The Investment Company Institute, the trade association for mutual funds, released its weekly "Money Market Mutual Fund Assets," its monthly "Trends in Mutual Fund Investing" and its "Month-End Portfolio Holdings of Taxable Money Funds" updates yesterday. ICI shows that money fund assets rebounded in the latest week (after dropping the two weeks prior but rising for 7 weeks before this), ending the year approximately flat. The second release shows both taxable and tax-exempt money fund assets up in November, while the third confirms earlier reports of continued jumps in Treasury and Agency holdings and declines in Repo last month. (See our Dec. 12 News, "December Portfolio Holdings: Treasuries Surpass Repo as Largest Piece.")
The latest "MMF Assets report says, "Total money market fund assets increased by $15.93 billion to $2.73 trillion for the week ended Wednesday, December 28, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $14.83 billion and prime funds increased by $1.48 billion. Tax-exempt money market funds decreased by $370 million."
It continues, "Assets of retail money market funds increased by $820 million to $983.21 billion. Among retail funds, government money market fund assets increased by $220 million to $604.25 billion, prime money market fund assets increased by $650 million to $252.40 billion, and tax-exempt fund assets decreased by $50 million to $126.56 billion.... Assets of institutional money market funds increased by $15.11 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $14.61 billion to $1.62 trillion, prime money market fund assets increased by $820 million to $123.95 billion, and tax-exempt fund assets decreased by $320 million to $4.41 billion." Total money fund assets are down year-to-date in 2016 by $31.0 billion, or 1.1%.
ICI's latest "Trends in Mutual Fund Investing - November 2016" shows a $55.3 billion increase in money market fund assets in Nov. to $2.721 trillion. The increase follows a decrease of $12.1 billion in Oct. and $51.1 billion in Sept., and an increase of $18 billion in August and $14 billion in July. In the 12 months through Nov. 30, money fund assets were perfectly flat -- up a mere $1.2 billion, or 0.0%. (Month-to-date in Dec. through 11/28, our Money Fund Intelligence Daily shows total assets up by $21.8 billion with Prime MMFs up $772 million, Tax Exempt MMFs up $2.5 billion, and Govt MMFs up $18.5 billion.)
The monthly report states, "The combined assets of the nation’s mutual funds increased by $158.90 billion, or 1.0 percent, to $16.24 trillion in November, 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 outflow of $16.51 billion in November, compared with an inflow of $10.16 billion in October.... Money market funds had an inflow of $54.41 billion in November, compared with an outflow of $8.20 billion in October. In November funds offered primarily to institutions had an inflow of $31.89 billion and funds offered primarily to individuals had an inflow of $22.52 billion."
The latest "Trends" shows that both Taxable MMFs and Tax-Exempt MMFs increased in November. Tax-Exempt MMFs added $1.9 billion, after falling $0.4 billion in October and $15.3 billion in September. Taxable MMFs increased by $53.4 billion, after dropping $11.7 billion the prior month. Year-to-date through Nov. 30, MMFs have had $13.9 billion in outflows, with $13.8 billion flowing out of Taxable funds and just $95 million in outflows from Tax-Exempt funds. Money funds now represent 16.7% (up from 16.5%) of all mutual fund assets, while bond funds represent 22.4%. The total number of money market funds was flat at 423 in November, but down from 495 a year ago. (Tax exempt money funds have declined from 151 to 102 over the last year.)
ICI's Portfolio Holdings confirms another jump in Treasuries and increase in Agencies in November, while Repo showed the only large decline. Treasury Bills & Securities moved into first place among composition segments, rising $82.8 billion, or 10.8%, to $846.9 billion, or 32.7% of holdings. Repo fell to become the second largest portfolio segment, down by $21.1 billion, or 2.7%, to $771.5 billion or 29.8% of holdings. U.S. Government Agency Securities remained in third place, gaining $19.5 billion, or 2.9%, to $684.1 billion or 26.4% of holdings. Government funds and government-affiliated holdings continue to hold the vast majority of money fund assets following 2016's money fund reforms.
Certificates of Deposit (CDs) stood in fourth place; they increased $1.4 billion, or 0.9%, to $153.9 billion (5.9% of assets). Commercial Paper remained in fifth place and increased $1.4B, or 1.4%, to $109.4 billion (4.2% of assets). Notes (including Corporate and Bank) were up by $1.9 billion, or 23.1%, to $10.1 billion (0.4% of assets), and Other holdings fell to $35.8 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 404 thousand to 25.386 million, while the Number of Funds was flat at 321. Over the past 12 months, the number of accounts rose by 2.173 million and the number of funds declined by 23. The Average Maturity of Portfolios was 43 days in Nov., up 1 day from Oct. Over the past 12 months, WAMs of Taxable money funds have lengthened by 8 days. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our Dec. Money Fund Portfolio Holdings and the latest files.)
Below, we reprint the lead article from the December issue of our Bond Fund Intelligence newsletter. Entitled, "USAA Short-Term Bond's Bass Has Focus on Yields," it says: This month, Bond Fund Intelligence interviews Julianne Bass, Assistant V.P. & Portfolio Manager at USAA Investment Management, who co-manages USAA Short-Term Bond Fund, and several other bond funds for the San Antonio-based, military alumnus-affiliated manager. We discuss their funds and their focus on attractive yields. Our Q&A follows.
BFI: How long has USAA been involved in running short-term bond funds? How long have you been involved? Bass: USAA Short-Term Bond Fund has been an existence since 1993.... The Ultra-Short Bond Fund has a shorter history, about six years. We also have USAA Income Fund that's been around since the 1970's, and an Intermediate Term Bond Fund.... I've been at USAA for 17 years. I started as an analyst, and for the past 10 years I've been the co-manager on the Short-Term Bond Fund, Intermediate-Term Bond Fund, and the High Income Fund. I've also been the co-manager on the Income Fund for the past four years.... Brian Smith is my co-manager on the Short-Term Bond Fund.
BFI: Tell us about the Short-Term Bond Fund and other bond fund offerings. Bass: They all focus on spread product, and, with all of our funds, we're looking for an attractive yield for an acceptable level of risk. So we focus on yields, and over time that's what has worked for us. The Short-Term Bond Fund has to have a weighted average maturity of three years or under.... So it's much shorter duration. All three of the investment grade funds have corporate, asset-backed securities, commercial mortgage-backed securities, and various loans and some high yield. They're typically underweight Treasurys and mortgage-backed securities, with a focus on heavy spread pickup.
The Intermediate-Term Bond Fund has to have an average life of between three and 10 years. The Income Fund can have any duration, but it's typically a longer fund than the Intermediate Fund. The duration is around 5.3 years for the Intermediate Term Bond Fund. Typically, the duration positioning is shortest in the Short-Term Bond Fund.
BFI: What's the biggest challenge for these funds today? Bass: The biggest challenge for Short-Term Bond Fund is that is has a short duration, currently 1.8 years. Short-term bond funds constantly have a lot of maturities coming through, so you're constantly reinvesting. The challenge always is just finding attractive things to invest in.... But the duration is short, so that's the fund that will have the least impact as rates go up. Since [the portfolio] is very quickly running off all the time, it will be a good opportunity to invest at higher rates.
BFI: What kinds of investment strategies can and can't you use? Bass: In the Short-Term Bond and Intermediate-Term Bond, we can buy basically anything that's in the fixed income sector. But we have limits on how much high yield we can hold in the investment grade funds, so we can hold that up to ten percent. In the Short-Term and Intermediate-Term, we cannot buy common equity. But we can buy common equity in the Income Fund, but it will never be a meaningful part of the portfolio. We also don't do very much with derivatives, and we don't buy CDS.
BFI: Are there any diversity or concentration limits on these funds? Do financials play a big role? Bass: We have limits. We can only have up to 25 percent in one industry, [and normally] we don't go anywhere near that. Then there are also some limits on individual obligors -- the general rule is five percent. But these are diversified portfolios, and typically every issuer excluding the U.S. government is under one percent. So one percent is a large issuer for these funds.
Financials are a pretty big part of investment grade issuance. So we're involved in that. Other types of securities we buy are other corporate bonds, asset-backed securities and commercial mortgage-backed securities. We have bought MBS in the past and we probably will again when that market is free of the government, and then we buy Treasurys.... On the number of issuers, we have 381 [as of October 2016] ... it's much more [in] individual securities, usually around 500. We have 20 credit analysts.... We actually buy municipal bonds as well, taxable munis. So we have a group of municipal analysts, that specializes by state and then we have our corporate analysts that specialize by industry.
BFI: Have you taken advantage of any of the LIBOR or SIFMA spikes in the money market space? Bass: The Short-Term Bond Fund did a little bit in variable rate demand notes, but that trade has moved away and it's not something that's been actively pursued right now. A little bit of that's been done.
BFI: Does USAA manage separate accounts, ETFs or other pools? Bass: USAA does have custom managed portfolios. Our analysts also work on our internal money -- our life portfolio, and our property and casualty portfolio.... Our life portfolio is very similar to an intermediate-term bond fund and our P&C portfolio is more conservative. It's typically much shorter.... Overall, USAA has been a conservative firm and it has a very high credit rating (Aa1/AA). We have $16 billion in the taxable fixed income funds, total mutual fund assets are $70 billion, and total assets under management including the insurance affiliates are $150 billion.
BFI: Tell us about your distribution, investors and flows. Bass: We do have a new, third party distribution effort. I've seen the numbers of that amount of money and it's manageable, it's not a very large percentage of the fund. We cater to the military, and we have sticky retail investors in our funds. So we don't see drastic inflows and outflows [like] some other fund companies.... On occasion, there might be an internal rebalancing because our private wealth management area uses some of our funds and they might rebalance one of their models. That would be the largest kind of swing we've seen. We know about [these though] and they've actually allowed us to match our cash flows to their movement.
BFI: What is your outlook for the Fed and for the coming year? Bass: We don't predict interest rates here. All of our funds are duration neutral to their peer groups. What we focus on is finding attractive yields bond-by-bond. So our analysts look at every single bond we have in our portfolio, and we're looking for attractive yield pickup for risk. I'll just use the example of our Income Fund. Over the past 10 years its average annual return has been 4.9 percent, and 4.4 percent of that was from the yield and 0.5 percent was from the NAV movement. So we really focus on finding attractive yield pickups and holding to maturity. It's very low turnover.
BFI: Any thoughts on the recent spike in bond yields? Have you seen flows impacted by this? Bass: Personally, no, and it's not something that we're being asked about very much yet. Since we're involved mainly in spread product, our rates have gone up but spreads have stayed steady or tightened a little bit. So we haven't really seen that much of a difference in all-in yields.
BFI: How fast does the portfolio adjust to new higher yield levels? Bass: About 15 percent of the fund is cash and floaters and that will quickly adjust to higher rates. The duration is 1.8 years, so prices in the underlying bonds won't change as much as funds with longer durations which are more sensitive to interest rate changes. So the yield will adjust more slowly than for the longer duration funds. As the fund reinvests it will be at higher rates.
BFI: Any thoughts on the future of short-term bond funds? Bass: I don't really see any change for short term bond funds going forward. They're in a place to get a yield pickup over money markets or ultra-short funds, and you can write checks on them. The net asset value does fluctuate some, but I think they'll still have an attractive place.
This past year saw historic changes to money market mutual funds, including a massive shift of assets from Prime funds into Government MMFs, rates inching their way higher after almost a decade of zero yields, and the dawn of floating NAVs for Prime Inst money funds. Money fund managers continued to revamp their money fund lineups, convert funds to Government MMFs, and exit the business in 2016. It was also the second straight year that the Federal Reserve inched rates higher in the last month of the year. We've selected the most important news stories of the past year below, as well as those that represent some of the major trends. Crane Data's Top 10 Stories of 2016 include (in chronological order): "Rolling w/Reform Changes II: Recap of '15 Announcements, '16 Plans" (1/6/16); "Govt MMF Assets Surpass Prime for First Time Ever; Highest in 5 Yrs" (2/26/16); "More Exits: PNC Liquidates, PIMCO Goes Govt; First American Update" (3/1/16); "Money Fund Disclosure Reforms Go Live; Websites Add MNAVs, DLA, WLA" (4/14/16); "Prime Outflows, Spreads, and Liquidity Major Issues at MF Symposium" (6/30/16); "Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes" (8/15/16); "Big Shift Out of Prime and Muni MMFs Hits $1 Trillion" (9/30/16); "SEC's Money Fund Reforms Go Live; NAVs Float, Emergency Gates, Fees" (10/14/16); "Europe Agrees to Money Fund Reforms: VNAVs, CNAVs and New LVNAVs" (11/17/16); and "Fed Hikes! Second Time in 10 Years; Dec. BFI: End of Bull, USAA Profile (12/15/16)."
Our Jan. 6 News story, "Rolling w/Reform Changes II: Recap of '15, '16 Plans," says, "On July 22 , we ran a story entitled, "Managers Rolling with Reform Changes; Recap of Announcements So Far," which summarized all of the money market fund reform related changes that had taken place in the first half of 2015. Since then, we have seen many more announcements and shifts, so we've hit the reset button to update all of the fund lineup changes that occurred in 2015, starting with the largest MMF managers and working our way down. Note: Readers may also review www.cranedata.com's "News Archives" (we recommend choosing "List Archives by Title Only" if you're browsing the history and selecting month by month to browse), "Link of the Day Archives" and "Money Fund Intelligence Archives" for more details."
On February 26, we wrote, "Govt MMF Assets Surpass Prime for First Time Ever. This piece said, "Money fund assets increased for the third straight week, climbing $15.1 billion and pushing asset totals to $2.778 trillion, their highest total since January 2011. The Investment Company Institute's weekly statistics show that for the first time ever, Government money funds now have more assets than Prime funds. Government MMF assets stand at $1.270 trillion, while Prime assets are at $1.265 trillion." Also of note in February, on the 24th we wrote, "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche," which told us, "There has been a steady stream of fund liquidations since SEC Money Fund Reforms were announced, with a surprisingly large number of them coming from the Tax-Exempt side."
Our third Top 10 entry is the March 1 article, "More Exits: PNC Liquidates, PIMCO Goes Govt," which comments, "Yet another round of money fund liquidations, prime-to-government conversions and fund lineup change announcements surfaced over the last several days. Among the latest batch: PNC Funds filed with the SEC to liquidate its Prime and Tax-Exempt money funds; PIMCO filed to convert its Prime MMF to Government; and, First American Funds announced a series of changes to its fund lineup, including the launch of a new Prime Retail MMF. With the PIMCO and PNC changes, we now count $272 billion in Prime money funds that have liquidated or converted to Government MMFs, or plan to convert prior to October 2016.... Though the vast majority of these have been conversions from Prime into Govt funds, PNC joins RBC in liquidating its Prime funds instead of converting them. We also report on a new filing from the Schwab Variable Share Price Money Fund."
An April 14 News article, "Disclosure Reforms Go Live; Websites Add MNAVs, DLA, WLA," comments, "Phase II of the SEC's Money Market Fund Reforms goes "live" today, April 14, which means that money fund managers must now officially begin disclosing certain information on their websites. Specifically, they must disclose the percentages of daily and weekly liquid assets (DLA and WLA); daily net inflows and outflows; and, the current market NAV (or MNAV) rounded to four decimal places.... We review statements from several of the largest money fund complexes on what they have done to meet the new requirements, recap the SEC rules, and provide links to websites of the top 20 MMF managers ... below. (Note: Crane Data provides MNAVs, DLA and WLA figures in our MFI Daily product.)" Also of note in April, we wrote on 4/19, "BlackRock Completes BofA Funds Merger; Now 2nd Largest MMF Manager and on 4/18, "NAIC Eliminates Class 1 Status for Prime Money Funds; American Update."
