Federal Reserve is working with a broad range of private sector participants, including dealers, clearing banks, and tri-party repo investors to eliminate the structural instability of the tri-party repo system so that tri-party borrowers are less vulnerable to runs." But he adds, "Liquidity risk will never be eliminated, nor should it."
Money market mutual fund assets declined for the fifth week in a row and the ninth week out of the past 11 according to the latest statistics from the Investment Company Institute. The declines moderated in the week ended Wednesday, November 11, with assets dropping by $3.68 billion to $3.335 trillion, their lowest level since the end of January 2008. Money fund assets have declined by $495 billion, or 12.9%, year-to-date, and have declined by $585.2 billion, or 14.9%, since setting a record high of $3.920 trillion on Jan. 14, 2009.
ICI's weekly "Money Market Mutual Fund Assets," which is released every Thursday around 5pm, says, "Taxable government funds decreased by $4.68 billion, taxable non-government funds increased by $4.52 billion, and tax-exempt funds decreased by $3.51 billion." It adds, "Assets of retail money market funds decreased by $4.17 billion to $1.093 trillion. Taxable government money market fund assets in the retail category decreased by $380 million to $168.66 billion, taxable non-government money market fund assets decreased by $2.41 billion to $685.30 billion, and tax-exempt fund assets decreased by $1.38 billion to $238.80 billion."
The report continues, "Assets of institutional money market funds increased by $493 million to $2.242 trillion. Among institutional funds, taxable government money market fund assets decreased by $4.30 billion to $883.05 billion, taxable non-government money market fund assets increased by $6.93 billion to $1.191 trillion, and tax-exempt fund assets decreased by $2.13 billion to $168.39 billion."
Year-to-date, retail money fund assets have decline by a stunning 19.3% ($262 billion), which Crane Data believes is evidence of brokerages forcing investor cash into FDIC-insured sweep programs. Institutional money fund assets, which represent 67.2% of all money fund assets, have declined by a more modest 9.8% ($244 billion). Money funds haven't had two consecutive weeks of asset inflows since early March 2009.
We believe the majority of money fund asset outflows have taken temporary refuge in bank savings deposits, which have increased by $600.5 billion (to $4.703 trillion) YTD through 10/31 (according to the Federal Reserve's H.6. "Money Stock Measures" series) and in bond funds. Bond fund assets have increased by $508.9 billion (32.5%) YTD through Sept. 30 (according to ICI's monthly "Trends in Mutual Fund Investing"). A substantial portion of these assets should return once temporary deposit insurance increases expire and rising rates return the normal historical yield advantage that money funds have over bank deposits.
In yet more signs that near zero yields are causing stresses to money market mutual funds, the $5 million Monetta Government Money Market Fund (MONXX) announced plans to liquidate and the $705 million Accessor U.S. Government Money Fund announced plans to invest in commercial paper.
The Monetta Govt MMF filing says, "On November 9, 2009, the Monetta Trust Board of Trustees and the Trust's investment adviser approved a plan to liquidate and close Monetta Government Money Market Fund. The liquidation is expected to occur on December 18, 2009. The remaining 3 series of the Monetta Trust will remain open and unaffected by this announcement."
It adds, "The Government Money Market Fund will not accept any additional purchases of Fund shares through the Liquidation Date. Shares of the Government Money Market Fund may be exchanged for shares of Monetta Fund or any of the other series of the Monetta Trust before the Liquidation Date. Shareholders in the Government Money Market Fund who do not exchange or redeem their shares prior to the Liquidation Date will have the proceeds of their account sent to them at their address of record when the liquidation occurs."
Accessor's Director of Investments Nathan Rowader wrote a letter to shareholders recently, saying "I am pleased to announce an expansion to the current investment guidelines for the Accessor U.S. Government Money Fund effective September 14, 2009. The expansion will allow the Fund to take a position in commercial paper while maintaining its status as a government money market fund. As you are no doubt aware, U.S. Treasury and Agency bond rates have reached historical lows and are no longer sufficient to produce a positive yield in the Fund. This is a phenomenon that many money market funds currently face."
The letter continues, "As the Accessor U.S. Government Money Fund's higher yielding bonds mature, those assets are being reinvested at today's lower levels. Forward Management has explored several options to adapt to this difficult environment and has determined that the best solution for shareholders is an expansion of the current guidelines. This allows the investment team the flexibility to include an allocation to commercial paper to help mitigate the effect of lower rates in the short term government fixed income markets.... The short-term nature of commercial paper provides the portfolio access to bonds yielding roughly two times that of comparable U.S. Treasury and Agency securities."
