News Archives: November, 2016
The Investment Company Institute, the trade group for mutual funds, released its most recent monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds" yesterday. The former shows both taxable and tax-exempt money fund assets down slightly in October, while the latter confirms earlier reports of a continued surge in Treasury holdings and plunge in Repo and CDs last month. (See our Nov. 10 News, "November Portfolio Holdings: Treasuries Jump; Repo, TDs, CDs Fall.")
ICI's latest "Trends in Mutual Fund Investing - October 2016" shows a $12.1 billion decrease in money market fund assets in Oct. to $2.660 trillion. The increase follows a decrease of $51.1 billion in Sept., and an increase of $18 billion in August and $14 billion in July. In the 12 months through Oct. 31, money fund assets have gone down by $54.7 billion, or 2.0%. (Month-to-date in Nov. through 11/28, our Money Fund Intelligence Daily shows total assets up by $49.1 billion with Prime MMFs down $5.2 billion, Tax Exempt MMFs up $1.6 billion, and Govt MMFs up $52.7 billion.)
The monthly report states, "The combined assets of the nation's mutual funds decreased by $275.38 billion, or 1.7 percent, to $16.08 trillion in October, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $10.15 billion in October, compared with an inflow of $17.62 billion in September.... Money market funds had an outflow of $13.24 billion in October, compared with an outflow of $52.38 billion in September. In October funds offered primarily to institutions had an outflow of $7.89 billion and funds offered primarily to individuals had an outflow of $5.35 billion."
The latest "Trends" shows that both Taxable MMFs and Tax-Exempt MMFs decreased slightly in October. Tax-Exempt MMFs declined by $0.4 billion after falling $15.3 billion in September. Taxable MMFs decreased by $11.7 billion, after dipping $1.1 billion the prior month. Year-to-date through Oct. 31, MMFs have had $95.4 billion in outflows, with $28.0 billion in inflows to Taxable funds and $123.4 billion in outflows from Tax-Exempt funds. Money funds now represent 16.5% (up from 16.3%) of all mutual fund assets, while bond funds represent 23.2%. The total number of money market funds dropped to 410 in Oct., down from 416 in Sept. and down from 501 a year ago.
ICI's Portfolio Holdings confirms a jump in Treasuries and an increase in Agencies in Oct., while every other composition category declined. Repo remained the largest portfolio segment, but it fell by $64.7 billion, or 7.6%, to $790.9 billion or 31.2% of holdings. Treasury Bills & Securities reclaimed second place among composition segments, rising $127.7 billion, or 20.1%, to $762.9 billion, or 30.1% of holdings. U.S. Government Agency Securities dropped to third place, gaining $19.8 billion, or 3.1%, to $662.5 billion or 26.2% of holdings. These increases were fueled by the final crescendo of assets shifting away from Prime fund assets and into Government funds ahead of the October 14 money fund reform deadline.
Certificates of Deposit (CDs) stood in fourth place, but decreased $64.7 billion, or 7.6%, to $150.9 billion (6.0% of assets). Commercial Paper remained in fifth place but decreased $5.3B, or 4.7%, to $107.9 billion (4.3% of assets). Notes (including Corporate and Bank) were down by $3.0 billion, or 26.9%, to $8.2 billion (0.4% of assets), and Other holdings fell to $39.2 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 427 thousand to 24.974 million, while the Number of Funds fell by 2 to 308. Over the past 12 months, the number of accounts rose by 1.737 million and the number of funds declined by 41. The Average Maturity of Portfolios was 42 days in Oct., up 3 days from Sept. Over the past 12 months, WAMs of Taxable money funds have lengthened by 4 days. Note: Crane Data also revised its Nov. MFI XLS last week to reflect the latest 10/31/16 Portfolio Composition data and Maturity breakouts. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our Sept. Money Fund Portfolio Holdings and the latest files.)
The SEC released its latest "Money Market Fund Statistics" last week. The latest data set shows that assets were down slightly in October, as over $177 billion shifted out of Prime and $148 billion shifted into Government MMFs. Gross yields jumped for Prime MMFs but dropped sharply for Tax Exempt MMFs. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. The Commission's latest statistics show total money market fund assets decreased by $30.0 billion in October to $2.915 trillion. (The SEC's series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Assets fell $35.2 billion in Sept., $33.7 billion in August, $21.2 billion in July, and $20.7 billion in June. Year-to-date, total assets are down $170.6 billion, or 5.5%, through 10/31.
Of the $2.915 trillion in assets, $562.5 billion was in Prime funds, which dropped by $177.4 billion in October after falling $293.2 billion in Sept., $201.3 billion in August, $44.5 billion in July, $124.5 billion in June, and $66.9B in May. Prime funds represented 19.3% of total assets at the end of Oct. They've declined by $1.010 trillion YTD, or 64.2%, and they've fallen $1.228 trillion, or 68.6% since 10/31/15.
Government & Treasury funds total $2.217 billion, or 76.0% of assets, up $148.0 billion in October, after being up $268.3 billion in Sept., $212.0 billion in August, $77.0 billion in July and $120B in June. Govt & Treas MMFs are up $967.8 billion YTD (77.5%) and $1.176 trillion (129.8%) since 10/31/15, just prior to the start of the Prime to Govt conversion trend. Tax Exempt Funds were down again, dropping $0.64 billion to $135.0 billion, or 4.6% of all assets. The number of money funds was 420, down 13 for the month and down 98 from 10/31/15.
Yields increased in October. The Weighted Average Gross 7-Day Yield for Prime Funds on October 31 was 0.71%, up 8 basis point from the previous month, and more than double the 0.27% of November 2015 (before the Fed hike). Gross yields remained at 0.42% for Government/Treasury funds, unchanged from the previous month but up 0.27% since 11/15. Tax Exempt Weighted Average Gross Yields decreased 12 basis points in October to 0.69% (after rising 19 bps in Sept. and rising 59 bps since 11/30/15).
The Weighted Average Net Prime Yield was 0.48%, up 0.08% from the previous month and up 0.37% since 11/15. For the year-to-date, 7-day gross yields for Prime are up 30 basis points and net yields are up 26 basis points. The Weighted Average Prime Expense Ratio was 0.24% in October (up one bps from September). Prime expense ratios have risen from 0.17% in November 2015. (Note: These averages are asset-weighted.)
Weighted Average Maturities jumped and liquidity plunged in October as the deadline for new money fund reforms passed. The average Weighted Average Life, or WAL, was 58.7 days (up 15.8 from last month) for Prime funds, 94.5 days (down 0.1 days) for Government/Treasury funds, and 25.9 days (down 1.6 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM was 35.2 days (up 9.4 days from the previous month) for Prime funds, 43.1 days (up 0.9 days) for Govt/Treasury funds, and 23.7 days (down 1.2 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 36.4% in October (down 6.6% from previous month). Total Weekly Liquidity was 52.5% (down 10.5%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $56.3 billion, followed by the U.S. with $55.2 billion. France was third with $53.2 billion, followed by Japan ($47.8B), Sweden with $38.6B and Australia/New Zealand ($28.2B), the UK ($25.7B) and Germany ($23.7B). The Netherlands ($20.3B) and Switzerland ($12.2B) round up the top 10.
The only gainers among Prime MMF bank related securities for the month included: Norway (up $2.8 billion), Belgium (up $2.7B), Other (up $622 million) and Singapore (up $599M). The biggest drops came from the US (down $21.9B), Canada (down $20.5B), Sweden (down $18.7B), Australia/New Zealand (down $9.1B) and Germany (down $5.0B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $189.5B (down $29.3B from last month), while the Eurozone subset had $102.6 billion (down $7.9B). The Americas had $112.1 billion (down from $154.3B), while Asian and Pacific had $84.3 billion (down $14.3B).
Of the $563.0 billion in Prime MMF Portfolios as of October 31, $212.5B (37.7%) was in CDs (down from $260.3B), $126.0B (22.4%) was in Government securities (including direct and repo), down from $223.0B, $106.5B (18.9%) was held in Non-Financial CP and Other Short Term Securities (down from $129.1B), $86.6B (15.4%) was in Financial Company CP (up from $86.1B), and $31.2B (5.5%) was in ABCP (down from $32.2B).
The Proportion of Non-Government Securities in All Taxable Funds was 16.3% at month-end, down from 18.7% the previous month. All MMF Repo with Federal Reserve decreased to $198.1B in October from $384.3B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 38.3% were in maturities of 60 days and over (up from 24.9%), while 6.2% were in maturities of 180 days and over (up from 3.6%).
Vanguard announced that it will liquidate its $400 million Ohio Tax-Exempt Money Market Fund, the latest in a long line of liquidations in the municipal money market space. The Prospectus Supplement filing for Vanguard OH Tax-Exempt MMF, entitled, "Important Changes to Vanguard Ohio Tax-Exempt Money Market Fund," tells us, "On November 17, 2016, the board of trustees for Vanguard Ohio Tax-Exempt Money Market Fund (the Fund) approved a proposal to liquidate and dissolve the Fund on or about February 22, 2017 (the liquidation date). In anticipation of the liquidation and dissolution, the Fund will be closed to new investors after the close of business on November 22, 2016, and will be closed to new investments after the close of business on January 18, 2017." We review this news below, and also excerpt from J.P. Morgan Securities' 2017 Outlook, which discusses the uncertainty surrounding the money markets following their massive 2016 transformation.
Vanguard's filing continues, "On the liquidation date, the Fund will redeem all of its outstanding shares at the net asset value of such shares. On this same date, all outstanding shares of the Fund will be canceled and the Fund will cease operations as a mutual fund. In order to provide for an orderly liquidation and satisfy redemptions in anticipation of the liquidation, the Fund may deviate from its investment objective and strategies as the liquidation date approaches. Prior to the liquidation date, the Fund will declare and pay its shareholders of record one or more dividends and/or other distributions of its investment company taxable income, if any, and net realized capital gains, if any, for the current taxable year through the liquidation date."
It adds, "The liquidation and dissolution is not expected to result in income tax liability for the Fund. The Fund may pay more than one liquidating distribution in more than one installment. Distribution of liquidation proceeds, if any, to Fund shareholders may result in a taxable event for shareholders, depending on their individual circumstances. Shareholders should consult their own tax advisors about any tax liability resulting from the receipt of liquidation proceeds."
We wrote in our Nov. 21 Link of the Day that Vanguard also filed recently to change the names of its State Tax-Exempt Money Market Funds to "Municipal." They explain, "The boards of trustees of Vanguard California Tax-Free Funds, Vanguard New Jersey Tax-Free Funds, Vanguard New York Tax-Free Funds, Vanguard Ohio Tax-Free Funds, and Vanguard Pennsylvania Tax-Free Funds have approved the renaming [to "Municipal" MMF] of the following Funds. `These name changes are expected to occur in the first quarter of 2017. The investment objective and limitations of each Fund will remain the same, including the 20% limitation on investments in securities that are subject to the alternative minimum tax."
For more on liquidations in the Tax Exempt money fund sector, see our Aug. 17 News, "Federated Tax-Free MMF Liquidating; Impact on Investment Policies," our Aug. 4 News, "Muni MMFs "Decimated" by Rules Says Bloomberg; More Liquidations," our July 15 News, "BIF Liquidates Muni MMFs; Nicholas Closes; MS; PFM Prime Goes Govt," and our Feb. 24 News, "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche." Also, note that Western Inst Cash Reserves (CFSXX) has stated that "effective November 9, 2016, the Fund will no longer offer Class S shares."
In other news, J.P. Morgan Securities' Alex Roever, Teresa Ho and John Iborg write in a new "Short-Term Fixed Income 2017 Outlook about life after Prime. They tell us, "Normally, these year-ahead outlooks are focused on the future. We forecast how markets are going to evolve and what that means for short-term fixed income. Yet as we write this in November 2016, our forecasts are clouded with a level of uncertainty, not only because of the outcome of the US elections but also because there's been a significant transformation in the money markets this past year, leaving many to wonder just how liquidity investors and issuers will behave in the new world absent the large presence of prime MMFs."
The piece explains, "In the current environment, the only thing we know for certain is the significantly diminished buying power of prime MMFs. The onset of MMF reform prompted a massive, but orderly run from prime MMFs into government and Treasury MMFs. As of November 15, total prime MMF AUM registered $375bn, down over $1tn over the past year. Over the same time, government and Treasury MMFs increased by $942bn and $152bn, respectively. The drawdown in prime MMF AUM has forced international banks to borrow less and/or seek out alternate, more expensive sources of USD funding."
It continues, "So far, there have been other buyers, both traditional and non-traditional, providing alternative sources of liquidity. Some of these buyers are what we consider to be "beyond" money market investors, whose duration and investment mandates are generally greater than 6 months and span a variety of credit products respectively. That being said, their participation thus far has largely been opportunistic in nature. Should spreads change such that they are no longer attractive relative to the rest of the credit curve, it's unclear whether they will continue to participate. If not, there could be implications for issuers that wish to continue to fund in the money markets."
J.P. Morgan writes, "Going forward, for issuers looking to access the short-term markets, liquidity will not be from your 2a-7 prime funds but from a set of non-2a-7 investors. Their focus may not be isolated to the very front-end of the money markets (0-6m duration) but also in a space we call beyond the money markets (6-24m duration). As we saw this past summer, they have helped to prevent bank CP/CD outstandings from plummeting even as prime MMFs faced massive redemptions."
They add, "The challenge of course is that these investors each have different mandates and liquidity needs. More importantly, their buying capacity for short-term credits is significantly smaller than prime MMFs. Furthermore, some of these investors are going through structural changes themselves. Who are these investors we are referring to?" The article lists: Offshore prime MMFs, Securities Lenders, Private Liquidity Funds, Short-Term Bond Funds and Separately Managed Accounts (SMAs).
Finally, the paper comments, "Taken together, we highlight the above investors because their motivations will be what drive money market credit spreads and in turn Libor in 2017. For now, we do not foresee their demand for bank CP/CD fading, but their participation will be very much driven by how money market bank CP/CDs, and in particular 6m-1y floaters, price relative to the rest of the credit curve."