Our June 30 article, "Prime Outflows, Spreads, and Liquidity Major Issues at Symposium," says, "Two of the most popular sessions at our 2016 Money Fund Symposium in Philadelphia last week were "Major Money Fund Issues 2016" and "Senior Portfolio Manager Perspectives," which featured some of the leading authorities from some of the largest players in the money fund industry. During the first session, panelists were asked about the questions they're getting most frequently of late. Fitch Ratings' Ian Rasmussen replied, "The questions usually fall within 3 main categories: They want to know about liquidity, they want to know about asset flows, and they want to know about yield." Indeed, these three topics dominated not just the conversations in these sessions, but the entire conference."
Sweep accounts shifted away from Prime and Tax Exempt funds en masse in 2016, as we reported in our Aug. 15 News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps." It comments, "Prime and Tax Exempt MMF assets continued their steep slide last week. Though at this point it appears everybody is selling or switching, brokerage sweep accounts continue to be the major contributor of the now over $500 billion shift from Prime and Muni into Government MMFs." Also of note, in August, we wrote on the 4th, "Muni MMFs 'Decimated' by Rules Says Bloomberg; More Liquidations," and on the 12th, we wrote, "TDAM Does About Face, Liquidates Inst MMF and Inst Muni; More Filings."
Of course, the biggest story of 2016 was the trillion shift from Prime into Govt MMFs. We reported in our Sept. 30 News, "Big Shift Out of Prime and Muni MMFs Hits $1 Trillion." It says, "The total amount of money that's moved out of Prime and Tax Exempt MMFs combined approached $1.0 trillion (-$988B) this week, as the "Big Shift" of assets into Government money funds accelerated ahead of the mid-October money fund reform deadline. ICI's latest "Money Market Fund Assets" report shows MMFs overall increasing $10.5 billion in the latest week, but Prime funds fell by over $85 billion (after falling by $60 billion a week the prior 2 weeks). Prime has declined in 17 out of the past 18 weeks (-$579B), and has averaged outflows of $33 billion a week since June 1 and $59 billion since Sept. 1." Also of note, on September 12 we wrote, "HSBC Latest to Exit Prime; Turn Off the Lights? BlackRock on NRSROs."
On October 14, we featured, "SEC's Money Fund Reforms Go Live; NAVs Float." It reads, "October 14 marks the implementation date for the final phase of the SEC's 2014 Money Fund Reforms, which most notably include a floating (4-digit) NAV for Prime Institutional funds and emergency gates and fees provisions for all Prime and Municipal money market funds. (See our July 24, 2014 News, "SEC Adopts MMF Reforms; Chair White on Rule's Fundamental Changes.") ICI released a "Statement on SEC Money Market Fund Rules," which is subtitled, "Reforms from 2010 and 2014 Have Fundamentally Changed Product to Address Any Pre-Crisis Risks." We excerpt their statement, as well as comments from Fitch Ratings and S&P Global Ratings, below."
Then, on Nov. 17, we featured in our News, "Europe Agrees to Money Fund Reforms," The article says, 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."
Lastly, the year again ended with a little good news. We reported in our Dec. 15 News, "Fed Hikes! Second Time in 10 Years." It says, "Money market fund investors and managers cheered as the Federal Reserve raised short-term interest rates for the first time this year and for just the second time in 10 years. Money funds, which have an average weighted average maturity (WAM) of 36 days and an average yield of 0.32% currently (as measured by our Crane 100 MF Index), should begin reflecting the 25 basis point higher yields immediately and should reflect them fully in just over a month. So yields should break over 0.5% (levels not seen since early 2009) as we move into January, and the highest-yielding money funds, currently 0.7-0.8%, should break above 1.0% within weeks. Given rejuvenated expectations for more Fed hikes in 2017, money fund yields, and revenues (as fee waivers melt away), are looking up for 2017."
For more 2016 News (and prior years going back to 2006), see Crane Data's News Archives. We'll continue to provide daily updates on the money fund marketplace in the coming year, so keep reading our News and Link of the Day commentaries in 2016. (Watch for our Bond Fund Intelligence News website to launch at some point in the coming months too.) Thanks to our readers, subscribers and supporters; we wish you all the best in the coming year. Happy New Year!
Crane Data, which publishes the Money Fund Intelligence newsletter and produces Money Fund Symposium, the largest annual gathering of money fund and money market professionals, announces the launch of Bond Fund Symposium, the first conference devoted entirely to bond mutual funds. Crane's Bond Fund Symposium will be held March 23-24, 2017 at the Hyatt Regency Boston. BFS will bring together bond fund managers, marketers, and professionals with fixed-income issuers, investors and service providers. We review the preliminary agenda and details below, and we also give an update on our 2017 conference calendar, including next month's Money Fund University in Jersey City (1/19-20/17). (As a reminder, please make hotel reservations this week if you plan on attending MFU.)
Crane Data, which is celebrating the second anniversary of its Bond Fund Intelligence publication and BFI XLS bond fund information service and benchmarks, continues to expand its fixed income fund offerings with the launch of our first conference in this space. Bond Fund Symposium will offer fixed-income portfolio managers, bond investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Registration for Bond Fund Symposium is $500; exhibit space is $2,000 (includes 2 tickets); and sponsorship opportunities are $3K, $4K, $5K and $6K. Our mission is to deliver the best possible conference content at an affordable price to bond fund professionals and investors.
The morning of Day One of the inaugural BFS agenda includes: Welcome to Bond Fund Symposium with Peter Crane, President & Publisher, Crane Data; Keynote: PIMCO's Short-Term Strategies with Jerome Schneider, Managing Director PIMCO; Segmenting the Ultra-Short Bond Market, moderated by Crane and featuring Teresa Ho, Executive Director of J.P. Morgan Securities, Michael Morin, Director Inst. Port. Mgmt. at Fidelity Investments, and Dave Martucci of J.P. Morgan A.M.; Bond Strategist: Outlook for Rates & Spreads with Michael Cloherty, Head of Rates Strategy at RBC Capital Markets; and, Ratings & Risks in Bond Funds, with Roger Merritt, Managing Director if Fitch Ratings.
Day One's afternoon agenda includes: Senior Portfolio Manager Perspectives, moderated by Crane with Rob Galusza, PM of Fidelity Investments, Sue Hill, Senior Portfolio Manager at Federated Investors, and Joanne Driscoll, Portfolio Manager of Putnam Investments; Major Issues in Fixed-Income Investing, moderated by Alex Roever of J.P. Morgan Securities and featuring: Tony Wong of Invesco and Jeff Weaver of Wells Fargo Funds; ETF Trends: Fund Usage, Issues & ETF Investors with a speaker from BlackRock and Shawn McNinch of Brown Brothers Harriman; and, Bond Index Funds & Indexes with Joshua Barrickman of the Vanguard Group and Brandon Bettencourt of Fidelity Investments.
Day Two's agenda includes: State of the Bond Fund Marketplace with Peter Crane of Crane Data, Sean Collins, Senior Director of the Investment Company Institute, and Ed Baldry, EMEA CEO of Institutional Cash Distributors; Regulatory Update: Liquidity, Fees & More with Stephen Cohen, Partner of Dechert LLP and John Hunt, Partner with Sullivan & Worcester LLP; Government Bond Fund Roundtable with Michael Salm of Putnam and Sue Hill from Federated.
The second day also features: Corporate Bonds & Intermediate Bond Funds with Sean Rhoderick, CIO Taxable Fixed-Income at PNC Capital Advisors, and another speaker to be determined; Municipal Bond Fund Issues with Kristian Lind, Senior VP at Neuberger Berman and Doug McGinley Portfolio Manager at Fidelity Investments; High Yield Bond Fund Update with Craig Brandon of Eaton Vance and James Keenan of BlackRock; and, Bond Fund Data, Statistics & Ratings with Peter Crane and Roger Merritt of Fitch Ratings. (Note: The agenda is still somewhat in flux and some of our speakers have yet to confirm their participation.)
Portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of bond funds and fixed-income investing should benefit from our comprehensive program. A block of rooms has been reserved at the Hyatt Regency Boston. We'd like to thank our sponsors to date (some are still tentative) –- BlackRock, Fitch Ratings, Federated, J.P. Morgan Asset Management, Invesco, S&P Global Ratings, and Fidelity -- for their support, and we continue to seek additional sponsors and speakers. E-mail Pete Crane (email@example.com) for more details.
Crane Data is also making final preparations and still accepting registrations for our "basic training" Money Fund University. Our seventh annual MFU will be held at the Westin Jersey City Newport, Jersey City, NJ, January 19-20, 2017. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event also focuses on hot topics like money market regulations, money fund alternatives, offshore markets, and other recent industry trends. For those attending, please make hotel reservations ASAP; our discounted room rates expire early this week.
Finally, mark your calendars for our "big show," Money Fund Symposium, which will be held June 21-23, 2017, at the Atlanta Hyatt Regency. Watch for the preliminary agenda in coming weeks at www.moneyfundsymposium.com and let us know if you'd like more details on sponsoring this event. We are also still finalizing the location and dates for our next European Money Fund Symposium, but we're tentatively scheduled for Sept. 25-26, 2017, in Paris, France. Watch for more details in the coming weeks.... Happy Holidays and New Year, and we hope to see you at one of our events in 2017!
This month, our flagship newsletter Money Fund Intelligence interviewed State Street Global Advisors' Senior Managing Directors and Global Heads of Cash Management Yeng Felipe Butler and Pia McCusker. We discussed a number of topics, including finding the right mix of liquidity and return for clients in the new post-reform money fund environment. Our discussion follows. (The interview below is reprinted from the December issue of our flagship Money Fund Intelligence newsletter; e-mail firstname.lastname@example.org to request the latest issue.)
MFI: How long has State Street Global Advisors been involved in running cash and money market funds? Butler: State Street Global Advisors has been managing client cash for nearly four decades. We launched our first prime money market fund in 1988 and have continued to bring new cash solutions to our clients over the years. Today, we provide commingled and tailored solutions to institutional clients around the world through our money market funds, separately managed accounts, cash ETFs, and ultra-short term bond funds.
MFI: How long have you been involved? McCusker: I've been with the organization for 16 years, starting my career as an analyst in State Street's ABCP conduit team (anyone remember Clipper, Frigate, or Galleon?), thereafter navigating through and post financial crisis as Head of Credit Research within Global Cash. Amidst a greater regulatory regime, I took over the Global Cash Management team last year when my predecessor was appointed Chief Risk Officer. Butler: I joined SSGA in 2010 as Head of the US Cash Business and started my career in institutional cash sales and marketing at Merrill Lynch Investment Management. What attracted me to SSGA was the chance to work with a team dedicated to excellence and always putting clients first. This year, I took on responsibility for the global cash business, and we've been able to build on that culture of excellence globally to ensure a seamless and highly differentiated client experience to our large multinational corporate cash clients.
MFI: What is your biggest priority currently? What are you working on? Butler: Helping clients understand and navigate the changes brought on by reform is our top priority right now. Across the industry, the conversion of prime funds to floating NAV has largely transitioned uneventfully. And if there were issues, they were small and very quickly remedied. This points to the strength of the product and the commitment of the industry to meeting the challenge of money market reform. Sharing this experience with clients helped them better understand the full value proposition that we offer-both from an investment and operational standpoint.
McCusker: It is critical for us to work closely with our cash clients to find the right solution to cash investing post money market reform. Since October, many of our clients have shifted their cash portfolios toward government strategies. As the yield spread widens between government and prime funds, we are actively partnering with these clients to find the right mix of liquidity and return for them.
MFI: Tell us about your latest fund adjustments. McCusker: We recently made two major changes to optimize our fund line-up. The SEC reforms of 2016 presented an opportunity to rationalize our product offering and expand it to better meet the needs of our clients. We created six new cash management strategies to provide more choice for our clients to balance their safety, liquidity and yield needs. We also merged some funds from our legacy fund families to simplify our offering and eliminate duplicative offerings. The result is a very comprehensive line-up designed to meet the cash needs of all of our clients worldwide.
MFI: What's the biggest challenge in managing cash today? What has it been historically? McCusker: From a portfolio management perspective, moving a trillion dollars from prime to government has created capacity issues. We are having further conversations with clients to determine if the government fund will continue to be the best strategy for them. Balancing liquidity with return targets is the key issue. Historically, prior to 2008, clients were focused on return -- they were very interested in yield. Now, we are helping them with their increased focus on liquidity and ready access to their cash.
MFI: What are you buying now? What aren't you buying? McCusker: SSGA's philosophy on credit investments has not changed over its history. We are focused on preservation of principal and liquidity. Historically and currently, we are a conservative cash manager. We will stand by this philosophy regardless of the interest rate or credit environment. Moreover, having an independent credit research team supporting the global cash business has been a successful 'ingredient' for us, and we plan to keep this winning 'recipe'.
MFI: What are your customers concerned about these days Butler: In our consultations with clients, they are telling us that they are most concerned with liquidity and ease of access to their cash. They want a simple, transparent investment process that is easy to explain to their management. When you are running a business, no matter if you fly airplanes, build software apps, or are managing an investment portfolio, our clients want to know where there cash is and how quickly they can access it. Furthermore, our clients need help in navigating the new landscape. What is the Fed going to do? Are interest rates poised to move higher? How are new regulations impacting my business? SSGA helps answer these questions and provides custom-tailored solutions.
MFI: Are fee waivers impacting SSGA? Butler: We continue to monitor interest rates and the yield our funds are providing to investors. Currently, in the U.S., fee waivers are less of a challenge post the rate hike in 2015. But negative interest rates in Europe and Asia warrant constant close attention, and we remain diligent in providing the best outcomes for our clients.
MFI: Can you comment on the recent MMF reforms? Butler: While money market reform has had an immense impact on our business, the smooth transition was a testament to the industry, issuers, investors and clients, who all handled it with fluidity and in an orderly fashion. I think our biggest lesson learned was that by carefully listening to clients and planning ahead to meet their needs, we were able to lead innovative efforts across investment and operational processes that resulted in a good outcome for everyone. This experience will be put to good use as we look ahead to reform activity that will soon impact our European clients.
MFI: Can you comment on the huge shift from Prime to Government? Butler: It was massive. We expected it, we planned for it, it happened in an orderly manner, and now we are potentially looking at a rebalance back to prime strategies as yield spreads widen. We are very well-positioned for this as our institutional prime fund (Institutional Liquid Reserve) is currently one of the largest institutional prime funds with over $9B in assets under management.
MFI: Do you manage ultra-short bond, enhanced cash, and/or offshore funds? McCusker: Yes, all three. SSGA offers a full suite of short-term investment products. We are active across a broad array of global investments including Dublin based UCITS in US Dollar, Euro and Sterling that serve a wide variety of institutional cash clients. Separately managed accounts are also a huge part of our cash business. We currently manage over $120B in separately managed accounts. These are highly customized portfolios based on bespoke requirements from clients on their investment guidelines and goals.