Finally, it says, "Forward Management has always managed the Accessor U.S. Government Money Fund conservatively and has developed a number of processes to help mitigate risk. This process will continue as we expect to limit the Fund's exposure to commercial paper to 15% of Fund assets and will be complemented with rigorous credit research on the issues we choose to put into the portfolio. We intend to include only the highest rated, most stable companies on our authorized purchase list. We feel that the addition of commercial paper to the Accessor U.S. Government Money Fund enhances the investment team's ability to generate value for shareholders. This change in strategy will likely alter the credit profile of the portfolio, but we believe the yield benefits will be measureable and sustainable. We are confident that this change is the appropriate adjustment in today's investment environment."
As we reported Friday in our November Money Fund Intelligence, Union Bank has upgraded its online money market fund trading portal and entered the portal custody business with the launch of Union Bank Moneyport (www.unionbankmoneyport.com). Monday's press release says, "Union Bank, N.A., announced today the launch of Union Bank MoneyPort -- an upgraded version of its Institutional Money Market Portal -- that features a secure online environment with enhanced web offerings and functionality for Institutional Trust & Custody clients."
It continues, "In launching MoneyPort, Union Bank collaborated with Cachematrix, a vendor with a proven track record in money funds technology. Through the portal, clients can quickly select and trade money market funds offered by 30 globally recognized money managers, and more than 250 short-term investment vehicles. These short-term vehicles available to U.S. institutional investors encompass a complete suite of domestic 2a-7 money funds and Union Bank depository products. Additionally, foreign or offshore money funds may be made available to qualified non-U.S. institutional clients."
Union Bank Senior Vice President Marianne Bamonte says, "The upgrades now available on Union Bank MoneyPort incorporate a broader array of money market vehicles including multiple currency options, flexible trade authorization controls, a customizable investment compliance module, real-time trade confirmations, and treasury workstation compatibility." Union Bank Portal Services Manager Liz Hamilton adds, "With MoneyPort, institutional custody clients can keep their organization's money fully invested and diversified -- all within a secure online environment."
Finally, the release says, "Prior to its recent upgrade to MoneyPort, Union Bank's Institutional Money Market Portal provided online trading services to money markets for institutional custody clients with combined assets totaling $6.3 billion. With the upgrade, the bank hopes to appeal to existing clients as well as prospects who are seeking opportunities to maximize earnings, manage portfolio diversification, and save administrative time."
See our interview with Union Bank's Marianne Bamonte, "MM Portal Makeover: Union Bank's MoneyPort," in this month's MFI. (To request a copy, e-mail pete@cranedata.us.) Finally, see Cachematrix's press release from this morning here.
In its latest "Portfolio Manager Commentary: Overview, Strategy, and Outlook research piece, the $157 billion Wells Fargo Advantage Funds discusses supply and rates in the money markets with a focus on commercial paper, ABCP, and municipal variable-rate demand notes. We excerpt from the article below.
Under "Surveying the Landscape," Wells Fargo writes, "The lack of supply is one of the dominant topics of conversation in the money markets. Issuers have found it both desirable and possible to extend the term of the debt issuance into the longer part of the money market curve and into the bond markets. A conflict exists as regulators overseeing the issuers are encouraging them to issue longer, while potential new money fund regulations encourage money funds to stay short in order to boost liquidity.... `One of the major contributors to the improvement in the financial markets continues to be market participants' willingness to take more risk, especially in terms of the duration of their investments."
They also comment, "Potential changes to the accounting treatment of asset backed securities (ABS) threaten to drop ABCP outstandings even further. On June 12, 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 166, ... and SFAS 167.... These standards will come into effect next year and will change accounting for securitizations and off-balance sheet financing. The impact of both FAS 166 and 167 will make off-balance-sheet treatment of ABS and ABCP more difficult to achieve.... The ABCP and ABS markets will most likely continue to shrink with fewer transactions, as the economics for domestic financial institutions become less attractive to finance assets off the balance sheet."
Wells' Dave Sylvester writes, "With the improvement in the tone of the markets, the programs designed last fall to support the money markets continue to decline in importance. The main programs in this sector are the Commercial Paper Funding Facility (CPFF) and the Asset-Backed Commercial Paper Money Market Mutual Fund Lending Facility (AMLF).... With only about 1% of the total CP now owned by the Fed, we expect that both of these programs will be allowed to expire in their present forms as scheduled on February 1, 2010."