UBS Asset Management writes in a new "Liquidity Perspectives" about "Increasing liquidity: A framework for managing risk in volatile times." The piece says, "The global economy has experienced anemic growth in the aftermath of the financial crisis, which has been partially sustained by an unprecedented level of monetary policy action.... `From a corporate treasurer's perspective, this environment warrants caution and places a premium on maintaining a healthy level of liquidity, not only as a defensive buffer to protect against the unknown, but also to capitalize on opportunities."
It explains, "Preserving capital on a real and unadjusted basis is extremely challenging, especially given the "lower-for-longer" rate environment and the need to maintain a strategic liquidity buffer. Nevertheless, we believe developing a disciplined approach to segmenting cash into different layers and deploying it across various risk-and-return parameters is key and may provide some of the following benefits: Cost efficiency: having clearly visible and accessible stores of cash reduces the need to tap into credit lines and can help ensure business continuity at a significantly lower cost; Diversification: identifying levels of cash with different maturity profiles allows treasurers to use a variety of investment vehicles and counterparties, effectively reducing concentration risk; and, Enhanced risk-adjusted returns: categories of cash that are deemed "reserve" or "strategic" allow treasurers to utilize investment options that could potentially provide better inflation-adjusted returns."
UBS continues, "A diversified cash management strategy is critical to maintaining liquidity while preserving and growing capital on an inflation-adjusted basis. Investing cash in a diverse range of vehicles may require venturing into new territory further out the yield curve and down the credit spectrum. But this requires an understanding of key risk and volatility metrics such as liquidity, credit quality and duration."
They tell us, "Liquidity risk is the risk that a counterparty may be unable to meet a redemption call due to its inability to immediately convert a security or hard asset into cash. The liquidity related to each investment vehicle is usually agreed upon in advance. For example, bank deposits and 2a-7 money market funds typically provide daily liquidity, while short-duration bond funds and separate accounts may settle within a few days.... When investing in individual securities, treasurers should also consider the financial health of the custodian and have a clear understanding about their right to access securities if a counterparty fails."
UBS writes, "Credit risk is the risk that a counterparty may default in part or in whole on its principal obligation. Reference to credit rating agencies is useful when looking at diversified investment vehicles such as money market funds or short-duration bond funds.... Duration risk is the risk that measures the sensitivity of a bond's price to changes in interest rates. The vast majority of cash management vehicles, including bank deposits, are typically linked to fixed income securities sensitive to duration risk.... [D]uration risk becomes an especially important concept should central bank policy become more volatile, or move more quickly."
They discuss the risk/return tradeoffs for various cash vehicles, saying, "Money Market Funds ... are the most diversified and most liquid cash investment available to treasurers. Given their exposure to underlying US Government securities and related repurchase agreements, government funds score the highest in terms of credit quality. Furthermore, they are not subject to potential gates and fees provisions that apply to prime funds. Prime funds continue to be a high-credit quality vehicle for cash, providing daily liquidity under normal circumstances while potentially enhancing returns. Some of the key questions treasurers should consider when regarding prime funds include: 1. Is the liquidity risk associated with potential gates and fees well compensated? 2. Is it worthwhile to consider other options such as Short Duration Funds or Separate Accounts to mitigate the liquidity risk associated with prime funds?"
On Bank Deposits, UBS comments, "Similar to money market funds, overnight bank deposits usually provide immediate access to liquidity. However, placing cash with a single institution brings no diversification benefit and entails more risk especially when considering that banks, too, could gate deposits through suspension of convertibility. Additionally, new regulations aimed at eliminating banks' reliance on implicit government support in times of crisis must be considered."
They add, "Given the recent shift in money market assets from bank paper to government instruments, the Libor curve has experienced a significant upward shift, making investing in instruments such as commercial paper and floating rate notes very attractive on an absolute return basis. When investing in single issuers, it is important to consider incorporating it as part of a broader and well-diversified investment strategy so that the added risk aligns with the risk profile of the overall cash portfolio."
Finally, the paper discusses Short-Duration Bond Funds (SDBF) and Separately Managed Accounts, explaining, "SBDFs and SMAs allow access to a broader universe of securities but may cause higher volatility given increased credit and interest rate risks. We think such volatility can be tolerable for the portion of cash assets that is stable, provided that investors do stick with the strategy's underlying duration.... When duration increases, so does the volatility of total returns. However, when considering an investment horizon consistent with the duration of these strategies, rare periods of negative returns are typically offset by multiple periods of strong positive returns."
Below, we reprint the lead article from our November BFI, "Touchstone Ultra Short Duration's Weston & Miller".... This month, Bond Fund Intelligence interviews Fort Washington Investment Advisors' Scott Weston, MD & Senior PM, and Brent Miller, Asst. VP & Senior PM. Fort Washington, a subsidiary of Western & Southern Financial Group, is the sub-advisor for several Touchstone funds and the Touchstone Ultra-Short Duration Fixed Income Fund, which was started in 1994. Our interview, which discusses the ultra-short bond fund space, the Fed, and "inside-out" investors, follows.
BFI: Tell us briefly about your history. Miller: Fort Washington has been managing in the ultra-short space since 1995. Scott and I took over management of the ultra-short duration composite in 2001. At that time the composite was corporate credit oriented, and we re-oriented the strategy with a securitized products emphasis. We've always been students of the ultra-short space. An attribution study we completed on our peer group confirmed what we've long suspected -- securitized products have traditionally provided the best risk-adjusted returns among short duration fixed income assets. We took over the sub-advisory role with the Touchstone Ultra-Short Duration Fixed Income fund in October of 2008.
BFI: Tell us about Touchstone's lineup. Miller: In addition to the Touchstone Ultra Short Duration Fixed Income Fund, Fort Washington serves as sub-advisor to a number of Touchstone fixed income funds including Touchstone Active Bond Fund, Touchstone High Yield Fund, and Touchstone Ohio Tax-Free Bond Fund.
BFI: How did the Ultra-Short come about? Weston: We've had a strong heritage in the money market fund space. A group of us came over from Midwest Group of Funds, which was one of the first money market fund complexes in the country. So we had a strong lineage in ... short duration.... An acquisition in 2006 brought the current fund into the stable of offerings. I think the ultra-short space was a more difficult sell back in the pre-crisis era. Our experience was that banks had strong relationships with their clients and most cash accounts and short duration monies were managed by the banks internally.
But with yields on money market funds and deposit accounts near zero, we believe this has driven a new segment of retail and institutional investors into ultra-short duration. These are what we refer to as "inside-out" investors, those who are invested in cash and looking to move out on the curve to earn a higher yield. At times, with the specter of higher rates, we've also seen investors moving from core bonds into ultra-short ... what we term "outside-in" investors. Since the crisis, most of our interest has been of the inside-out variety, and those are the investors that we cater to with our strategy. We believe it's been a popular strategy because of the low interest rate environment engineered by the Fed, the regulatory environment for money market funds and the challenges that banks face with Basel III.
BFI: What's the biggest challenge for these funds? Miller: I think for the ultra-short fund, there's always the temptation in our space to extend out the curve or take additional risk to try to get more yield and return potential. But our investors, who we've found are looking for a modest risk premium over cash, prefer the limited volatility of a true ultra-short strategy. They don't want the volatility of a longer duration fund.
As the curve has flattened, it simply hasn't paid for us to extend duration. Also, spreads have reached very tight levels when viewed historically, so it doesn't really pay for us to take a lot of credit risk either. Right now you're picking up about 20 basis points to go from the half-year part of the curve to the two-year part of the curve. Break-evens are very low. If rates rise just 13 basis points, that wipes out the extra carry that you get.
We watch our peer group closely ... and we're seeing returns compress among our peers. In that kind of environment, you've got to be really careful as to how much risk you take. What we've always said is that we're happy to take "second quartile" returns in a flat relative value environment. It's really not part of our DNA to radically shift the risk profile of the portfolio.... We're happy with middle of the pack returns during "risk on" periods because where we've tended to outperform is in the flat rate and credit environments and risk-off environments. This is evidenced in our upside-downside capture statistics. Historically, we have generally tended to produce returns in line with, or better than the peer group during periods of positive returns, but capture almost none of the downside when the peer group has negative returns.
BFI: What can and can't you buy? Weston: It's an investment grade only fixed income portfolio. We do have a one year portfolio option-adjusted duration limit, and we tend to target securities with three year option-adjusted duration, or shorter. Our [duration] operating range historically has been 0.6 to 0.9 years, and we're at the low end of that range right now. We're also targeting higher-quality securities, averaging AA-minus or single-A plus for the overall portfolio rating. So it's definitely a high quality focus. We're not limited by SEC Rule 2a-7, which allows us to pursue securitized products which tend to have longer legal final maturities, but very short option-adjusted durations. We don't use leverage.
Miller: We have very talented investment professionals, including our front end trader who manages liquidity needs and the corporate bond sector within the portfolio. The spike in LIBOR has created some opportunities for us. It's had a positive impact on the fund. There's been a "bulging" around the one year part of the curve that has made it attractive for us to stay relatively short. Effectively, we're getting the same yield on one year paper as we are on two to three year paper right now.
Yields on VRDNs and commercial paper, the more traditional money market instruments, are very attractive relative to recent history. So it hasn't been painful to carry a high cash allocation and to stay short as compared to what it has been in the past. LIBOR being elevated is a phenomenon that we think is going to persist for a while. As a result, we've shifted the portfolio somewhat into more floating-rate instruments.... Again, it's been a positive for us.
BFI: Any other comments on the regulatory environment? Weston: We feel like the pendulum may have swung a bit too far in the direction of more regulation. We believe the intention is right, to reduce risks in the financial system. But the magnitude and the extent of the reform, we do feel is unduly burdensome. What we have now is a dealer community that's less willing and able to position risk. We also have more onerous reporting and compliance requirements, which increases the cost of doing business. As a result, we're seeing less liquidity and higher volatility in all sectors of the market. Ultimately, this manifests itself in the form of a higher cost of capital. We are confident that the markets will adapt, and we'll likely see another wave of financial engineering in an effort to optimize business execution within this new framework. Wall Street has an uncanny way of always figuring out the best way to get things done.
BFI: What's your outlook on the Fed? Weston: The Fed's important. We're very sensitive to potentially rising rates. We don't want to be caught with a long duration when the Fed's in an aggressive tightening mode. I was managing bond funds back in 1994 when short-term rates were up 300+ basis points, and that was a painful period. But, with that in mind, our outlook for the Fed is pretty benign. Because of our emphasis on consumer related assets we tend to keep close tabs on consumer fundamentals, which remain very sound, if not strong.
We feel that there is upside risk to economic growth and inflation, and we think the Fed is in agreement. For the past 6 months, the Fed has been telegraphing its desire to raise rates, market conditions permitting. Considering recent growth and employment trends, and what appears to be firming in the inflation indices, you can build a case for higher rates over the next couple of years. The Fed has had more a hawkish bias recently, and I think because of our focus on the consumer we understand that bias.
BFI: What about the future of ultra-short bond funds? Weston: Gradually rising rates is a 'Goldilocks' scenario, where you've got enough economic growth to support credit fundamentals but not enough growth to trigger aggressively increasing rates. So it does seem like an ideal time for short-duration bonds. That said, we are concerned about the upside risk to the market's growth and inflation expectations. We're pretty much consensus in our forecast for Fed Funds -- our base case is for a move in December and another move next year.
However, we do believe there's increasing risk that the Fed could move more aggressively in 2017 with multiple rate hikes. If we see continued improvement in employment, wages and inflation over the next year, we believe core bond investors are going to begin looking for the "outside-in" trade -- out of longer duration bonds and into ultra-short duration funds. If, by chance, the credit cycle turns, we could also see investors moving out of high yield bonds and loan funds and into safer fixed income alternatives such as money market funds and ultra short bond funds. So, I think ultra short duration funds are poised to benefit from changes in either the rate cycle or the credit cycle -- a safer place when volatility returns to the markets.
The Board of Governors of the Federal Reserve has added a page entitled, "Money Market Funds: Investment Holdings Detail" to its "Financial Accounts Guide" for its Z.1 (formerly Flow of Funds) data series. The Fed writes, "These tables provide additional detail on the investment holdings of U.S. money market funds, based on a monthly dataset of security-level holdings for all U.S. money market funds. Table 1 reports the aggregate dollar amount of investments of U.S. money market funds since 2010, by the world region and country of the security issuer. The first row shows total U.S. money market fund assets (i.e., worldwide investments). The first row of each subsection represents total U.S. money market fund investments for each respective world region, with individual country investments listed below. U.S. investments are subcategorized into Treasury securities, agency and GSE securities, Federal Reserve reverse repurchase agreements, municipal securities, and other U.S. investments."
They continue, "Table 2 provides a finer level of detail by month, showing, for each country of issuer, the aggregate dollar amount of investments of U.S. money market funds by type of money fund (i.e., prime, government, and municipal bond funds), type of security (i.e., direct debt and deposits, repurchase agreement, asset-backed commercial paper, and other), and by maturity of the security. The first figure depicts the asset allocation of U.S. money market fund portfolios over time. Figures 2, 3, and 4 show the asset allocation of prime, government, and tax-exempt money market funds, respectively, over time. The sum of the values in these three figures equals the total value of Figure 1. Figures 5 and 6 report additional detail on the repurchase agreement holdings and the commercial paper holdings, respectively, for U.S. money market funds."
Tables now provided quarterly by the Fed include: Table 1. U.S. Money Market Fund Investment Holdings by Country of Issuance, Table 2. U.S. Money Market Fund Investment Holdings by Country of Issuance, Fund Type, Instrument, and Maturity.
They also include the following Charts: Figure 1. Total Money Market Fund Investment Holdings by Instrument, Figure 2. Prime Money Market Fund Investment Holdings by Instrument, Figure 3. Government Money Market Fund Investment Holdings by Instrument, Figure 4. Tax-exempt Money Market Fund Investment Holdings by Instrument:, Figure 5. Money Market Fund Repo Holdings, and, Figure 6. Money Market Fund Commercial Paper (CP) Holdings.
