News Archives: December, 2017

ICI Trends: MMF Assets Jump; Treasury, Repo Holdings Dip in November

Dec 29 17

The Investment Company Institute released its latest "Money Market Fund Assets" and its monthly "Trends in Mutual Fund Investing" reports yesterday. Their numbers show jump in money fund assets in the latest week and in November, following a dip in October and big increases in September and August. Money market mutual fund assets, which broke above $2.8 trillion 3 weeks ago reached their highest level since early 2010. Year-to-date, MMF assets have increased by $113 billion, or 4.1%. For 2017, money fund assets are showing their biggest annual increase since 2009. Prime MMFs have increased by $69.1 billion, or 17.8%, year-to-date. We review ICI's Trends and latest Portfolio Composition statistics, below.

ICI writes, "Total money market fund assets increased by $22.31 billion to $2.84 trillion for the week ended Wednesday, December 27, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $20.83 billion and prime funds increased by $1.40 billion. Tax-exempt money market funds increased by $86 million." Total Government MMF assets, which include Treasury funds too, stand at $2.254 trillion (79.3% of all money funds), while Total Prime MMFs stand at $456.9 billion (16.1%). Tax Exempt MMFs total $131.2 billion, or 4.6%.

They explain, "Assets of retail money market funds increased by $378 million to $1.01 trillion. Among retail funds, government money market fund assets increased by $190 million to $612.00 billion, prime money market fund assets decreased by $193 million to $268.76 billion, and tax-exempt fund assets increased by $381 million to $125.64 billion." Retail assets account for over a third of total assets, or 35.4%, and Government Retail assets make up 60.8% of all Retail MMFs.

ICI's release adds, "Assets of institutional money market funds increased by $21.93 billion to $1.84 trillion. Among institutional funds, government money market fund assets increased by $20.64 billion to $1.64 trillion, prime money market fund assets increased by $1.59 billion to $188.18 billion, and tax-exempt fund assets decreased by $295 million to $5.59 billion." Institutional assets account for 64.6% of all MMF assets, with Government Inst assets making up 89.4% of all Institutional MMFs.

ICI's "Trends in Mutual Fund Investing - November 2017" shows a $57.9 billion increase in money market fund assets in November to $2.797 trillion. This follows a $8.8 billion decrease in October, a $28.8 billion increase in Sept., a $71.8 billion increase in August, and a $13.6 billion increase in July. In the 12 months through November 30, money fund assets have increased by $74.9 billion, or 2.8%.

The monthly report states, "The combined assets of the nation's mutual funds increased by $284.46 billion, or 1.6 percent, to $18.60 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."

It explains, "Bond funds had an inflow of $14.99 billion in November, compared with an inflow of $29.83 billion in October.... Money market funds had an inflow of $57.01 billion in November, compared with an outflow of $9.52 billion in October. In November funds offered primarily to institutions had an inflow of $50.54 billion and funds offered primarily to individuals had an inflow of $6.48 billion."

The latest "Trends" shows that both Taxable and Tax Exempt MMFs gained assets last month. Taxable MMFs increased by $57.4 billion in November, after decreasing $9.4 billion in October, increasing $30.1 billion in September, $73.5 billion in August and $11.9 billion in July. Tax-Exempt MMFs increased $0.5 billion in November, after increasing $0.9 billion in October, but decreasing $1.3 billion in September and $1.7 billion in August. Over the past year through 11/30/17, Taxable MMF assets increased by $76.3 billion (2.9%) while Tax-Exempt funds fell by $1.4 billion over the past year (-1.1%).

Money funds now represent 15.0% (the same as 15.0% the previous month) of all mutual fund assets, while bond funds represent 21.7%, according to ICI. The total number of money market funds decreased by 3 to 391 in November, down from 423 a year ago. (Taxable money funds fell by 3 to 308 and Tax-exempt money funds were unchanged over the last month.)

ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed a dip in Treasuries and Repo in November. Repo remained the largest portfolio segment; it was down $5.2 billion, or -0.6%, to $905.0 billion or 33.7% of holdings. Repo has increased by $132.9 billion over the past 12 months, or 17.2%. (See our Dec. 12 News, "Dec. Money Fund Portfolio Holdings: Fed Repo Down Again; CP, CDs Up.")

Treasury Bills & Securities moved in second place among composition segments; they fell by $8.1 billion, or -1.1%, to $702.1 billion, or 26.1% of holdings. Treasury holdings have fallen by $145.2 billion, or -17.1%, over the past year. U.S. Government Agency Securities remained in third place; they rose by $14.6 billion, or 2.2%, to $677.0 billion, or 25.2% of holdings. Agency holdings have fallen by $7.8 billion, or -1.1%, over the past 12 months.

Certificates of Deposit (CDs) stood in fourth place; they increased $3.2 billion, or 1.5%, to $218.1 billion (8.1% of assets). CDs held by money funds have risen by $64.1 billion, or 41.6%, over 12 months. Commercial Paper remained in fifth place, increasing $6.8B, or 4.9%, to $146.4 billion (5.4% of assets). CP has increased by $37.0 billion, or 33.8%, over one year. Notes (including Corporate and Bank) were down by $410 million, or -5.0%, to $7.8 billion (0.3% of assets), and Other holdings decreased to $10.7 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 127.6 thousand to 26.579 million, while the Number of Funds declined by 3 to 308. Over the past 12 months, the number of accounts rose by 1.301 million and the number of funds decreased by 13. The Average Maturity of Portfolios was 30 days in November, unchanged from October. Over the past 12 months, WAMs of Taxable money funds have shortened by 13 days.

Dec. BFI Profiles Neuberger Berman's Lind, McGinnis: Customization Key

Dec 28 17

This month, BFI interviews Neuberger Berman Senior Portfolio Manager & MD Kristian Lind and PM & VP Matt McGinnis, who manage tax-exempt and taxable short-term strategies, respectively. Lind oversees the firm's Municipal Short Duration portfolios, while McGinnis is part of a team that runs taxable Enhanced Cash and Short Duration separate accounts, as well as the Neuberger Berman taxable Short Duration Bond Fund. Our discussion follows.(Note: This "profile" is reprinted from the December issue of our Bond Fund Intelligence publication. Contact us if you'd like to see the full issue, our new Bond Fund Portfolio Holdings product, or the agenda for our upcoming Bond Fund Symposium, which will be in Los Angeles, Calif., March 22-23, 2018.)

BFI: Can you give us a little background? Lind: Our fixed income team has a long history managing cash management and short duration mandates in a variety of vehicles. Many team members have over 20 years of experience partnering with clients on customized short duration and cash management solutions. Some of our largest mandates date back to the mid 1980's.... I've been with Neuberger Berman since 2005 and Matt has been with us since 2008.

BFI: Talk about your short strategies. McGinnis: The short duration space is a significant focus for us at Neuberger Berman. As a firm, we currently manage $29.6 billion in various short duration fixed income strategies across Floating Rate Loans, High Yield, Emerging Markets, Municipals and Investment Grade debt. We manage $1.7 billion in Municipal Short Duration assets and $4.7 billion in taxable Investment Grade Short Duration assets. While we do offer a taxable short duration bond mutual fund, a large focus of ours is partnering with our clients to create customized separately managed accounts tailored to our client's individual needs.

Lind: At the moment, we don't currently have a '40-Act mutual fund in the tax exempt short duration space. The main reason for that is based on overall client demand. For the most part, our institutional and ultra-high net worth prospects are looking for highly customized separate accounts.... Our client base welcomes the idea of having the ability to tailor fit their guidelines and risk parameters. That's very tough to do with a mutual fund. In terms of how our portfolios are currently positioned, we've definitely been defensive from a duration perspective. We've already had two rate hikes this year and we're expecting another one on December 13th, so ... naturally, we've been defensive. With preservation of capital our number one priority for all cash management mandates, it's been the right position for our clients this year.

McGinnis: We do offer a taxable Short Duration Bond mutual fund (NSHLX) that's been around since 1986.... The fund and the SMA's are run by the same team and have similar overall themes. We are also defensive in terms of duration, and we take advantage of multiple asset classes in both. We have flexibility in separately managed customized accounts, and the mutual fund, to really invest in a wide range of asset classes. In the fund, we have assets ranging from investment grade credits, ABS and CMBS, to agency mortgage-backed securities and Treasuries. In the SMAs, we have the ability to do all that, [but] tailored to each client's particular objectives and constraints.

BFI: What are your big challenges? Lind: Given the gradually rising rate environment we're currently in, one of the major challenges has been trying to take advantage of the positively sloped yield curve without losing principal. By utilizing instruments such as floating rate notes, variable rate demand obligations, and shorter dated fixed rate maturities, we've been able to capitalize on rising rates by continuously reinvesting client proceeds at higher interest rates. Not only does this help us preserve principal, but it also allows our clients to enhance the yields of their portfolios throughout the year. Our short duration strategies have less interest rate risk than longer duration strategies; this has been advantageous in a rising rate environment and helps to minimize a potential risk to principal.

BFI: Tell us more about your portfolios. McGinnis: We are able to take advantage of a wide range of investment strategies based on individual client needs. We manage accounts with varying degrees of duration, several types of asset classes, and different tax considerations, which separate our suite of offerings from money funds. For example, we often invest in securities well beyond the typical 397 days a money fund is restricted to. In addition, we have created solutions for clients by building portfolios that hold both taxable and tax exempt securities, giving us the flexibility to invest in both based on relative value. The partnership with our clients and the customization we offer sets us apart from money funds and other separate account managers.

Neuberger Berman has a deep and experienced team across a wide variety of fixed income asset classes. Driven by a collaborative research process, we partner with clients to create portfolios that take advantage of this. We have expertise in the municipal market, corporate credit market, structured products such as ABS and CMBS, and government markets such as agency MBS, agencies and Treasuries. Depending on a client's objectives, risk appetite, and tax considerations, we [then] create customized solutions.

BFI: Are you seeing inflows? Lind: Since money market fund reform took place back in late 2016, we've seen a noticeable uptick in separate account inflows. While institutional clients seem to take a binary view on whether to utilize municipal money funds subject to the new rules, the mention of a floating NAV and potential gates and fees seems to scare the average high net worth investor, especially with net muni money fund yields still well below 1.00%. The risk reward just doesn't seem palatable, so most investors seem to have gravitated to Government money funds, which are excluded from the recent 2a-7 reforms, or a separate account alternative.

BFI: Are you seeing 'outside-in' interest? Lind: We've been in this very static environment in terms of volatility on the front end of the yield curve for many years.... Now, [some investors] are starting to see that interest rates across the curve have the potential to move higher. [A] lot of prospects and clients that have been sitting in longer duration strategies, whether it be core or extended core offerings, have noticed this increased volatility, and some have begun trimming some of their longer duration exposure and are actually moving into shorter duration products. I think this is a natural response considering where we are in the interest rate cycle.

McGinnis: It's been about staying ahead of these interest rate hikes. We've really taken advantage of floating rate notes over the last couple of years. And this year, it's been a particular boon to performance and returns.... Conservatively, over 50 percent of our enhanced cash account assets are in 3-month LIBOR based floaters. We've seen great success in deploying them.

BFI: Tell us about your investors. Lind: We have a wide variety of clients who invest in our municipal strategies, including corporations, insurance companies, foundations and endowments, family offices, and high net worth individuals.... While we do manage institutional assets, a majority of the recent demand has come from high net worth investors. Even though the financial crisis happened almost ten years ago, we still find that many prospects continue to sit on unusually large piles of cash, and their frustration resides around the inability to earn a decent return on those funds. Unfortunately, traditional cash management vehicles, such as money market funds, haven't afforded them the opportunity to do that.

With net yields as low as they've been for such a long period of time, some investors have been stretching for yield.... They've been moving out the [credit] spectrum in addition to the duration spectrum. Over the past several years those products have outperformed, but if we do see a backup in rates, particularly in the long end of the curve, and increased volatility ... there's a good chance those investors will reconsider a more defensive alternative. McGinnis: We've seen growth from both retail and institutional clients. You know [for] a lot of the people and firms that we talk to -- corporations, state treasurers or insurance companies -- the customization really peaks their interest.

BFI: What about tax reform? Lind: Our Fixed Income CIO, Brad Tank, recently published a piece on the potential impacts of tax reform across fixed income markets. In it, he touches on how the House and Senate proposals would effectively eliminate "advance refunding" in the municipal market, ultimately shrinking and having a meaningful impact on future municipal supply. In addition, the House proposal eliminates the tax exemption for private activity bonds.... [T]raditional municipal market issuers such as colleges, hospitals and airports, [could] lose [this] tax exemption.