The company says of its funds, "Our focus remains on liquidity and maintaining a stable $1.00 net asset value (NAV). In our prime-category money market funds, we have been able to use our highly liquid position to selectively purchase longer-dated investments. Most of our short-term investments have been made in the one- to three-month maturity sector, with some selected purchases in longer-dated paper, where those investments are consistent with the primary objectives of the funds. As rates have compressed, municipal variable-rate demand notes (VRDNs) are sometimes offered higher yields than taxable investments of a comparable term, and we continue to add to that sector on an opportunistic basis. While we have increased the weighted average maturities of our portfolios somewhat, they remain well below the industry average."
Finally, Wells says, "We will in all likelihood face a prolonged period of low interest rates in the money markets. As investments purchased in the past at higher rates mature, money fund yields will continue to decline. With yields at record lows and credit spreads narrowing, we believe that this is the wrong time to be chasing yield. While we take the Federal Reserve at its word when it tells us that rates may remain low 'for an extended period,' there are some signs globally that central banks are beginning to reverse course, or at least contemplate doing so.... Attempting to increase yields by increasing maturity seems to be taking an inordinate risk at this point. Rates will inevitably rise, and this might necessarily require more emphasis on liquidity and a stable $1.00 NAV."
The November issue of Crane Data's flagship Money Fund Intelligence contains the articles: "FDIC-Insured Brokerage Sweeps Draining MMFs," "Quiet Giant of Cash: Q&A w/Northern Trust," and "MM Portal Makeover: Union Bank's MoneyPort." MFI also summarizes the month's news in money funds, with briefs on assets, yields, regulations, filings, and more, and contains a wealth of performance statistics and rankings on over 1,300 money market mutual funds.
We've written about it briefly several times over the past couple of weeks on www.cranedata.com, but FDIC-insured brokerage sweeps, or "bankerage," fills our lead article in MFI this month. The issue says, "While investors are no-doubt moving assets out of money funds and into bond funds and stocks, we believe that what's really driving the outflows is the shift into 'bankerage,' or FDIC-insured brokerage sweep account programs by a number of large brokerages.... Recently, Schwab, TD Ameritrade, and BlackRock have all commented on the trend. We noticed several very large drops in brokerage retail money funds this month, so the trend shows no signs of slowing just yet. Retail money funds have been hemorrhaging cash all year."
Our latest MFI monthly money fund "profile" interviews members of Northern Trust's Money Market Fund team, including Steve Everett, Director of Balance Sheet, Assets, and Insurance, Peter Yi, Director of Money Markets, and Investment Strategist David Rothon. Northern manages over $70 billion in money funds, and the company ranks even higher among cash and short-duration managers when bank trust and securities lending pools are counted in the totals.
Finally, we announce the re-launch of Union Bank MoneyPort, Union Bank's entrant into the online money market fund trading portal custody business. We hear from banking industry veteran Marianne Bamonte about the new $6.3 billion platform, as well as about the bank's focus on the custody and liquidity marketplace. Look for more later today!
Last week, money fund manager Reich & Tang, manager of the $10 billion Daily Income family of money funds, posted an announcement saying that it was preparing to re-enter the ABCP market. The "News" brief says, "Given the improving market conditions, Reich & Tang's Investment Credit Committee (ICC) has decided to re-examine issuers in the Asset Backed Commercial Paper (ABCP) market for potential investment consideration. Our investment approach always includes consideration of a number of factors before reaching a decision to expand our investment options."
The company explains, "We are experiencing a challenging rate environment and it is our expectation that low yields will continue for several months. Approved ABCP issuers will give our portfolio managers the ability to position our portfolios to meet the needs of our shareholders. We continually monitor the improving credit conditions, economic trends and improved financial health of issuing companies to find opportunities that meet our investment objective."
They continue, "It should be noted that Reich & Tang has previously invested in ABCP issues across its portfolios, but we were proactive in shunning these securities when credit conditions began to deteriorate. We stand ready to take such actions again, if necessary. However, we feel it is a good time to review ABCP issuers and other opportunities to incrementally enhance our yield in our portfolios."