Historical Data Tables provided by the Fed include: U.S. Money Market Fund Investment Holdings by Country of Issuance, U.S. Money Market Fund Investment Holdings by Country of Issuance, Fund Type, Instrument, and Maturity, Total Money Market Fund Investment Holdings by Instrument, Prime Money Market Fund Investment Holdings by Instrument, Government Money Market Fund Investment Holdings by Instrument, Tax-exempt Money Market Fund Investment Holdings by Instrument, Money Market Fund Repo Holdings, and Money Market Fund Commercial Paper (CP) Holdings.
The Fed explains in its "Documentation," "U.S. money market funds are mutual funds that invest in short-term liquid assets and pay their investors dividends that reflect short-term interest rates. Like other mutual funds, they are registered with the Securities and Exchange Commission and regulated under the Investment Company Act of 1940. In addition, all U.S. money market funds must comply with rule 2a-7 of the Investment Company Act of 1940, which seeks to limit their liquidity risk. The data on money market fund investments are taken from the SEC form N-MFP filings. The reported values are the sums of the investments of all U.S. money market funds for the respective category. The country labels represent the country of domicile of the security issuer. The data are available at a monthly frequency beginning in December 2010. Total assets reported differ slightly from the number reported in Table L.121 of the Financial Accounts of the United States. The main difference is due to the fact that the data presented on this page include money market funds that are not marketed to the public, which are excluded from Table L.121."
In other news, Colleen Meehan wrote in a Dreyfus BNY Mellon "Tax-Exempt Money Market Commentary earlier this month, "The Securities Industry and Financial Markets Association (SIFMA) index continues to increase steadily beginning the year at 0.01% and reaching the current level of 0.63% (as of 10/26/16). The SIFMA index is a weekly high grade market index comprised of seven-day tax-exempt variable rate demand notes produced by Municipal Market Data Group. The year-to-date 2016 average is 0.38% versus a 0.05% average for 2015. We expect these levels to remain attractive compared to similar taxable investments as we head towards year-end."
She continues, "As expected, one-year rates have backed up as funds continue to stay short and liquid preparing for the shift in fund assets ahead of money market reform. Demand from separately managed accounts, intermediate-term bond funds and long-term bond funds has picked up as that sector of the market has seen continued asset inflows. The current tax-exempt yield curve is relatively flat one-year out to five-years, making one-year notes very attractive to this segment of the market."
According to Meehan, "Careful and well-researched credit remains key. Many state general obligation bonds, essential service revenue bonds issued by water, sewer and electric enterprises, certain local credits with strong financial positions and stable tax bases, and various health care and education issuers should remain stable credits. Overall, municipal credit now appears to have stabilized following years of slow improvement. This is particularly evident at the state government level, as rainy day emergency funds have been replenished to pre-recession levels, providing a cushion against future economic downturns. However, the degree of recovery continues to vary by region. Isolated credit concerns still persist, such as the State of New Jersey and the State of Illinois, as pension funding and retiree health care benefits remain challenges."
Finally, Meehan says, "The City of Chicago and the Chicago public school system are also high-profile credit concerns for the municipal market and the response of the State of Michigan to the Flint water crisis merits monitoring, as this issue may confront other municipal water supply systems. States and local economies dependent upon petroleum and natural resource activities have developed as pockets of credit concern and deterioration. In particular, the budgets of Alaska, Louisiana, North Dakota and Oklahoma have been damaged by the decline in oil prices. The Texas economy, which is larger and more diversified than other states, bears heightened scrutiny as tax revenue has begun to weaken."
With news last week that the European Parliament has reached agreement on European money fund reforms, we thought we would review the latest European, "International" or "offshore" money fund assets, yields, and portfolio holdings, as well as some new commentary on the soon-to-be pending regulatory changes. (See our Nov. 17 News, "Europe Agrees to Money Fund Reforms: VNAVs, CNAVs and New LVNAVs.") European money fund assets domiciled in Dublin and Luxembourg and denominated in USD, Euro and Sterling are up $41 billion year-to-date through 10/31/16, and they're up $8.7 billion month-to-date in November to $748.8 billion, according to our Money Fund Intelligence International. (Note: Crane Data tracks money funds domiciled in Dublin and Luxembourg, but doesn't track French money funds, the other major segment of "European" money funds.)
U.S. Dollar (USD) funds (157) tracked by MFII account for over half ($380.2 billion, or 50.8%) of the total, while Euro (EUR) money funds (97) total just E90.1 billion and Pound Sterling (GBP) funds (107) total L185.3. USD funds are down $16 billion, or 4.1%, YTD through Oct. 31, and down another $4.5 billion in November (through 11/17). Euro funds are up E16 billion YTD (through 10/31) but down E1.6 billion in November MTD. GBP funds are up L4.1 billion in November, and up L31 billion YTD. USD MMFs yield 0.46% (7-Day) on average (11/17/16), up 30 basis points from 12/31/15. EUR MMFs yield -0.46% on average, down 27 basis points YTD, while GBP MMFs yield 0.22%, down 15 bps YTD.
European-domiciled US Dollar MMFs, on average, consist of 24% in Treasury securities, 22% in Commercial Paper (CP), 20% in Certificates of Deposit (CDs), 18% in Other securities (primarily Time Deposits), 13% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 30.1% of their portfolios maturing Overnight, 11.5% maturing in 2-7 Days, 18.5% maturing in 8-30 Days, 9.5% maturing in 31-60 Days, 10.1% maturing in 61-90 Days, 15.8% maturing in 91-180 Days, and 4.5% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (35.5%), France (15.6%), Japan (9.5%), Canada (7.7%), Germany (5.9%), Sweden (5.5%), Australia (4.7%), the Netherlands (4.3%), Great Britain (2.5%), Singapore (2.0%) and China (1.8%), according to our latest MFII MF Portfolio Holdings report, with data as of Oct. 31, 2016.
The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $103.7 billion (25.4% of total assets), Credit Agricole with $17.7B (4.3%), BNP Paribas with $16.9B (4.1%), Mitsubishi UFJ with $12.4B (3.0%), Natixis with $9.1B (2.2%), Society Generale with $8.3B (2.0%), Sumitomo Mitsui Banking Co with $7.7B (1.9%), Bank of Nova Scotia with $7.4B (1.8%), Federal Reserve Bank of New York with $7.4B (1.8%), DZ Bank AG with $7.3B (1.8%), RBC with $7.3B (1.8%), Wells Fargo with $7.3B (1.8%), Skandinaviska Enskilda Banken AB with $7.1B (1.7%), Credit Mutuel with $6.9B (1.7%), Rabobank with $6.7B (1.6%), Mizuho Corporate Bank LTD with $6.4B (1.6%), Sumitomo Mitsui Trust Bank with $5.8B (1.4%), Federal Home Loan Bank with $5.2B (1.3%), Nordea Bank with $5.2B (1.3%), and Swedbank AB with $5.1B (1.3%).
Euro MMFs tracked by Crane Data contain, on average 47% in CP, 25% in CDs, 17% in Other (primarily Time Deposits), 8% in Repo, 2% in Treasury securities and 1% in Agency securities. EUR funds have on average 21.2% of their portfolios maturing Overnight, 8.0% maturing in 2-7 Days, 16.1% maturing in 8-30 Days, 13.7% maturing in 31-60 Days, 17.1% maturing in 61-90 Days, 22.0% maturing in 91-180 Days and 1.9% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (30.0%), US (13.6%), Japan (13.0%), Germany (10.1%), Sweden (6.8%), Netherlands (6.4%), Belgium (5.3%), Great Britain (2.8%), Switzerland (2.4%), and Canada (2.0%).
The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.1B (6.1%), Rabobank with E3.9B (4.7%), Proctor & Gamble with E3.4B (4.1%), Mitsubishi UFJ Financial Group Inc with E3.3B (4.0%), Credit Agricole with E3.2B (3.8%), Societe Generale with E3.2B (3.8%), DZ Bank AG with E3.1B (3.7%), Credit Mutuel with E2.9B (3.5%), Sumitomo Mitsui Banking Co. with E2.9B (3.5%), Svenska Handelsbanken with E2.8B (3.4%), JP Morgan with E2.4B (2.9%), Norinchukin Bank with E2.4B (2.9%), Nordea Bank with E2.3B (2.8%), Dexia Group with E2.3B (2.7%) and Agence Central de Organismes de Securite Sociale with E2.2B (2.6%).
The GBP funds tracked by MFI International contain, on average (as of 10/31/16): 39.0% in CDs, 27.0% in Other (Time Deposits), 20.0% in CP, 10.0% in Repo, 3.0% in Treasury, and 1.0% in Agency. Sterling funds have on average 23.7% of their portfolios maturing Overnight, 6.1% maturing in 2-7 Days, 11.2% maturing in 8-30 Days, 17.4% maturing in 31-60 Days, 16.1% maturing in 61-90 Days, 21.4% maturing in 91-180 Days, and 4.0% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (15.5%), Japan (14.4%), Great Britain (14.1%), Australia (9.1%), Germany (8.4%), Canada (7.7%), Netherlands (6.4%), US (6.1%), Sweden (4.9%), and Belgium (2.7%).
The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L9.8B (7.0%), Bank of America with L5.3B (3.8%), Mitsubishi UFJ Ltd with L5.2B (3.7%), DZ Bank AG with L5.2B (3.7%), Rabobank with L5.2B (3.7%), Commonwealth Bank of Australia with L4.8B (3.4%), BNP Paribas with L4.3B (3.1%), Credit Agricole with L4.3B (3.1%), Mizuho Corporate Bank Ltd. with L4.3B (3.0%), Toronto Dominion Bank with L4.2B (3.0%), Credit Mutuel with L4.0B (2.9%), Sumitomo Mitsui Banking Co. with L4.0B (2.9%), Sumitomo Mitsui Trust Bank with L3.9B (2.8%), Sevenska Handelsbanken with L3.5B (2.5%), Westpac Banking Co. with L3.5B (2.5%), BPCE SA with L3.3B (2.4%), Dexia Group with L3.2B (2.3%), Bank of Nova Scotia with L3.2B (2.3%), Erste Abwicklungsanstalt with L3.1B (2.2%), and ING Bank with L2.8B (2.0%).
For more on European money fund reforms, see our June 16 News, "European Money Fund Reform Deal Poised to Pass; CNAVs to Be LVNAVs," our April 16 News, "European Compromise Moves MMF Reforms Closer; Sterling MFs Jump," and our March 2 News, "IMMFA on European Reforms; MFI Intl Review; European MF Symposium." (Let us know too if you'd like to see our Money Fund Intelligence International, which tracks these markets, or our MFI Intl Portfolio Holdings data.)
J.P. Morgan Securities mentioned the new European MMF Regulations in their latest "Short Duration Strategy Weekly," "Lastly, it was reported this week that that the Council of EU has reached a provisional agreement with European Parliament on a draft regulation of European money market fund reform. Details of the draft regulation remain murky, but news sources suggest that they have settled on three types of funds post reform: public debt CNAV MMFs, low volatility NAV (LVNAV) MMFs and VNAV MMFs. Fees and gates will apply to CNAV and LVNAV MMFs, but not to VNAVs. As this is still a draft regulation, it remains to be seen if these structures will come to fruition. Furthermore, a number of technical issues relating to the draft regulation still need to be finalized.... Needless to say, European MMF reform is not done yet, but we are getting close to a final rule. We suspect a final rule could emerge by the end of this year/early next year. But for now, market participants must continue to wait and see what happens next."
Finally, "repatriation" could have a huge impact on the assets held in these "European" money funds, given that a substantial percentage are likely held by U.S. multinationals. Citi's Steve Kang writes in his most recent "Short-Term Notes," a brief called, "No place like home – $1.9 trillion repatriation possible." He says, "Trump proposed a lower corporate tax rate of 15% and a one-time 10% repatriation tax. On repatriation, bipartisan support is probable and this could lead to significant deficit reduction in the near-term. Our preliminary back-of-the-envelope calculation is $1.9trillion of repatriation: At the end of 2015, offshore cash was estimated to be $2.5 trillion dollars."
ICI's latest "Money Market Fund Assets" report shows an increase in Prime money fund assets for the second week in a row (last week saw the first increase since July 13) and an increase in Tax Exempt MMFs for the 5th week in a row. The release says, "Total money market fund assets increased by $3.32 billion to $2.69 trillion for the week ended Wednesday, November 16, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $1.06 billion and prime funds increased by $1.46 billion. Tax-exempt money market funds increased by $810 million."
It explains, "Assets of retail money market funds increased by $7.54 billion to $972.08 billion. Among retail funds, government money market fund assets increased by $6.58 billion to $593.87 billion, prime money market fund assets increased by $420 million to $252.70 billion, and tax-exempt fund assets increased by $540 million to $125.51 billion."
ICI's weekly continues, "Assets of institutional money market funds decreased by $4.22 billion to $1.71 trillion. Among institutional funds, government money market fund assets decreased by $5.53 billion to $1.59 trillion, prime money market fund assets increased by $1.03 billion to $124.19 billion, and tax-exempt fund assets increased by $270 million to $4.48 billion."
Prior to the past 2 weeks' worth of inflows ($4.1 billion in total), prime MMFs had declined by 16 weeks in a row, dropping by $663.1 billion. YTD, Prime MMF assets have declined by $906.9 billion, or 70.6%, and they've declined by $1.082 trillion, or 74.2%, since 10/31/15. Government money funds have also gained $4.1 billion over the past 2 weeks, and they increased by $679.6 billion over the 16 weeks prior.
Govt MMFs are up by $958.8 billion YTD (78.5%) and they're up by $1.116 trillion (115.0%) since 10/31/15. Tax Exempt MMFs have risen for 5 weeks in a row, up $2.4 billion. after falling by $68.5 billion the previous 14 weeks. Tax Exempt MMFs are down by $124.4 billion YTD (-48.9%) and they're down by $115.0 billion (-46.9%) since 10/31/15.