McGinnis: Tax reform could have an impact on the corporate market as well. Depending on the outcome, a reduction in the corporate tax rate should stimulate consumption spending, and the possibility of fully deducting capital spending for five years, as proposed under the House bill, should strongly encourage investment spending. So, while there are a lot of moving parts and steps to be seen, one of the major things we are watching is the jockeying in Washington.

BFI: What is your outlook? Lind: We think the money market reform that took place last fall has created a great opportunity in both the institutional and high net worth separately managed account spaces. With changes to the dollar NAV and the potential gates and fees that have been put in place, we continue to see more interest in customized solutions to achieve clients' cash management needs. We think our track record of partnering with clients sets us up well for the foreseeable future.

Worldwide MMF Assets: China Jumps Again; US, France, Ireland Up in Q3

Dec 26 17

The Investment Company Institute released its "Worldwide Regulated Open-End Fund Assets and Flows Third Quarter 2017" late last 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 $389.6 billion, or 7.3%, in Q3'17, led by another huge jump in Chinese money funds and a big jump in U.S. MMFs. Money funds in France, Ireland and Luxembourg also rose. MMF assets worldwide have increased by $667.1 billion, or 13.2%, the past 12 months. Korea, Japan and Chinese Tapei (formerly labeled Taiwan) were the only countries showing noticeable decreases in Q3'17. We review the latest Worldwide MMF totals below.

ICI's release says, "Worldwide regulated open-end fund assets increased 5.3 percent to $47.37 trillion at the end of the third quarter of 2017, excluding funds of funds. Worldwide net cash inflow to all funds was $800 billion in the third quarter, compared with $609 billion of net inflows in the second quarter of 2017."

It explains, "The Investment Company Institute compiles worldwide open-end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations. The collection for the third quarter of 2017 contains statistics from 47 jurisdictions."

ICI tells us, "The growth rate of total regulated open-end fund assets reported in US dollars was increased by US dollar depreciation over the third quarter of 2017. For example, on a US dollar–denominated basis, fund assets in Europe increased by 6.1 percent in the third quarter, compared with an increase of 2.5 percent on a euro-denominated basis."

It explains, "On a US dollar–denominated basis, equity fund assets increased by 5.2 percent to $20.61 trillion at the end of the third quarter of 2017. Bond fund assets increased by 4.5 percent to $10.18 trillion in the third quarter. Balanced/mixed fund assets increased by 4.9 percent to $6.22 trillion in the third quarter, while money market fund assets increased by 7.3 percent globally to $5.72 trillion."

ICI writes, "At the end of the third quarter of 2017, 44 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 21 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 2017, 36 percent were in Europe, and 13 percent were in Africa and the Asia-Pacific regions."

The release adds, "Net sales of regulated open-end funds worldwide were $800 billion in the third quarter of 2017. Flows into equity funds worldwide were $141 billion in the third quarter, after experiencing $124 billion of net inflows in the second quarter of 2017. Globally, bond funds posted an inflow of $226 billion in the third quarter of 2017, after recording an inflow of $220 billion in the second quarter.... Money market funds worldwide experienced an inflow of $310 billion in the third quarter of 2017 after registering an inflow of $126 billion in the second quarter of 2017."

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 Q3'17 with $2.748 trillion, or 48.0% of all global MMF assets. U.S. MMF assets increased by $114.3 billion in Q3'17 and increased by $75.7B in the 12 months through Sept. 30, 2017. China remained in second place among countries overall and approached $1 trillion, as assets continued surging in the latest quarter and year. China saw assets increase $195.7 billion (up 26.0%) in Q3 to $948.7 billion (16.6% of worldwide assets). Over the last 12 months through Sept. 30, 2017, Chinese MMF assets have risen by $284.3 billion, or 42.8%.

Ireland remained third among these country rankings, ending Q3 with $560.4 billion (9.8% of worldwide assets). Dublin-based MMFs were up $21.3B for the quarter, or 3.9%, and up $65.0B, or 13.1%, over the last 12 months. France remained in fourth place with $434.1 billion (7.6% of worldwide assets). Assets here increased $34.1 billion, or 8.5%, in Q3, and were up $57.2 billion, or 15.2%, over one year. Luxembourg was in fifth place with $384.7B, or 6.7% of the total, up $14.1 billion in Q3 (3.8%) and up $30.1B (8.5%) over 12 months.

Japan remained in sixth place but fell by $2.2 billion to $109.7 billion, after jumping earlier this year. (We assume this was a reclassification of some sort.) Korea, now the 7th ranked country, saw MMF assets fall $2.9 billion, or -3.0%, to $94.1 billion (1.6% of total) in Q3 and fell $4.6 billion (-4.7%) for the year. Brazil remained in 8th place; assets increased $1.9 billion, or 2.3%, to $83.4 billion (1.5% of total assets) in Q3. They've increased $18.2 billion (27.9%) over the previous 12 months.

ICI's statistics show Mexico in 9th place with $59.9B, or 1.0% of total, up $3.4B (6.1%) in Q3 and up $8.0B (15.4%) for the year. India was in 10th place, increasing $1.0 billion, or 1.9%, to $54.4 billion (1.0% of total assets) in Q3 and increasing $8.1 billion (17.5%) over the previous 12 months. (Note also that 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 two years ago.)

The United Kingdom ($26.9B, up $1.6B and up $18.8B over the quarter and year, respectively) moved ahead of Chinese Tapei ($25.8B, down $1.8B and down $1.6B), Switzerland ($24.1B, up $1.2B and up $4.1B) moved ahead of South Africa ($23.2B, up $71M and up $1.8B), and Chile ($23.0B, up $1.4B and up $3.5B) ranked 11th through 15th, respectively. Sweden, Canada, Norway, Poland and Spain round out the 20 largest countries with money market mutual funds.

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. (See also our Dec. 19 News, "Dec. MFI International Holdings; Fitch on China's Yu'e Bao vs. JPM Govt," and our Dec. 20 Link of the Day, "WSJ: China Unhappy w/MMF Coverage.")

Invesco Global Liquidity Featured in F-I Strategy; MMF Assets Decline

Dec 22 17

Invesco published its most recent "Global Fixed Income Strategy," which includes a brief entitled, "Get to know Invesco Global Liquidity." The Q&A explains, "We speak with the Invesco Global Liquidity Team about the main tenets of their management process and how money market fund reform has impacted the money markets and the team's investment approach." It first asks, "What are the key tenets of managing global liquidity assets?" Marques Mercier, Head of Invesco's Govt MMFs, responds, "Safety, liquidity and yield. These are the three tenets of managing global liquidity. Our priorities are preserving principal, selecting liquid securities and generating competitive yield.... Our disciplined and well-defined fundamental research and investment processes have been tested and proven through multiple credit events and various economic cycles."

He explains, "We believe the great communication and collaboration between our portfolio managers and credit research analysts also drives our success. Because the money market asset class is governed by a 'same day' trading convention, the high velocity of trading and shareholder activity requires efficiency across all aspects of operational work flows, decision-making and strategy implementation. The ability to incorporate and execute our investment strategies while simultaneously understanding underlying market trends in a fast-paced environment requires well-coordinated communication among the team."

Invesco's piece also asks, "How has regulatory change affected your market?" Mercier says, "New regulations in the US money market industry have effectively homogenized our market, resulting in very little differentiation among funds. We believe a key differentiator for Invesco Global Liquidity has been our commitment to shareholders, the investment teams and the three key tenets that have helped us achieve our investment objectives and provide investment solutions to clients."

It queries, "What changes have you had to implement due to US money market fund reform?" Head of Credit & Muni MMFs Joe Madrid tells us, "The latest reforms, which became effective in October 2016, were very impactful for both investment managers and clients. The most significant reforms were the adoption of floating net asset values (FNAVs) and the potential imposition of liquidity fees and redemption gates for certain types of funds. The industry, as well as Invesco, invested significant financial resources and employee hours to implement and comply with these new rules. For Invesco Global Liquidity, these changes required coordination and teamwork among many different areas of Invesco, including fund accounting, compliance, information technology, the transfer agency, legal and operations, to name just a few."

He adds, "Fortunately, the transition out of prime funds into government funds was orderly, although it caused some distortions in both commercial paper and Libor rates that finally normalized in the first quarter of 2017. Assets are now weighted toward government funds, amid reduced size and number of surviving prime funds.... This shift has resulted in a smaller number of large prime fund managers and, therefore, the potential for greater fund concentration risk, in our view."

Madrid also comments, "As the dust settles, it appears that fund size has become more meaningful in the prime category. Managers have also become more conservative, maintaining excess liquidity over and above regulatory requirements to help reduce the potential need to impose fees and gates. This, along with improved relative value, has resulted in approximately USD60 billion returning to prime funds this year.... We believe many investors would like to diversify among more prime funds, as long as competing funds offer competitive yields and have sizable assets. We believe, going forward, successful managers will not only offer scale, but will offer multiple liquidity solutions, such as ultra-short duration strategies."

Invesco also asks, "Where are we on European Money Fund reform?" Senior Portfolio Manager Paul Mueller explains, "The European Commission proposed new money market fund regulations in September 2013.... The final rules were published in June 2017 and the compliance date for existing funds is January 2019. The regulation introduced new types of short-term money market funds: a public debt constant net asset value (CNAV) fund, a low volatility NAV (LVNAV) fund and a variable NAV (VNAV) fund. As in the US, European regulations have included fee and gates provisions. However unlike in the US, CNAV and LVNAV will have fees and gates, including CNAV public debt funds. Therefore, we would not expect a large flow out of prime LVNAV funds into public debt funds, as seen in the US. VNAV funds are not subject to fee and gate requirements. Industry expectation is that LVNAV will be the most likely replacement for current prime CNAV funds, although this will likely be influenced by country and type of investor."

Finally, Senior Analyst Jennifer Brown comments on Invesco's credit process, "The Global Liquidity Credit Research Team employs a robust, bottom-up approach to credit analysis that has been in place for many years. This process proved successful in navigating the global financial crisis and has changed very little in the years since.... US money market regulatory reform has had a limited impact on Global Liquidity's longstanding, market-tested credit process. Many of the new credit-quality and diversification requirements implemented by the SEC in October 2016 had already been practiced as part of Invesco's historically conservative approach."

In other news, money market mutual fund assets, which broke above $2.8 trillion 2 weeks ago, declined in the latest week. Assets of Retail MMFs broke above $1.0 trillion for the first time since April 2010 last week, and rose again this week. The Investment Company Institute's latest "Money Market Fund Assets" report shows that year-to-date, MMF assets have increased by $91 billion, or 3.3%. For 2017, money fund assets are still showing their biggest annual increase since 2009. ICI's numbers also show Prime money market fund assets fell for the first week in 10 weeks, but Tax Exempt MMFs rose. Prime MMFs have increased by $67.7 billion, or 17.5%, year-to-date.

ICI writes, "Total money market fund assets decreased by $21.15 billion to $2.82 trillion for the week ended Wednesday, December 20, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $16.04 billion and prime funds decreased by $5.67 billion. Tax-exempt money market funds increased by $560 million." Total Government MMF assets, which include Treasury funds too, stand at $2.233 trillion (79.2% of all money funds), while Total Prime MMFs stand at $455.5 billion (16.2%). Tax Exempt MMFs total $131.2 billion, or 4.7%.

They explain, "Assets of retail money market funds increased by $5.32 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $2.87 billion to $611.81 billion, prime money market fund assets increased by $1.87 billion to $268.95 billion, and tax-exempt fund assets increased by $575 million to $125.26 billion." Retail assets account for over a third of total assets, or 35.7%, and Government Retail assets make up 60.8% of all Retail MMFs.

ICI's release adds, "Assets of institutional money market funds decreased by $26.47 billion to $1.81 trillion. Among institutional funds, government money market fund assets decreased by $18.91 billion to $1.62 trillion, prime money market fund assets decreased by $7.55 billion to $186.59 billion, and tax-exempt fund assets decreased by $15 million to $5.89 billion." Institutional assets account for 64.3% of all MMF assets, with Government Inst assets making up 89.4% of all Institutional MMFs.