MFI: Tell us about the "offshore" or European fund business. Butler: Our European money market fund business provides a full suite of cash strategies across the three major currencies (US$, Euro, Sterling). As the European money fund industry begins its journey down the road to reform, we stand well-prepared to meet that challenge and provide the best solutions to our clients. Regardless of Central Bank interest rate policy, our clients value cash as an asset class and we will continue to engage with them and offer perspective to help them optimize their portfolios.
MFI: What is your outlook for the coming year and the future of money funds? Butler: Money market funds have a very bright future because they provide a unique set of benefits to our clients. Note that despite the dramatic asset shift from prime to government funds, the total assets in the money market funds industry has not changed. Further, as the Federal Reserve begins to normalize rates, we could potentially see a reallocation of assets back to prime funds. We also expect to see refinement and continued innovation in cash strategies along the short-term spectrum as investors seek new solutions and providers like SSGA innovate alongside clients.
McCusker: We are all looking forward to positive rates! As the Fed begins the process of normalizing rates, we hope this will be a catalyst for our clients to differentiate between products, such as prime and government funds, and use them in a combination that best meets their particular investment needs.
The SEC's latest "Money Market Fund Statistics" data summary shows that assets increased in November, with Prime funds gaining $3.4 billion, Tax Exempt MMFs gaining $0.3 billion and Government funds gaining $56.4 billion. Gross yields continued higher for Prime MMFs but dropped again 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. Total money market fund assets increased by $60.1 billion in November to $2.975 trillion. (The SEC's series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Overall assets fell $30.0 billion in October, $35.2 billion in Sept., and $33.7 billion in August. Year-to-date, total assets are down $110.6 billion, or 3.6%, through 11/30.
Of the $2.975 trillion in assets, $566.0 billion was in Prime funds, which increased by $3.4 billion after falling $177.4 billion in October, $293.2 billion in Sept., and $201.3 billion in August. Prime funds represented 19.0% of total assets at the end of November. They've declined by $1.006 trillion YTD, or 64.0%, and they've fallen $1.225 trillion, or 68.4% since 10/31/15.
Government & Treasury funds totaled $2.274 billion, or 76.4% of assets,, up $56.4 billion, after rising $148.0 billion in October, $268.3 billion in Sept., and $212.0 billion in August. Govt & Treas MMFs are up $1.024 trillion YTD (82.0%) and $1.223 trillion (118.4%) since 10/31/15, just prior to the start of the Prime to Govt conversion trend. Tax Exempt Funds rose $0.3 billion to $135.3 billion, or 4.5% of all assets. The number of money funds was 415, down 5 from last month and down 99 from 11/30/15.
Yields increased in November for Taxable MMFs. The Weighted Average Gross 7-Day Yield for Prime Funds on Nov. 30 was 0.73%, up 2 basis point from the previous month, and more than double the 0.27% of November 2015 (before the Fed hike). Gross yields increased to 0.44% for Government/Treasury funds, up 0.02% from the previous month but up 0.27% since 11/15. Tax Exempt Weighted Average Gross Yields decreased 0.07% in November to 0.62% (after rising 19 bps in Sept. and rising 59 bps since 11/30/15).
The Weighted Average Net Prime Yield was 0.49%, up 0.01% from the previous month and up 0.38% since 11/15. For the year-to-date, 7-day gross yields for Prime are up 32 basis points and net yields are up 27 basis points. The Weighted Average Prime Expense Ratio was 0.23% in November (down one bps from October). Prime expense ratios have risen from 0.17% in November 2015. (Note: These averages are asset-weighted.)
Weighted Average Maturities were mixed and liquidity dipped in November. The average Weighted Average Life, or WAL, was 62.3 days (up 3.6 days from last month) for Prime funds, 94.6 days (up 0.1 days) for Government/Treasury funds, and 27.2 days (up 1.3 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 34.6 days (down 0.6 days from the previous month) for Prime funds, 43.3 days (up 0.2 days) for Govt/Treasury funds, and 24.9 days (up 1.2 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 32.1% in November (down 4.3% from previous month). Total Weekly Liquidity was 51.1% (down 1.4%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $60.3 billion, followed by France with $57.6 billion. The US was third with $52.9 billion, followed by Japan ($43.8B), Sweden with $39.2B, Australia/New Zealand ($29.0B), Germany ($22.7B) and the Netherlands ($21.8B). The UK ($21.8B) and Switzerland ($10.5B) rounded out the top 10.
The only gainers among Prime MMF bank related securities for the month included: France (up $4.4 billion), Canada (up $4.0B), the Netherlands (up $1.5B) and Australia/New Zealand (up $747M). The biggest drops came from Japan (down $4.1B), the UK (down $3.9B), the US (down $2.4B), Switzerland (down $1.8B) and Germany (down $1.1B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $189.4B (down $154M from last month), while the Eurozone subset had $108.1 billion (up $5.5B). The Americas had $113.8 billion (up from $112.2B), while Asian and Pacific had $80.5 billion (down $3.7B).
Of the $568.0 billion in Prime MMF Portfolios as of Nov. 30, $211.1B (37.2%) was in CDs (down from $212.5B), $125.2B (22.1%) was in Government securities (including direct and repo), down from $126.0B, $112.7B (19.8%) was held in Non-Financial CP and Other Short Term Securities (up from $106.5B), $86.1B (15.2%) was in Financial Company CP (down from $86.7B), and $32.6B (5.7%) was in ABCP (up from $31.2B).
The Proportion of Non-Government Securities in All Taxable Funds was 15.8% at month-end, down from 16.2% the previous month. All MMF Repo with Federal Reserve decreased to $177.3B in November from $198.1B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 38.2% were in maturities of 60 days and over (down from 38.3%), while 6.2% were in maturities of 180 days and over (unchanged from the prior month).
In other news, the Treasury's Office of Financial Research has also updated its U.S. Money Market Fund Monitor with Nov. 30, 2016 data. OFR's tool "is designed to track the investment portfolios of money market funds by funds asset types, investments in different countries, counterparties, and other characteristics."
The Investment Company Institute released its "Worldwide Regulated Open-End Fund Assets and Flows Third Quarter 2016" earlier this week. The latest data collection on mutual funds in other countries (as well as the U.S.) shows that money fund assets globally rose by $56.3 billion, or 1.1% in Q3'16, led by increases in Luxembourg, China, France and India. MMF assets worldwide have risen by $220.4 billion, or 4.6%, the past 12 months. China, Brazil, Luxembourg, France, Ireland and India showed the biggest asset increases in the past 12 months through Sept. 30, 2016. The U.S., Ireland, Brazil and Japan showed the largest declines in Q3, while Japan, Mexico and Sweden posted the largest declines over the past year. We review the latest `Worldwide MMF totals, and we also discuss Crane Data's latest MFI International and MFII Portfolio Holdings statistics, below. (See today's "Link of the Day for the latest on European money fund reforms too.)
ICI's release says, "Worldwide regulated open-end fund assets increased 4.0 percent to $40.85 trillion at the end of the third quarter of 2016, excluding funds of funds.... The Investment Company Institute compiles worldwide open-end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations.... Bond fund assets increased by 4.6 percent to $9.21 trillion in the third quarter. Balanced/mixed fund assets increased by 3.1 percent to $5.46 trillion in the third quarter, while money market fund assets increased by 1.2 percent globally to $5.05 trillion."
It explains, "At the end of the third quarter of 2016, 42 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 23 percent and the asset share of balanced/mixed funds was 13 percent. Money market fund assets represented 12 percent of the worldwide total. By region, 51 percent of worldwide assets were in the Americas in the third quarter of 2016, 36 percent were in Europe, and 13 percent were in Africa and the Asia-Pacific regions."
The release adds, "Globally, bond funds posted an inflow of $281 billion in the third quarter of 2016, after recording an inflow of $147 billion in the second quarter. Inflows from balanced/mixed funds worldwide totaled $47 billion in the third quarter of 2016, compared with $45 billion of inflows in the second quarter of 2016. Money market funds worldwide experienced an inflow of $49 billion in the third quarter of 2016 after registering an outflow of $13 billion in the second quarter of 2016."
According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. maintained its position as the largest money fund market in Q3'16 with $2.672 trillion (or 52.9% of all global MMF assets). U.S. MMF assets decreased by $20.2 billion in Q3'16 and increased by $3.7B in the 12 months through Sept. 30, 2016. China remained in second place among countries overall, as assets rebounded strongly following their first declines since late 2010 in Q2. China saw assets jump $32.5 billion (up 5.1%) in Q3 to $664.4 billion (13.2% of worldwide assets). Over the last 12 months through Sept. 30, 2016, Chinese MMF assets have grown an astounding $87.1 billion, or 15.1%.
Ireland remained third among these country rankings, ending Q3 with $495.4 billion (9.8% of worldwide assets). Dublin-based MMFs were down $14.9B for the quarter, or 2.9%, but up $20.0B, or 4.2%, over the last 12 months. France remained in fourth place with $376.9 billion (7.5% of worldwide assets). Assets here jumped $16.9 billion, or 4.7%, in Q3, and were up $27.1 billion, or 7.8%, over one year. Luxembourg was in fifth place with $354.6B, or 7.0% of the total, up $41.6 billion in Q3 (13.3%) and up $30.7B (9.5%) over 12 months.
Korea, the 6th ranked country, saw MMF assets jump $5.4 billion, or 5.8%, to $98.7 billion (2.0% of total) in Q3 and rise $12.6 billion (14.6%) for the year. Brazil remained in 7th place, decreasing $5.6 billion, or 7.9%, to $65.2 billion (1.3% of total assets) in Q3. It increased $31.7 billion (94.4%) over the previous 12 months. (ICI's data no longer includes money fund figures for Australia, but they would rank as the sixth largest market at $322 billion, their level of two years ago, if they were still included. Australia's MMF assets were shifted into the "Other" category several quarters ago.)
ICI's statistics show Mexico in 8th place with $51.9B, or 1.0% of total, down $3.5B (6.4%) in Q3 and down $4.5B (8.0%) for the year. India was in 9th place, increasing $10.2 billion, or 28.2%, to $46.3 billion (0.9% of total assets) in Q3 and increasing $19.1 billion (70.3%) over the previous 12 months. Taiwan was in 10th place with $27.4 billion, or 0.5% of worldwide assets.
South Africa ($21.4B, up $2.7B and up $2.6B over the quarter and year, respectively), Switzerland ($20.0B, down $253M and up $778M), Chile ($19.6B, up $3.5B and up $5.7B), Sweden ($19.1B, down $2.4B and down $3.1B), and Canada ($18.4B, down $158M and down $480M) ranked 11th through 15th, respectively. Belgium, Norway, Spain, Poland and Germany round out the 20 largest countries with money market mutual funds. South Africa moved ahead of Switzerland and Sweden in the latest rankings.
Note that Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. Contact us if you'd like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data, or if you'd like to see our MFI International product.
Crane Data's Money Fund Intelligence International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Dublin or Luxemburg and denominated in USD, Euro and GBP (sterling), up $20 billion year-to-date to $719 billion as of 12/19/16. U.S. Dollar (USD) funds (156) account for over half ($389.1 billion, or 54.1%) of the total, while Euro (EUR) money funds (97) total E90.7 billion and Pound Sterling (GBP) funds (107) total L188.1. USD funds are down $3 billion, YTD, while Euro funds are up E15 billion and GBP funds are up L38B. USD MMFs yield 0.53% (7-Day) on average (12/19/16), up 37 basis points from 12/31/15. EUR MMFs yield -0.47% on average, down 28 basis points YTD, while GBP MMFs yield 0.21%, down 16 bps YTD.
Crane's latest Money Fund Intelligence International Portfolio Holdings data (11/30/16) shows that European-domiciled US Dollar MMFs, on average, consist of 25% in Treasury securities, 21% in Commercial Paper (CP), 20% in Certificates of Deposit (CDs), 17% in Other securities (primarily Time Deposits), 14% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 29.0% of their portfolios maturing Overnight, 11.4% maturing in 2-7 Days, 18.3% maturing in 8-30 Days, 12.4% maturing in 31-60 Days, 12.7% maturing in 61-90 Days, 12.2% maturing in 91-180 Days, and 4.0% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (36.1%), France (14.5%), Japan (9.5%), Canada (9.0%), Sweden (5.1%), Germany (5.0%), Australia (4.2%), the Netherlands (4.0%), Great Britain (2.9%), Singapore (2.2%) and China (1.5%).
The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $111.7 billion (25.2% of total assets), Credit Agricole with $17.6B (4.0%), BNP Paribas with $16.8B (3.8%), Mitsubishi UFJ with $12.9B (2.9%), Wells Fargo with $10.7B (2.4%), RBC with $9.0B (2.0%), Sumitomo Mitsui Banking Co with $8.1B (1.8%), Bank of Nova Scotia with $7.8B (1.8%), Canadian Imperial Bank of Commerce with $7.6B (1.7%), Societe Generale with $7.5B (1.7%), Natixis with $7.3B (1.6%), Mizuho Corporate Bank LTD with $7.2B (1.6%), Credit Mutuel with $6.9B (1.6%), Federal Home Loan Bank with $6.7B (1.5%), Toronto-Dominion Bank with $6.7B (1.5%), Sumitomo Mitsui Trust Bank with $6.1B (1.4%), Bank of Montreal with $5.9B (1.3%), ING Bank with $5.9B (1.3%), DZ Bank AG with $5.8B (1.3%), and Svenska Handelsbanken with $5.7B (1.3%).
Euro MMFs tracked by Crane Data contain, on average 42% in CP, 28% in CDs, 14% in Other (primarily Time Deposits), 11% in Repo, 4% in Treasury securities and 1% in Agency securities. EUR funds have on average 21.1% of their portfolios maturing Overnight, 8.3% maturing in 2-7 Days, 13.3% maturing in 8-30 Days, 19.7% maturing in 31-60 Days, 15.1% maturing in 61-90 Days, 19.9% maturing in 91-180 Days and 2.6% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (31.3%), US (13.5%), Japan (11.5%), Germany (9.1%), Netherlands (6.7%), Sweden (6.0%), Belgium (5.1%), Great Britain (3.3%), Switzerland (3.0%), and Finland (2.2%).
The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.9B (6.6%), Credit Agricole with E3.6B (4.1%), Rabobank with E3.6B (4.0%), Proctor & Gamble with E3.4B (3.8%), Societe Generale with E3.1B (3.5%), DZ Bank AG with E3.1B (3.4%), Credit Mutuel with E2.8B (3.2%), Mitsubishi UFJ Financial Group Inc with E2.8B (3.1%), BPCE SA with E2.7B (3.0%), Svenska Handelsbanken with E2.5B (2.7%), Republic of France with E2.4B (2.6%), Dexia Group with E2.3B (2.6%), Sumitomo Mitsui Banking Co. with E2.3B (2.5%), Nordea Bank with E2.2B (2.5%), and Norinchukin Bank with E2.1B (2.4%).
The GBP funds tracked by MFI International contain, on average (as of 11/30/16): 38% in CDs, 26% in Other (Time Deposits), 21% in CP, 10% in Repo, 5% in Treasury, and 0% in Agency. Sterling funds have on average 22.5% of their portfolios maturing Overnight, 6.6% maturing in 2-7 Days, 13.5% maturing in 8-30 Days, 16.4% maturing in 31-60 Days, 17.8% maturing in 61-90 Days, 19.3% maturing in 91-180 Days, and 3.9% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (15.5%), Japan (14.0%), Great Britain (13.3%), Netherlands (9.2%), Australia (9.2%), Germany (8.1%), Canada (6.4%), US (5.6%), Sweden (5.5%), and Belgium (2.7%).