In other news, the Treasury's Office of Financial Research updated its U.S. Money Market Fund (MMF) Monitor yesterday with data as of Oct. 31, 2016. Spokesperson John Poirier comments, "In October, outflows from prime money market funds continued, but at a slower pace. Assets of prime funds declined an additional $167 billion. Assets of government funds increased $176 billion. The total assets invested in money market funds were still about $2.9 trillion."
He explains, "Since the beginning of the year, prime funds have declined $991 billion and government funds have grown $965 billion, largely in anticipation of reforms that took effect on Oct. 14. Government funds now account for 76 percent of total assets in money market funds, compared with 41 percent at the beginning of the year. Although a shift has occurred from prime to government funds, total assets in money market funds have been little changed as a result of the reform."
The OFR update notes, "The reforms require prime and tax-exempt money market funds to split their investor base into retail and institutional investors. Funds for institutional investors must let their net asset value float with the value of the underlying portfolio's assets. Both retail and institutional funds also must adopt liquidity fees and restrictions on redemptions called "gates." Fees and gates are tools for limiting cash outflows during market stress. Government funds are not required to adopt liquidity fees and gates. They can continue to sell and redeem their shares at a stable net asset value."
It adds, "Large inflows into government money market funds support demand for short-term Treasuries, government agency securities, and repurchase agreements (repos) collateralized by these securities. The OFR's MMF Monitor shows that money market funds' investments in the Federal Reserve's reverse repo (RRP) facility were $198 billion. This is about $71 billion higher than the average for months other than quarter ends. Usually, investments in the RRP facility increase at quarter end, when banks reduce their borrowing in the money market to improve balance sheet ratios."
Finally, the OFR writes, "Investments in bank debt continued to decline in October. An OFR blog on Sept. 22 explained that the sharp decline in the assets of prime money market funds had ripple effects. For example, demand has declined for commercial paper and banks' certificates of deposit. As a result, short-term rates have risen, such as the benchmark three-month London Interbank Offered Rate (LIBOR). In October, the three-month LIBOR stabilized at about 0.88 percent, although it later increased due to developments unrelated to money fund reform."
The European Union agreed on a new set of money market fund regulations, we learned from Bloomberg and Reuters. The European Parliament issued a release entitled, "Money Market Funds: breakthrough agreement between MEPs and Slovak Presidency," which says, "An agreement on the EU money market funds regulation has been struck by the European Parliament, Council and Commission, after lengthy negotiations, more than three years after the Commission published the original proposal." (See Bloomberg's "EU Strikes Deal on Tighter Rules for $1.1 Trillion Money Market, Reuters' "EU agrees new rules for money market funds, eliminating some, and our June 16 News, "European Money Fund Reform Deal Poised to Pass; CNAVs to Be LVNAVs.")
U.K. Rapporteur Neena Gill comments, "This is one of the most contentious and complex pieces of legislation that has been held up for more than three years. I am delighted we have an overall agreement between Parliament and the Council. I believe this is a win-win deal for both major European MMF sectors, variable and constant net asset value MMFs (VNAVs and CNAVs) respectively."
She adds, "Moreover the key objectives of preventing the future systemic risks and runs on the funds have been addressed. I am particularly pleased we found a viable operational model for low volatility net asset value (LVNAV) MMFs, which was introduced at the European Parliament's initative.... This agreement is an important step forward in MMF regulation, as the EU has been lagging behind on its international commitments to regulating the sector. The USA implemented its own reform in October this year."
The EU lawmakers' release continues, "MMFs provide highly liquid short-term financing, to investors seeking to diversify their portfolios, for business start-ups and small and medium-sized enterprises (SMEs). However, MEPs wanted to make them more resilient to crises, and make them more stable and less vulnerable in case of "runs", if most of their investors withdraw their funds at the same time in response to market turbulence."
It describes the "LVNAV: a new type of MMF proposed by the MEPs," explaining, "The Parliament proposed a new category of MMF: Low Volatility Net Asset Value MMF (LVNAV MMF) with an objective that it has to work for the real economy." The "Main LVNAV features include: A strict portfolio fluctuation band: the constant NAV cannot deviate by more than 20 basis points from the actual NAV -- this is far stricter than the 50 basis points used by CNAVs; Diversified portfolio with stringent concentration requirements to reduce risk, assets described more precisely and subject to strict conditions; Limit the use of the amortised accounting method for the valuation of assets; Strict daily and weekly liquidity requirements to fulfil potential redemption requests; A stringent regime of fees and gates in case of shortfalls in liquidity, to address the question of 'run risk and first mover advantage; and Increase[d] transparency to ensure investors and supervisors get better & earlier information."
The release continues, "The draft law should also require MMFs to diversify their asset portfolios, investing in higher-quality assets, follow liquidity and concentration requirements and have in place sound stress testing processes conducted at least bi-annually. The assets of a MMF would have to be valued at least once a day and the result should be published daily on the website of the MMF."
It adds, "The EP proposal that that a MMF should not receive external support from a third party including from its sponsor was also sustained in the agreement, together with a requirement that MMFs should report on the ten largest holdings in the MMF.... Some technical work on the text is now under way by the services of the three institutions. Afterwards, the agreement reached by the EP negotiating team will have to be approved by a plenary vote."
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Oct. 31, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See our Nov. 10 News, "November Portfolio Holdings: Treasuries Jump; Repo, TDs, CDs Fall.")
ICI's release explains, "The Investment Company Institute (ICI) reports that, as of the final Friday in October, prime money market funds held 28.9 percent of their portfolios in daily liquid assets and 47.4 percent in weekly liquid assets, while government money market funds held 59.7 percent of their portfolios in daily liquid assets and 76.2 percent in weekly liquid assets."
It says, "At the end of October, prime funds had a weighted average maturity (WAM) of 38 days and a weighted average life (WAL) of 61 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 43 days and a WAL of 95 days."
On Holdings By Region of Issuer, it adds, "Prime money market funds' holdings attributable to the Americas declined from $256.53 billion in September to $167.42 billion in October. Government money market funds' holdings attributable to the Americas rose from $1,759.69 billion in September to $1,790.59 billion in October."
The Prime Money Market Funds by Region of Issuer table shows Americas at $167.4 billion, or 44.3%; Asia and Pacific at $68.5 billion, or 18.1%; Europe at $138.4 billion, or 36.7%; and Other (including Supranational) at $3.1 billion, or 0.9%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.791 trillion, or 82.9%; Asia and Pacific at $65.8 billion, or 3.0%; and Europe at $301.3 billion, or 14.0%.
The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data. The report includes all money market funds registered under the Securities Act of 1933 and the Investment Company Act of 1940, that are publicly offered. All master funds are excluded, but feeders are apportioned from the corresponding master and included in the report."
This month, our flagship newsletter Money Fund Intelligence interviews Deutsche Asset Management Managing Director Joe Sarbinowski and Director & PM Geoff Gibbs. We discuss the recent big shift from Prime MMFs into Government funds, and the new frontier of money fund alternatives, including ultra-short bond funds, separate accounts and FDIC insured products. Our discussion follows. (The interview below is reprinted from our November Money Fund Intelligence.)
MFI: How have you been involved in the cash business? Sarbinowski: Our roots hail back to a couple of different firms including the Scudder Kemper, Alex Brown and the Bankers' Trust franchises. There are some legacy funds from those organizations that have made it all the way to today.... I got involved in the business in 2000, so [I've been here] about 16 years now. Gibbs: I started back in ‘96 with the Scudder, Stevens & Clark business, and then we went through the few mergers where I ended up here in New York with Deutsche.
MFI: What is your biggest priority? Sarbinowski: We're pleased to have gotten past October 14 and to have successfully implemented our plan for reform. Really our priority right now is getting out in front of our clients and ... helping them assess the new environment and where to go. I know you're fully aware that $1 trillion has left the prime space for government, which probably exceeded most people's expectations. We believe that some of our clients will be looking for another home at some point, so now we're helping them understand how our platform has changed and how their decisions can affect the type of risk and return they are willing to take going into future.
MFI: What other offerings do you have? Sarbinowski: We have a full range of choices for mutual fund investors and beyond, quite frankly. We've got prime retail, we've got prime institutional -- our VNAV and Daily Assets funds.... We've got government and treasury only, we have retail tax-exempt -- the stable NAV version -- and then a year ago we launched ultra-short funds in our Limited Maturity Quality Income fund and our Ultra-Short Fixed Income fund.... We have our FDIC sweep product, and we're big in separate accounts. That's our complete lineup, offering clients a real wealth of choice.
Gibbs: If you remember last year at this time, projections for how much money would transition were, at the high end of the range, $600 billion. Ultimately, seeing north of $1 trillion dollars move, I think is a testament to the industry how smoothly that transition was and how well prepared all of us were for reform here. It really goes to show all the work that was done behind the scenes, and we all handled it well.
MFI: What's your biggest challenge? Gibbs: I think to the extent that the Fed Repo facility is available and has been a great back-stop of supply ... that's been helpful. I think the bigger challenge really is managing the prime funds in this new environment. Most of the funds are much smaller than they were in the past. So it becomes trying to balance that liquidity versus stability of NAV, while at the same time providing a sufficient amount of yield to really maintain the confidence of our clients and assuage their fears about some of the [reform-related] changes.
Sarbinowski: We're in a unique situation where our VNAV has operated as a T-0, 2a-7 fund for five years. We've been through the Euro crises, the U.S. debt downgrade, and the budget ceiling crises, geopolitical risks and even a Fed hike. So we're fortunate to have good history to share with clients. But now everyone gets to see how these floating funds operate. The challenge is certainly with so much money sitting in government MMFs, working to create that differentiating factor to have clients to do business with us. So we're not just supplying them with a nice-performing government fund, but also bringing value in the consultative process of where to begin, where to take the risks, what sort of wrappers are appropriate for the right type of cash bucketing they're doing. So that's really the challenge now -- to find some new ways to add value.
MFI: What are you buying now? Gibbs: I think when you're looking at the Primes, it really becomes focusing on short maturities and floating rate product. We're looking to demonstrate the stability of the NAV while providing robust liquidity buckets. In terms of what we're not buying, we're cautious on spread risk [and] use of illiquid products in those portfolios. When we're looking at the government funds, we're making use of floaters. There is a lot less product availability there ... you're really talking about agencies and repo, so it does become difficult to differentiate yourself. Some of the challenges there are really managing around late day liquidity, especially giving the new rules around repo reform.... It really just becomes providing liquidity for your clients, providing service, and having good communications with them.
MFI: What about customer concerns? Sarbinowski: They're taking a breather after moving their money into government funds. But there are some that are now saying, 'Let's talk about [options].' We're first seeing it first in the form of separate accounts. The largest cash investors have done separate accounts for many years in a low rate environment to get some extra yield. Now some additional firms are getting a little sharper about their bucketing and what can they term out.... Obviously, Basel III continues to impact them on the banking front. So they turn to us on the asset management side to see what solutions we have.... So regulatory challenges are on their mind, low yields are on their mind.... It's a more complicated story about how to deploy your cash in this new environment.
MFI: Are you seeing fee waiver relief? Sarbinowski: Certainly, last December's Fed hike gave the whole industry some relief, as well as differentiation between the performance and credit versus noncredit. So, a second hike, potentially this December, would be welcome. It will further sharpen that delineation, and any [remaining] waivers ... will be probably be absorbed with that hike.
MFI: What about MMF alternatives? Sarbinowski: We don't see that there's one silver bullet. The old prime funds were wonderful, and they served a lot of needs at once.... On our platform, we do have an ultra-short offering ... our Limited Maturity fund, which is very similar to [the] 2a-7 of old. Then you've got Ultra-Short, which is more akin to what we see bigger clients buying in the form of separate accounts.
Separate accounts are an animal [where] you have to work with investor guidelines.... The big folks have been doing this for a while.... But other investors who may have in the past only done money funds and deposits, they may have to change their investment policies. There definitely are some hurdles in terms of education.... We think the market will eventually come back in a bigger way to credit, taking advantage of some of the spread differentials. It's just a question of what sort of format that will take. We think ultimately it will be a combination of 'all of the above.'
MFI: Tell us about the "offshore" or European business. Sarbinowski: The offshore business continues to be a growth business for us. We manage stable NAV in dollar, euro and sterling.... We continue to be optimistic about the overall offshore universe in money fund land. Asia-Pac and LatAm are two areas that continue to be growth areas for us. We continue to add clients, and that all feeds into our Irish and Luxembourg platforms. Clearly the elephant in the room is pervasive negative rates, which continue to exist in Europe. There [in Europe] it's just a function of where can clients go to have their money with T-0 liquidity that's well diversified with high quality credits? And really the answer to that is money funds. So we've seen an uptick in flows since rates have gone negative in our euro money market fund.
European money fund reform is quite complex. The regulators have come to some sort of agreement on the shape that it will take, but they still have to iron out the details. With an event like Brexit, there are a few greater distractions going on slowing from moving forward. We really don't see, assuming the same sort of implementation time frame we had here in the U.S., any sort of reform striking until either late 2018 or early 2019, at the earliest. So it's business as usual in a fairly good environment for investors with cash offshore.
MFI: What about brokerage sweeps? Sarbinowski: We've seen a shift into government [MMFs] ... but also FDIC [sweep] continues to grow for us at a nice double digit growth rate. I think that's a function of the flexibility that it affords. It allows a little bit more customization by the clearing firm to treat their clients ... while also having the pass through insurance of FDIC. So money has been moving there for our [Insured Deposit Program, or IDP] product for quite some time. We've been operating a multi-bank program for over 10 years and it continues to be a growth area for us.
MFI: What is your outlook? Sarbinowski: We're thankful that clients still continue to recognize the value of the 'homogenization' of 2a-7. It's a standard, it's well-known, [it has] T-0 liquidity, diversity ... it's a very convenient tool that delivers a very decent return for them. So we're pleased all this money remains there. Looking forward, we think that versus when we were in the zero rate environment, we think that this is a very exciting time to be in this business. There's just so much to talk to with clients about and assist them. You can really be quite valuable and deepen the relationship through this consultative process, having them speak with folks like Geoff and his team and helping them understand where to go with their money. This is a big difference from when we were just in the doldrums of waiting for final money fund reform rules.