Dec. MFI Profile: Vanguard's Justin Schwartz Talks Muni Money Funds

Dec 21 17

This month, MFI interviews Justin Schwartz, Head of Municipal Money Markets at the Vanguard Group. Vanguard is the 2nd largest manager of tax-exempt MMFs (and MMFs overall) with over $29.4 billion ($285.2B overall). Schwartz manages the $17.4 billion Vanguard Municipal Money Market Fund, the largest fund in the tax-exempt space. We discuss supply, credit, liquidity, and several other topics below. (Note: This interview is reprinted from the December issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue. Subscriptions to MFI are $500 a year or $1,000 including the MFI XLS spreadsheet "complement.")

MFI: Give us a little background. Schwartz: Vanguard began running tax exempt money market funds in 1980 with the launch of the Vanguard Tax Exempt MMF. At the time we launched, interest rates were in the double digits so it was a much different environment than today. We followed up with the launch of our state funds; most of which [were added] in the late '80s, with our final product being launched in 1997. So we've been managing tax exempt money funds for coming up on four decades.

In terms of my background, I joined the fixed income group of Vanguard in 2005 as a trader with our long-term bond funds. Subsequently, I joined the short-term municipal team in 2008, [which was] a challenging time to start a career in the money market space. But the lessons learned during the financial crisis are invaluable with regards to shaping my perspective on the proper ways to manage risk and liquidity in money market portfolios. I was promoted to fund manager in 2010 and most recently became head of the municipal short desk in 2016 following Pam Tynan's retirement. Along the way I've managed several of our state specific money funds. I currently manage our Vanguard Municipal Money Market and also Vanguard Short Term Tax Exempt Fund. My team consists of three portfolio managers and six traders. In addition to the money funds, we manage all the cash investments for our muni bond funds.

MFI: What's your biggest priority? Schwartz: The biggest priority, currently and always, is managing the product and ensuring the safety and liquidity of all of our money funds. Beyond that, exploring and investing in technology is a key initiative. We're continually looking to improve our current investment tools or add new tools to ensure we are providing best in class risk management, performance and efficiency for the funds.

The fund lineup is pretty set.... We liquidated the Ohio money fund product earlier this year. That leaves us with our flagship national product in the Vanguard Municipal MMF, and our four state funds for clients in California, New York, New Jersey and Pennsylvania.... We've always been very retail focused.... We do manage one institutional municipal money fund, but that product is only available internally to our municipal funds. I don't foresee us looking to publicly offer an institutional municipal fund at this point.

MFI: What's your biggest challenge? Schwartz: I think one of the biggest challenges ... is really adjusting to the dynamics of a new buyer base in the short term municipal market. Fifty percent of assets left the municipal money fund industry in a pretty short timeframe last year. However, most of this money didn't actually leave the front end; it just changed investment vehicles.... Our experience is that SMA or corporate cash managers often behave very differently than money fund managers do for varying reasons, including not being subject to the same set of regulations. So really learning and adjusting to the way these new buyers operate ... has been something we've been highly focused on

MFI: What are you buying? Schwartz: In terms of securities, we're very well diversified.... New issue supply has certainly been a challenge in the muni money market space post financial crisis, but there's plenty of product to buy.... Not much has changed in terms of what types of products we're buying. The dominant product in the municipal money market space continues to be the variable rate demand note. Our portfolios consist of 70-80% between daily variable rates and weekly variable rates; that includes TOB positions. Outside of that, on the margins we've been investing in slightly higher percentages of commercial paper.

One thing that we have been avoiding and mainly just from a valuation standpoint is fixed rates securities. Until recently, we really didn't think that they offered attractive break-evens given our projected path for Fed rate hikes.... With tax reform on the horizon and ... supply that's been pulled forward into the market, this dynamic has changed. Rates have backed up to a point where we are comfortable adding more fixed-rate paper and extended the funds WAMs.

We're always well in excess of the 30% weekly liquidity threshold, and this holds true across the board in the muni money market industry. The excess liquidity is due to the nature of the securities available for purchase in our market. It would take a large, wholesale shift away from VRDNs by the issuer and underwriting communities to really see liquidity numbers come down much.

MFI: Who are the biggest issuers? Schwartz: The national portfolio is very well diversified, geographically.... There are certain states -- California, Texas, New York -- that are heavy issuers in the municipal market.... Obviously there's a handful of states and cities that have some credit challenges in the market.... `Given our mandate in the money funds to focus on high quality credits that represent minimal credit risk for the portfolio, these are credits that we've been out of for quite some time. At Vanguard, we have what I believe to be a best in class credit team that helps us steer clear of these issuers, well before they become an a potential problem.

MFI: What about regulatory changes? Schwartz: Bank regulations have had a huge impact on these products over the years. [There's] declining supply in the VRDN space.... We can certainly attribute quite a bit of the drop off in supply to Basel III and the liquidity coverage ratio.... It makes issuing a letter of credit or a standby bond purchase agreement much less attractive for a bank.... This results in increased costs for municipal issuers.... Another substitute for VRDNs has been floating rate notes, which are products that generally are being bought by short-term bond funds.... Finally with historically low long-term fixed rates, you've seen a lot of issuers opt to term out their debt and lock in attractive long term financing rates.

MFI: Any customer concerns of late? Schwartz: I think the best feedback mechanism is cash flows. So I'd say, from that angle, we're certainly seeing investors pick their heads up and notice the higher yields that the funds are offering. We've seen solid growth in our funds this year, about $1 billion dollars in new inflows.... Looking forward, I would expect money funds to continue to become even more of a compelling option. When you think about the backdrop of a dramatically flattening yield curve, combined with the potential of four additional Fed hikes through 2018, we are entering the environment where money funds thrive. Looking back over time, money funds tend to see some of their best cash flows in periods when the yield curve is flattening or is very flat. Importantly, money funds are getting to a point where the rates we're offering are increasingly competitive relative to banking products ... even inclusive of high yield saving accounts. So, given all these things, I think we'd expect to see significant growth in these funds over the next couple years.

MFI: What about fees and waivers? Schwartz: The fees on our products are consistent with where they've been over the long term.... There were certain points in time where we did have to limit our expenses in order to maintain a positive yield for the investors. But we've returned to our full expense charge at this point.... We continue to offer very competitive expenses, relative to the industry.

MFI: Any thoughts on last year's reforms? Schwartz: Stepping back and looking at reform as a whole, it was an enormous effort internally and within the industry to make all of the necessary changes to become compliant with the new regulations. We saw a very rapid change in the investor landscape in the short-term municipal space, but ultimately despite a brief dislocation the market quickly found an equilibrium. The market has adapted to the new landscape and I think that we're left with a set of money fund products that will be able to continue to reliably serve our clients cash management needs for many decades to come.

MFI: Talk about the short-term muni fund. Schwartz: We have a full suite of funds across the maturity spectrum here. We've offered the Short-Term Tax-Exempt Fund since 1977. So it's ... not a new product for us.... The fund invests in bonds with maturities out to five years and in normal environments we maintain a duration of just over a one-year. It's generally a very high credit quality fund [but] we do have the ability to invest down the credit quality spectrum. These levers provide us opportunities to add some additional return relative to 2a-7 funds.

MFI: Tell us about your outlook. Schwartz: I do expect the Fed to hike rates 25 basis points this month and likely 3 more times in 2018. This should lead to a significantly higher 7-day SIFMA index as it adjust to the new effective Fed funds rate. What we've seen over the last year or so, is that yields in the municipal market do take a few weeks to effectively adjust to any rate hike. In this regard we do tend to lag the taxable market a bit. But the market always works itself out. If municipal rates are too low relative to taxable, investors will move their cash to the higher yielding option until the relative rates normalize.

As we look forward to the rest of this year and into next year, we expect [the funds to be] more attractive to our shareholders as the Fed continues to raise rates. It's rewarding as a fund manager to be able to offer a more attractive product in terms of yield. [But] as we found out from many years of offering very little yield, our shareholders [also] value very much the safety of principle and liquidity of the product offering.

U.S. SEC MMF Stats: Prime Rebound Streak 11 Mos; Assets, Yields Jump

Dec 20 17

The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary late Monday. It shows that total money fund assets were up sharply ($55.4 billion in November to $3.080 trillion, as Prime funds increased for the 11th month in a row. Prime MMF assets rose by $14.3 billion (after gaining $1.0 billion in October, $22.8 billion in September, and $16.8 billion in August) to $679.8 billion. Government money funds increased by $40.8 billion, while Tax Exempt MMFs rose by $0.2 billion. Gross yields moved higher for Prime, Government & Treasury, and Tax Exempt funds. 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. We review their latest numbers below.

Overall assets increased by $55.4 billion in November, after decreasing by $9.5 billion in October. MMFs increased by $46.2 billion in September, $71.2 billion in August, and $19.9 billion in July, but decreased by $23.7 in June and increased by $3.8 billion in May. Over the past 12 months through 11/30/17, total MMF assets have increased by $105.4 billion, or 3.5%. (Note that the SEC's series includes a number of private and internal money funds not reported to ICI or others, which Crane Data now also tracks.)

Of the $3.080 trillion in assets, $679.8 billion was in Prime funds, which increased by $1.0 billion in October. Prime MMFs increased by $14.3 billion in November, $22.8 billion in September, $16.8 billion in August, $9.5 billion in July, and $4.0 billion in June. Prime funds represented 22.1% of total assets at the end of November. They've increased by $129.4 billion, or 23.5%, YTD. They've increased by $113.9 billion the past 12 months, or 20.1%, but they've decreased by $1.044 trillion over the past 2 years.

Government & Treasury funds totaled $2.268 billion, or 73.6% of assets,. They were up $40.8 billion in November, but they were down $11.2 billion in October. Govt MMFs increased by $24.5 billion in September, $56.8 billion in August and $8.0 billion in July, but were down $26.9 in June. Govt & Treas MMFs are down $6.2 billion over 12 months (-0.3%). Tax Exempt Funds increased $0.2B to $132.9 billion, or 4.3% of all assets. The number of money funds is 382, down 17 funds from last month and down 33 from 11/30/16.

Yields were up noticeably in November for Taxable and Tax Exempt MMFs. The Weighted Average Gross 7-Day Yield for Prime Funds on November 30 was 1.32%, up 3 basis points from the previous month and up 0.59% from November 2016. Gross yields increased to 1.14% for Government/Treasury funds, up 0.04% from the previous month, and more than double the 0.44% of November 2016. Tax Exempt Weighted Average Gross Yields were up 4 bps in November to 1.00%; they've increased by 38 bps since 11/30/16.

The Weighted Average Net Prime Yield was 1.12%, up 0.03% from the previous month and up 0.63% since 11/30/16. The Weighted Average Prime Expense Ratio was 0.20% in November (the same level as the previous month). Prime expense ratios are down by four bps over the past year. (Note: These averages are asset-weighted.)

WALs and WAMs were higher in November, up across all categories. The average Weighted Average Life, or WAL, was 64.5 days (up 2.2 days from last month) for Prime funds, 85.2 days (up 3.1 days) for Government/Treasury funds, and 27.1 days (up 1.0 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 28.0 days (up 1.2 days from the previous month) for Prime funds, 30.5 days (up 0.4 days) for Govt/Treasury funds, and 24.8 days (up 1.2 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 32.3% in November (down 0.9% from previous month). Total Weekly Liquidity was 50.7% (down 0.2%) for Prime MMFs.

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $93.1 billion, followed by France with $65.7 billion, the U.S. with $65.0 billion, Japan with $54.1B, then Sweden ($42.5B), Australia/New Zealand ($42.4B), Germany ($33.1B) and the UK ($32.9B). The Netherlands ($29.2B) and Switzerland ($15.8B) rounded out the top 10.

The gainers among Prime MMF bank related securities for the month included: Canada (up $14.6B), Germany (up $4.9B), the US (up $4.2B), Japan (up $4.1B), France (up $2.3B), the UK (up $1.6B), and Aust/NZ (up $1.5B). The biggest drops came from the Netherlands (down $5.5B), Sweden (down $4.4B), Belgium (down $1.5B), Switzerland (down $910M), Other (down $323M), and Norway (down $140 million). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $243.5B (down $4.3B from last month), while the Eurozone subset had $141.7B billion (up $415M). The Americas had $158.7 billion (up $18.7 B), while Asian and Pacific had $109.9 billion (up $6.7B).