The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L9.4B (6.4%), Rabobank with L5.7B (3.8%), Commonwealth Bank of Australia with L5.0B (3.4%), DZ Bank AG with L4.8B (3.2%), Credit Mutuel with L4.7B (3.2%), Mizuho Corporate Bank Ltd. with L4.5B (3.1%), Bank of America with L4.5B (3.1%), ING Bank with L4.5B (3.0%), BNP Paribas with L4.4B (3.0%), Mitsubishi UFJ Financial Group Inc. with L4.4B (3.0%), Sumitomo Mitsui Trust Bank with L4.1B (2.8%), Sumitomo Mitsui Banking Co. with L4.0B (2.7%), Credit Agricole with L3.8B (2.6%), Erste Abwicklungsanstalt with L3.7B (2.5%), Sevenska Handelsbanken with L3.6B (2.4%), Nordea Bank with L3.6B (2.4%), Westpac Banking Co. with L3.5B (2.3%), BPCE SA with L3.3B (2.3%), Dexia Group with L3.3B (2.2%), and Toronto-Dominion Bank with L3.3B (2.2%).
The Federal Reserve Bank of New York's "Liberty Street Economics" blog published the article, "Investigating the Proposed Overnight Treasury GC Repo Benchmark Rates," which reviews several repo benchmarks. Written by Alexandra Altman, Kathryn Bayeux, Marco Cipriani, Adam Copeland, Scott Sherman, and Brett Solimine, the piece says, "In its recent "Statement Regarding the Publication of Overnight Treasury GC Repo Rates," the Federal Reserve Bank of New York, in cooperation with the U.S. Treasury Department's Office of Financial Research, announced the potential publication of three overnight Treasury general collateral (GC) repurchase (repo) benchmark rates. Each of the proposed rates is designed to capture a particular segment of repo market activity. All three rates, as currently envisioned, would initially be based on transaction-level overnight GC repo trades occurring on tri-party repo platforms."
The blog explains, "The first rate would only include transactions in the tri-party repo market, excluding both General Collateral Finance Repo Service, or GCF Repo, transactions and Federal Reserve transactions. (GCF Repo is a registered service mark of the Fixed Income Clearing Corporation.) Henceforth in this post, this segment will be referred to as tri-party ex-GCF/Fed. The second rate would build on the first by including GCF Repo trading activity while still excluding Federal Reserve transactions. Finally, the third rate would include tri-party ex-GCF/Fed transactions, GCF Repo transactions, and Federal Reserve transactions."
It continues, "The repo benchmark rates would be calculated as volume-weighted medians, as is currently the case for the production of the effective federal funds rate (EFFR) and the overnight bank funding rate (OBFR), and would be accompanied by summary statistics. The three proposed rate compositions result from staff analysis on the various market segments and characteristic trading behavior, though the New York Fed expects to work with the Board of Governors of the Federal Reserve System to seek public comment on the composition and calculation methodology for these rates before adopting a final publication plan."
Regarding its goals, the NY Fed economists write, "The principal driver behind the potential publication of overnight Treasury GC repo benchmark rates is to enhance market transparency and efficiency by improving the quality and breadth of repo market information available to the public. Currently, little rate information is available on the repo market. Among the information that does exist is the Bank of New York Mellon (BNYM) Treasury Tri-Party Repo Index, or "Treasury TRIP," which reflects the average rate on all overnight Treasury-collateralized repo transactions cleared on BNYM's platform, including the Fed's overnight reverse repurchase (RRP) trades. In addition, the Depository Trust and Clearing Corporation (DTCC) publishes aggregated daily rate and volume data for the GCF Repo market in its own Treasury index."
The blog tells us, "The currently proposed repo benchmark rates differ from both the BNYM and DTCC indexes in several important ways. First, two of the three new proposed rates would exclude Fed transactions, thereby providing focused insight into market-determined collateralized funding rates. Second, consistent with best practices for financial benchmarks, the New York Fed plans to exclude trades that are conducted between affiliated entities.... The increased transparency provided by these rates would support the New York Fed's primary objective of improving publicly available information on the repo market, and may support ongoing work by the Alternative Reference Rates Committee (ARRC)."
The NY Fed's update states, "In the United States, the repo market is primarily subdivided on the basis of settlement platform. `In the tri-party repo segment, transactions are negotiated between the cash lender and the collateral provider, while a third-party clearing bank acts as an intermediary by managing clearing and settlement of the trades. For bilateral repo transactions, however, the two institutions on either side of the repo contract and their respective custodian banks manage all aspects of trade settlement. The benchmark rates that the New York Fed proposes publishing are anticipated to rely only, at the outset, on transactions in the tri-party market, since robust data on the bilateral repo market are currently unavailable."
Finally, it adds, "Within the tri-party market, there are three distinct sub-segments: tri-party ex-GCF/Fed, GCF Repo, and tri-party activity with the Federal Reserve. The segments are differentiated by the type of activity and the market participants.... The chart below shows the behavior between August 2014 and October 2016 of the three proposed GC repo benchmark rates. During the sample period, the three rates tracked each other closely, with each rate showing exactly the same value on 60 percent of the days.... In contrast, the tri-party including GCF Repo/Fed rate has been slightly lower than the tri-party including GCF Repo rate on financial statement dates, given that more activity flows into the overnight RRP on those dates."
In other news, Wells Fargo Securities recently published, "The Curious Case of the Discounted Callable," which explains, "The impact of money market fund reform hits markets in many different ways. We know of its impact in repo markets, in Treasury bill markets, in commercial paper markets, in bank CD markets, but we hadn't really seen its impact in Agency callable markets, or maybe we simply hadn't recognized it."
It adds, "It is no secret that government money market fund assets under management (AUM) have risen by approximately $1 trillion since the beginning of 2016. With that increase in government fund AUM comes a significant increase in the demand for government securities.... As a result of the increased demand for money market government securities, the GSEs have shifted their funding mix away from callables and towards short-term floaters and discount notes. To provide some context to the magnitude of the change in cost for callable funding relative to money market funding over the past six months, Exhibit 2 illustrates the estimated new issue spread to LIBOR for agency discount notes and swapped callables."
Wells Fargo continues, "With the current lack of callable supply and new issue callable spreads trading very close to agency bullets, slightly seasoned callables have begun to trade at a decent discount to par and may offer an interesting alternative to both new issue callables and bullets. For buy-and-hold investors, the yield on discounted callables is generally higher than maturity-matched bullets and new issue callables (i.e. par bonds)."
The piece explains, "One benefit of buying a discounted callable is that the additional spread to bullets is less attributable to the embedded call option. As a result, the discount callable is less likely to be called, has upside price potential, and has a higher book yield and total return than a maturity-matched bullet as rates rise.... It should be noted that in a falling interest-rate environment the bullet outperforms the discount callable, while in a flat-to-rising rate environment the discount callable outperforms the bullet."
It says, "If an investor's view is for rates to remain relatively range bound, a discount callable may achieve a higher holding-period return than a maturity-matched bullet or a par callable. If the outlook is for rates to rise, the discount callable has a higher book yield and holding-period return than a maturity-matched bullet. Should rates fall, the discount callable achieves a higher holding-period return than a par callable due to the accelerated repayment schedule of the discount."
Finally, Wells piece tells us, "Given the overall lack of supply in the new issue callable market, we see secondary discount callables as an alternative that can provide a bullet buyer with the potential for greater returns in a rising rate environment, and limited optionality versus a new issue callable in a falling rate environment. For the callable buyer, there is an opportunity for price appreciation in a product where price appreciation does not typically exist, coupled with available supply for investors that have found new issue investment alternatives relatively scarce."
The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Nov. 30, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. J.P. Morgan Securities also released its new "Prime money market fund holdings update" late last week. Both updates, which review below, confirm our earlier reports of a stabilization in Prime assets and a jump in Treasury holdings in November. (See our Dec. 12 News, "December Portfolio Holdings: Treasuries Surpass Repo as Largest Piece.")
ICI's release explains, "The Investment Company Institute (ICI) reports that, as of the final Friday in November, prime money market funds held 29.1 percent of their portfolios in daily liquid assets and 46.3 percent in weekly liquid assets, while government money market funds held 59.3 percent of their portfolios in daily liquid assets and 75.3 percent in weekly liquid assets."
It says, "At the end of November, prime funds had a weighted average maturity (WAM) of 37 days and a weighted average life (WAL) of 68 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 43 days and a WAL of 95 days." Prime WAMs were down from 38 days in October and Prime WALs were up from 61 days the prior month.
On Holdings By Region of Issuer, it adds, "Prime money market funds' holdings attributable to the Americas rose from $167.43 billion in October to $170.07 billion in November. Government money market funds' holdings attributable to the Americas rose from $1,790.59 billion in October to $1,896.11 billion in November."
The Prime Money Market Funds by Region of Issuer table shows Americas at $170.1 billion, or 44.9%; Asia and Pacific at $68.5 billion, or 18.1%; Europe at $136.5 billion, or 36.0%; and Other (including Supranational) at $3.5 billion, or 0.9%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.896 trillion, or 84.6%; Asia and Pacific at $75.2 billion, or 3.4%; and Europe at $266.8 billion, or 11.9%.
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."
J.P. Morgan's latest update comments, "After several months of turbulence, volatility in the prime money market fund space waned during November. Prime AuM went virtually unchanged during the month at $375bn. This was the story for both institutional and retail funds. Institutional and retail fund assets both finished flat at $125bn and $350bn respectively. Prime allocations to banks remained stable throughout the month. Net exposure to short-term bank debt was up $1bn."
It continues, "Government fund AuM increased by $61bn during November. Inflows primarily occurred post-election, which could have been due to some investors reacting to heightened uncertainty by moving into cash. Government money market funds increased their allocations to Treasury bills by nearly $100bn during the month, the most of any asset class. This increase was coincident with a $100bn increase in net bill supply. During 2016 bills have helped to bolster supply, alleviating pressure felt by government MMFs."
JPM's piece tells us, "Our longer term outlook for bill supply is positive (we look for $456bn of net bill supply next year). However, a downside risk to this view is the debt ceiling. Treasury would need to cut bill supply as the end of the debt ceiling suspension approaches.... Such a downturn in bill outstandings would pressure the yields of bills and their close substitutes (coupons, discos, repo) lower. We project bill supply to slightly fall by $30bn going into year-end.... Year-end should make things tight for government funds."
Finally, it adds, "As certain dealers temporarily withdraw from the repo market, funds will inevitably park their cash into the RRP facility. Using last quarter-end for reference, it is interesting to note that many funds invested one-third or more of their portfolio into the facility.... Allocations will probably go even higher on December 31 as year-ends typically are more severe than other quarterends. Taking this into consideration, we wouldn't be surprised if more than a few funds go in for the maximum counterparty limit of $30bn and total usage exceeds $500bn."
FIS, formerly SunGard, published "FIS Corporate Cash Investment Report 2016: A New Era For Corporate Cash Investment?" The study's introduction says, "Now in its sixth year, FIS' Corporate Cash Investment Report provides an in-depth exploration of corporate attitudes to cash investment, investment policies and transaction execution in an environment of market volatility and regulatory change. With six years of data, this report is unique in presenting both the findings from the 2016 survey, and an analysis of ongoing trends. The year 2016 marks a "watershed" year for many corporate treasurers with surplus cash to invest with a convergence of issues that individually have a considerable impact on investment, which are exacerbated when taken together." (See our Sept. 21 News, "FIS (formerly SunGard) Portal Conducts 2016 Cash Investment Survey.)
FIS writes, "Regulations such as Basel III are impacting on their banks' willingness and ability to accept short-term deposits, regulatory change in the US is having a significant impact on the prime money market fund (MMF) landscape, while the low -- and in Europe, negative -- interest rate environment is also impacting on investment strategy. This year, the study involved a representative sample of 81 corporations globally across a wide range of industries. Fifty-one percent of respondents were located in North America, with a further 38 percent in Europe."
Among the report's "Key Findings," it states, "Corporate cash balances continue to rise in 2016, a consistent trend since 2012, although the rate of growth has slowed this year.... 2016 marks a major change in cash investment challenges: 60 percent noted that the low or negative interest rate environment was their number one concern. This contrasts with visibility, regulatory, asset availability and trapped cash that have variously topped treasurers' list of investment challenges over the previous five years."
FIS explains, "Deposits remain the investment instrument of choice for corporate treasurers: 82 percent of participants noted that they used deposits, investing an average of 48 percent of cash. Limit headroom with authorized dealing banks is the first priority when depositing cash; however, yield is more important to treasurers than whether a bank is a relationship bank, which would appear to contrast with many banks' and treasurers' emphasis on "share of wallet". Sixty-eight percent of treasurers currently transact deposits by telephone, but the value of independent dealing portals to seek competitive quotes and integrate transactions into the treasury management system (TMS) is becoming more compelling with a combination of reduced availability of short-term (i.e. less than 30 day) deposits, newly emerging deposit products and a focus on generating a positive yield."
The comment on the "new liquidity fund environment," "Prime fund reform in the US that took effect in October 2016 is already impacting on corporate investment decisions. Thirty-nine percent indicated that variable net asset value (VNAV) is a disincentive; in addition, 34 percent were concerned that the ability to withdraw cash from prime MMFs could be suspended in certain situations. Consequently, 65 percent of treasurers involved in this study expected to reduce their holdings, more than half materially, a prediction that has been validated by the flow out of prime funds into other instruments, such as government funds, during the three months leading up to the October deadline."
The study continues, "2016 has witnessed two important developments in the execution of MMFs. First, the proportion of companies using telephone dealing has fallen, from 38 percent in 2014 and 2015 to 23 percent in 2016. Second, the use of independent portals exceeded proprietary, single-provider portals for the first time in 2015, and the gap has widened further in 2016. Thirty-seven percent now use independent portals compared with 23 percent using proprietary portals."
The key findings add, "Awareness of regulatory change and in particular, the impact on corporate investment strategy, appears to be low. Deposits and constant net asset value (NAV) MMFs continue to be the instruments in which treasurers (76 percent and 51 percent respectively) anticipate investing a large proportion of their cash, despite the potential hurdles."
FIS details its findings, telling us, "Deposits remain the investment instrument of choice for corporate treasurers: 82 percent of participants noted that they used deposits, investing an average of 48 percent of cash. Sixty-five percent use money market funds, mostly constant NAV, but this will necessarily change now that new regulations have taken effect in the US. For example, we have already seen a considerable outflow from prime funds to government funds, although it is not yet clear whether this will reflect a permanent shift. Furthermore, treasurers need to be prepared for changes to deposits and European MMFs, as discussed further below. Other high quality, short-term instruments such as certificates of deposit (used by 32 percent of respondents), commercial paper and short-dated fixed-rate bonds (24 percent each) have emerged more strongly, a trend we expect to continue, although availability remains a challenge."
They discuss "A new era for MMFs," saying, "Money market funds have become a popular investment choice for corporate treasurers, originally in the US, then and more recently, a number of other countries globally. In particular, treasurers recognize the liquidity and security benefits of MMFs, with same-day access to cash and inherent diversification of high quality assets. Since the global financial crisis, there has been greater regulatory scrutiny of MMFs, and a variety of changes have already been implemented. This year 2016 marks the next, and arguably the most significant step in the tightening of MMF regulations. In the new US Securities and Exchange Commission (SEC) reforms took effect on October 14, 2016."