The November issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Monday, features the lead story, "Bond Funds See Biggest Outflows of '16; ETFs Suffer," which discusses the recent downturn in bond fund flows, and a profile of Scott Weston and Brent Miller, Senior Portfolio Managers of Touchstone Ultra-Short Duration Fixed Income Fund. Also, we recap the latest Bond Fund News, including yield increases in October and more updates on the ultra-short sector. BFI also includes our Crane BFI Indexes, which showed declines in October. We review the latest BFI below, and we also quote from new releases from Fitch Ratings and Moody's.
Our lead Bond Fund Intelligence story says, "Bond funds have seen 2 straight weeks of outflows in November, their first real declines since January 2015. While our October numbers still show inflows and modest asset increases, prices fell and yields jumped last month. But month-to-date in November things have turned ugly."
It tells us, "Bond fund assets currently stand at $3.735 trillion, up $286 billion over the past year and more than double their level of 2008. Bond ETFs total another $427.2 billion, up $94.1 billion, or 28.2%, over a year ago. These spectacular growth rates no doubt indicate a fair amount of 'hot money'."
Our story adds, "ICI's latest "`Combined Estimated Long-Term Fund Flows and ETF Net Issuance" says, "Bond funds had estimated outflows of $4.63 billion for the week, compared to estimated inflows of $3.94 billion during the previous week. Taxable bond funds saw estimated outflows of $4.62 billion, and municipal bond funds had estimated outflows of $6 million."
The BFI "Touchstone Profile" says, "This month, Bond Fund Intelligence interviews Fort Washington Investment Advisors' Scott Weston, MD & Senior PM, and Brent Miller, Asst. VP & Senior PM. Fort Washington, a subsidiary of Western & Southern Financial Group, is the sub-advisor for several Touchstone funds and the Touchstone Ultra-Short Duration Fixed Income Fund, which was started in 1994." (Watch for more excerpts from this story later this month on www.cranedata.com, or contact us if you'd like to see a copy of our latest Bond Fund Intelligence.)
A sidebar entitled, "Wiener on Small Numbers," explains, "The Independent Adviser for Vanguard Investors writes about the "Law of Small Numbers" in its latest issue. The publication says, "I'm going to call this the 'law of small numbers' because, indeed, when yields get tiny, some funny things begin to happen. Take Ultra-Short-Term Bond, one of the newest of Vanguard's bond funds, which I think of as a money market alternative, even though Vanguard says it isn't. The fund's maturity is ultrashort ... and comes in two flavors, the Investor shares, with a $3,000 minimum and a 0.20% expense ratio, and the Admiral shares, for which you need $50,000 [for] a ... 0.12% expense ratio."
A sidebar on FA on Cap Group Warning, says, "Fund Action featured a brief entitled, "Capital Group Warns On High Yield, Unconstrained Bond Funds." It explains, "Investors need to be wary of excessive credit exposure and unconstrained bond funds, Michael Gitlin, chair of the fixed income management committee at Capital Group, said at Charles Schwab's IMPACT 2016 conference. He added investors should also expect yields to remain lower for longer in light of global central bank policies."
In other news, a release entitled, "Fitch: Bank Short-Term Funding Shifts With US Money Fund Reform," tell us, "The substantial shrinking of US prime money market fund assets and the shift to government money funds as a result of US money fund reform has resulted in significant changes in short-term funding dynamics for global banks over the past year, says Fitch Ratings. Funding profiles have shifted in some banks, with reduced commercial paper issuance and increased secured funding from government money funds."
It explains, "Among the larger banking systems, US, Canadian, French and Japanese banks reduced the funding they take from US prime money funds the most (in absolute terms), according to Crane data compiled by Fitch. Each saw gross financial sector exposure from prime money funds fall in excess of USD100 billion. US, Japanese and Canadian banks have significantly increased their borrowing from government money funds to compensate, with each replacing about one-quarter to one-third of the decline in funding from prime money funds. British banks -- which saw about a USD40 billion decline in prime money fund exposure -- replaced about 80% of their reduced prime fund financing with borrowings from government funds."
Fitch adds, "In contrast, other countries' banks that reduced US commercial paper issuance -- including France, Sweden, Norway and Australia -- did not switch to government funds. US commercial paper is not an important funding source for them. Overall, US prime money funds have reduced lending to banks and their affiliates globally by USD775 billion between October 2015 and September 2016, but the banks have replaced about USD151 billion of that, or 20%, with government fund financing."
Another press release, "Moody's: Money funds emerge as winners from Brexit uncertainty," says, "Uncertainty surrounding "Brexit" and the lack of comparable investment alternatives have kept investors in highly liquid money market funds (MMFs), despite the fact that central bank policy has sent yields tumbling, says Moody's Investors Service." Vice President and Senior Credit Officer Vanessa Robert comments, "Investors have very few suitable, equally safe alternative investments in the current uncertain environment. Lower investor confidence and higher risk aversion could continue to cause corporate investments to be postponed, leading to inflows into low-risk, highly liquid assets such as money market funds."
It adds, "Moody's expects euro prime MMFs will be attractive relative to bank deposits at a time when European banks' appetite for deposits has waned owing to Basel III leverage and liquidity rules. Sterling assets will also increase in Q4 given the uncertainty around Brexit. Prime rated euro MMFs rose to their highest level in a year to 69.2 billion, attracting 5.9 billion of inflows in Q3. Sterling prime MMF assets rose to a 12-month high at GBP111.8 billion over the same period, drawing GBP4.6 billion in inflows -- representing a 4.2% increase."
Wells Fargo Money Market Funds' latest Portfolio Manager Commentary discusses the "orderly nature" of the transition to money fund reforms. It explains, "When something as transformative as money market reform occurs, one naturally expects something will mark -- or mar, depending on your outlook -- the occasion. After all, this reform effort has affected virtually every aspect of the short term investment markets. The U.S. Securities and Exchange Commission (SEC) required all institutional prime and municipal money market funds to begin transacting with shareholders at a floating net asset value (FNAV) by the fund opening on Friday, October 14. But when the opening bell figuratively rang, nothing happened. It was a day like any other day, with portfolio managers trading and shareholders purchasing and redeeming. It was ... ordinary." We review this, as well as recent updates from Fitch Ratings and Capital Advisors, below.
Wells Fargo Asset Management's piece continues, "The orderly nature of the conversion was the culmination of two years of planning and implementation, in which changes -- and yes they were big -- happened not suddenly, but incrementally and, for the most part, with a great deal of foresight. The headline change of note is, of course, the rotation of investors out of prime and municipal funds and into government funds. Between October 2015 and close of business October 13, 2016, overall money market fund assets declined by only 2%. But ... over $1.1 trillion left prime and muni funds, and virtually the same amount flowed into government funds."
It explains, "The hardest-hit sector was prime institutional funds, which declined by almost 83%; in comparison, municipal funds saw their assets cut virtually in half. As mentioned in our August commentary, cash flows out of prime funds occurred throughout the year, with the majority of planned changes happening by the end of June. At that point, just over three months away from the implementation deadline, $491 [b]illion had moved out of prime and municipal funds. Client-driven cash flows were still the big unknown, in regards to both amount and timing. As expected, those redemptions accelerated in the last two weeks before funds began their implementation."
Wells also commented, "Another thing creeping onto radar screens is the possibility of another debt ceiling showdown in Washington as early as March of next year. It is certainly not worth speculating yet what that showdown might entail, but it is important to note that past debt-ceiling discussion periods have usually been preempted by noticeable declines in Treasury bill issuance. Considering the importance of the increase in outstanding T-bills in helping government funds during this period of asset growth, it should come as no surprise that the potential for a similar decline in the near future is something market participants should certainly add to their watch list, if it is not there already."
Fitch Ratings also released yet another update, saying, "While the mass exodus from prime institutional money market funds slowed in the weeks following the Oct. 14 reform implementation date, asset outflows continue, with prime institutional assets under management declining $12 billion between Oct. 14 and Nov. 7. Government institutional funds' assets increased by $46 billion in the same period, reaching a total of approximately $1.6 trillion. Since Oct. 27, 2015, prime institutional money funds have lost approximately $870 billion in assets, and all prime money funds have lost $1.1 trillion (due to a combination of fund conversions and investor outflows)."
They state, "Of 30 prime institutional funds reviewed as of Nov. 7, one fund reported a shadow net asset value (NAV) below $1.00, consistent with one fund as of Oct. 24. Some of the cash that left may return to prime funds, but this will be a function of the relative yield differential between prime and government funds as well as investors adapting to the new features of prime funds. Alternative liquidity products are also expected to garner inflows."
Fitch adds, "As of Nov. 7, prime institutional funds' weekly liquidity averaged 71%, up from 54% on June 30. However, as asset flows have stabilized, fund managers are beginning to revert to more normal portfolio management by extending maturities. This has caused prime institutional funds' average weekly liquidity to fall 16% from a peak of 87% on Oct. 7, a week ahead of reform.... [T]he spread between institutional prime and government funds increased to 0.21% as of Nov. 7."
In other news, Capital Advisors Group writes in a new blog post, "AFP Conference Attendees Rethink Cash Management Strategies In Wake of Money Market Fund Reforms." CEO Ben Campbell, tells us, "Our panel session at this year's AFP Conference on "Managing Liquidity in a Post-Reform World" came at an opportune time -- just after new SEC regulations on institutional prime money market funds went into affect that have already started to dramatically transform the cash management landscape. So it was no surprise when much of the formal discussion at the conference (not to mention plenty of informal cocktail party talk as well) focused on one simple question: "Now what?" (See also, Capital Advisors' new white paper, "Six Advantages of Separately Managed Accounts Over Ultra-short Bond Funds," which we cover briefly in our November Bond Fund Intelligence.)
Capital Advisors writes, "A standing-room-only crowd of more than 250 conference attendees heard our three panelists -- Kim Kelley-Lippert, CTP, Manager of Treasury Operations at American Honda Motor Co., Inc.; Klas Holmlund, CFA, Assistant Treasurer at Vertex Pharmaceuticals; and David Miller, Treasurer and Senior Vice President at Hunt Companies -- share their insights and experiences positioning their organizations for the new era. The session provided an overview of the macro changes in cash management markets. `Even before the institutional prime funds on October 14 imposed SEC-mandated floating net asset values, optional redemption fees and possible liquidity gates, asset managers had made major moves into alternative cash investments."
They continue, "But with yields stuck at historically low rates as all that cash chased a limited supply of government debt, many investors said they were also considering other scenarios that might offer slightly higher returns along with an acceptable balance of liquidity and safety of principal. Some said they planned to trade off a bit of liquidity by allocating a portion of their portfolios to investments with longer maturity dates and slightly higher returns. Others said they would change their investment policies to accommodate a broader range of investments, including separately managed accounts and/or direct purchases of commercial paper and other alternatives."
Campbell says, "In fact, in the annual AFP Liquidity Survey fielded last summer, 44% of respondents said they were considering separately managed accounts, the most-preferred investment alternative that organizations would consider in response to the money market fund reforms.... We got similar results from an electronic poll of the attendees at our conference session. When asked to choose one of six options, 29.9% of the respondents to our instant poll said they were considering separately managed accounts, followed by FDIC-insured deposit solutions (20.1%), floating-NAV prime funds (14.2%), direct ownership of securities (12.7%), short-term/ultra-short bond funds (12.7%) and private money market funds (10.7%)."
Finally, he adds, "Don't be surprised if we see a lot more movement of cash into alternatives once the dust starts to settle from the impact of the money market fund reforms -- especially if and when the Fed decides to raise interest rates again by the end of this year or early in 2017. During our panel session and through several days of conversations at the AFP Conference with corporate cash managers wrestling with the fallout from the reforms, one thing became clear to me. We're only at the starting line of a long-term process of reallocating cash investments in response to this once-in-a-generation disruption of the cash management landscape."
Crane Data released its November Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of Oct. 31, 2016, shows a big increase in Treasuries and Agencies, and big decreases in Repo, Other (TDs) and CDs. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $32.0 billion to $2.586 trillion last month, after decreasing by $114 billion in Sept., increasing by $75.9 billion in August and $47.9 billion in July, and decreasing by $59.7 billion in June. Repos remained the largest portfolio segment, though they declined and dipped below $800 billion, and Treasuries and Agencies continued their growth spurt driven by the shift to Govt MMFs. Holdings of "credit" instruments declined slightly as the final shift from Prime to Government money funds took place, primarily in the first half of October. CDs were in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Money funds' European-affiliated securities rebounded to 18.3% of holdings, up from the previous month's 15%. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Repurchase Agreements (repo) fell by $65.2 billion (-7.6%) to $797.3 billion, or 30.8% of holdings, after rising $127 billion in Sept. and $102 billion in August. Treasury securities rose $112.2 billion (26.2%) to $780.4 billion, or 30.2% of holdings, after rising $28 billion in Sept., $79 billion in August and $39 billion in July. Government Agency Debt increased $32.3 billion (23.8%) to $639.8 billion, or 24.7% of all holdings, after increasing $12 billion in Sept., $24 billion in August, $27.0B in July and $37.4B in June. The rise in Treasuries and Agencies (and Repo prior to this month) has been driven by the shift of almost $1.1 trillion of Prime MMF assets and another $100 billion in Tax Exempt MMF assets (since late 2015) into Government MMFs.
CDs and Other (Time Deposits) moved lower, falling to their lowest levels since Crane Data began tracking these in early 2011, while CP inched higher. Certificates of Deposit (CDs) were down $13.6 billion (-6.4%) to $148.9 billion, or 5.8% of taxable assets, after declining $100 billion in Sept., $55 billion in August and $37.6 billion in July. Commercial Paper (CP) was up $1.0 billion (4.9%) to $127.3 billion, or 4.9% of holdings (after declining $76B last month), while Other holdings, primarily Time Deposits, fell $32.5 billion (-3.5%) to $57.9 billion, or 2.2% of holdings. VRDNs held by taxable funds decreased by $2.2 billion (-1.4%) to $34.3 billion (1.3% of assets).