Of the $678.3 billion in Prime MMF Portfolios as of Nov. 30, $283.6B (41.8%) was in CDs (up from $279.1B), $132.1B (19.5%) was in Government securities (including direct and repo), down from $137.3B, $95.7B (14.1%) was held in Non-Financial CP and Other Short Term Securities (up from $95.2B), $126.7B (18.7%) was in Financial Company CP (up from $119.3B), and $40.2B (5.9%) was in ABCP (up from $38.9B).

The Proportion of Non-Government Securities in All Taxable Funds was 18.7% at month-end, up from 18.2% the previous month. All MMF Repo with Federal Reserve plunged (again) to $96.2B in November from $164.4B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 39.1% were in maturities of 60 days and over (up from 37.1%), while 10.4% were in maturities of 180 days and over (up from 9.7%).

Dec. MFI International Holdings; Fitch on China's Yu'e Bao vs. JPM Govt

Dec 19 17

Crane Data's MFI International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), up $100 billion year-to-date to $832 billion as of 12/15/17. U.S. Dollar (USD) funds (152) account for over half ($430 billion, or 51.7%) of the total, while Euro (EUR) money funds (93) total E95 billion and Pound Sterling (GBP) funds (106) total L218. USD funds are up $32 billion, YTD, while Euro funds are flat (up E0 billion) and GBP funds are up L28B. USD MMFs yield 1.09% (7-Day) on average (12/15/17), up 93 basis points from 12/31/16. EUR MMFs yield -0.50% on average, down 31 basis points YTD, while GBP MMFs yield 0.26%, down 2 bps YTD. We review the latest MFI International Portfolio Holdings and also quote from a recent article on China's Yu'e Bao, below.

Crane's latest MFI International Money Fund Portfolio Holdings, with data (as of 11/30/17), shows that European-domiciled US Dollar MMFs, on average, consist of 17% in Treasury securities, 25% in Commercial Paper (CP), 22% in Certificates of Deposit (CDs), 19% in Other securities (primarily Time Deposits), 14% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 30.3% of their portfolios maturing Overnight, 14.0% maturing in 2-7 Days, 24.1% maturing in 8-30 Days, 11.0% maturing in 31-60 Days, 8.3% maturing in 61-90 Days, 8.8% maturing in 91-180 Days, and 3.6% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (26.0%), France (15.9%), Japan (9.5%), Canada (9.0%), Sweden (6.1%), The Netherlands (5.7%), Australia (5.1%), Germany (5.0%), United Kingdom (4.3%), Singapore (3.4%), Belgium (2.4%), and China (2.4%).

The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $83.9 billion (16.9% of total assets), BNP Paribas with $20.1B (4.1%), Societe Generale with $15.2B (3.1%), Credit Agricole with $13.3B (2.7%), Mitsubishi UFJ Financial Group Inc with $11.7B (2.4%), Toronto-Dominion Bank with $11.5B (2.3%), RBC with $11.1B (2.2%), Wells Fargo with $10.2B (2.1%), Mizuho Corporate Bank Ltd with $9.2B (1.9%), Credit Mutuel with $8.0B (1.6%), Svenska Handelsbanken with $7.8B (1.6%), Sumitomo Mitsui Banking Co with $7.8B (1.6%), Natixis with $7.7B (1.5%), Barclays PLC with $7.6B (1.5%), Swedbank AB with $7.5B (1.5%), Skandinaviska Enskilda Banken AB with $7.2B (1.5%), DnB NOR Bank ASA with $7.1B (1.4%), ING Bank with $7.0B (1.4%), Nordea Bank with $6.8B (1.4%), and National Australia Bank with $6.8B (1.4%).

Euro MMFs tracked by Crane Data contain, on average 42% in CP, 23% in CDs, 23% in Other (primarily Time Deposits), 10% in Repo, 1% in Treasuries and 1% in Agency securities. EUR funds have on average 23.9% of their portfolios maturing Overnight, 9.4% maturing in 2-7 Days, 13.1% maturing in 8-30 Days, 17.1% maturing in 31-60 Days, 18.1% maturing in 61-90 Days, 14.8% maturing in 91-180 Days and 3.6% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (30.3%), Japan (13.6%), US (11.0%), Sweden (7.7%), The Netherlands (7.4%), Belgium (6.6%), Switzerland (5.2%), Germany (4.8%), the United Kingdom (3.8%), and China (3.1%).

The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.7B (5.8%), Credit Agricole with E4.1B (4.2%), Svenska Handelsbanken with E3.7B (3.8%), Nordea Bank with E3.5B (3.6%), Rabobank with E3.5B (3.5%), Credit Mutuel with E3.4B (3.4%), Societe Generale with E3.2B (3.3%), KBC Group NV with E3.0B (3.1%), Mizuho Corporate Bank Ltd with E3.0B (3.0%), UBS AG with E3.0B (3.0%), Sumitomo Mitsui Banking Co with E2.9B (3.0%), Agence Central de Organismes de Securite Sociale with E2.8B (2.8%), BPCE SA with E2.6B (2.7%), Mitsubishi UFJ Financial Group Inc with E2.6B (2.6%), and Dexia Group with E2.5B (2.5%).

The GBP funds tracked by MFI International contain, on average (as of 11/30/17): 41% in CDs, 24% in Other (Time Deposits), 20% in CP, 11% in Repo, 3% in Treasury, and 1% in Agency. Sterling funds have on average 27.0% of their portfolios maturing Overnight, 6.1% maturing in 2-7 Days, 9.5% maturing in 8-30 Days, 17.5% maturing in 31-60 Days, 19.8% maturing in 61-90 Days, 16.6% maturing in 91-180 Days, and 3.5% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (20.3%), Japan (18.2%), United Kingdom (14.4%), The Netherlands (7.2%), Germany (6.3%), Canada (5.7%), the US (5.2%), Sweden (4.8%), Australia (3.8%), and China (2.8%).

The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L10.3B (6.2%), Credit Agricole with L7.3B (4.4%), BPCE SA with L7.2B (4.3%), Mitsubishi UFJ Financial Group Inc. with L7.2B (4.3%), BNP Paribas with L6.5B (3.9%), Sumitomo Mitsui Banking Co. with L6.3B (3.8%), Sumitomo Mitsui Trust Bank with L6.2B (3.7%), Rabobank with L6.0B (3.6%), Mizuho Corporate Bank Ltd with L5.2B (3.1%), Credit Mutuel with L5.1B (3.1%), Bank of America with L5.1B (3.0%), DZ Bank AG with L4.7B (2.8%), Nordea Bank with L4.4B (2.6%), Toronto Dominion Bank with L4.3B (2.6%), and ING Bank with L3.5B (2.1%).

In other non-U.S. money fund news, the South China Morning Post writes "China's giant Yu'e Bao money market fund riskier than US rival, Fitch says." It explains, "Chinese money market fund Yu'e Bao, the world's largest with assets of some 1.56 trillion yuan (US$233 billion), has a weaker credit quality and liquidity than its closest competitor run by US bank JPMorgan, according to a report by ratings agency Fitch."

The article continues, "Yu'e Bao, which is managed by Tianhong Asset Management and distributed by Alibaba Group Holding's online payments affiliate Ant Financial, attracted much fanfare during its early years when it offered investors annualised returns of over 6 per cent, and has grown to represent a quarter of the entire money market fund sector in China. The fund was set up in part to manage the money transacted through Alibaba's e-commerce platforms, and its size dwarfs JPMorgan's US government fund, which has about US$140 billion of assets under management."

It explains, "But Fitch noted that 87 per cent of Yu'e Bao's underlying assets were negotiable time deposits with domestic Chinese banks, whereas the JPMorgan fund invested only in AAA-rated US Treasuries and government securities, or in repos backed by those bonds." The piece quotes Fitch analyst Huang Li, "The liquidity of Yu'e Bao is weaker than its US counterpart, because these banking deposit instruments are bilateral contracts and hence do not have a secondary market.... Also, Yu'e Bao's assets are longer dated, as the weighted average maturity of its assets is 60 days, compared with just 17 days for the JPMorgan money market fund."

Finally, the South China Morning Post adds, "However, Fitch also noted that Yu'e Bao's investor base is large and diversified, with 325 million investors, making large-scale redemptions an unlikely event. In contrast, the JPMorgan fund is predominately held by institutional investors, meaning its investor base is more concentrated.... Huang said recent new money market fund regulations introduced by China's securities regulator, which became effective in October, would be positive for the industry's development."

See also, The Wall Street Journal's "Tax Plan Strikes at Tech Giants' Foreign Profits," which says, "While most U.S. businesses would pay lower taxes under congressional Republicans' proposed tax overhaul, some of the world's richest technology companies might actually see their rates rise. A window into how Microsoft Corp. currently pays a disproportionately larger portion of its taxes overseas shows how the legislation could offset the benefits of returning cash home."

The piece comments, "Microsoft could bring cash home after the tax law is passed without much penalty beyond the initial one-time tax on accumulated foreign profits. The company keeps 95% of its cash, or $132 billion, outside of the U.S., a larger offshore cash pile than any company except Apple Inc., which holds 94% of its cash, or about $252 billion, overseas."

Grant's on Income Deficit, Money Funds, Deposits; ICI Holdings Update

Dec 18 17

Grant's Interest Rate Observer mentioned money funds in a brief last week entitled, "Income Deficit." They write, "Animal spirits, we have. Employment, ditto. But interest income? We have not. According to the Bureau of Economic Analysis, households suffered a 23% drop in 'monetary interest' between 2007 and 2016. In real terms, it plunged by a third. Now unfolding is a survey of the brightening prospects for income-seekers.... In an environment of rising money-market interest rates, where might the conservative saver turn? In preview, we judge that there are worse alternatives than money-market mutual funds and floating-rate notes." We quote from some of the rest of the Grant's piece, and we also review the ICI's latest update on MMF Holdings below.

After discussing rising rates, the Grant's article comments, "Which brings us to money-market mutual funds, investors in short-term, investment-grade paper. Money funds are supposed to own safe, low-yielding, short-term, liquid assets -- and, after a series of post-2008 regulatory clampdowns, they assuredly do. Peter Crane, the president of Crane Data, LLC, tells [Evan] Lorenz that, as a result of these rules, any rate increases will quickly flow through to money-fund yields."

It explains, "The yields aren't much. Funds deliver 0.93% on average, according to the Crane 100 Money Fund Index, up from 0.13% and 0.43% at year-end 2015 and 2016. The typical government-focused retail money fund holds agency debt (48% of the average portfolio), Treasurys (20.1%) and repurchase agreements (31.6%), according to Crane Data. Examples of the type include the JPMorgan U.S. Government Money Market Fund (OGVXX; $144.2 billion in assets) and Fidelity Government Cash Reserves (FDRXX; $135.1 billion). They are priced to yield 0.97% and 0.82%, respectively."

Grant's continues, "The typical 'prime' retail fund -- i.e., not 100% government-backstopped -- invests in certificates of deposit (33.2% of the typical portfolio), financial-company commercial paper (21.2%), Treasurys (10.9%), non-negotiable time deposits (8.2% ) and asset-backed commercial paper (8.1%). The biggest counterparties for money funds are companies situated in the United States (30% of the average portfolio), Canada (16.3%), France (10%) and Japan (9.6%). The Vanguard Prime Money Market Fund (VMMXX), with $96.5 billion in assets, is the largest nongovernment money fund and yields 1.24%."

Finally, they add, "An interesting sidelight to the money-fund story is the growing pressure on bank net interest margins. 'We haven't seen the big shoe drop yet, which likely is going to be bank deposit money,' says Crane. 'Bank deposit totals show signs of peaking. They've gone down the past couple months, but it is not clear that bank deposits are declining yet. But there are pretty good signs that they will start to very soon. Primarily because of the $9.1 trillion in bank deposits, about half of that is uninsured. It's big institutional blocks, and a lot of that is sensitive to rates.'"

In other news, the Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of Nov. 30, 2017) Thursday. This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See too Crane Data's Dec. 12 News, "Dec. Money Fund Portfolio Holdings: Fed Repo Down Again; CP, CDs Up.")

The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in November, prime money market funds held 26.1 percent of their portfolios in daily liquid assets and 45.6 percent in weekly liquid assets, while government money market funds held 55.7 percent of their portfolios in daily liquid assets and 74.8 percent in weekly liquid assets." Prime DLA increased from 23.7% last month and Prime WLA decreased from 43.3% last month. Govt MMFs' DLA decreased from 57.4% last month and Govt WLA decreased from 77.3% last month.