The survey results continue, "Prime funds must now publish the NAV based on the current value of the assets they hold, rather than maintaining a constant value of $1 a share. As a result, the fund's price will fluctuate in line with market conditions, which has accounting and valuation implications. Thirty-nine percent of respondents noted that the floating NAV is a disincentive to investing in these funds. In addition, MMF boards have new tools, such as the ability to impose liquidity fees and redemption gates, to prevent or limit runs. Since the new rules came in, if liquid assets (i.e. assets that can be liquidated within one week) fall below 30 percent, the fund may impose a fee of up to 2 percent on redemptions. If liquid assets fall below 10 percent, a fee of 1 percent must be imposed. In addition, the fund can also suspend redemptions for up to 10 days if the 30 percent threshold is breached. This has led to concerns amongst many investors -- 34 percent of respondents in this study -- that the ability to withdraw cash from prime MMFs could be suspended. Twenty-eight percent also noted concerns about liquidity, some of which are related to the new regulations."
Furthermore, FIS explains, "These changes have already resulted in an exodus of more than $1 trillion from prime money market funds between January and mid-October 2016, much of which has flowed into government MMFs which are not subject to the same rules. These in turn have increased their assets from $1 trillion to $2.1 trillion over the same period. As figure 8 shows, around a third (35 percent) of treasurers that invest in US funds expect their investment strategy to remain unchanged, but 65 percent expect to reduce their holdings, more than half of whom expect this to decline materially."
They add, "The extent to which this will happen in practice remains unclear, however. In reality, there are few instruments that offer the security, liquidity and diversification that liquidity funds offer. Furthermore, although security and liquidity are the most important investment criteria for corporations, yield could be a more powerful incentive in the future. More than a third (38 percent) of participating treasurers for whom this issue was relevant indicated that they would be prepared to consider investing in variable NAV funds if the yield grew by 21 basis points or more, which is feasible given the potential for an increase in the USD base rate, although for a third, the uplift in yield would need to be more than 50 basis points. Consequently, we may see more corporate treasurers maintaining their current MMF investment strategy than anticipated, and others returning to these funds in the future."
Finally, FIS writes, "As this study outlines, treasurers in all regions need to consider the impact of Basel III on their investment strategy, and whether prime funds still meet their investment criteria.... Other short-term investment instruments such as commercial paper, certificates of deposits and short-term fixed rate bonds will continue to be an important element of many companies' investment strategy, as well as government debt, but there is also potential for the increase in investment in emerging types of fund such as bond funds, particularly for core and strategic cash. The next year will be a significant one as regulatory change takes effect, and the geopolitical and market environments continue to evolve. Inevitably, these will impact on corporate cash investment strategy, and the wider business strategy of which this is a part."
Money market fund investors and managers cheered as the Federal Reserve raised short-term interest rates for the first time this year and for just the second time in 10 years. Money funds, which have an average weighted average maturity (WAM) of 36 days and an average yield of 0.32% currently (as measured by our Crane 100 MF Index), should begin reflecting the 25 basis point higher yields immediately and should reflect them fully in just over a month. So yields should break over 0.5% (levels not seen since early 2009) as we move into January, and the highest-yielding money funds, currently 0.7-0.8%, should break above 1.0% within weeks. Given rejuvenated expectations for more Fed hikes in 2017, money fund yields, and revenues (as fee waivers melt away), are looking up for 2017. We discuss the Fed move and statement below, and we also review the December issue of our Bond Fund Intelligence, which shipped to subscribers yesterday.
The new FOMC Statement says, "In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation."
The Fed explains, "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.... 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."
The long-awaited second rate increase was expected, but the Fed also increased expectations for more hikes in 2017. The Fed's "economic projections from the December 13-14 FOMC meeting" now call for 3 rate hikes next year, compared to expectations of 2 prior to this meeting.
Federal Reserve Chair Yellen says in a statement, "Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by 1/4 percentage point, bringing it to 1/2 to 3/4 percent. In doing so, my colleagues and I are recognizing the considerable progress the economy has made toward our dual objectives of maximum employment and price stability. Over the past year, 2-1/4 million net new jobs have been created, unemployment has fallen further, and inflation has moved closer to our longer-run goal of 2 percent. We expect the economy will continue to perform well, with the job market strengthening further and inflation rising to 2 percent over the next couple of years. I'll have more to say about monetary policy shortly, but first I'll review recent economic developments and the outlook."
She continues, "Returning to monetary policy, the Committee judged that a modest increase in the federal funds rate is appropriate in light of the solid progress we have seen toward our goals of maximum employment and 2 percent inflation. We continue to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives. That's based on our view that the neutral nominal federal funds rate--that is, the interest rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel--is currently quite low by historical standards. With the federal funds rate only modestly below the neutral rate, we continue to expect that gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years."
Yellen adds, "This view is consistent with participants' projections of appropriate monetary policy. The median projection for the federal funds rate rises to 1.4 percent at the end of next year, 2.1 percent at the end of 2018, and 2.9 percent by the end of 2019. Compared with the projections made in September, the median path for the federal funds rate has been revised up just 1/4 of a percentage point. Only a few participants altered their estimate of the longer-run normal federal funds rate, although the median edged up to 3 percent."
In other news, the December issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Wednesday, features the lead story, "Bond Funds Ponder End of Bull Market; Bond Index Turns 30," which discusses the recent downturn in bond fund returns and flows, and an interview with USAA Investment Management's Julianne Bass, who co-manages a number of short-term USAA Bond Funds. Also, we recap the latest Bond Fund News, including yield increases in November and more updates on the ongoing selloff in bonds. BFI also includes our Crane BFI Indexes, which showed declines in November. We excerpt from the latest BFI below.
Our lead Bond Fund Intelligence story says, "It was a tough month for bonds, bond funds and bond investors, to say the least. Though November and early December's drop in returns and outflows barely dented 2016's still excellent showing, it was painful. Bond fund assets declined by $42.4 billion in November, about evenly split between outflows and price declines."
Our story adds, "MarketWatch explains in 'Bond funds losing money in roughest stretch since 'taper tantrum' of 2013,' writing, 'During the past six weeks, investors have pulled $34 billion from global bond funds.... `That's the longest run of declines since the so-called bond-market taper tantrum.... `A global bond-market rout, which has entered its sixth week, is behind the latest exodus." We also salute Vanguard Total Bond Index Fund, which celebrated its 30th birthday this month.
BFI's USAA Profile says, "This month, Bond Fund Intelligence interviews Julianne Bass, Assistant V.P. & Portfolio Manager at USAA Investment Management, who co-manages USAA Short-Term Bond Fund, and several other bond funds for the San Antonio-based, military alumnus-affiliated manager. We discuss their funds and their focus on attractive yields." (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 News brief entitled, "Bond Fund Returns Decline in November; Yields Jump Again," explains, "Returns fell across most of the Crane BFI Indexes. Our BFI Total Bond Fund Index averaged a 1-month return of -1.63% and is up 3.14% YTD through Nov. 30. The BFI 100 had a return of -1.70% in Nov. and is up 3.57% YTD. The BFI Conservative Ultra-Short Index returned 0.03% and is up 1.02% YTD while the BFI Ultra-Short Index had a one month return of 0.02% and is up 1.89% YTD. The BFI High Yield Index decreased 0.43% in Nov. but is up 11.77% YTD, while the BFI Muni Index had a 1- month return of -3.20% and -0.38% YTD."
A brief on "WSJ Takes Closer Look at Bond Funds," quotes, `The Wall Street Journal story, "As Rates Rise, a Closer Look at Bond Funds." It explains, "`[W]ith the expectation (again) that interest rates now are almost certain to rise, investors are struggling anew to figure out what to do with their bondholdings -- especially intermediate-term bonds, the workhorses of most investors' bond allocation.... We compiled a list of 95 intermediate-term bond funds with more than $1 billion in assets, drawing on the database of Morningstar Inc. ... and ranked those that did best in the two most recent periods of rising rates." The piece lists: Dodge & Cox Income, Metropolitan West Intermediate Bond, USAA Intermediate-Term Bond, Loomis Sayles Securitized Asset, and DoubleLine Total Return as 'Stalwarts'."
The U.S. Treasury's Office of Financial Research released its "2016 Annual Report to Congress" and "2016 Financial Stability Report yesterday, saying that "overall risks to U.S. financial stability remain in a medium range. The reports, which contain a number of references to money market mutual funds, mutual funds, repurchase agreements and "shadow banking," explain, "A fundamental element of the OFR mission is to improve financial data to support the Financial Stability Oversight Council (FSOC) and promote financial stability.... At the OFR, we have taken a particular interest in data related to shadow banking. Bank-like activities that take place outside the banking industry often face less oversight and transparency. Since the crisis, the OFR and financial regulators have gained more access to detailed information about shadow banking activities that were largely opaque a decade ago, including data on hedge funds, money market funds, and securities financing transactions."
The OFR's Annual Report explains, "Projects are underway to expand the scope of information about shadow banking. The OFR is planning permanent data collections on repurchase agreements and securities lending -- important sources of short-term funding in the financial industry.... Funding and liquidity risks persist in the U.S. financial system. These types of risk are slow to change."
It tells us, "Liabilities that are payable on demand and not backed by government backstops are susceptible to run risk. The volume of "runnable" liabilities has decreased since the crisis when they were hit by runs and fire sales. Such liabilities include repurchase agreements, securities loans, commercial paper, money market funds, and uninsured bank deposits. Post-crisis reforms partly account for the decrease (see Figure 15). The sharp increase in 2013 coincides with the end of temporary unlimited deposit insurance under the Dodd-Frank Act."
OFR comments on "Shadow Banking," writing, "We define shadow banking as the extension of credit by nonbank companies, or credit funded by liabilities susceptible to runs because they are payable on demand and lack a government backstop.... Runs on prime money market funds accelerated the financial crisis in September 2008 after the Reserve Primary Fund "broke the buck," falling below a net asset value of $1 per share by more than half a cent. To curb this risk, a recent SEC rule requires prime and tax-exempt money market funds with institutional investors to let their net asset values float with the value of underlying assets. Prime and tax-exempt funds with retail investors may continue to offer a stable net asset value; they may be sold and redeemed at $1 per share but must report the market value of their share prices."
They continue, "Under the rule, both types of funds must adopt restrictions on redemptions and impose "liquidity fees," fees on redemptions that may rise as a fund's liquidity falls below certain levels. However, each fund's board has the power to suspend these requirements. In anticipation of this rule, which took effect on Oct. 14, 2016, $1 trillion shifted from prime funds to government funds (see Figure 20). Other funds and pools, some of which report a stable net asset value and have no government backstop, can also be vulnerable to run risk. These vehicles include some short-term investment funds sponsored by banks, local government investment pools, and private liquidity funds."
The report adds, "The OFR recently obtained data that the Office of the Comptroller of the Currency collects from national banks about their short-term investment funds. We also have data that the SEC collects from private liquidity funds. Combined, private liquidity funds and short-term investment funds had more than $500 billion under management at the end of June 2016, according to these data. State-regulated banks and local government investment pools do not report this information."
The OFR also comments, "In late July 2016, we launched our interactive U.S. Money Market Fund Monitor. The monitor converts data from the SEC's Form N-MFP into a user-friendly format on the OFR website. Users are able to examine individual funds and the industry as a whole on the basis of credit, interest rate, and liquidity risks. The monitor also helps the OFR and other users understand industry trends and activities in new ways. The monitor analyzes each risk category based on portfolio statistics and holdings."
The OFR's "Financial Stability Report" also comments on money funds, saying, "Runs on prime money market funds in September 2008 made the financial crisis more severe. A recent SEC rule addresses this risk. The rule requires prime and tax-exempt money market funds with institutional investors to let their net asset values float with the value of the assets they hold. Prime and tax-exempt funds with retail investors may continue to offer a stable net asset value -- that is, these funds may be sold and redeemed at a $1 share price. Even then, these funds will have to report the market value of their share prices."
Like the Annual Report, the Stability Report tells us, "Similar short-term investment vehicles can be subject to runs. Some of these vehicles report a stable net asset value, although they take credit risks and have no government backstop. These include retail prime and tax-exempt money market funds, some short-term investment funds sponsored by banks, some local government investment pools, and some private liquidity funds. Data are relatively new for some of these vehicles, so not all are included in the series.... An OFR paper last year used the SEC's Form PF to analyze private liquidity funds.... The form is comparable to Form N-MFP, allowing comparisons to money market funds."
Finally, the OFR adds, "European holdings of U.S.-based money market funds could also be vulnerable to a shock. The possible exit of a European state from the EU could create uncertainty about a fund's holdings of short-term debt issued by banks and corporations in that state. Using the OFR's U.S. Money Market Fund Monitor, the OFR assessed exposures of U.S. money market funds to large EU banks. Fund exposures to these banks have declined by half over the past five years but remain large for some banks (see Figure 27). An EU disruption that makes European assets less creditworthy could stress these funds. However, the effect on U.S. money market funds may be limited. In anticipation of the October deadline for compliance with money market fund reform, some substantially reduced the duration of their overall credit exposures, resulting in less volatile asset pricing."
The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") late last week. Among the 4 tables it includes on money market mutual funds, the Third Quarter, 2016 edition shows that the Household Sector remains the largest investor segment, though assets here declined again, falling further below the $1.0 trillion level. Nonfinancial Corporate Businesses and Funding Corporations (which is primarily Securities Lending money) remained the second and third largest segments. State & Local Governments, Nonfinancial Noncorporate Business and Private Pension Funds showed (very small) gains in the latest quarter, while the Household Sector and Funding Corporations showed declines. Nonfinancial Corporate Businesses, Funding Corporations, State & Local Governments, and Nonfinancial Noncorporate Businesses showed the biggest increases over the past 12 months. We review the latest Fed Z.1 numbers, and we also review a number of recent minor fund changes and lineup tweaks, below.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows total assets declining by $31 billion, or 1.1%, in the second quarter to $2.672 trillion. Over the year through September 31, 2016, assets are up $4 billion, or 0.2%. The largest segment, the Household sector, totals $973 billion, or 36.4% of assets. The Household Sector decreased by $14 billion, or -1.4%, in the quarter, after decreasing $50 billion in the 1st quarter, and $32 billion in Q1'16. Over the past 12 months through Sept. 30, Household assets are down $34 billion, or -3.4%. Household assets remain well below their record level of $1.581 trillion (from year-end 2008).
Nonfinancial Corporate Businesses were the second largest investor segment, according to the Fed's data series, with $575 billion, or 21.5% of the total. Business assets in money funds decreased $2.0 billion in the quarter, or -0.3%, and have risen by $16 billion over the past year, or 2.9%. Funding Corporations remained the third largest investor segment with $457 billion, or 17.1% of money fund shares. They decreased by $7 billion in the latest quarter and increased $13 billion over the previous 12 months.