Finally, the piece says, "Our Credit Research department has clearly defined Reich & Tang's risk tolerance level, which uses historical and forward looking data to generate various market scenarios. In addition, we choose to rely on creditworthy counterparties with irrevocable commitments to purchase. These are key elements of our Credit Risk Review practices. As always, we remain committed to the preservation of safety, liquidity and credit quality in our Money Market Funds, and will maintain our focus on the credit quality of the securities we purchase to ensure that our funds have ample liquidity to meet all our clients' needs."
Asset-backed commercial paper balances have declined sharply since peaking over the $1 trillion barrier three years ago and recently dropped below $500 billion. (See our Oct. 16, 2006, one of our first Crane Data News pieces, "ABCP Outstanding Breaks $1 Trillion Says Credit Suisse Newsletter".) The Federal Reserve's Commercial Paper Outstandings series shows ABCP totals at $463.3 billion, down 34% year-to-date. ABCP represents 39.6% of the total CP market of $1.169 trillion (unseasonally adjusted), down from 44% at year-end 2008 and 47% at year-end 2007.
ICAP plc issued a press release yesterday announcing that its European money market fund (MMF) portal MyTreasury has been awarded the 2009 Treasury Management International MMF Dealing Portal award, "the second consecutive year that MyTreasury has won this award, as voted by the readers of TMI", a London-based Treasury magazine. (See our January 2008 News brief, "ICAP's MyTreasury.com European Money Market Portal Launches.")
The release says, "MyTreasury has seen a 300% growth in the number of users between April and October 2009. The diversity of the MyTreasury user base, ranging from small local authorities with one or two fund accounts to global organisations with over 50 accounts, also illustrates the unique combination of simplicity in use and powerful risk control that users value so highly."
It adds, "MyTreasury is the only MMF portal provider integrated with the fund administrators and as a result is the only provider able to offer fully automated trade execution. Investors using MyTreasury receive major benefits from the MyTreasury/SWIFT automation service which eliminates all manual processing and potential trading errors, failure and other inefficiencies that inevitably occur with manual intervention."
Justin Meadows, Chief Executive of MyTreasury, said "We are delighted to receive this award for the second year running and believe that it is recognition of both the high technical quality of our platform and the comprehensive support we provide to all our users. We are now building on our success and have begun a development programme to extend operations into new regions and products, including onshore MMFs, Term Deposits, Certificates of Deposit and FX in the short term."
Recently, some money fund managers and market strategists have held out hope for fund investors that slightly higher rates may be imminent. While nobody is predicting a hike in the benchmark Federal funds target rate in 2009, expectations of higher rates in 2010, the unwinding of Fed support programs, and the Fed's preparations for reverse repos with money funds all should bring some welcome breathing room for money funds subsisting on rock-bottom gross yields.
Last Thursday, Federated Investors hosted a Quarterly Money Market Update entitled "The Fed's Low-Rate Stance: Prospects for Relief." CIO Debbie Cunningham said, "The possible reverse repo by the Fed with select players, including money markets, would begin to reverse that process [pushing repo rates to the 20-25 bps range]. It gives us better selection from a securities perspective." She notes that Australia and Norway have already tightened rates, and added, "When one country begins, it's usually within the next 6 months that other countries move."
Cunningham also said, "There's been a slightly different tone to Fed-speak. There's been a lot of discussion about the Fed's statement next week [which] gives us a lot of confidence that we're not going to stay at 0.00-0.25% forever and ever. Although no formal change in rates is expected over the next 6 months, some of the quantitative easing may be taken back, and already has been taken back. The MMIFF is set to expire tomorrow [the unused facility did expire], big yawn, and AMLF and CPFF have dwindled to nothing and a tiny amount."
DB Advisors' hosted a recent conference call where Portfolio Manager Nagesh Gopal said, "If the monetary policy has the desired effect, it will lead to an increase in short-term rates. That will consequently lead to an increased yield from a liquidity management strategies as well. More importantly, the additional collateral due to the Fed's reverse repo program will cause repo rates to rise, which again will provide money funds with incremental yield opportunities in the short-term. Finally, given where we are in the interest rate environment, high quality floating rate securities may be a good idea to add portfolio yield without taking on undue risk."
Gopal added, "Money funds complying with the proposed SEC regulations will be forced to comply with a number of new rules [liquidity buckets, maturity restrictions, no A2-P2].... More importanly, new regulations are likely to suppress money fund yields, and the creation of backstop vehicles, such as liquidity banks, will probably erode yields further."