ICI explains, "At the end of November, prime funds had a weighted average maturity (WAM) of 30 days and a weighted average life (WAL) of 73 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 30 days and a WAL of 86 days." Prime WAMs remained the same from the prior month, and WALs were up one day. Govt WAMs were unchanged from October and Govt WALs increased by 4 days from last month.

Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $169.04 billion in October to $177.94 billion in November. Government money market funds’ holdings attributable to the Americas declined from $1,720.51 billion in October to $1,697.26 billion in November."

The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $177.9 billion, or 39.0%; Asia and Pacific at $93.0 billion, or 20.4%; Europe at $181.0 billion, or 39.7%; and, Other (including Supranational) at $4.5 billion, or 1.1%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.697 trillion, or 76.7%; Asia and Pacific at $106.0 billion, or 4.8%; and Europe at $401.6 billion, or 18.2%.

Also, a statement says, "The U.S. Office of Financial Research has updated the Money Market Fund Monitor with data as of November 30, 2017. The monitor can be found here: https://www.financialresearch.gov/money-market-funds/. The OFR MMF Monitor is designed to track the investment portfolios of money market funds by funds asset types, investments in different countries, counterparties, and other characteristics. Users can view trends and developments across the MMF industry. Data are downloadable and displayed in six interactive charts."

Dec. BFI: BlackRock Blasts BB Agg, Neuberger's Lind; WSJ on NAV Bill

Dec 15 17

The December issue of our Bond Fund Intelligence newsletter was sent to subscribers yesterday. The latest issue features the lead story, "BlackRock Blog Blasts Bloomberg Barclays Aggregate Index," which reviews a piece by iShares' Martin Small on how benchmarks can be deceiving, and the fund "profile" piece, "Neuberger Berman's Lind & McGinnis: Customization Key," which discusses NB's focus on customized separate accounts on both the taxable and tax-exempt side. BFI also recaps the latest Bond Fund News, including the briefs: Yields Up, Returns Down in Nov., IBD Says 'Bond Funds Declined', and Vanguard Expands Active F-I Lineup. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the December issue below, and we also quote from a WSJ article on legislation to overturn the floating NAV. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence, which is $500 a year, and BFI XLS data spreadsheet, which is $1,000. Watch for our next Bond Fund Portfolio Holdings data too late next week.)

Our lead "BlackRock Blog Blasts" story says, "Martin Small, Head of U.S. iShares at BlackRock, recently wrote a blog entry entitled, 'Why your bond fund and its index may not be a good fit.' In it, he discusses why many bond fund managers are benchmarking to an inappropriate index and beating it handily by taking more risk. The piece's introduction tells us, "Most actively managed core bond funds are measured against the Aggregate Index, even though their holdings often sit outside the benchmark. Martin explains why this may be confusing for investors."

Small writes, "In political parlance, 'gerrymandering' is when the boundaries of an electoral constituency are manipulated to favor a particular result. The practice has long been controversial, prompting intervention from the U.S. Supreme Court. But the High Court has never weighed in on 'gerrymandering' in the largest active bond fund segment: the over $1 trillion of assets captured by the Morningstar US Intermediate-Term bond (ITB) category." (Note: Crane Data's Intm-Term category totals $911 billion, by far our largest segment.)

The BlackRock blog continues, "The Bloomberg Barclays U.S. Aggregate Bond Index -- commonly referred to as the Aggregate Index -- is the benchmark against which over 90% of active ITB mutual fund performance is evaluated. Investors have typically used these funds at the core of their portfolios to pursue broad, diversified exposure to the U.S. market. Over time, however, the Aggregate Index has gradually become a less apt mirror of the investment universe of the total investable U.S. bond market."

Our "profile" interview says, "This month, BFI interviews Neuberger Berman Senior Portfolio Manager & MD Kristian Lind and PM & VP Matt McGinnis, who manage tax-exempt and taxable short-term strategies, respectively. Lind oversees the firm's Municipal Short Duration portfolios, while McGinnis is part of a team that runs taxable Enhanced Cash and Short Duration separate accounts, as well as the Neuberger Berman taxable Short Duration Bond Fund. Our discussion follows."

BFI asks, "Can you give us a little background?" Lind answers, "Our fixed income team has a long history managing cash management and short duration mandates in a variety of vehicles. Many team members have over 20 years of experience partnering with clients on customized short duration and cash management solutions. Some of our largest mandates date back to the mid 1980's.... I've been with Neuberger Berman since 2005 and Matt has been with us since 2008."

On their strategies, McGinnis comments, "The short duration space is a significant focus for us at Neuberger Berman. As a firm, we currently manage $29.6 billion in various short duration fixed income strategies across Floating Rate Loans, High Yield, Emerging Markets, Municipals and Investment Grade debt. We manage $1.7 billion in Municipal Short Duration assets and $4.7 billion in taxable Investment Grade Short Duration assets. While we do offer a taxable short duration bond mutual fund, a large focus of ours is partnering with our clients to create customized separately managed accounts tailored to our client's individual needs." (Watch for the full profile later this month.)

Our Bond Fund News includes a brief entitled, "Yields Up, Returns Down in Nov," which says, "Yields jumped and returns were lower across our Crane BFI Indexes last month. The BFI Total Index averaged a 1-month return of -0.12% and a gain of 4.11% over 12 months. The BFI 100 returned -0.08% in Nov. and 4.29% over 1 year. The BFI Conservative Ultra-Short Index returned 0.08% over 1 month and 1.29% over 1-year; the BFI Ultra-Short Index averaged 0.03% in November and 1.63% over 12 mos. Our BFI Short-Term Index returned -0.14% and 1.97%, and our BFI Intm-Term Index returned -0.17% and 3.57% for the month and year. The BFI High Yield Index fell 0.15% in Nov. but rose 7.26% for 1 year. (See p. 6 or BFI XLS for more.)"

The new issue also includes a News brief entitled, "IBD Says 'Bond Funds Declined In November: Turning Of The Tide?'" The article comments, "With a Federal Reserve interest rate hike all but priced in by fixed-income markets this week and short-term rates on a steady rise, November may well be the month bond investors saw the tide turning on forever-low rates.... With few exceptions, most bond mutual funds fell. Short-intermediate investment grade debt funds posted the biggest decline, shedding 0.26% and trimming their yearly gains to 1.72%. Core bond funds also underperformed, off 0.15% for the month, for a year-to-date gain of 3.15%. Riskier assets were not rewarded either.... Municipal bond funds lost 0.37% on average, with a [YTD] gain of 3.43%."

Finally, the December issue of BFI includes the sidebar, "Bond Fund Inflows Slow." It tells us, "ICI's latest 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' with data as of Nov. 29 tells us, 'Bond funds had estimated inflows of $6.16 billion for the week, compared to estimated inflows of $6.54 billion during the previous week. Taxable bond funds saw estimated inflows of $6.47 billion, and municipal bond funds had estimated outflows of $312 million.' Over the past 5 weeks through 11/29, bond funds and ETFs have seen almost $26.5 billion in inflows vs. $49.3 billion in inflows over the prior 5-weeks."

In other news, The Wall Street Journal writes, "Bringing Back the Money-Fund Buck?" It says, "A fight is brewing over whether to reverse rules meant to prevent another crisis-triggered exodus from a corner of the mutual-fund industry, the latest front in a broad push to undo post crisis regulations. A pending House bill would overturn a 2014 Securities and Exchange Commission requirement that a subsection of money-market mutual funds -- those whose shares are held by institutions and that purchase corporate debt or municipal bonds -- float in value like other mutual funds. That would allow the funds to return to offering investments with stable, $1 share prices."

The article explains, "Legislation backed by Federated Investors Inc., a midsize, Pittsburgh-based company with nearly 70% of its assets in money funds, has racked up an unusual amount of bipartisan support, fueled by lobbying from municipal officers and treasurers who say the rule has increased short-term borrowing costs and crimped investment options. Federated says the bill, by Rep. Keith Rothfus (R., Pa.), will 'enhance the utility and availability of money market funds.'"

It adds, "Big asset-management firms such as Vanguard Group and BlackRock Inc., which argue the industry has already spent millions of dollars to comply with the SEC's requirements, have lined up against the legislation. Opponents also say they are loath to relive a bruising fight over the structure of the funds that lasted several years, according to people familiar with their thinking. Representatives for Vanguard and BlackRock declined to comment. The House Financial Services Committee could act on the legislation in early 2018." (See also our Dec. 12 Link of the Day, "BofA's Cabana on Bill H.R.2319" and our Nov. 17 News, "AFP Comments on Stable NAV Bill.")

Fed Hikes Rates Again to 1.25-1.5 Percent; Wells Funds, BOJ Research

Dec 14 17

The Federal Reserve raised interest rates yesterday for the third time in 2017 and the fifth time in 3 years. The Fed continues to expect 3 more hikes in 2018, and money market fund yields, which have been inching up in anticipation of the hike, should move higher in coming weeks. The Federal Reserve's 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 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation." We review the Fed's latest move, as well as research pieces from Wells Fargo Funds and the Bank of Japan, below.

The Fed's statement also tells us, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant 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."

Wells Fargo Asset Management's "Portfolio Manager Commentary" says, "Yields on short-term U.S. government securities moved higher in November, reflecting growing expectations for positive developments from the two main drivers of rates: Federal Reserve (Fed) policy and the supply/demand equation. On the Fed front, consistently solid economic data, including stabilizing prices (suggesting inflation may be ready for a slow grind higher), has combined with unwavering Fed messaging to not only make a December rate hike a near certainty but also put further rate hikes in 2018 firmly on the table. The Treasury bill (T-bill) market's embrace of the likely 0.25% rate hike in mid-December is reflected in the steady march higher in 3-month T-bill yields as the Fed meeting approaches. [T]erm premia, as measured by the excess of the T-bill yield over the then-current rate on the Fed's reverse repurchase agreement (RRP) program—currently at 1.00% -- have increased earlier in the weeks leading into the potential rate hike than in the four previous tightening moves in this cycle, dating back to December 2015."

Wells explains, "The T-bill market appreciating the approaching hike to a greater degree than previous hikes could be due to several factors. First, it could reflect growing Fed credibility, a belief that the Fed will do what it has suggested it will, bolstered by economic data that has continued to be solid. Second, bringing us back to the supply/demand market dynamic, it may reflect the accumulated weight of a steady increase in T-bill issuance throughout the fall. The total amount of T-bills outstanding rose $252 billion from June 30, 2017, to the end of November 2017, providing a supply shock that, all other things being equal, may push yields higher."

They add, "A good indication of the impact of the larger supply on the market has been a reduction in the amount of money placed with the Fed in its RRP program.... Over the period from the effective date of the change in money market fund (MMF) regulation on October 14, 2016, through October 31, 2017, the average daily RRP take-up was $161 billion. That regulatory change resulted in about $1 trillion moving from prime to government money market funds, adding significant demand to the market for short-maturity government securities, including the RRP. For the month of November 2016, the daily RRP average fell to just $52 billion. It seems likely that higher T-bill yields enticed investors to move out of the RRP into T-bills or other similarly priced government securities, such as agency discount notes."

The monthly update also says, "The benign credit environment in risk assets has put the focus of prime funds squarely on the effects of Fed policy, especially with a sharply curtailed supply pipeline. Last month, we mentioned that we anticipated that LIBOR (London Interbank Offered Rate) would reset higher by about 2 basis points (bps; 100 bps equal 1.00%) a week as we approach the Federal Open Market Committee (FOMC) meeting in mid-December. And indeed, three-month LIBOR not only has methodically marched higher but also has exceeded our expectations, increasing 11 bps during November. At this pace, it may reach just under 1.55% at the time of the predicted 25-bp tightening at the December 14 Fed meeting. That may place three-month LIBOR just above the new upper band of the Fed target range of 1.25% to 1.50%. (Fed RRP is expected to be at the lower band of 1.25%.)"

Wells adds, "For prime money market funds, the gradual pace of Fed tightening has enabled managers of those assets to opportunistically extend weighted average maturities (WAMs) and weighted average lives (WALs) to take advantage of what yield pickup there is from extension out the curve. The average maturity for institutional prime funds has hovered in the mid-20s for the past several months. Our funds' WAMs have been slightly lower at around 20 days recently (with WALs closer to 55 days) in an effort to maintain increased amounts of liquidity and to be in a position to more quickly capture the effects of future rate hikes. In this environment, we continue to construct high-quality portfolios that are focused on liquidity while opportunistically purchasing floating-rate notes as we seek to incrementally increase yields."