The fourth largest segment, State and Local Governments held 6.8% of money fund assets ($182 billion) -- up $2 billion, or 1.3%, for the quarter, and up $8 billion, or 4.7%, for the year. Private Pension Funds, which held $154 billion (5.8%), remained in 5th place. Rest Of The World category was the sixth largest segment in market share among investor segments with 4.2%, or $111 billion, while Nonfin Noncorp Business held $96 billion (3.6%), Life Insurance Companies held $54 billion (2.0%), State and Local Government Retirement Funds held $51 billion (1.9%), and Property-Casualty Insurance held $20 billion (0.7%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.559 trillion, or 58.3%. Debt securities includes: Open market paper ($113 billion, or 4.2%; we assume this is CP), Treasury securities ($635 billion, or 23.8%), Agency and GSE backed securities ($643 billion, or 24.1%), Municipal securities ($157 billion, or 5.9%), and Corporate and foreign bonds ($11 billion, or 0.4%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($856 billion, or 32.0%) and Time and savings deposits ($193 billion, or 7.2%). Money funds also hold minor positions in Foreign deposits ($4 billion, or 0.2%), Miscellaneous assets ($10 billion, or 0.4%), and Checkable deposits and currency ($49 billion, 1.8%). Note: The Fed also recently added a new breakout line to this table which lists "Variable Annuity Money Funds;" they currently total $35 billion, down $1.1 billion in the quarter.
During Q3, Security Repurchase Agreements (up $214 billion), Treasury Securities (up $117 billion), Agency- and GSE-Backed Securities (up $77 billion), and Checkable Deposits and Currency (up $36 billion) showed increases. Time and Savings Deposits (down $233 billion), Open Market Paper (down $159 billion), and Municipal Securities (down $57 billion) all showed large declines.
In other news, Northern Trust said in a filing, "The GFS Shares class ("GFS Shares") of the Prime Obligations Portfolio (the "Portfolio") was terminated on November 17, 2016. All disclosure information relating to the GFS Shares of the Portfolio in each Prospectus and SAI is hereby deleted in its entirety." The manager also liquidated its Northern Institutional Tax-Exempt Portfolio two months ago.
Also, a statement entitled, "First American Institutional Prime Obligations Fund Announces Share Class Conversions," explains, "Effective October 25, 2016, Class A and Class D shares of First American Institutional Prime Obligations Fund (the "Fund") are closed to new investors in preparation for share class conversions. Current Class A and Class D investors in the Fund can continue to transact normally. On December 8, 2016, any holdings of Class A and Class D shares of the Fund will automatically convert to Class Y shares. No action is required by shareholders of Classes A and D. The Fund's Class A, D and Y shares have identical provisions, rights and privileges, except that Class Y shares' total annual fund operating expenses are lower than Classes A and D shares. The share class conversions are being done to streamline the Fund's offerings."
Western Asset Management liquidated its "S" shares recently. Western Institutional Cash Reserves' filing says, "Please note that effective November 9, 2016, the Fund will no longer offer Class S shares. Effective as of that date, the share class will be closed to all incoming purchases and exchanges."
Finally, BlackRock liquidated its "offshore" Cayman Islands-domiciled International Dollar Reserve Fund due to "changes in the U.S. tax code," according to a client letter. This fund was removed from our Money Fund Intelligence International this week. (For more recent changes, see the "Changes" tab on our Money Fund Intelligence XLS.)
Crane Data released its December Money Fund Portfolio Holdings Friday, and our latest collection of taxable money market securities, with data as of Nov. 30, 2016, shows yet another big increase in Treasuries and Agencies, but a decrease in Repo. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $106.5 billion to $2.692 trillion last month, after increasing by $32.0 billion in Oct., decreasing by $123 billion in Sept., and increasing by $75.9 billion in August. Treasuries surpasses Repo as the largest portfolio segment, as Treasuries and Agencies continued their growth spurt. (Growth in Govt funds though was driven by new money, not by asset shifts last month though.) Holdings of "credit" instruments were flat on the month. CDs were in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Money funds' European-affiliated securities fell to 16.4% of holdings, down from the previous month's 18.3%. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Treasury securities rose $101.6 billion (13.2%) to $882.0 billion, or 32.8% of holdings, after rising $112.2 billion in Oct. and $27.7 billion in Sept. Repurchase Agreements (repo) fell by $21.1 billion (-2.7%) to $776.2 billion, or 28.8% of holdings, after falling $65.2 billion in Oct., and rising $127 billion in Sept. and $102 billion in August. Government Agency Debt increased $20.3 billion (3.2%) to $660.1 billion, or 24.5% of all holdings, after increasing $32.3 billion in Oct. and $11.8 billion in Sept. The rise in Treasuries and Agencies (and Repo prior to last month) had 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, though this month's increase appears to be driven by new money coming into MMFs.
CDs and Other (Time Deposits) inched lower, again falling to their lowest levels since Crane Data began tracking these in early 2011, while CP inched higher. Certificates of Deposit (CDs) were down $1.0 billion (-0.7%) to $147.8 billion, or 5.5% of taxable assets, after declining $13.6 billion in Oct., and $100.1 billion in Sept. Commercial Paper (CP) was up $5.8 billion (4.5%) to $133.1 billion, or 4.9% of holdings (after increasing $1.0B last month), while Other holdings, primarily Time Deposits, fell $0.1 billion (-0.2%) to $57.8 billion, or 2.1% of holdings. VRDNs held by taxable funds increased by $1.1 billion (3.3%) to $35.4 billion (1.3% of assets).
Prime money fund assets tracked by Crane Data (in our holdings collection) rose to $491 billion (up from $486 billion last month), or 18.2% (down from 18.8%) of taxable money fund holdings' total of $2.692 trillion. Among Prime money funds, CDs represent under one-third of holdings at 30.1% (down from 30.6% a month ago), followed by Commercial Paper at 27.1% (up from 26.2%). The CP totals are comprised of: Financial Company CP, which makes up 16.0% of total holdings, Asset-Backed CP, which accounts for 6.5%, and Non-Financial Company CP, which makes up 4.6%. Prime funds also hold 0.8% in US Govt Agency Debt (down from last month), 13.3% in US Treasury Debt (up from 12%), 4.0% in US Treasury Repo, 1% in Other Instruments, 9.7% in Non-Negotiable Time Deposits, 5.7% in Other Repo, 2.1% in US Government Agency Repo, and 5.4% in VRDNs.
Government money fund portfolios totaled $1.552 trillion (57.7% of all MMF assets), up from $1.483 trillion in October, while Treasury money fund assets totaled another $649 billion (24.1%) in November, up from $617 billion the prior month. Government money fund portfolios were made up of 42.3% US Govt Agency Debt, 18.6% US Government Agency Repo, 21.1% US Treasury debt, and 17.3% in US Treasury Repo. Treasury money funds were comprised of 75.4% US Treasury debt, 24.4% in US Treasury Repo, and 0.2% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.201 trillion, or over 80% (81.8%) of all taxable money fund assets, up from 81.2% last month.
European-affiliated holdings decreased $31.2 billion in November to $442.5 billion among all taxable funds (and including repos); their share of holdings decreased to 16.4% from 18.3% the previous month. Eurozone-affiliated holdings decreased $19 billion to $306.4 billion in Nov.; they now account for 11.4% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $10.6 billion to $159.3 billion (5.9% of the total). Americas related holdings increased $127 billion to $2.090 trillion and now represent 77.6% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $67.1 billion, or 13.0%, to $446.9 billion, or 16.6% of assets; US Government Agency Repurchase Agreements (up $46.8 billion to $300.9 billion, or 11.2% of total holdings), and Other Repurchase Agreements ($28.3 billion, or 1.1% of holdings, down $0.8 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $1.6 billion to $78.6 billion, or 2.9% of assets), Asset Backed Commercial Paper (up $1.2 billion to $31.8 billion, or 1.2%), and Non-Financial Company Commercial Paper (up $3.0 billion to $22.6 billion, or 0.8%).
The 20 largest Issuers to taxable money market funds as of Nov. 30, 2016, include: the US Treasury ($882.0 billion, or 32.8%), Federal Home Loan Bank ($473.9B, 17.6%), Federal Reserve Bank of New York ($173.4B, 6.4%), BNP Paribas ($89.3B, 3.3%), Federal Home Loan Mortgage Co. ($77.9B, 2.9%), Federal Farm Credit Bank ($65.2B, 2.4%), Wells Fargo ($60.1B, 2.2%), Credit Agricole ($57.1B, 2.1%), RBC ($49.4B, 1.8%), Societe Generale ($39.3B, 1.5%), Federal National Mortgage Association ($38.8B, 1.4%), Nomura ($38.7B, 1.4%), Bank of America ($33.7B, 1.3%), JP Morgan ($31.8B, 1.2%), Mitsubishi UFJ Financial Group Inc. ($31.2B, 1.2%), Bank of Nova Scotia ($31.1B, 1.2%), HSBC ($26.1B, 1.0%), Citi ($26.1B, 1.0%), Deutsche Bank AG ($24.7B, 0.9%), and Credit Suisse ($24.1B, 0.9%).
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 ($173.4B, 22.3%), BNP Paribas ($77.1B, 9.9%), Wells Fargo ($49.8B, 6.4%), Credit Agricole ($43.0B, 5.5%), RBC ($38.9B, 5.0%), Nomura ($38.7B, 5.0%), Societe Generale ($33.3B, 4.3%), Bank of America ($30.4B, 3.9%), JP Morgan ($27.0B, 3.5%), and Deutsche Bank AG ($24.5B, 3.2%). The 10 largest Fed Repo positions among MMFs on 11/30 include: Northern Trust Trs MMkt ($16.5B), JP Morgan US Govt ($15.6B), Goldman Sachs FS Gvt ($13.2B), Morgan Stanley Inst Lq Gvt ($8.8B), First American Gvt Oblg ($8.7B), Vanguard Fed MMkt ($6.6B), Northern Inst Government Select ($6.4B), JP Morgan US Treasury Plus ($6.0B), Fidelity Inv Money Market: Govt Port ($5.6B), and BlackRock Lq FedFund ($5.6B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($15.0B, 5.0%), Credit Agricole ($14.1B, 4.7%), BNP Paribas ($12.2B, 4.0%), RBC ($10.5B, 3.5%), Wells Fargo ($10.3B, 3.4%), Sumitomo Mitsui Banking Co ($10.1B, 3.3%), Svenska Handelsbanken ($9.8B, 3.2%), Bank of Montreal ($9.6B, 3.2%), Bank of Nova Scotia ($9.5B, 3.1%), and Canadian Imperial Bank of Commerce ($9.5B, 3.1%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc. ($11.4B, 7.8%), Wells Fargo ($10.0B, 6.8%), Bank of Montreal ($9.0B, 6.1%), Canadian Imperial Bank of Commerce ($7.6B, 5.2%), Toronto-Dominion Bank ($7.6B, 5.1%), Svenska Handelsbanken ($6.8B, 4.6%), Sumitomo Mitsui Banking Co ($6.4B, 4.3%), RBC ($5.6B, 3.8%), Bank of Nova Scotia ($5.5B, 3.7%), and BNP Paribas ($5.0B, 3.4%). The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($6.8B, 5.6%), Credit Agricole ($6.7B, 5.5%), Commonwealth Bank of Australia ($6.0B, 5.0%), Societe Generale ($5.6B, 4.6%), Microsoft Co. ($4.3B, 3.5%), JP Morgan ($4.2B, 3.5%), National Australia Bank Ltd. ($4.1B, 3.4%), Bank of Nova Scotia ($4.0B, 3.3%), DnB NOR Bank ASA ($3.8B, 3.1%), and Toyota ($3.8B, 3.1%).
The largest increases among Issuers include: US Treasury (up $101.6B to $882.0B), JP Morgan (up $10.1B to $31.8B), Bank of Montreal (up $9.7B to $22.6B), Federal Home Loan Bank (up $8.7B to $473.9B), RBC (up $6.3B to $49.4B), Nomura (up $6.0B to $38.7B), Federal Home Loan Mortgage Co, (up $5.6B to $77.9B), Canadian Imperial Bank of Commerce (up $5.1B to $15.7B), Federal Farm Credit Bank (up $3.9B to $65.2B), and National Australia Bank Ltd. (up $3.1B to $9.1B).
The largest decreases among Issuers of money market securities (including Repo) in Nov. were shown by: Federal Reserve Bank of New York (down $20.5B to $173.4B), Wells Fargo (-$11.5B to $60.1B), Deutsche Bank AG (-$9.0B to $24.7B), BNP Paribas (-$7.1B to $89.3B), Societe Generale (-$3.7B to $39.3B), Credit Suisse (-$3.7B to $24.1B), HSBC (-$3.1B to $26.1B), Barclays PLC (-$2.8B to $23.3B), Goldman Sachs AB (-$1.7B to $11.7B), and Credit Mutuel (-$1.1B to $4.9B).
The United States remained the largest segment of country-affiliations; it represents 72.2% of holdings, or $1.943 trillion. France (8.1%, $219.3B) remained in second and Canada (5.4%, $146.2B) remained in 3rd. Japan (4.5%, $121.4B) stayed in fourth, while the United Kingdom (2.3%, $62.3B) was the fifth largest. Germany (1.7%, $46.0B) was sixth, while Sweden (1.3%, $35.9B) and The Netherlands (1.3%, $35.5B) were seventh and eighth, respectively. Australia (1.1%, $30.3B) was ninth, and Switzerland (1.1%, $28.2B) was 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 Nov. 30, 2016, Taxable money funds held 28.8% (down from 31.2%) of their assets in securities maturing Overnight, and another 14.0% maturing in 2-7 days (up from 12.4%). Thus, 42.8% in total matures in 1-7 days. Another 19.2% matures in 8-30 days, while 11.3% matures in 31-60 days. Note that almost three-quarters, or 73.3% 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 11.7% matures in 91-180 days, and just 4.2% matures beyond 180 days.
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Friday, and our Tax Exempt MF Holdings and MFI International "offshore" Portfolio Holdings will be released later this week. Visit our Content center to download files or our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports.
ICI's latest "Money Market Fund Assets" report shows overall money fund assets rising for the 7th week in a row, increasing by $101 billion since 10/19 and hitting their highest level since the first week in August. Total assets appear intent on erasing their modest year-to-date deficit; they're now down just $23 billion, or 0.8%. MMF assets have seen year-end growth spurts in each of the past 5 years, so it appears likely we'll end the year with assets up slightly for the 5th year in a row. Prime money market fund assets inched higher again in the latest week, their 4th increase in the past five weeks. Prime MMFs began November with their first increase since July 13 and have risen $3.8 billion since 11/2. Tax Exempt MMFs also rose again for the 7th week out of the past eight. We review the latest statistics, and also cover testimony from Treasury Strategies' Tony Carfang to a House Subcommittee below. (Note: Crane Data also posted the latest versions of our "Funds" and "Portfolio Holdings" data files from the SEC's Form N-MFP data series here. Our regular December Money Fund Portfolio Holdings will also be released later today.)
The release says, "Total money market fund assets increased by $16.87 billion to $2.74 trillion for the week ended Wednesday, December 7, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $15.21 billion and prime funds increased by $910 million. Tax-exempt money market funds increased by $760 million." Total Government MMF assets, which represent 81.5% of all money funds, stand at $2.229 trillion, while Total Prime MMFs, which total 13.8%, stand at $376.5 billion. Tax Exempt MMFs total $130.8 billion, or 4.8%.
ICI explains, "Assets of retail money market funds increased by $3.77 billion to $975.87 billion. Among retail funds, government money market fund assets increased by $3.15 billion to $597.81 billion, prime money market fund assets decreased by $180 million to $251.88 billion, and tax-exempt fund assets increased by $810 million to $126.18 billion.... Assets of institutional money market funds increased by $13.09 billion to $1.76 trillion. Among institutional funds, government money market fund assets increased by $12.06 billion to $1.63 trillion, prime money market fund assets increased by $1.09 billion to $124.67 billion, and tax-exempt fund assets decreased by $50 million to $4.58 billion."