Prime money fund assets tracked by Crane Data (in our holdings collection) fell to $486 billion (down from $605 billion last month and $913 the prior month), or 18.8% (down from 24%) of taxable money fund holdings' total of $2.586 trillion. Among Prime money funds, CDs represent under one-third of holdings at 30.6% (up from 27% a month ago), followed by Commercial Paper at 26.2% (up from 21%). The CP totals are comprised of: Financial Company CP, which makes up 15.9% of total holdings, Asset-Backed CP, which accounts for 6.3%, and Non-Financial Company CP, which makes up 4.0%. Prime funds also hold 0.2% in US Govt Agency Debt (down from last month), 12.0% in US Treasury Debt (up from 9%), 4.9% in US Treasury Repo, 4% in Other Instruments, 2.5% in Non-Negotiable Time Deposits, 5.5% in Other Repo, 2.5% in US Government Agency Repo, and 5.8% in VRDNs.
Government money fund portfolios totaled $1.483 trillion, up from $1.337 trillion in September, while Treasury money fund assets totaled another $617 billion, up slightly from the $611 billion from the prior month. Government money fund portfolios were made up of 42.8% US Govt Agency Debt, 16.3% US Government Agency Repo, 18.2% US Treasury debt, and 22.1% in US Treasury Repo. Treasury money funds were comprised of 73.4% US Treasury debt, 26.4% in US Treasury Repo, and 0.2% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.100 trillion, or over 80% (81.2%) of all taxable money fund assets, up from 76% last month.
European-affiliated holdings increased $85.7 billion in October to $473.7 billion among all taxable funds (and including repos); their share of holdings increased to 18.3% from 15% the previous month. Eurozone-affiliated holdings increased $90.4 billion to $325.4 billion in Oct.; they now account for 12.6% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $2.3 billion to $148.7 billion (5.8% of the total). Americas related holdings decreased $51 billion to $1.963 trillion and now represent 75.9% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $93.0 billion, or 23.8%, to $514 billion, or 19.9% of assets; US Government Agency Repurchase Agreements (up $39.2 billion to $254 billion, or 9.8% of total holdings), and Other Repurchase Agreements ($29.2 billion, or 1.1% of holdings, down $11.4 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $0.8 billion to $77 billion, or 3.0% of assets), Asset Backed Commercial Paper (down $0.6 billion to $30.6 billion, or 1.2%), and Non-Financial Company Commercial Paper (up $2.4 billion to $19.7 billion, or 0.8%).
The 20 largest Issuers to taxable money market funds as of Oct. 31, 2016, include: the US Treasury ($780.4 billion, or 31.4%), Federal Home Loan Bank ($465.3B, 18.7%), Federal Reserve Bank of New York ($193.9B, 7.8%), BNP Paribas ($96.3B, 3.9%), Federal Home Loan Mortgage Co. ($72.4B, 2.9%), Wells Fargo ($71.5B, 2.9%), Federal Farm Credit Bank ($61.4B, 2.5%), Credit Agricole ($55.8B, 2.2%), RBC ($43.1B, 1.7%), Societe Generale ($43.0B, 1.7%), Federal National Mortgage Association ($37.4B, 1.5%), Deutsche Bank AG ($33.6B, 1.4%), Nomura ($32.7B, 1.3%), Bank of America ($32.3B, 1.3%), Mitsubishi UFJ Financial Group Inc. ($29.6B, 1.2%), HSBC ($29.2B, 1.2%), Bank of Nova Scotia ($28.8B, 1.2%), Credit Suisse ($27.9B, 1.1%), Citi ($26.2B, 1.1%), and Barclays PLC ($26.1B, 1.1%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($193.9B, 24.3%), BNP Paribas ($85.3B, 10.7%), Wells Fargo ($60.3B, 7.6%), Credit Agricole ($43.3B, 5.4%), Societe Generale ($37.6B, 4.7%), RBC ($33.7B, 4.2%), Deutsche Bank AG ($33.3B, 4.2%), Nomura ($32.7B, 4.1%), Bank of America ($28.5B, 3.6%), and Credit Suisse ($23.6B, 3.0%). The 10 largest Fed Repo positions among MMFs on 10/31 include: Northern Trust Trs MMkt ($13.7B), JP Morgan US Govt ($13.0B), BlackRock Lq FedFund ($11.0B), Goldman Sachs FS Gvt ($10.0B), Morgan Stanley Inst Lq Gvt ($9.5B), First American Gvt Oblg ($8.5B), Vanguard Fed MMkt ($8.5B), BlackRock Lq T-Fund ($8.2B), Fidelity Cash Central Fund ($8.0B) and Wells Fargo Gvt MMkt ($7.5B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($14.6B, 4.9%), Credit Agricole ($12.4B, 4.2%), Wells Fargo ($11.2B, 3.8%), Sumitomo Mitsui Banking Co ($11.1B, 3.8%), BNP Paribas ($11.1B, 3.7%), Svenska Handelsbanken ($10.4B, 3.5%), Bank of Nova Scotia ($9.5B, 3.2%), RBC ($9.4B, 3.2%), Toronto-Dominion Bank ($9.0B, 3.0%), and Skandinaviska Enskilda Banken AB ($8.7B, 2.9%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc. ($10.9B, 7.4%), Wells Fargo ($10.4B, 7.1%), Toronto-Dominion Bank ($8.3B, 5.6%), Canadian Imperial Bank of Commerce ($8.2B, 5.6%), Sumitomo Mitsui Banking Co ($7.7B, 5.2%), Bank of Montreal ($7.3B, 4.9%), Svenska Handelsbanken ($6.5B, 4.4%), RBC ($6.0B, 4.1%), Bank of Nova Scotia ($5.9B, 4.0%), and BNP Paribas ($4.7B, 3.2%). The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($6.1B, 5.3%), BNP Paribas ($5.7B, 5.0%), Credit Agricole ($5.7B, 4.9%), Societe Generale ($4.9B, 4.2%), JP Morgan ($3.9B, 3.4%), Toyota ($3.9B, 3.4%), Westpac Banking Co ($3.7B, 3.3%), Bank of Nova Scotia ($3.6B, 3.1%), Australia and New Zealand Banking Group Ltd ($3.5B, 3.0%) and Nordea ($3.5B, 3.0%).
The largest increases among Issuers include: US Treasury (up $112.2B to $780.4B), Credit Agricole (up $32.4B to $55.8B), Federal Home Loan Bank (up $22.6B to $465.3B), BNP Paribas (up $18.8B to $96.3B), Credit Suisse (up $18.4B to $27.9B), Deutsche Bank AG (up $16.5B to $33.6B), Societe Generale (up $16.1B to $43.0B), Federal Home Loan Mortgage Co (up $9.3B to $72.4B), and Natixis (up $5.8B to $23.1B).
The largest decreases among Issuers of money market securities (including Repo) in Oct. were shown by: Federal Reserve Bank of New York (down $172.5B to $193.9B), HSBC (-$11.1B to $29.2B), Canadian Imperial Bank of Commerce (-$11.0B to $10.5B), Bank of Montreal (-$8.5B to $12.9B), Nordea Bank (-$7.2B to $8.4B), Svenska Handelsbanken (-$5.4B to $10.4B), Federal National Mortgage Association (-$4.5B to $37.4B), National Australia Bank Ltd (-$4.3B to $6.1B), Swedbank AB (-$4.3B to $8.6B), and ABN Amro Bank (-$2.5B to $10.3B).
The United States remained the largest segment of country-affiliations; it represents 71.3% of holdings, or $1.843 trillion. France (8.9%, $229.0B) remained in second and Canada (4.6%, $119.5B) remained in 3rd. Japan (4.4%, $113.8B) stayed in fourth, while the United Kingdom (2.7%, $69.5B) moved up to fifth. Germany (2.1%, $55.1B) moved up to sixth, while The Netherlands (1.4%, $36.3B) and Sweden (1.4%, $36.3B) fell to seventh and eighth. Switzerland (1.3%, $32.4B) moved up to ninth, and Australia (1.1%, $27.1B) dipped to tenth. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Oct. 31, 2016, Taxable money funds held 31.2% (down from 36%) of their assets in securities maturing Overnight, and another 12.4% maturing in 2-7 days (down from 13%). Thus, 43.6% in total matures in 1-7 days. Another 17.3% matures in 8-30 days, while 11.8% matures in 31-60 days. Note that almost three-quarters, or 72.7% of securities, mature in 60 days or less (down from last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 10.9% of taxable securities, while 11.8% matures in 91-180 days, and just 4.5% matures beyond 180 days.
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Wednesday, and our Tax Exempt MF Holdings and MFI International "offshore" Portfolio Holdings will be released late this week and early next week, respectively. Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports.
First American Funds posted some commentaries on their website recently, including one entitled, "The Ostrich Principle and Institutional Prime Money Market Funds," which gives a number of "Reasons to Invest in Institutional Prime Funds Post-Reform." Lou Martine, Head of Distribution and Marketing for U.S. Bancorp Asset Management, writes, "'To bury one's head in the sand' is a popular metaphor for ignoring uncomfortable situations in the hope that by simply denying their existence they will go away.... Not surprisingly, the "Ostrich Principle" is not very effective. However, it is important to realize that the Ostrich Principle is not equivalent to evaluating a situation and then deciding not to make a change. This is simply decision making."
He explains, "The Securities and Exchange Commission's (SEC) ... reform of prime money market funds (Reform) is a situation where, at first blush, many institutional investors wish the Ostrich Principle would work. However, after undertaking some evaluation of the Reform and one's risk tolerance and cash needs, institutional investors will soon realize the benefits institutional prime money market funds still offer post-Reform."
Among the reasons to invest in Prime Inst MMFs, First American lists, "Reason 1: Two of the SEC's stated goals in implementing Reform are to improve the money market fund industry's ability to perform in times of market stress and to increase transparency. Both of these goals benefit institutional prime money market fund investors, as well as all money market fund investors. Reason 2: It is our opinion that institutional prime funds may offer a yield spread over government money market funds of up to 20 to 40 basis points. While this in no way can be ascertained with any degree of certainty, it is logical to expect issuers of money market debt instruments to have to offer higher yields."
They continue, "Reason 3: For investors concerned about the NAV variability, some solace may be offered through the understanding of total return. Historically, prime funds have been the best-yielding type of money market fund.... Reason 4: It is expected that the most common cause of deviation from a $1.0000 NAV per share for an institutional prime fund will be interest rate movement or an expectation of such, for various reasons including – but not limited to – an actual federal funds rate change. We believe such deviations will be relatively short lived before the fund's NAV migrates back to $1.0000."
Martine comments, "Reason 5: More and more institutional investors are focusing on cash flow forecasting and cash management. As a result, institutions are getting a better handle on their actual daily cash needs. Given their focus on principal stability and liquidity in conjunction with yield, money market funds have historically been utilized to invest operating cash."
The article concludes, "We feel the primary features investors want in money market funds – safety, liquidity and yield commensurate with risk – will remain intact for institutional prime money market funds post-Reform. Ultimately, however, an investor's cash flow needs and risk tolerance will determine its appetite for institutional prime money funds. For those investors currently invested in prime funds who determine to remain so invested after evaluating the situation, such a decision is not adherence to the Ostrich Principle. It is prudent cash management."
First American also published, "The Dynamics of Quarter-End Investing for Money Market Funds," "First American Institutional Prime Obligations Fund Announces Share Class Conversions," and "U.S. Bancorp Asset Management Announces a Capital Contribution to First American Institutional Prime Obligations Fund." The latter Oct. 14 letter says, "U.S. Bancorp Asset Management announced today that it has made a capital contribution to First American Institutional Prime Obligations Fund (the "Fund") in the amount of $17,048.52. The contribution was made by U.S. Bancorp Asset Management in order to offset the Fund's historical capital losses. The Fund was required to disclose additional information about this event on Form N-CR and to file this form with the U.S. Securities and Exchange Commission (the "Commission"). Any Form N-CR filing submitted by the Fund is available on the EDGAR Database on the Commission's Internet site at http://www.sec.gov."
Note that a number of others funds filed "Form N-CR" submissions prior to the October 14 reform deadline, though all are minor and not indicative of any "bailout" or problem in the fund. (See the SEC's Form N-CR filings here.) These all appear to be "window dressing" to make sure NAVs were all exactly at 1.0000 prior to liquidations, mergers or separation of retail vs. institutional assets.
In other news, The Wall Street Journal writes, "Libor Alternatives Have Their Own Issues," which says, "Efforts to replace the compromised Libor financial benchmark are running into their own problems, in part thanks to new rules governing money-market funds.... Since 2014, market overseers have been pushing the industry to come up with a credible replacement for U.S. dollar Libor. One strong candidate has been the Overnight Bank Funding Rate, a new benchmark devised by the Federal Reserve as a comprehensive measure of overnight bank borrowing costs."
It continues, "But since it was introduced in March, the rate, known as OBFR, has been beset by slumping trading volume. Lower volumes stand to make the rate less useful as an indicator of demand for funds, traders and analysts say -- an important consideration for its future role. It is the latest setback for regulators' efforts to replace the tainted Libor benchmark with a new measure that will more accurately depict conditions in short-term lending markets. The overhaul has been complicated by regulations that have dampened lending to banks and the limits on regulators' capacity to impose a new gauge by fiat."
The Journal explains, "Declines in eurodollar transactions are being attributed in part to new restrictions on U.S. money-market funds that took effect last month and aim to prevent a recurrence of the 2008 run on such funds. The rules have driven investors away from "prime" funds that historically have invested in a range of debt, toward funds that invest in government bonds and therefore aren’t subject to new restrictions."
Finally, it adds, "In May, a Fed-sponsored industry committee proposed two alternatives. One is OBFR. The other is a blended rate of short-term loans called "repurchase agreements" secured by U.S. Treasury bonds. This "repo" rate, as envisaged, has never been calculated before but on Friday the Federal Reserve Bank of New York announced three new repo benchmarks that fit the bill, and likely will be published starting in late 2017 or early 2018. The final decision by the industry committee on choosing a new benchmark is expected to take several months, and implementation would take even longer."