Finally, the Bank of Japan mentions money funds and sources Crane Data in its latest "Financial Systems Report." (See page 45.) On the "Foreign currency funding environment," they comment, "In FX and currency swap markets, U.S. dollar funding premiums, which had been on an upward trend since around 2015, peaked at the end of 2016 and have declined since then (Chart II-2-2). Moreover, in the market for dollar-denominated CDs and CP, the issuance of those purchased by Prime money market funds (MMFs) had decreased substantially in the wake of the MMF reform in October 2016; however, the issuance environment has been improving as direct purchases by ultimate investors have gradually increased (Chart IV-3-7)."

The BOJ explains, "However, against the background of the difference in growth rates and yields between the Japanese and overseas economies, the appetite of Japanese financial institutions and institutional investors for investment in overseas assets remains strong. It is therefore likely that dollar funding premiums through FX and currency swaps will tend to experience upward pressure under a stress situation. Major banks, which have a wider range of dollar funding means, have accumulated client-related deposits in order to ensure dollar funding stability and have avoided utilizing comparatively expensive FX and currency swaps as a funding tool, especially since the start of 2017 (Chart IV-3-8). However, the amount of dollar funding through FX and currency swaps by Japanese financial institutions overall is still on an uptrend. This mainly reflects the increase in funding demand by regional banks and insurance companies, which do not have a wide range of options to secure dollar funding compared to major banks."

They add, "Meanwhile, the proportion of loans denominated in local currencies continues to increase, especially in the Asian region (Chart IV-3-9). While loan-to-deposit ratios have generally declined reflecting the fact that deposits have increased at a faster pace than loans, banks' dependence on market funding remains high in several currencies (Chart IV-3-10). Because liquidity in local currency funding markets is relatively low, financial institutions need to continue to make efforts to bolster stable funding bases through, for example, making committed lines with local banks and utilizing medium- and long-term funding means (swaps, capital, etc.)."

Fidelity on Prime Fund Considerations: Spreads, NAVs, Return, Liquidity

Dec 13 17

Fidelity Investments published, "Prime Fund Considerations in a VNAV World," a white paper that reviews the "yield differential between prime and government funds, net asset value (NAV) volatility, total rate of return perspective, size of prime money market funds, and the importance of liquidity risk management." The piece explains, "Money market regulatory changes have made the liquidity management environment more complicated for corporate treasurers. This paper examines several important prime money market fund characteristics that institutional investors should consider when contemplating a move back to prime funds in an effort to optimize their cash segmentation strategy."

The paper tells us, "On October 14, 2016, the money market industry pivoted to accommodate a new regulatory landscape that brought about variable net asset values (VNAV) for institutional prime money market funds (MMFs). At that time, many institutional investors demonstrated their preference for a constant net asset value (CNAV) by reallocating their investments from prime funds to government funds that retained the CNAV and were not subject to the potential liquidity fees and/or redemption gates.... Now that the one-year anniversary of the new regulations has passed, many institutional investors are reviewing their cash segmentation strategy to determine the appropriateness of prime money market funds amongst a broader set of potential investment solutions. These alternatives include bank deposits, government MMFs, and other solutions, such as ultra-short bond funds, separately managed accounts, and private placements."

It says, "Many institutional prime investors indicated their desire to remain in prime funds through the October 14, 2016, conversion deadline. However, as the deadline approached, most prime investors were unwilling to underwrite the operational risk and the uncertainty of future NAV volatility for the diminishing yield advantage of prime funds.... Utilizing the 7-day yield for institutional prime and government money market funds as reported below by iMoneyNet, one can see that the average yield differential has increased dramatically from both the pre-conversion and long-term average to reach in excess of 25 basis points."

Fidelity writes, "In our discussion with institutional clients, there does not appear to be any magic yield differential that could lead to a massive transition back to prime funds. In fact, some clients have indicated that no amount of yield pickup may entice them to leave the comfort of the $1.00 CNAV of government money market funds and subject their liquidity to potential fees and/or redemption gates. However, the majority of clients have recognized that the potential to increase returns by more than 25 basis points is worthy of further analysis.... Assets under management in institutional prime money market funds have increased by almost 46% since the beginning of the year ... indicating that for some investors the yield advantage is too much to pass up."

They continue, "One concern for institutional prime investors is a fluctuating NAV, which could lead to the redemption NAV being higher/lower than the subscription NAV, resulting in a gain/loss. Fidelity examined the historical 4-decimal daily market value NAV for Fidelity Investments Prime Money Market (FIPXX) from January 2011 through October 2017. The NAV was unchanged from the prior day 93.4% of the time. Since the industry conversion deadline to a VNAV on October 14, 2016, FIPXX has been unchanged 96.8% of the time and has ranged from $1.0003 to $1.0005. This recent period includes three increases of one-quarter percentage point each to the federal funds target rate range, and reinforced the fact that modest changes in the federal funds target rate may only have a minimal impact on the money market fund's NAV."

Fidelity also comments, "The VNAV aspect of institutional prime money market funds requires investors to shift from their historical money market equivalent yield calculation to a total rate of return perspective. While investors may welcome investment gains from NAV appreciation, they would prefer not to realize an investment loss as a result of NAV declines. As mentioned previously, the NAV for institutional prime funds has thus far exhibited limited volatility in terms of both frequency and magnitude of variability."

They state, "The VNAV construct of institutional prime money market funds may lead to investors realizing gains and/or losses due to the variable NAV and the typical frequency of trading in and out of the fund. Investors need to understand the tax implications of such activity and should consult their tax department for appropriate advice."

The update tells us, "While it was not uncommon to see institutional prime portfolios with assets in excess of $40 billion and more than a dozen larger than $10 billion prior to the conversion, there are only 6 institutional prime funds with more than $5 billion in the third quarter. The reduced size of the funds creates a challenge to large investors who typically have fund concentration limits and minimum fund size written into their investment policies. Investors with a $10 billion minimum portfolio size could be limited to just 3 institutional prime funds, while a 2.5% portfolio concentration could limit investment to as little as $300 million."

It adds, "As investors contemplate returning to institutional prime MMFs, they need to understand the risk of potential redemption gates and/or liquidity fees. In the event the weekly liquidity of a prime MMF falls below the minimum 30 percent of total assets (as defined by the SEC in Rule 2a-7), the fund's board of trustees may impose a liquidity fee of up to 2 percent on the redemption amount, or prevent redemptions altogether by imposing a redemption gate that can be in place no longer than 10 business days.... Since liquidity fees and redemption gates can occur if a fund's weekly liquidity falls below the 30% threshold, investors should consider the manager's approach to liquidity risk management when selecting a prime fund."

Fidelity states, "Since October 2016, the weekly liquidity of Fidelity Investments Prime fund (FIPXX) has not fallen below 50% of total assets and year-to-date is significantly and consistently higher on average than the industry's other large prime institutional funds. For investors who decide a prime money market fund may be an optimal solution for some portion of their liquidity needs, it may be useful to analyze the specific funds to identify the manager's ability to minimize volatility of both the NAV and weekly liquidity.... Institutional prime funds exhibiting high levels of weekly liquidity and low volatility of NAV and weekly liquidity may be worthy of consideration for institutional investors who have determined that prime money market funds are an appropriate means to enhance their total rate of return on strategic liquidity."

Finally, they write, "Optimizing corporate liquidity has become more complicated following the regulatory changes to money market funds. Accurate cash forecasting remains a critical process that enables the treasury team to appropriately segment their cash between operating and strategic components. The potential solution set has expanded following money market reform, and the fundamental characteristics of prime funds have been altered, requiring additional monitoring and due diligence. While a return to institutional prime money market funds may not be appropriate for every corporate treasurer, those with a thorough understanding of the risks and rewards may view variable NAV prime funds as a valuable component of their cash segmentation strategy (if permitted by investment policy)."

Dec. Money Fund Portfolio Holdings: Fed Repo Down Again; CP, CDs Up

Dec 12 17

Crane Data released its December Money Fund Portfolio Holdings late yesterday, and our most recent collection of taxable money market securities, with data as of Nov. 30, 2017, shows a drop in Repo and Treasuries, but increases in CP, Agencies and CDs. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $18.4 billion to $2.856 trillion last month, after increasing $77.7 billion in October, $8.5 billion in September, and $58.6 billion in August. Repo remained the largest portfolio segment, followed by Treasuries and Agencies. CP moved into fourth place ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us if you'd like to see our latest Money Fund Portfolio Holdings reports.)

Among all taxable money funds, Repurchase Agreements (repo) decreased $16.4 billion (-1.7%) to $939.2 billion, or 32.9% of holdings, after decreasing $3.9 billion in October and $4.4 billion in September but increasing $65.1 billion in August. Treasury securities fell $3.0 billion (-0.4%) to $736.3 billion, or 25.8% of holdings, after rising $66.0 billion in October and $27.8 billion in September but falling $32.7 billion in August. Government Agency Debt increased $10.5 billion (1.6%) to $675.3 billion, or 23.6% of all holdings, after falling $2.2 billion in October, rising $1.2 billion in September, and falling $11.2 billion in August. Repo, Treasuries and Agencies total $2.351 trillion, representing a massive 82.3% of all taxable holdings.

CP, CDs and Other (mainly Time Deposits) securities jumped in the latest month. Commercial Paper (CP) was up $14.9 billion (8.2%) to $196.7 billion, or 6.9% of holdings (after increasing $3.3 billion in October, decreasing $4.4 in September, and increasing $16.2 billion in August). Certificates of Deposits (CDs) increased $8.9 billion (4.8%) to $193.5 billion, or 6.8% of taxable assets (after increasing $14.1 billion in October, decreasing $7.3 billion in September, and increasing $3.4 billion in August). Other holdings, primarily Time Deposits, rose by $3.7 billion (3.6%) to $106.4 billion, or 3.7% of holdings. VRDNs held by taxable funds decreased by $0.2 billion (-2.2%) to $8.2 billion (0.3% of assets).

Prime money fund assets tracked by Crane Data increased to $655 billion (up from $632 billion last month), or 22.9% (up from 22.3%) of taxable money fund holdings' total of $2.856 trillion. Among Prime money funds, CDs represent just under a third of holdings at 29.5% (up from 29.2% a month ago), followed by Commercial Paper at 29.9% (up from 28.7%). The CP totals are comprised of: Financial Company CP, which makes up 18.9% of total holdings, Asset-Backed CP, which accounts for 6.1%, and Non-Financial Company CP, which makes up 4.9%. Prime funds also hold 1.9% in US Govt Agency Debt, 8.7% in US Treasury Debt, 5.9% in US Treasury Repo, 2.2% in Other Instruments, 13.2% in Non-Negotiable Time Deposits, 4.6% in Other Repo, 1.9% in US Government Agency Repo, and 1.0% in VRDNs.

Government money fund portfolios totaled $1.549 trillion (54.2% of all MMF assets), up from $1.541 trillion in October, while Treasury money fund assets totaled another $651 billion (22.8%), up from $664 billion the prior month. Government money fund portfolios were made up of 42.5% US Govt Agency Debt, 19.4% US Government Agency Repo, 15.6% US Treasury debt, and 22.3% in US Treasury Repo. Treasury money funds were comprised of 67.2% US Treasury debt, 32.5% in US Treasury Repo, and 0.3% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.200 trillion, or 77.0% of all taxable money fund assets, down from 77.7% last month.

European-affiliated holdings increased $20.8 billion in November to $654.1 billion among all taxable funds (and including repos); their share of holdings increased to 22.9% from 22.3% the previous month. Eurozone-affiliated holdings increased $14.5 billion to $447.7 billion in November; they account for 15.7% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $13.1 billion to $227.9 billion (8.0% of the total). Americas related holdings decreased $25.6 billion to $1.972 trillion and now represent 69.1% of holdings.

The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $16.8 billion, or -2.7%, to $595.3 billion, or 20.8% of assets; US Government Agency Repurchase Agreements (down $0.7 billion to $313.7 billion, or 11.1% of total holdings), and Other Repurchase Agreements ($30.2 billion, or 1.1% of holdings, up $1.1 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $11.1 billion to $123.9 billion, or 4.3% of assets), Asset Backed Commercial Paper (up $2.2 billion to $40.3 billion, or 1.4%), and Non-Financial Company Commercial Paper (up $1.5 billion to $32.5 billion, or 1.1%).