The update notes, "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."
Prior to this week's Prime inflows, the past 4 weeks had seen (admittedly modest) inflows of $3.8 billion in total. Prime MMFs had declined by 16 weeks in a row prior to 11/9, dropping by $663.1 billion. YTD, Prime MMF assets have declined by $907.3 billion, or 70.7%, and they've declined by $1.082 trillion, or 74.2%, since 10/31/15 (just prior to the start of the massive Prime to Government migration).
Government money funds have gained $104.6 billion over the past 7 weeks, and they increased by $686.0 billion over the past 19 weeks. Govt MMFs are up by $1.008 trillion YTD (82.6%) and they're up by $1.215 trillion (119.9%) since 10/31/15. Tax Exempt MMFs have risen for 7 out of the past 8 weeks, gaining $3.2 billion. They'd fallen by $68.5 billion the previous 14 weeks. Tax Exempt MMFs are down by $123.6 billion YTD (-48.6%) and they're down by $114.2 billion (-46.6%) since 10/31/15.
Also, a press release entitled, "Treasury Strategies Testifies on 'The Impact of Regulations on Short-Term Financing' to the U.S. Congress," explains, "Anthony Carfang, Managing Director of Treasury Strategies, a division of Novantas, Inc., testified today at the U.S. House of Representatives on "The Impact of Regulations on Short-Term Financing." Treasury Strategies supports well-thought-out efforts to improve economic efficiency and to reduce the likelihood of another systemic failure."
It explains, "Citing experiences of Treasury Strategies' corporate clients, Carfang raised serious concerns about unintended consequences of the simultaneous implementation of Dodd-Frank, Basel III, Money Market Fund regulations." He cites "Impaired market liquidity; Higher costs and less certainty for borrowers; Reduced access to credit for businesses; Reduced access to capital for state and local governments; and Reduced capacity for economic growth" as concerns.
Treasury Strategies statement explains, "Money Market Mutual Funds, a primary cash management tool for corporate treasurers is a case in point. Prime funds, a key funding source for corporations and banks, have declined 74% or $1.04 trillion since the new rules were announced. Tax exempt funds, a key funding source for municipalities, school districts and hospitals, have declined 51% or $132 billion. Almost all of the assets have moved into Government or Treasury Funds. This $1.1 trillion movement of capital out of the private sector raises the cost of capital and limits credit available for America's businesses and communities."
"Well-thought-out efforts to mitigate the adverse consequences of these regulations and restore the smooth flow of capital in the U.S. economy are essential," noted Cathy Gregg, also a Treasury Strategies Managing Director.
Carfang comments, "Recent financial regulations such as Dodd-Frank, Basel III, Money Market Fund regulations and many more, separately and in concert with each other, have triggered regulatory and compliance cost burdens that radiate through the economy. Ultimately, this is choking the U.S. economy and paralyzing American businesses and financial firms that had nothing to do with the financial crisis.... One place to start is to dial back the most recent MMF regulations, which have caused $1.1 trillion in assets to flee the private sector."
Crane Data's latest Money Fund Market Share rankings show modest asset increases for the majority of U.S. money fund complexes in November, as total assets increased by $33.0 billion, or 1.2%. Overall assets inched lower, falling $2.8 billion, or -0.1%, over the past 3 months. Over the past 12 months through Nov. 30, they've increased by $8.2 billion, or 0.3%. The biggest gainers in November were Fidelity, whose MMFs rose by $18.5 billion, or 4.2%, and Goldman Sachs, whose MMFs rose by $12.6 billion, or 7.0%. Morgan Stanley, Vanguard, JPMorgan, Western and Schwab also saw assets increase, rising by $8.5 billion, $6.2B, $5.2B, $1.9B and $1.8B, respectively. The biggest declines were seen by BlackRock, SSgA, Invesco and Wells Fargo. (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.
Over the past year through Nov. 30, 2016, Goldman Sachs was the largest gainer (up $39.0B, or 25.3%), followed by BlackRock (up $32.7B, or 15.2%), Fidelity (up $31.5B, or 7.3%), Vanguard (up $27.3B, or 15.4%), Northern (up $10.7B, or 12.9%), and PNC (up $6.7B, or 142.2%). Vanguard, JP Morgan, Goldman Sachs, and Fidelity had the largest money fund asset increases over the past 3 months, rising by $11.7B, $7.0B, $6.7B and $6.5B, respectively. (Note: BlackRock was buoyed by its acquisition of BofA's money funds -- a deal which closed in April 2016.)
Other asset gainers for the past year include: First American (up $6.5B, or 16.0%), Morgan Stanley (up $5.6B, 4.4%), Alliance Bernstein (up $4.3B, 226.3%), JP Morgan (up $1.6B, 0.7%), and UBS (up $1.5B, 4.2%). The biggest decliners over 12 months include: Wells Fargo (down $23.4B, or -17.9%), Dreyfus (down $17.9B, or -11.0%), Deutsche (down $13.9B, or -41.8%), Western (down $12.9B, or -27.2%), SSgA (down $10.6B, or -11.3%), and Federated (down $10.5B, or -5.1%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $463.0 billion, or 17.5% of all assets (up $18.5 billion in Nov., up $6.5 billion over 3 mos., and up $31.5B over 12 months). JP Morgan is second with $250.8 billion, or 9.5% of assets (up $5.1B, up $7.0B, and up $1.6B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock is third with $248.4 billion, or 9.4% market share (down $5.5B, up $4.0B, and up $32.7B for the past 1-month, 3-mos. and 12-mos., respectively). Vanguard is in fourth with $204.5 billion, or 7.7% of assets (up $6.2B, up $11.7B, and up $27.3B).
Federated ranked 5th with $194.1 billion, or 7.3% of assets (up $1.7B, down $8.9B, and down $10.5B). Goldman Sachs held onto sixth place with $193.3 billion, or 7.3% (up $12.6B, up $6.6B, and up $39.0B). Schwab ($159.7B, or 6.0%) was in seventh place, followed by Dreyfus in eighth place ($144.1B, or 5.4%), Morgan Stanley in ninth place ($133.2B, or 5.0%), and Wells Fargo in tenth place ($107.4B, or 4.1%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($93.6B, or 3.5%), SSGA ($83.2B, or 3.1%), Invesco ($56.0B, or 2.1%), First American ($47.2B, or 1.8%), UBS ($37.9B, or 1.4%), Western Asset ($34.5B, or 1.3%), Deutsche ($19.5B, or 0.7%), Franklin ($19.4B, or 0.7%), American Funds ($17.0B, or 0.6%), and T. Rowe Price ($16.0B, or 0.6%). The 11th through 20th ranked managers are the same as last month. Crane Data currently tracks 63 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 Goldman Sachs moving up to #4 ahead of Federated and Vanguard, and Dreyfus/BNY Mellon and Morgan Stanley moving ahead of Schwab to 7th and 8th.
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 ($472.2 billion), JP Morgan ($393.7B), BlackRock ($359.2B), Goldman Sachs ($289.6B) and Vanguard ($204.5B). Federated ($202.5B) was sixth, followed by Dreyfus/BNY Mellon ($166.6B), Morgan Stanley ($161.6B), Schwab ($159.7B), and Wells Fargo ($108.6B), 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 November Money Fund Intelligence and MFI XLS show that yields were up slightly in November across most of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 724), was up 1 bp to 0.16% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 1 bp to 0.16%. The MFA's Gross 7-Day Yield inched higher to 0.50% (up 3 bps), while the Gross 30-Day Yield was up two bps to 0.49%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.30% (up 2 bps) and an average 30-Day Yield of 0.30% (up 3 bps). The Crane 100 shows a Gross 7-Day Yield of 0.55% (up 3 bps), and a Gross 30-Day Yield of 0.54% (up 2 bps). For the 12 month return through 11/30/16, our Crane MF Average returned 0.12% and our Crane 100 returned 0.22%. The total number of funds, including taxable and tax-exempt, increased to 970, up 4 from last month. There are currently 724 taxable and 246 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 0.33% (up 4 bps) as of Nov. 30, while the Crane Govt Inst Index was 0.17% (up 1 bp) and the Treasury Inst Index was 0.15% (up 3 bps). Thus, the spread between Prime funds and Treasury funds is 18 basis points, the same as last month. The Crane Prime Retail Index yielded 0.25% (up 3 bps), while the Govt Retail Index yielded 0.03% (unchanged) and the Treasury Retail Index was 0.04% (up 1 bp). The Crane Tax Exempt MF Index yield declined to 0.15% (down 5 bps).
The Gross 7-Day Yields for these indexes in November were: Prime Inst 0.65% (up 5 bps), Govt Inst 0.42% (up 1 bp), Treasury Inst 0.40% (up 2 bps), Prime Retail 0.72% (up 6 bps), Govt Retail 0.43% (up 1 bp), and Treasury Retail 0.37% (up 1 bp). Also, the Crane Tax Exempt Index declined 6 basis points to 0.57%. The Crane 100 MF Index returned on average 0.02% for 1-month, 0.07% for 3-month, 0.21% for YTD, 0.22% for 1-year, 0.10% for 3-years (annualized), 0.07% for 5-years, and 0.84% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The December issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Wednesday morning, features the articles: "Prime, Tax-Ex Assets Bottom; Rising Rates Returning Cash?" which reviews the latest yields, flow data and fund changes; "SSGA's Butler & McCusker on Cash Investing Post Reform," which profiles Yeng Felipe Butler and Pia McCusker on State Street's latest thinking; and "European Money Fund Regs Passed, But Details Murky," which looks at the EU's new money fund reforms. We have updated our Money Fund Wisdom database query system with Nov. 30, 2016, performance statistics, and also sent out our MFI XLS spreadsheet Wednesday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our December Money Fund Portfolio Holdings are scheduled to ship Friday, Dec. 9, and our Dec. Bond Fund Intelligence is scheduled to go out Wednesday, Dec. 14.
MFI's lead "Prime, T-E MMFs Stabilize" article says, "Prime money market fund assets, which slid $1.1 trillion, or 75% in the 52 weeks through the end of October, have been flat at around $375 billion for 5 weeks straight. Tax-exempt MMF assets too have seen outflows subside, as both savaged segments of the money fund world catch a breather and await a likely Fed hike next week. The return of Prime and the development of alternatives like conservative ultra-short bond funds depends heavily on growing spreads between these and Government products."
It adds, "While it's been a very rough year for Prime, the New Year looks a lot brighter. Yields have already risen slightly in recent weeks. Our Crane 100 Money Fund Index, the average yield of the 100 largest taxable MMFs, is up 2 basis points in November (to 0.30%) and another one in December month-to-date. If, as expected, the Fed moves its target funds rate to a range of 0.5-075% next week, money fund rates will quickly follow."
Our latest fund "profile" interview reads, "This month, Money Fund Intelligence interviews State Street Global Advisors' Senior Managing Directors and Global Heads of Cash Management Yeng Felipe Butler and Pia McCusker. We discuss a number of topics, including finding the right mix of liquidity and return for clients in the new post-reform money fund environment."
The article asks, "How long has State Street Global Advisors been involved in running cash and money market funds?" Butler tells us, "State Street Global Advisors has been managing client cash for nearly four decades. We launched our first prime money market fund in 1988 and have continued to bring new cash solutions to our clients over the years. Today, we provide commingled and tailored solutions to institutional clients around the world through our money market funds, separately managed accounts, cash ETFs, and ultra-short term bond funds."
Our "European Money Fund Regs" article explains, "The European Union agreed to a new set of money market fund regulations recently, which will introduce a hybrid of stable and variable NAV money funds in Europe. The European Parliament's release entitled, "Money Market Funds: breakthrough agreement between MEPs and Slovak Presidency," 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."
It adds, "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."
In a sidebar, we discuss, "Wells and RBC on SIFMA," saying, "Wells Fargo Securities' Garret Sloan writes, "After taking a wild ride over the past few months, the SIFMA 7-day index appears to be finding an equilibrium level in the mid-50s. In December, the index remained relatively uncorrelated with the movement of the Fed funds rate, remaining pinned at 1 basis point for another three months before moving in response to tax-related outflows in March. Previous rate cycles have seen SIFMA move more quickly, though not in a 1-for-1 relationship."
We also do a sidebar, entitled, "JPM: 2017 Outlook Uncertain," which comments, "J.P. Morgan Securities' writes 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.... 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."
Our December MFI XLS, with Nov. 30, 2016, data, shows total assets increased $32.1 billion in November to $2.646 trillion after decreasing $3.1 billion in October and $48.5 billion in September, and increasing $19.3 billion in August and $11.6 billion in July. Our broad Crane Money Fund Average 7-Day Yield was up 1 bps to 0.16% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) rose 2 bps to 0.30% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA inched up to 0.50% and the Crane 100 rose 3 bps to 0.55%. Charged Expenses averaged 0.33% and 0.25% for the Crane MFA and Crane 100, respectively (unchanged). The average WAM (weighted average maturity) for the Crane MFA was 35 days (up 1 day from last month) and for the Crane 100 was 36 days (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
A publication entitled, "2017 Outlook: Money Market Funds" was put out by Fitch Ratings yesterday, which reviews the impact of both U.S. and European regulatory changes on money funds in the coming year. The report says, "Following a tumultuous two-year implementation period, money fund reform in the US is now in place. More than USD1trn has shifted from prime to government money funds, but asset levels have now stabilised and are expected to reverse to a degree over 2017. As fund managers and investors begin to feel more comfortable with the new equilibrium, funds are beginning to revert to a more normal portfolio strategy." We excerpt from Fitch's update below, and also review a BlackRock paper on new European money fund reforms.
Fitch also comments on European reforms, explaining, "The European Commission, Parliament and Council announced agreement on European money fund reform in November 2016. The new regulation will make low volatility net asset value (LVNAV) funds a viable alternative to existing constant NAV (CNAV) funds, notably as a previously proposed sunset clause has been removed from the agreed regulation. Given the 18-month implementation period, reforms will likely be fully effective in 2H18."
The Outlook continues, "Under the new regulatory regime in the US, prime and municipal money funds now have the ability to impose liquidity fees or redemption gates on investors. Fund managers will be carefully managing their portfolios to avoid these scenarios, but will be pressured to balance liquidity with the search for higher yields. Fitch views the potential for a run on a fund with low or declining levels of liquidity as the biggest risk to the industry. European reform will likely include similar provisions."
Fitch adds, "Alternative products to prime money funds, including private money funds, ultra-short bond funds, and separate accounts, have been growing. In the US, after the initial big move from prime to government, investors are likely to re-evaluate their cash needs and the range of available liquidity products and move money out of government funds.... Low and negative yields in euro and sterling have been a strong driver of growth for ultra-short bond funds. In the US fund managers have been aggressively re-positioning prime funds and alternatives as higher yielding than government money funds to quickly win back investors. The differences in yields across the various liquidity products will be a key determinant for investors' cash allocation decisions."
On Supply, they comment, "A silver lining of the US shift from prime to government funds is the markedly improved supply-demand dynamics for the remaining assets in prime funds. Conversely, government money funds are in a more difficult position, given the significant inflows they have experienced. So far the larger asset base of government funds has been absorbed by the market rather smoothly, but participants are concerned with the future availability of dealer repo, US Treasuries, and Agencies. One bright spot is the expanded capacity of the Fed's reverse repo program."