Crane Data's latest Money Fund Market Share rankings show modest asset declines for the majority U.S. money fund complexes in October as total assets fell by $10.0 billion, or 0.4%. Overall assets also inched lower, falling $32.2 billion, or 1.2%, over the past 3 months. Over the past 12 months through Oct. 31, they fell by $43.0 billion, or 1.6%. The biggest gainers in October were JP Morgan, whose MMFs rose by $12.6 billion, or 5.4%, and BlackRock, whose MMFs rose by $8.6 billion, or 3.5%. Vanguard, Invesco, Northern and First American also saw assets increase, rising by $3.2 billion, $2.0 billion, $1.3B, and $1.2B, respectively. The biggest declines were seen by Dreyfus, Wells Fargo, Federated and Goldman Sachs. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.) We review these below, and we also look at money fund yields the past month, which were up for Taxable funds but down for Tax Exempts.
JP Morgan, BlackRock, Vanguard, and First American had the largest money fund asset increases over the past 3 months, rising by $11.8B, $9.2B, $8.5B and $5.9B, respectively. Over the past year through Oct. 31, 2016, Goldman Sachs was the largest gainer (up $34.4B, or 23.5%), followed by BlackRock (up $28.5B, or 12.6%), Fidelity (up $22.9B, or 5.4%), Vanguard (up $21.1B, or 11.9%), Northern (up $11.7B, or 14.5%), and PNC (up $6.5B, or 137.9%). (Note: BlackRock was buoyed by its acquisition of BofA's money funds -- a deal which closed in April.)
Other asset gainers for the past year include: Alliance Bernstein (up $5.0B, or 271.7%), First American (up $3.3B, 7.8%), Invesco (up $2.5B, 4.6%), USAA (up $1.0B, 11.9%), and American Beacon (up $664M, 155.5%). The biggest decliners over 12 months include: Dreyfus (down $19.6B, or -12.1%), JP Morgan (down $16.7B, or -6.4%), Federated (down $15.5B, or -7.5%), Deutsche (down $13.8B, or -42.6%), Western (down $13.2B, or -28.8%), and Wells Fargo (down $13.2B, or -10.9%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $444.5 billion, or 17.2% of all assets (up $298 million in Oct., down $9.2 billion over 3 mos., and up $22.9B over 12 months). BlackRock is second with $253.9 billion, or 9.8% of assets (up $8.6B, up $9.2B, and up $28.5B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan is third with $245.6 billion, or 9.5% market share (up $12.6B, up $11.8B, and down $16.7B for the past 1-month, 3-mos. and 12-mos., respectively). Vanguard is in fourth with $198.3 billion, or 7.7% of assets (up $3.2B, up $8.5B, and up $21.1B).
Federated ranked 5th with $192.4 billion, or 7.4% of assets (down $6.6B, down $11.9B, and down $15.5B). Goldman Sachs held onto sixth place with $180.7 billion, or 7.0% (down $5.4B, down $4.7B, and up $34.4B). Schwab ($157.9B, or 6.1%) was in seventh place, followed by Dreyfus in eighth place ($142.3B, or 5.5%), Morgan Stanley in ninth place ($124.7B, or 4.8%), and Wells Fargo in tenth place ($108.5B, or 4.2%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($92.6B, or 3.6%), SSGA ($85.3B, or 3.3%), Invesco ($57.8B, or 2.2%), First American ($45.6B, or 1.8%), UBS ($37.3B, or 1.4%), Western Asset ($32.6B, or 1.3%), Deutsche ($18.6B, or 0.7%), Franklin ($18.4B, or 0.7%), American Funds ($16.3B, or 0.6%), and T. Rowe Price ($15.3B, or 0.6%). The 11th through 20th ranked managers are the same as last month. Crane Data currently tracks 64 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for JPMorgan moving ahead of BlackRock to No. 2, Goldman Sachs moving up to #4 ahead of Federated and Vanguard, and Dreyfus/BNY Mellon moving ahead of Schwab.
Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families are: Fidelity ($453.6 billion), JP Morgan ($387.0B), BlackRock ($374.5B), Goldman Sachs ($273.9B) and Federated ($200.8B). Vanguard ($198.3.7B) was sixth, followed by Dreyfus/BNY Mellon ($165.6B), Schwab ($157.9B), Morgan Stanley ($152.2B), and Wells Fargo ($109.6B), which round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
Finally, our October Money Fund Intelligence and MFI XLS show that yields were up slightly in October across most of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 722), was up 1 bp to 0.15% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 2 bps to 0.15%. The MFA's Gross 7-Day Yield inched higher to 0.47% (up one bps), while the Gross 30-Day Yield was up two bps to 0.47%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.28% (up 3 bps) and an average 30-Day Yield of 0.27% (up 4 bps). The Crane 100 shows a Gross 7-Day Yield of 0.52% (up 3 bps), and a Gross 30-Day Yield of 0.52% (up 4 bps). For the 12 month return through 10/31/16, our Crane MF Average returned 0.11% (up 1 bp) and our Crane 100 returned 0.20% (up 2 bps). The total number of funds, including taxable and tax-exempt, fell to 966, down 10 from last month. There are currently 722 taxable and 244 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 0.29% (flat) as of Oct. 31, while the Crane Govt Inst Index was 0.16% (down 1 bp) and the Treasury Inst Index was 0.12% (up one bp). Thus, the spread between Prime funds and Treasury funds is 17 basis points, down from 18 bps last month. The Crane Prime Retail Index yielded 0.22% (up 7 bps), while the Govt Retail Index yielded 0.03% (down one bp) and the Treasury Retail Index was 0.03% (unchanged). The Crane Tax Exempt MF Index yield declined to 0.20% (down 9 bps).
The Gross 7-Day Yields for these indexes in October were: Prime Inst 0.60% (up 3 bps), Govt Inst 0.41% (down 1 bp), Treasury Inst 0.38% (up 1 bps), Prime Retail 0.66% (up 6 bps), Govt Retail 0.42% (up 1 bp), and Treasury Retail 0.35% (unchanged). Also, the Crane Tax Exempt Index declined 10 basis points to 0.63%. The Crane 100 MF Index returned on average 0.03% for 1-month, 0.07% for 3-month, 0.19% for YTD, 0.20% for 1-year, 0.09% for 3-years (annualized), 0.07% for 5-years, and 0.88% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The November issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Monday morning, features the articles: "Post-Reform MMF Era Begins; Prime Outflows Stabilize," which reviews the Oct. 14 transition and latest flow data; "Deutsche's Sarbinowski & Gibbs Thankful for Change," which profiles Joe Sarbinowski and Geoff Gibbs on Deutsche Asset Management's latest fund lineup; and "Focus Turns to Government Money Funds; A Comparison," which looks at the new largest money fund sector. We have updated our Money Fund Wisdom database query system with Oct. 31, 2016, performance statistics, and we also sent out our MFI XLS spreadsheet Monday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our November Money Fund Portfolio Holdings are scheduled to ship Wednesday, Nov. 9, and our Nov. Bond Fund Intelligence is scheduled to go out Monday, Nov. 14.
MFI's lead "Post-Reform MMF Era" article says, "Money market mutual funds took a bit of a breather following the October 14 implementation of the final round of reforms. The gigantic shift of assets from Prime and Tax Exempt money funds into Government money funds was finalized in the first half of October, though some money continues to trickle out. The focus now is shifting to whether cash will return to Prime or populate a host of alternatives, and how another hike in rates by the Fed in December will impact MMFs."
It adds, "Apart from the giant shift of assets, the transition to adapt to the SEC's 2014 Money Fund Reforms, with their floating (4-digit) NAV for Prime Institutional funds and emergency gates and fees provisions for all Prime and Municipal money market funds, went surprisingly smooth. Prime outflows have slowed to a trickle, and we've even seen several days, including Thursday, with inflows. Also, spreads between Prime and Govt MMFs have widened slightly, and WAMs, particularly for Prime Retail funds, have lengthened."
Our latest fund interview reads, "This month, Money Fund Intelligence interviews Deutsche Asset Management Managing Director Joe Sarbinowski and Director & PM Geoff Gibbs. We discuss the recent big shift from Prime MMFs into Government funds, and the new frontier of money fund alternatives, including ultra-short bond funds, separate accounts and FDIC insured products. Our discussion follows."
The article asks, "How have you been involved in the cash business?" Sarbinowski says, "Our roots hail back to a couple of different firms including the Scudder Kemper, Alex Brown and the Bankers' Trust franchises. There are some legacy funds from those organizations that have made it all the way to today.... I got involved in the business in 2000, so [I've been here] about 16 years now. Gibbs: I started back in '96 with the Scudder, Stevens & Clark business, and then we went through the few mergers where I ended up here in New York with Deutsche."
The "Government MMF" article explains, "Given the massive growth in the Govt money fund space, we thought we'd examine some of the largest funds and issues here. Total Government fund assets -- which include Crane Data's Treasury Retail, Treasury Inst, Govt Retail and Govt Inst categories -- have more than doubled from $1.0 trillion to $2.1 trillion over the past year. Nine out of 10 of the largest portfolios are now Govt funds, versus 3 out of 10 a year ago."
In a sidebar, we discuss, "AFP Crowd Split on Alts," saying, "This year's Association for Financial Professionals' Annual Conference, which took place 2 weeks ago in Orlando, was surprisingly short on money market fund content this year with just two sessions involving cash investing. The first, "Managing Liquidity in a Post-Reform World," was moderated by Benjamin Campbell of Capital Advisors Group, and included Klas Holmlund of Vertex Pharmaceuticals, Kimberly Kelly-Lippert of American Honda Motor Company, and David Miller of Hunt Companies."
We also do a sidebar on "Federated Earnings," which comments, "Federated Investors, the 4th largest manager of money funds, reported its earnings late last month. Their release, "Federated Investors, Inc. Reports Third Quarter 2016 Earnings," shows that lower fee waivers continue to be a bright spot in the otherwise cloudy and rapidly-changing money fund sector."
Our November MFI XLS, with Oct. 31, 2016, data, shows total assets decreased $10.0 billion in September to $2.592 trillion after decreasing $48.5 billion in September, increasing $19.3 billion in August and $11.6 billion in July, and decreasing $13.8 billion in June. Our broad Crane Money Fund Average 7-Day Yield was up 1 bps to 0.15% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) rose 4 bps to 0.28% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA inched up to 0.47% and the Crane 100 rose 3 bps to 0.52%. Charged Expenses averaged 0.32% and 0.25% for the Crane MFA and Crane 100, respectively (unchanged). The average WAM (weighted average maturity) for the Crane MFA was 34 days (up 3 days from last month) and for the Crane 100 was 35 days (up 5 days). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The ICI's latest "Money Market Fund Assets" report says, "Total money market fund assets increased by $26.18 billion to $2.68 trillion for the week ended Wednesday, November 2, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $32.73 billion and prime funds decreased by $7.66 billion. Tax-exempt money market funds increased by $1.11 billion." We review the latest asset figures below, and we also excerpt from an article from iTreasurer entitled, "Post-Rule Change, Prime Funds in the Balance," which discusses Prime MMFs and alternatives.
Over the past 52 weeks, total money fund assets have declined by $39.7 billion, or 1.5%, while they've declined by $81.7 billion, or 3.0%, YTD in 2016. Prime money fund assets have plunged by $1.074 trillion (down 73.6%) over the past year and by $899.4 billion (down 70.1%) YTD. Government MMFs have increased by $1.150 trillion over 52 weeks (up 113.5%), and they've increased by $943.0 billion (77.2%) YTD. Tax-exempt MMFs have fallen by $115.9 billion (-47.3%) since 10/31/15 and $123.4 billion (-49.3) since 12/31/15. Combined Prime and Tax-exempt MMF assets fell by a massive $1.190 trillion since 10/31/15 and $1.025 trillion since 12/31.
ICI writes, "Assets of retail money market funds increased by $6.36 billion to $953.17 billion. Among retail funds, government money market fund assets increased by $5.10 billion to $566.80 billion, prime money market fund assets decreased by $30 million to $261.60 billion, and tax-exempt fund assets increased by $1.29 billion to $124.78 billion."
Their release continues, "Assets of institutional money market funds increased by $19.81 billion to $1.72 trillion. Among institutional funds, government money market fund assets increased by $27.63 billion to $1.60 trillion, prime money market fund assets decreased by $7.63 billion to $122.77 billion, and tax-exempt fund assets decreased by $190 million to $4.27 billion." Combined retail and institutional Prime assets now total $384.4 billion (14.4% of total assets), while combined retail and institutional Government assets total $2.164 trillion (80.8%). Tax-exempt assets total $129.0 billion, or 4.8%.
The update adds in a note, "ICI reports money market fund assets to the Federal Reserve each week. Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website. For more information about the implementation of new money market fund rules by the Securities and Exchange Commission (SEC), please see our ICI Viewpoints."
The recent iTreasurer article <i:http://www.itreasurer.com/Post-Rule-Change-Prime-Funds-in-the-Balance.aspx>`_ says, "October 14 has come and gone and there are a couple money market fund trends that may bode well for prime money market funds. One is that spreads between institutional prime and government MMFs have widened since the October 14 implementation of new SEC rules. The second is that prime fund portfolios' weighted average maturities (WAM) have lengthened somewhat. These shifts may eventually bring back some lost luster to prime funds for corporate treasurers, but so far inflows have yet to materialize, and views split sharply about whether they ever will."
The piece continues, "Prime institutional funds saw $872 billion flow out of them as of October 28 since the start of the year, bringing down the total invested in those funds to $383 billion as of October 27, according Treasury Strategies and Crane Data. Meanwhile, the volume of Treasury-bond MMFs increased over the same time period by $102 billion, to $603 billion. The biggest jump in volume, however, was with MMFs investing in government securities, which increased by $787 billion, to $1.463 trillion by October 28."