The 20 largest Issuers to taxable money market funds as of Nov. 30, 2017, include: the US Treasury ($736.3 billion, or 25.8%), Federal Home Loan Bank ($524.2B, 18.4%), BNP Paribas ($150.8B, 5.3%), Federal Reserve Bank of New York ($96.2B, 3.4%), RBC ($75.7B, 2.7%), Credit Agricole ($69.5B, 2.4%), Federal Farm Credit Bank ($68.3B, 2.4%), Wells Fargo ($64.7B, 2.3%), Federal Home Loan Mortgage Co ($55.6B, 1.9%), Barclays PLC ($54.3B, 1.9%), Societe Generale ($44.6B, 1.6%), Nomura ($43.5B, 1.5%), Mitsubishi UFJ Financial Group Inc ($38.8B, 1.4%), Bank of Nova Scotia ($36.8B, 1.3%), Toronto-Dominion Bank ($35.2B, 1.2%), Natixis ($34.7B, 1.2%), Bank of America ($34.7B, 1.2%), HSBC ($34.2B, 1.2%), JP Morgan ($33.5B, 1.2%), and Canadian Imperial Bank of Commerce ( $30.8B, 1.1%).

In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: BNP Paribas ($133.8B, 14.2%), Federal Reserve Bank of New York ($96.2B, 10.2%), RBC ($53.5B, 5.7%), Credit Agricole ($52.8B, 5.6%), Wells Fargo ($51.2B, 5.5%), Nomura ($43.5B, 4.6%), Barclays PLC ($43.4B, 4.6%), Societe Generale ($40.4B, 4.3%), Bank of America ($29.1B, 3.1%) and HSBC ($27.8B, 3.0%). NY Fed RRP Repo reached its lowest point since July 2016 (the last time it wasn't the largest repo program). (Fixed Income Clearing Corp repo ranked No. 12 with $13.2 billion from 13 funds.)

The 10 largest Fed Repo positions among MMFs on 11/30 include:Northern Trust Trs MMkt ($16.6B in Fed Repo), Fidelity Cash Central Fund ($11.0B), JP Morgan US Govt ($11.0B ), Morgan Stanley Inst Liq Govt Sec ($8.0B), Fidelity Sec Lending Cash Central ($7.1B), Northern Inst Govt Select ($5.7B), BlackRock Lq FedFund ($4.5B), Goldman Sachs FS Treas Sol ($3.9B), Vanguard Market Liquidity Fund ($3.9B), and Wells Fargo Govt MMkt ($3.8B).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($22.2B, 5.1%), BNP Paribas ($17.1B, 3.9%), Credit Agricole ($16.8, 3.9%), Toronto-Dominion Bank ($16.2B, 3.7%), Mitsubishi UFJ Financial Group Inc. ($15.6B, 3.6%), Canadian Imperial Bank of Commerce ($14.6B, 3.4%), Bank of Nova Scotia ($14.0B, 3.2%), Bank of Montreal ($13.8, 3.2%), Wells Fargo ($13.5B, 3.1%), and Australia & New Zealand Banking Group Ltd ($13.3, 3.1%).

The 10 largest CD issuers include: Bank of Montreal ($13.5B, 7.0%), Wells Fargo ($13.4, 7.0%B), RBC ($11.7, 6.1%), Sumitomo Mitsui Banking Co ($11.2B, 5.8%), Mitsubishi UFJ Financial Group Inc ($10.2B, 5.3%), Mizuho Corporate Bank Ltd ($9.4B, 4.9%), Toronto-Dominion Bank ($9.3B, 4.8%), Sumitomo Mitsui Trust Bank ($8.6B, 4.5%), KBC Group NV ($7.7B, 4.0%), and Canadian Imperial Bank of Commerce ($7.4B, 3.9%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($9.0B, 5.3%), JP Morgan ($7.9B, 4.7%), Westpac Banking Co ($7.5B, 4.4%), BNP Paribas ($7.2B, 4.3%), Bank Nederlandse Gemeenten ($6.6B, 3.9%), Bank of Nova Scotia ($6.3B, 3.7%), Credit Agricole ($6.2B, 3.6%), UBS AG ($5.9B, 3.5%), National Australia Bank Ltd ($5.8B, 3.4%), and Toronto-Dominion Bank ($5.7B, 3.3%).

The largest increases among Issuers include: BNP Paribas (up $12.5B to $150.8B), Federal Home Loan Mortgage Co (up $9.3B to $55.6B), JP Morgan (up $8.5B to $33.5B), RBC (up $7.7B to $75.7B), Canadian Imperial Bank of Commerce (up $7.0B to $30.8B), Bank of Montreal (up $6.8B to $29.2B), Mizuho Corporate Bank Ltd (up $5.4B to $24.4B), Deutsche Bank AG (up $4.5B to $25.8B), Credit Suisse (up $4.0B to $25.6), and Wells Fargo (up $3.1B to $64.7B).

The largest decreases among Issuers of money market securities (including Repo) in November were shown by: Federal Reserve Bank of New York (down $66.0B to $96.2B), ING Bank (down $8.5B to $27.8B), Societe Generale (down $3.5B to $44.6B), US Treasury (down $3.0B to $736.3B), Skandinaviska Enskilda Banken AB (down $2.2B to 10.6B), Canadian Imperial Bank of Commerce (down $2.5B to $23.8B), Skandinaviska Enskilda Banken AB (down $2.5B to $12.8B), Goldman Sachs (down $1.5B to $17.9B), KBC Group NV (down $1.3B to $10.0B), and Federal National Mortgage Association (down $1.1B to $21.7B).

The United States remained the largest segment of country-affiliations; it represents 61.4% of holdings, or $1.754 trillion. France (11.0%, $313.7B) remained in second place ahead of Canada (7.6%, $218.0B) in third. Japan (5.9%, $169.0B) stayed in fourth, while the United Kingdom (4.0%, $113.9B) remained in fifth place. Germany (2.2%, $62.0B) moved into sixth place ahead of The Netherlands (2.1%, $58.4B), while Australia (1.6%, $46.0B) moved ahead of Sweden (1.5%, $42.2B). Switzerland (1.3%, $36.9B) remained in tenth place. (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, 2017, Taxable money funds held 31.2% (down from 32.2%) of their assets in securities maturing Overnight, and another 17.3% maturing in 2-7 days (up from 16.1%). Thus, 48.5% in total matures in 1-7 days. Another 24.8% matures in 8-30 days, while 9.2% matures in 31-60 days. Note that over three-quarters, or 82.5% of securities, mature in 60 days or less (up slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 7.6% of taxable securities, while 7.7% matures in 91-180 days, and just 2.0% matures beyond 181 days.

Money Fund Family Market Share: Fidelity, BlackRock, MS Gain in Nov.

Dec 11 17

Crane Data's latest Money Fund Market Share rankings show assets were up across almost all U.S. money fund complexes in November. Overall assets increased by $55.6 billion, or 1.9%. Total assets have increased by $90.1 billion, or 3.1%, over the past 3 months. They've increased by $342.0 billion, or 12.9%, over the past 12 months through November 30, but note that our asset totals have been inflated by the addition of a number of funds. (Crane Data added batches of previously untracked funds in December 2016, and in February and April 2017. These funds, which total over $200 billion, include a number of internal funds that we hadn't been aware of prior to disclosures of the SEC's Form N-MFP.) The biggest gainers in November were Fidelity, whose MMFs rose by $9.7 billion, or 1.7%, BlackRock, whose MMFs rose by $9.4 billion, or 3.5%, and Morgan Stanley, whose MMFs rose by $8.9 billion, or 8.2%.

JPMorgan, Western, Deutsche, Wells Fargo, and Vanguard, also saw assets increase in November, rising by $5.2B, $3.9B, $3.7B, and $3.7B, $2.3B, respectively. Declines among the 25 largest managers were seen by Federated, HSBC and PNC. (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 market share totals below, and we also look at money fund yields the past month, which increased in November.

Over the past year through Nov. 30, 2017, Fidelity (up $104.7B, or 22.6%), Vanguard (up $83.4B, or 40.8%), Dreyfus (up $34.0B, or 23.6%), and T Rowe Price (up $22.8B, or 143.0%) were the largest gainers. (All of these families' totals but Dreyfus' were inflated by the addition of new funds earlier this year.) These 1-year gainers were followed by Prudential (up $14.0B, or 2220.7%), Columbia (up $13.2B, or 913.5%), Northern (up $11.4B, or 12.1%) and Invesco (up $9.0B, or 16.1%).

Fidelity, Vanguard, Wells Fargo, and BlackRock had the largest money fund asset increases over the past 3 months, rising by $14.1B, $13.1B, $11.8B, and $10.6B, respectively. The biggest decliners over 12 months include: Goldman Sachs (down $23.6B, or -12.2%), Morgan Stanley (down $16.1B, or -12.1%), Federated (down $4.7B, or -2.4%), and Western (down $4.5B, or -13.1%).

Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $567.7 billion, or 19.0% of all assets. It was up $9.7 billion in Nov., up $14.1 billion over 3 mos., and up $104.7B over 12 months. Vanguard is second with $287.9 billion, or 9.6% market share (up $2.3B, up $13.1B, and up $83.4B for the past 1-month, 3-mos. and 12-mos., respectively), while BlackRock is third with $280.7 billion, or 9.4% market share (up $9.4B, up $10.6B, and up $32.3B). JP Morgan ranked fourth with $257.1 billion, or 8.6% of assets (up $5.2B, up $8.9B, and up $6.2B for the past 1-month, 3-mos. and 12-mos., respectively), while Federated was ranked fifth with $189.4 billion, or 6.3% of assets (down $1.3B, down $913M, and down $4.7B).

Dreyfus was in sixth place with $178.1 billion, or 6.0% of assets (up $963M, up $2.8B, and up $34.0B), while Goldman Sachs was in seventh place with $169.7 billion, or 5.7% (up $206M, down $126M, and down $23.6B). Schwab ($158.4B, or 5.3%) was in eighth place, followed by Morgan Stanley in ninth place ($117.1B, or 3.9%) and Wells Fargo in tenth place ($111.1B, or 3.7%).

The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($105.0B, or 3.5%), SSGA ($84.4B, or 2.8%), Invesco ($65.0B, or 2.2%), First American ($49.2B, or 1.6%), UBS ($44.1B, or 1.5%), T Rowe Price ($38.7B, or 1.3%), Western ($30.0B, or 1.0%), Deutsche ($26.5B, or 0.9%), DFA ($25.3B, or 0.8%), and Franklin ($22.7B, or 0.8%). The 11th through 20th ranked managers are the same as last month, except Western and Deutsche moved ahead of DFA. Crane Data currently tracks 66 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 JPMorgan moves ahead of Vanguard and BlackRock, BlackRock moves ahead of Vanguard, Goldman Sachs moves ahead of Federated and Dreyfus, Dreyfus moves ahead of Federated, and Northern moves ahead Wells Fargo.

Looking at our Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products, the largest money market fund families include: Fidelity ($576.5 billion), JP Morgan ($433.8B), BlackRock ($415.4B), Vanguard ($287.9B), and Goldman Sachs ($272.3B). Dreyfus/BNY Mellon ($202.7B) was sixth and Federated ($198.6B) was in seventh, followed by Schwab ($158.4B), Morgan Stanley ($151.9B), and Northern ($133.3B), 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.

The December issue of our Money Fund Intelligence and MFI XLS, with data as of 11/30/17, shows that yields were up in November across our Taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 755), was up 3 bps to 0.75% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 2 bps to 0.73%. The MFA's Gross 7-Day Yield increased 3 bps to 1.19%, while the Gross 30-Day Yield was up 2 bps to 1.17%.

Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.93% (up 3 bps) and an average 30-Day Yield of 0.92% (up 3 bps). The Crane 100 shows a Gross 7-Day Yield of 1.19% (up 3 bps), and a Gross 30-Day Yield of 1.19% (up 3 bps). For the 12 month return through 11/30/17, our Crane MF Average returned 0.50% and our Crane 100 returned 0.68%. The total number of funds, including taxable and tax-exempt, decreased to 956, down 2 from last month. There are currently 755 taxable and 201 tax-exempt money funds.