Fitch also writes, "Recently agreed European money fund regulation could further shake up demand for short-term corporate and bank debt. However, we expect the impact to be smaller than in the US because investors accustomed to CNAV funds may be comfortable with the proposed LVNAV funds, which will still be able to hold non-government debt. Liquidity fees and withdrawal gates will also apply to government CNAV funds under the European regulation, which might make these funds less attractive to investors."
In other news, BlackRock sent out an update to International and offshore money fund investors explaining the recently approved (but not detailed) "European Money Market Fund Reform." It says, "European Money Market Fund Regulation (EMMFR) is nearing finalization with a political agreement reached between the European Parliament, Council and Commission, and the technical drafting now complete. The final rules are unlikely to change significantly from what has been agreed in recent weeks: an agreement that importantly, preserves Constant Net Asset Value (CNAV) for government funds, and introduces a new type of fund, the Low Volatility NAV (LVNAV) fund."
Co-Heads of International Cash Management Bea Rodriguez and Damien Donoghue, and Head of Government Affairs & Public Policy Joanna Cound, explain, "LVNAV is intended to replicate some of the utility of CNAV funds, with greater sensitivity to market pricing, and additional safeguards and controls built into the fund structure. This should mean that investors will continue to have a range of fund options and investment strategies to meet their needs. With the details now finalized, the formal sign off process will likely be completed by early next year via a full vote of the European Parliament."
They tell us, "The transition period for existing funds to comply with regulations is expected to be 18 months, however the timeline only begins when the regulation is formally adopted, translated and is officially published, meaning final rules are likely to come into force near the end of 2018."
BlackRock describes the LVNAV fund, saying the "Fund can price to 2 decimal places if the full mark-to-market price does not deviate from 1.00 by more than 20 basis points (bps), essentially rounding up to 1.00. If the 20 bps tolerance is breached the fund will price to 4 decimal places using the full mark-to-market NAV, essentially rounding down to the nearest basis point." It also, "Can use amortized cost for assets <75 days, however the mark to market price must be used if this deviates by >10 bps from the amortized cost price" and is "`Mandated to hold 10% in daily maturing assets and 30% in weekly maturing assets," and is "Subject to liquidity fees & gates."
Finally, the piece says, "For internal credit the Money Market Funds must establish, regularly review and maintain internal credit assessment procedures. Sponsor support is prohibited for all Money Market Funds including Government CNAV and LOW-Volatility NAV (LVNAV).... Low-Volatility NAV (LVNAV): As well has mandatory stress testing, enhanced Know Your Customer (KYC) rules, public disclosure rules. Also the fund is not subject to sunset clause."
Fitch Ratings published an update entitled, "Repo Use Declines in Prime European Money Funds," which reviews holdings of repurchase agreements in "offshore" money market funds denominated in US dollar, euro and pound sterling. It explains, "Repurchase agreement exposures in European 'AAAmmf' rated prime money market funds (MMFs) declined to 4% in September 2016 from 7% two years earlier. Fitch Ratings attributes this decline to a reduction in the availability of high-quality collateral and regulation affecting banks' ability and willingness to engage in short-dated repo.... Temporary declines in money funds use of repo at month-end, quarter-end and year-end are linked to reduced availability of high-quality collateral at these times as banks use this collateral for other regulatory purposes." We review Fitch's latest update, and also excerpt from updates on T-bill supply from Citi and BofA and the latest monthly from Federated.
Fitch's summary tell us, "Around 65% of Fitch-rated MMFs were undertaking repo transactions in September 2016, up from about 60% two years earlier, despite the decline in exposures. All MMFs are eligible to engage in repo transactions, and about 85% of rated fund complexes have set up the required legal documentation and counterparty relationships to do so.... Repo transactions in European MMFs are mainly used for portfolio liquidity management as they have short maturities, between overnight and seven days, or longer but with up to 48-hour call options. UCITS funds in particular are required by regulation to limit repo investment maturities to seven days (or callable within seven days)."
It explains, "Setting up a repo transaction can be operationally complex. For this reason, 70% of repo transactions are conducted in tri-party form where the custodian handles the operational side. Setting up the required legal documentation can also be a hurdle.... The number of repo counterparties has not significantly changed over the last two years. US and French banks are the most widely used repo counterparties in European-domiciled prime MMFs."
Finally, Fitch says, "Repo collateral in European MMFs comprises high-quality US and European governments and their agencies. There is typically no maturity restriction on collateral, and EU prime MMFs typically require the standard 102% overcollateralization.... European prime MMF repo investments totaled approximately EUR 26bn as of end-September 2016. This compares with a total repo amount outstanding in Europe of EUR5.4trn in June 2016 according to the International Capital Market Association, marginally down from the year before."
In other news, Citi's Steve Kang mentions a "2017 Supply Forecast for Treasury Bills" in his latest update. He writes, "There is much uncertainty around Treasury supply over the course of 2017. For now, we use the current law with an assumption that much of the fiscal change will kick in from FY2018. We project unchanged coupon supplies (net issuance of +560bn) and positive bill issuance (+150bn). For bill supply, we highlight two events ahead of us in 2017. First is the "soft" debt ceiling deadline in March.... Due to this, we expect negative bill issuance in 1H 2017 (Figure 9), likely alleviated in 2H. Treasury's cash balance remains very high around 420bn.... We think drama around a "hard" debt ceiling is less likely given the Republican sweep."
Citi adds, "Second is the timing and the scope of the repatriation.... Repatriation has potential to bring in a revenue windfall ($190bn) to the government. Given that there is bipartisan support for the bill, it could be delivered earlier than expected and this would pose a downside risk to deficits and bill supply. However, given that a repartition bill can be announced as a part of a larger bill as it was in 2004, it could also come in FY2018. We will keep a close eye on developments on this front and adjust our supply forecasts if needed."
Bank of America Merrill Lynch's Mark Cabana adds on the topic of T-bills, "We expect the Treasury Borrowing Advisory Committee (TBAC) will continue to advocate for additional bill issuance given "structural changes in the market" and still record low proportion of bills to total debt.... Increasing all bill offering sizes to 50% of their total capacity raises an additional $287bn in 2017, our baseline. Treasury would then need to raise $177 billion in additional coupon supply, on our estimates."
Finally, Federated Investors new "Month in Cash" discusses "Hiking expectations for hikes." The piece explains, "November brought more than a few uncertainties to the fore following the election of Donald Trump, but we were surprised that many included a rate hike as one of them.... Fed futures are now nearly unanimous in expecting a 25 basis-point increase in the target fed funds range at this point. There would have to be a calamity in the world for this not to happen. Every Fed governor who has spoken publically, including Chair Yellen recently in front of Congress, has essentially said this."
It continues, "We also expect the Dec. 14 Federal Open Market Committee (FOMC) meeting to raise expectations of future action. As you know, on several occasions in 2016 policymakers reduced their projections for the number of times they would raise rates this year and next. We think the improving U.S. economy and the likelihood for fiscal stimulus from the Trump administration, in whatever form it takes, will lead to higher growth, inflation and rates. This scenario won't play out until at least mid-2017, but expectations are growing for three hikes instead of two. If the latter, it would probably be one in March and September. Cash managers' main instruments, including Treasuries, agencies and commercial paper, already are beginning to price that in."
Federated writes, "All of this, of course, is good news from a return perspective for money market funds. And it is important to keep in mind that total return is now the gauge of performance for institutional prime money market funds rather than just yield, which has the potential to change slightly because prime funds now float their shares' net asset value (NAV)."
They also add, "On this subject, hardly a day goes by that someone doesn't ask us if the Trump administration's pledge to reduce regulation would apply to the reforms of Rule 2a-7 that forced a floating NAV. We don't see it. The focus likely will be on changes that have not yet occurred, such as the recently announced Department of Labor fiduciary rule or some Dodd-Frank requirements not yet enacted."
ICI's latest "Money Market Fund Assets" report shows that Prime money market funds' 3-week recovery came to an end in the latest week, with a decline of $1.4 billion. Prime MMFs began November with their first increase since July 13 and have risen $2.9 billion since 11/2. (Crane Data's Money Fund Intelligence Daily shows Prime MMFs down by $7.5 for the month of November though.) Tax Exempt MMFs also dipped after rising for 6 weeks in a row. However, overall assets, which broke back above $2.7 trillion for the first time since August last week, continued their push higher in the latest week. Year-to-date they're down $40 billion, or 1.4%. Total MMF assets, which have seen year-end growth spurts in each of the past 5 years, appear to again be embarking on a push to close the remaining deficit before year-end.
The new release says, "Total money market fund assets increased by $13.85 billion to $2.72 trillion for the eight-day period ended Wednesday, November 30, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $15.40 billion and prime funds decreased by $1.42 billion. Tax-exempt money market funds decreased by $130 million." Total Government MMF assets, which represent 81.4% of all money funds, stand at $2.213 trillion, while Total Prime MMFs, which total 13.8%, stand at $375. billion. Tax Exempt MMFs total $130.0 billion, or 4.8%.
ICI explains, "Assets of retail money market funds decreased by $2.28 billion to $972.10 billion. Among retail funds, government money market fund assets decreased by $1.31 billion to $594.67 billion, prime money market fund assets decreased by $830 million to $252.06 billion, and tax-exempt fund assets decreased by $140 million to $125.37 billion."
Their latest continues, "Assets of institutional money market funds increased by $16.13 billion to $1.75 trillion. Among institutional funds, government money market fund assets increased by $16.71 billion to $1.62 trillion, prime money market fund assets decreased by $590 million to $123.58 billion, and tax-exempt fund assets increased by $10 million to $4.63 billion."
Finally, it notes, "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."
Prior to this week's Prime outflows, the past 3 weeks had seen (admittedly modest) inflows of $4.3 billion in total. Prime MMFs had declined by 16 weeks in a row prior to this, dropping by $663.1 billion. YTD, Prime MMF assets have declined by $908.2 billion, or 70.7%, and they've declined by $1.083 trillion, or 74.2%, since 10/31/15 (just prior to the start of the massive Prime to Government migration). Government money funds have gained $37.5 billion over the past 4 weeks, and they increased by $575.2 billion over the 15 weeks prior.
Govt MMFs are up by $992.7 billion YTD (81.3%) and they're up by $1.200 trillion (118.4%) since 10/31/15. Prior to this week's minor outflows, Tax Exempt MMFs had risen for 6 weeks in a row, up $2.6 billion. They'd fallen 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.
Also, Fitch Ratings released a brief update entitled, "Prime Money Fund Assets Gain for Second Consecutive Week" yesterday. It says, "As more than $1 trillion shifted out of prime money funds in response to reform, Fitch's U.S. Commercial Paper Monitor shows that the funds significantly reduced investments in bank, corporate, and asset-backed CP. Fitch's U.S. Money Fund Reform Dashboard illustrates that following reform implementation, prime money fund managers have begun to revert back to more normal portfolio management strategies, as fund flows have stabilized.
Fitch explains, "Managers have been extending maturities and reducing liquidity in a bid to increase prime funds' yields and attract investors back from government money funds; prime institutional funds' assets increased $3 billion between Nov. 14 and Nov. 28. Average weekly liquidity across 29 prime institutional funds Fitch reviewed fell 19% from a peak of 87% on Oct.7, 2016 to 68% on Nov. 28, 2016. The spread between institutional prime and government funds increased to 0.22% as of Nov. 28 from a recent trough of 0.12% as of Sept. 14, a month before reform."
BlackRock announced some changes to its TempCash money market fund in a website posting entitled, "TempCash Investment Strategy Change." They tell us, "Since our implementation of the structural changes required for money market fund reform in October 2016, we have partnered with you to understand the impacts of the new cash investment landscape. In an effort to adapt our product offerings to your needs, we are pleased to announce that the BlackRock Liquidity Funds TempCash (the "Fund") will adopt a new investment strategy, effective February 28, 2017."
BlackRock explains, "The Fund will invest in a broad range of U.S. dollar-denominated money market instruments, including government, U.S. and foreign bank, and commercial obligations and repurchase agreements maturing in 397 days or less (with certain exceptions) and the portfolio will have a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less. This is a change from the Fund's current short-dated investment strategy, which sought to maintain a dollar-weighted average maturity and dollar-weighted average life of 5 days."
They add, "We believe that cash investors may benefit from the availability of a prime money market fund that will strike its net asset value only one time each day and takes advantage of the full maturity limits of Rule 2a-7. The Fund will seek to maintain the "Aaa-mf" and "AAAm" ratings from Moody's and Standard & Poors, respectively. Thank you for allowing us to serve you in your cash management needs. Please contact your BlackRock representative with any questions."
For history on the plans for TempCash, see our April 7, 2015 News, "BlackRock Announces Changes, Keeps Options Open; TempFund Floats." Our piece explained, "In a letter addressed to its money market fund clients, entitled, "New Product Line Up Plans," BlackRock announced ... changes to its money market fund lineup in response to last summer's sweeping SEC reforms. Among the proposed changes are the introduction of 7-day maximum maturity funds and the possible conversion of prime retail and sweep funds to government funds."
In other news, an article published by Global Capital entitled, "EU blunts the teeth of money market rules," comments, "The European Union has allowed lobbyists to blunt the teeth of its long-awaited money market fund reform act.... On November 16, it [the EU] finally reconciled the three separate versions of the reform produced by the European Commission, the European Parliament and the European Council, discarding in the process the suggested 3% capital buffer requirement. Though technical details are yet to be settled, the bill's reduced ambitions are gradually becoming clearer."
The article continues, "Lobbying from constant net asset value (CNAV) fund managers has left the reform lacking the bite of its American counterpart. The regulation was initially expected to force CNAV funds to convert to variable NAVs (VNAVs). Then, the concept of a low volatility NAV (LVNAV) fund emerged.... When LVNAVs were first floated, it was as a temporary measure to ease the transition to full VNAV status -- a transition that was to be enforced by a five year sunset clause that would force LVNAVs to convert to full VNAVs. But the sunset clause has been abandoned -- a casualty of lobbying -- so the mutant LVNAV is here to stay."
Global Capital adds, "Even if Europe were to introduce a hardline reform: mandatory immediate conversion to VNAVs, the consequences would be far less drastic than the turmoil in US funds. The US reform triggered a $1tr shift from prime funds to government-only funds, but such a sharp move is unlikely in Europe. For one thing, government only funds in Europe yield minus 70bp, while there simply isn't the capacity in short term European public debt to allow a mass influx of prime fund money. But most importantly, VNAVs are a far more familiar and less frightening concept to European investors than they were to US investors because, unlike America, Europe already has a flourishing community of VNAV funds."
Finally, we noticed a Wall Street Journal piece a couple days ago entitled, "Clearinghouses Park Billions in New Fed Accounts." It explains, "Financial firms are lining up for the hottest new account on Wall Street: checking with interest at the Federal Reserve. CME Group Inc. and the Options Clearing Corp. are among large companies that have parked billions of dollars in new accounts at the Fed, reflecting a recent rule change that made the accounts more widely available and the attractive rates paid by the central bank on deposits."
The Journal adds, "Earning interest on reserves at the Fed has been the privilege of banks since 2008, but a wider swath of Wall Street won the right under a provision of the 2010 Dodd-Frank Act that aimed to bolster "clearinghouses" that guarantee obligations on trades for a fee.... The clearinghouse operators are using their Fed accounts to earn interest on the cash collateral that members, such as Citigroup Inc., Goldman Sachs Group Inc. and Interactive Brokers LLC, pledge in the course of their daily transactions and trade-processing."