It tells us, "The outflow from prime funds has slowed to a trickle, with a mere $6 billion more bleeding out since mid-October. Anthony Carfang, managing director at Treasury Strategies, a Novantas company, said he does not anticipate anymore material outflow, and money will flow back when investors see "all clear" signals, such as longer weighted average maturities (WAM), asset inflows, and minuscule net asset value (NAV) fluctuation. He added that the money leaving prime funds went mostly to MMFs investing in government securities, including treasury and agency securities."
The iTreasurer article also says, "Corporate cash has several short-term alternatives, including bank deposits, structured deposits, certificates of deposit (CDs), commercial paper (CP), and repurchase agreements (repos). Mr. Carfang said corporates’ eventual return to prime funds depends on two “wildcard” conditions. One is the amount banks choose to pay on deposits, currently close to zero, and the second is whether the yield spread between government and prime MMFs widens."
Finally, it adds, "How the first plays out remains to be seen, but there are indications the yield spread will widen significantly. Mr. Carfang said that by the compliance date the spread had tightened to 8 or 9 basis points and the WAM for prime MMFs had shortened to around 15 days. Since then, the spread has since widened to around 13 bps while the prime WAM crept back up to between 20 and 25 days. The WAM of government and agency securities, however, is now more than 40 days."
A press release entitled, "Moody's: Global money market fund industry 2017 outlook stable, revised from negative in 2016" tells us that, "Moody's Investors Service's outlook for the global money market fund (MMF) industry is stable for 2017, from previously being negative for 2016. Reduced uncertainty surrounding regulatory reform supports the stable outlook. Moody's report, entitled "Money Market Funds -- Global: 2017 Outlook - Reduced Regulatory Uncertainty Supports Stable Outlook," is available on www.moodys.com." We review this below and also quote from the Federal Reserve's latest statement.
Vanessa Robert, a Vice President at Moody's, comments, "We changed the outlook for MMFs to stable for 2017 to reflect our renewed confidence in the industry, given its resilience during this period of transformational change. We consider that fund managers will conservatively manage portfolios in the new regulatory regime." Assistant Vice President David Wang adds, "While $1 trillion of assets have moved around within the industry, it has survived and can move forward in a more sound fashion.
The update says, "Moody's previously negative outlook on the money market fund industry for 2016 was driven by uncertainty surrounding the impact of transformational regulatory reform in the US and the ability of the industry to effectively manage the transition to a new regulatory regime. Moody's says regulatory uncertainty is receding."
They explain, "The conversion of institutional prime and tax-exempt funds to VNAV and the adoption of liquidity fees and gates on all non-government MMFs led to a shift in the mix of industry assets which far exceeded most estimates. Prime money market funds have already lost more than $1 trillion of assets as a result of the new rules, which allow managers to gate redemptions and impose fees should there be a threat to liquidity. However, most assets transferred into government money market funds and did not leave the sector altogether. In Europe, money market fund rules will be finalized in 2017, but are unlikely to be implemented before 2019."
The Moody's piece tells us, "The supply of highly rated short-term investments is less of a concern, according to the rating agency. In the US, the contraction of prime funds has sharply reduced their demand for short-term investments, and government funds also have no shortage of investable assets given higher Treasuries issuance and expanded repo availability. In Europe, supply has increased because certain issuers that once tapped the US market are turning to Europe, given diminished US MMF demand for short-term bank and corporate debt."
Finally, it adds, "Moody's says industry assets will be stable, despite negative or low rates in Europe and possible rate hikes in the US. Despite negative or low rates in Europe, money market fund asset levels will likely stay stable. MMFs remain an attractive investment option relative to bank deposits at a time when European banks' appetite for deposits has waned owing to regulatory pressures. In the US, where rate hikes are on the horizon, money market funds have been shortening portfolio durations to around five days, making portfolio net asset values less sensitive to rate increases."
In other news, the Federal Reserve Board issued its latest statement on interest rates, saying, "Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee's 2 percent longer-run objective."
It continues, "Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation."
The Fed's statement tells us, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
It adds, "In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
Fitch Ratings' latest "U.S. Money Fund Reform Dashboard" discusses recent asset flows, market NAVs, liquidity levels and yields. They write, "While the mass exodus from prime institutional money market funds has slowed in the week following the reform implementation date of Oct. 14, asset outflows continue, with prime institutional assets under management declining $3 billion in the week between Oct. 14 and Oct. 21, 2016. Government institutional funds' assets increased by $21 billion in the same period, reaching a total of approximately $1.6 trillion. Since Oct. 27, 2015, prime institutional money funds have lost approximately $861 billion in assets, and all prime money funds have lost $1.1 trillion (due to a combination of fund conversions and investor outflows)."
The Fitch update explains, "Of 30 prime institutional funds reviewed as of Oct. 21, 2016, one fund reported a shadow net asset value (NAV) below $1.00, compared with no funds as of Oct. 7, 2016. Some of the cash that left may return to prime funds, but this will be a function of the relative yield differential between prime and government funds as well as investors adapting to the new features of prime funds. Alternative liquidity products are also expected to garner inflows."
The piece tells us, "Facing uncertain flows as managers and investors adjust to the new fees and gates paradigm, fund managers have built substantial weekly liquidity buffers. As of Oct. 21, 2016, prime institutional funds' weekly liquidity averaged 80%, up from 52% on June 30. None of the 28 funds reviewed showed liquidity below 50%. However, as asset flows have stabilized, fund managers are beginning to revert back to more normal portfolio management by extending maturities. This has caused prime institutional funds' average weekly liquidity to fall 7% from a peak of 87% on Oct. 7, 2016, a week ahead of reform."
It adds, "Liquidity will likely remain a long-term focus, and Fitch expects prime funds to maintain a buffer above the 30% weekly liquidity threshold in order to assuage investor concerns with the liquidity fees and gates features that kicked in Oct. 14."
Finally, Fitch writes on "Yields," "The spread between net yields on prime institutional funds and government institutional funds declined for several months following a peak of 0.17% in May, as outflows and liquid asset requirements forced prime fund managers to maintain short maturities. Following reform, as market dynamics have stabilized and investors grow more comfortable with the new operating environment, prime fund managers have begun to extend maturities in their portfolios in order to take advantage of wider credit spreads offered by borrowers. Consequently, the spread between institutional prime and government funds increased to 0.18% as of Oct 21, 2016."
Note: Crane Data's most recent Money Fund Intelligence Daily shows that Prime MMF assets declined by $133.7 billion in October to $379.7 billion, while Government MMFs rose by $126.1 billion. Over the past 7 days (through 10/31), Prime MMFs fell by just $5.6 billion while Govt MMFs rose by $16.4 billion. Of the 132 Prime Inst MMFs tracked by Crane Data, we show just one with an NAV below $1.0000, and this fund isn't a "live" fund and is in the process of liquidation. The latest WLA (weekly liquid assets) average for Prime Institutional Money Market Funds stands at 72.2%, down from 80.9% on Oct. 14. Finally, Prime Inst MMF yields, on average, stand at 29 bps, up one bps on the week.
In other news, Citi writes about the recent decline in Tax Exempt yields, which have skyrocketed over the past 2-3 months. They comment, "SIFMA dropped by 11bp last week thus richening for 3 weeks in a row after the sustained rise since June 2016. Thus, our optimism over lower SIFMA resets was not misplaced though it was predicated on a moderation of tax-exempt money fund outflows. For now, it seems like tax-exempt fund flows have witnessed some sort of an inflexion point. Despite the drop in SIFMA, in our view, VRDNs remain attractive for crossover investors, especially relative to their WAM, which is only 7 days for weekly reset VRDN."
Our MFI Daily shows the average Tax Exempt MMF yielding 0.21%, down from 0.26% a week earlier. Tax Exempt MMF assets totaled $127.3 billion, down $175 million on the week and $1.3 billion in October.
Finally, the website ETF.com wrote a piece entitled, "When Cash Is King, These ETFs Benefit." It tells us, "Investors have been piling into cash, with portfolio allocations now at 15-year highs at nearly 6%, according to the Wall Street Journal. That data point could help explain why ETFs that behave like money-market proxies, offering cash-like exposure, are so hot this year. What's interesting is that the reason investors are running to cash -- at least according to Russ Koesterich, head of asset allocation at BlackRock -- has nothing to do with demand for safety."
ETF.com explains, "Instead, Koesterich says that investors are looking for ways to diversify equity risk, and the historical diversifier of choice -- bonds -- is increasingly correlated to equity, and should become more so as monetary policy evolves and rate hikes take place.... In that environment, "cash is once again king," as he puts it, as the "only major asset class available to hedge equity risk."
The article continues, "In the ETF space, there's no question that demand and performance of ETFs viewed as money market proxies are strong this year. Consider these three funds (below) as a sampling of this segment, and their year-to-date performance -- a clear uptrend: PIMCO Enhanced Short Maturity Active ETF (MINT), Guggenheim Enhanced Short Duration ETF (GSY), and FlexShares Ready Access Variable Income Fund (RAVI)."
Finally, it adds, "The performance has gone hand in hand with net creations. MINT has now gathered more than $1.02 billion in fresh net assets in 2016, while GSY has taken in almost $300 million and RAVI $11.3 million in inflows.... Beyond demand for cash, another important driver of demand for these ETFs is regulatory change to money market mutual funds stemming from the 2008 credit crisis.... Anticipation of higher interest rates is another important driver here, as investors look to shorten duration ahead of what many expect will be a rate hike in December."
UBS Global Liquidity Management writes in a recent "Liquidity Perspectives" a brief entitled, "Investment policy guidelines: Time for a review?" They say that the "New environment may require a refresh," explaining, "It has been an interesting year for cash management. Sweeping regulatory changes and uncertainty around the future direction of interest rates in the US are creating a challenging environment for corporate treasurers in managing liquidity." We discuss this white paper below, and we also review some recent news in the municipal money market sector.
UBS tells us, "The combination of market and regulatory factors is forcing many treasurers to look at their investment policy guidelines in ways they haven't done in years. Multinational corporations are especially under pressure. Not only do they have to adapt to the way banks are valuing deposits and address new considerations around money market funds, they also may need to reevaluate their investment policies and how they can be adjusted when traditional methods of capital preservation may not be effective."
They write about, "The importance of cash segmentation," stating, "Many investment policy statements provide detailed guidelines on how to invest cash, but they rarely address specific cash buckets. The one-size-fits-all approach may have worked in a world when interest rates were at historically normal levels; the line between operating and non-operating deposits was blurred; and there was limited distinction between stable and variable net asset value (NAV) short-duration products. However, today's challenges may call for a more customized approach. A clear delineation of cash may be critically important to achieving desired outcomes while also adapting investment policies to the new world."
The paper says, "Consider broadening the universe of investable securities," and tells investors, "Having a single set of guidelines for all types of cash may limit treasurers' ability to tap into the broader set of investment vehicles that have become more prominent in response to the new environment. A one-size-fits-all approach may be limiting because the universe of allowable investments is capped to the safest option. This creates an opportunity cost, because all cash is subject to guidelines applicable to working capital."
UBS states, "However, banking and money fund reforms are ushering in alternative solutions, such as separately managed accounts and short-duration bond funds. Despite the diversification benefits and potential yield enhancements these solutions could offer, most policies do not account for them. By segmenting cash and assigning distinct guidelines for each bucket, treasurers can have access to additional cash-management tools.... A broader set of investable options including separate accounts and private placement funds could also mitigate the effects of regulatory changes affecting money funds."
A section entitled, "Adjusting investment policy to floating NAV," explains, "Upcoming money fund reforms will impose the potential for gates and fees on all prime and municipal money market funds, and floating NAV on institutional prime and institutional municipal money market funds. As a result, treasurers have important decisions to make when adjusting their investment policies. The magnitude of the changes and the process involved in getting these changes approved may largely depend on the following two variables: Capital preservation: Is it strictly or loosely defined? Strictly means zero tolerance for gains and losses. Cash segmentation: Is the policy cash-bucket specific or not? Treasurers should also give careful consideration to the gates and fees that may be imposed on prime and municipal funds."
Finally, the piece adds, "Investment policies with separate guidelines for each cash bucket can provide more flexibility in dealing with gates and fees. For example, liquidity requirements on reserve cash are not as stringent as they are on operating cash, so with minimal changes to the policy, prime fund investments could simply be shifted from the operating cash bucket to the reserve cash bucket and still stay compliant with a given corporation's guidelines."
In other news, an article in The Bond Buyer entitled, "Clarity's Vision Realized as Ohio Bond Lands on Its Platform," tells us, "Clarity Bidrate Alternative Trading System, a division of Arbor Research & Trading LLC that aims to rejuvenate the variable rate municipal market, has won its first new bond issue."
It explains, "The deal came to market on Oct. 25, when the State of Ohio sold $32.3 million of variable rate bonds, series 2016C. After the initial underwriting by Key Bank, the bonds will go up on Clarity after the reset on Nov. 1. Clarity's goals include expanding and centralizing the market, bringing more transparency, and use competitive pricing to rejuvenate the variable rate municipal issues, though there will be other structures available on the system. The variable rate market collapsed in 2008, as the fall of Lehman Brothers triggered a run on the securities."
Bond Buyer comments, "Clarity's chief executive officer and president, Robert Novembre, said that orders for the Ohio bond ranged from the whole deal to as small as the minimum denomination of $100,000.... Novembre said the deal did better than anticipated and Clarity will be adding more investor clients in coming weeks."
The piece quotes Novembre, "The State of Ohio was the catalyst to spark the modernization of the marketplace, which is long overdue.... Now that we have the first one done, we want to get the ball rolling more aggressively. We are confident in growth of the pipeline, stronger odds of getting deals, and we are not just reliant on new money issues either."
Finally, Bond Buyer adds, "Clarity is in the document phase with a second issuer, with the hope that the transactions will go through by the year end. While the total amount of the deal may not on the larger side, the importance of the deal far surpasses the amount. "This was a historic moment for us and for the market," he said. "It's something new and is designed to help all parties."