Our Prime Institutional MF Index (7-day) yielded 1.00% (up 2 bps) as of November 30, while the Crane Govt Inst Index was 0.81% (up 5 bps) and the Treasury Inst Index was 0.85% (up 6 bps). Thus, the spread between Prime funds and Treasury funds is 15 basis points, down 4 bps from last month, while the spread between Prime funds and Govt funds is 19 basis points, down 3 bps from last month. The Crane Prime Retail Index yielded 0.79% (up one bp), while the Govt Retail Index yielded 0.49% (up 3 bps) and the Treasury Retail Index was 0.57% (up 5 bps). The Crane Tax Exempt MF Index yield increased to 0.50% (up 3 bps).

Gross 7-Day Yields for these indexes in November were: Prime Inst 1.36% (up 2 bps), Govt Inst 1.12% (up 4 bps), Treasury Inst 1.14% (up 6 bps), Prime Retail 1.35% (up 3 bps), Govt Retail 1.10% (up 2 bps), and Treasury Retail 1.14% (up 5 bps). The Crane Tax Exempt Index increased 2 basis points to 0.99%. The Crane 100 MF Index returned on average 0.08% for 1-month, 0.22% for 3-month, 0.65% for YTD, 0.68% for 1-year, 0.30% for 3-years (annualized), 0.19% for 5-years, and 0.40% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)

MMF Assets Break 2.8 Trillion; Fed Z.1: Sec Lending, Households Jump

Dec 08 17

Money market mutual fund assets broke above $2.8 trillion, reaching their highest level since the end of 2010. The Investment Company Institute's latest "Money Market Fund Assets" report shows that year-to-date, MMF assets have increased by $78 billion, or 2.9%. If trends continue, money fund assets should post their biggest annual increase since 2009. Since the end of June 2017, they've jumped by $190 billion, or 7.2%. ICI's numbers also show Prime money market fund assets rose for their 8th week in a row and their 15th week in the past 18. They've now increased by $73.4 billion, or 19.1%, year-to-date. We review ICI's latest money fund numbers, as well as the Federal Reserve's latest Z.1 statistics, below.

ICI writes, "Total money market fund assets increased by $8.39 billion to $2.81 trillion for the week ended Wednesday, December 6, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $6.54 billion and prime funds increased by $838 million. Tax-exempt money market funds increased by $1.02 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.218 trillion (79.0% of all money funds), while Total Prime MMFs stand at $459.3 billion (16.4%). Tax Exempt MMFs total $130.1 billion, or 4.6%.

They explain, "Assets of retail money market funds increased by $7.52 billion to $996.12 billion. Among retail funds, government money market fund assets increased by $6.21 billion to $605.39 billion, prime money market fund assets increased by $462 million to $266.49 billion, and tax-exempt fund assets increased by $842 million to $124.24 billion." Retail assets account for over a third of total assets, or 35.5%, and Government Retail assets make up 60.8% of all Retail MMFs.

ICI's release adds, "Assets of institutional money market funds increased by $874 million to $1.81 trillion. Among institutional funds, government money market fund assets increased by $323 million to $1.61 trillion, prime money market fund assets increased by $376 million to $192.75 billion, and tax-exempt fund assets increased by $175 million to $5.87 billion." Institutional assets account for 64.5% of all MMF assets, with Government Inst assets making up 89.0% of all Institutional MMFs.

In other news, the Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") yesterday. Among the 4 tables it includes on money market mutual funds, the Third Quarter, 2017 edition shows that the Household Sector remains the largest investor segment; assets here rose in Q3 after falling in Q2. The next largest segment, Funding Corporations (primarily Securities Lending money) also saw assets increase in the third quarter, while the third largest, Nonfinancial Corporate Businesses, saw assets decline. The Rest of the World category, State & Local Governments, Nonfinancial Noncorporate Business, and Property Casualty Insurance all saw assets rise slightly in Q3, while the State and Local Govt Retirement and Private Pension Funds categories saw assets inch lower in the latest quarter. Over the past 12 months, Funding Corporations, the Household Sector and State & Local Govt Retirement holdings increased, but `Nonfinancial Corporate Businesses and Life Insurance Companies showed decreases.

The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows that total assets increased by $114 billion, or 4.3%, in the third quarter to $2.748 trillion. Over the year through Sept. 30, 2017, assets were up $76 billion, or 2.8%. The largest segment, the Household sector, totals $1.042 trillion, or 37.9% of assets. The Household Sector increased by $65 billion, or 6.7%, in the quarter, after decreasing $21 billion in Q2'17. Over the past 12 months through Q3'17, Household assets were up $70 billion, or 7.2%.

Funding Corporations, which became the second largest segment in Q1'17 according to the Fed's data series, held $584 billion, or 21.3% of the total. Securities lending reinvestment (aka funding corporations) assets in money funds jumped by $62 billion in the quarter, or 11.8%, and they've increased by $128 billion, or 27.9%, over the past year. Nonfinancial Corporate Businesses remained the third largest investor segment with $449 billion, or 16.3% of money fund shares. They fell by $14 billion, or -3.0%, in the latest quarter, after dipping in Q2'17 (down $6 billion). Corporate money fund holdings decreased $126 billion, or -21.9%, over the previous 12 months.

The fourth largest segment, State and Local Governments held 6.8% of money fund assets ($186 billion) -- up $3 billion, or 1.4%, for the quarter, and up $4 billion, or 2.3%, for the year. Private Pension Funds, which held $149 billion (5.4%), remained in 5th place. The Rest Of The World category was the sixth largest segment in market share among investor segments with 4.0%, or $109 billion, while Nonfinancial Noncorporate Businesses held $101 billion (3.7%), State and Local Government Retirement Funds held $67 billion (2.5%), Life Insurance Companies held $42 billion (1.5%), and Property-Casualty Insurance held $18 billion (0.6%), 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 $1.594 trillion, or 58.0%. Debt securities includes: Open market paper ($133 billion, or 4.8%; we assume this is CP), Treasury securities ($651 billion, or 23.7%), Agency and GSE backed securities ($666 billion, or 24.2%), Municipal securities ($135 billion, or 4.9%), and Corporate and foreign bonds ($8 billion, or 0.3%).

Other large holdings positions in the Fed's series include Security repurchase agreements ($910 billion, or 33.1%) and Time and savings deposits ($199 billion, or 7.2%). Money funds also hold minor positions in Foreign deposits ($6 billion, or 0.2%), Miscellaneous assets ($4 billion, or 0.2%), and Checkable deposits and currency ($36 billion, 1.3%). Note: The Fed also recently added a new breakout line to this table which lists "Variable Annuity Money Funds;" they currently total $33 billion, down $2 billion in the quarter.

During Q3, Treasury Securities (up $26 billion), Agency- and GSE-Backed Securities (up $23 billion), Time and Savings Deposits (up $22 billion), Checkable Deposits and Currency (up $21 billion), Security Repurchase Agreements (up $15 billion), and Open market paper (up $9 billion) showed gains, while Municipal Securities (down $7 billion) showed a decrease. Over the 12 months through 9/30/17, Security Repurchase Agreements (up $54B), Agency- and GSE-Backed Securities (up $24B), Open Market Paper (down $20B), and Treasury Securities (up $15B) all showed big gains over the 12 months through Q2'17. Municipal Securities (down $21B) and Checkable deposits and currency (down $14B) both showed declines.

Dec. MFI: Decade After Subprime, Vanguard's Schwartz, Tax Exempts

Dec 07 17

The December issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Thursday morning, features the articles: "A Decade Later: Subprime Crisis & StratCash, SIVs, LGIPs," which reviews the 10-year anniversary of the financial crisis and troubles with enhanced cash; "Vanguard's Justin Schwartz Talks Muni Money Markets," which interviews Vanguard's Head of Municipal Money Markets; and, "Signs of Life in Tax Exempt Money Fund Sector Too," which reviews the slow rebound and launches in the Muni MMF space. We've also updated our Money Fund Wisdom database with Nov. 30, 2017, statistics, and sent out our MFI XLS spreadsheet Thursday 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 Monday, December 11, and our December Bond Fund Intelligence is scheduled to go out Thursday, December 14.

MFI's "Decade After Subprime" article says, "In recent months, we've been marking the 10-year anniversary of the start of the Subprime Liquidity Crisis, which dramatically impacted the money markets and money fund business. While it started in August 2007, the crisis didn't really get serious for money funds until November/December 2007, when SIV bailouts, meltdowns of LGIPs and exploding enhanced cash funds appeared in quick succession. We look back at these tumultuous days of a decade ago, and review some of our coverage at the time. (See our Nov. 29 News, "Another Look Back at Early Subprime Crisis 10 Years Ago: LGIPs, SIVs," and our Aug. 11 News, "10 Years Ago: Subprime Crisis Starts.")

It continues, "Ten years ago this weekend (on 12/8/07), we wrote the story, "More Enhanced Cash Troubles: Columbia StratCash Halts Redemptions," which told CraneData.com readers, "Market rumors swirled Friday that the largest entrant in the 'enhanced cash' space, Columbia's Strategic Cash had halted redemptions. Enhanced cash pools, or '3c-7' funds, are private placements available to only the largest qualified institutional investors.... Over half of the pool, $21 billion, has been separated into a 'StratCash 2' portfolio, perhaps signaling a very large 'in kind' separation.... StratCash has been gradually declined from $40 billion to $33 billion over the past several weeks. Columbia parent Bank of America reportedly set aside $300 million to support the pool previously.... StratCash becomes the latest enhanced cash product to retreat from the besieged sector."

MFI's latest Profile reads, "This month, MFI interviews Justin Schwartz, Head of Municipal Money Markets at the Vanguard Group. Vanguard is the 2nd largest manager of tax-exempt MMFs (and MMFs overall) with over $29.4 billion ($285.2B overall). Schwartz manages the $17.4 billion Vanguard Municipal Money Market Fund, the largest fund in the tax-exempt space. We discuss supply, credit, liquidity, and several other topics below."

We asked Schwartz to "Give us a little background." He responds, "Vanguard began running tax exempt money market funds in 1980 with the launch of the Vanguard Tax Exempt MMF. At the time we launched, interest rates were in the double digits so it was a much different environment than today. We followed up with the launch of our state funds; most of which [were added] in the late '80s, with our final product being launched in 1997. So we've been managing tax exempt money funds for coming up on four decades."

He continues, "In terms of my background, I joined the fixed income group of Vanguard in 2005 as a trader with our long-term bond funds. Subsequently, I joined the short-term municipal team in 2008, [which was] a challenging time to start a career in the money market space. But the lessons learned during the financial crisis are invaluable with regards to shaping my perspective on the proper ways to manage risk and liquidity in money market portfolios."

Schwartz adds, "I was promoted to fund manager in 2010 and most recently became head of the municipal short desk in 2016 following Pam Tynan's retirement. Along the way I've managed several of our state specific money funds. I currently manage our Vanguard Municipal Money Market and also Vanguard Short Term Tax Exempt Fund. My team consists of three portfolio managers and six traders. In addition to the money funds, we manage all the cash investments for our muni bond funds." (Watch for more excerpts from this "profile" later this month, or ask us to see the latest MFI.)

Our "Signs of Life in Tax Exempt" article says, "While they haven't seen the rebound that Prime money market funds have over the past year, Tax Exempt money market funds too are showing some signs of life after being left for dead following last year's money fund reforms. Year-to-date, Tax Exempt MMF assets have increased by $2.0 billion, or 1.5%, to $134.5 billion, and the number of funds appears to be stabilizing. Even the Tax Exempt Institutional sector, which was abandoned by all but 9 of the remaining 17 managers in the space, has seen some interest, as JPMorgan and Fidelity file to launch new funds here."

MFI quotes a recent, Ignites article entitled, "Green Shoots? Fidelity, JPMorgan Register Muni Money Funds," who writes, "Fidelity and JPMorgan each registered an institutional municipal money market fund in November, bucking the trend in recent years of liquidating such products or converting them to government or retail strategies. The plans to launch the products may indicate rekindled interest among institutional investors for municipal money funds, says Peter Crane, CEO of money fund tracking firm Crane Data. Clients of both firms presumably pressed the shops for the new products, says Crane."

They comment, "Fidelity, the largest manager of money funds, filed for the Fidelity SAI Municipal Money Market Fund, which will be offered 'exclusively to certain clients of the advisor or its affiliates,' according to the preliminary prospectus. Fidelity's Strategic Advisers Inc. unit oversees managed accounts.... Meanwhile, JPMorgan filed for an Institutional Tax-Free Money Market Fund. The preliminary prospectus is dated 2018, but does not include a specific launch date. The total expense ratio, after fee waivers and reimbursements, is 26 basis points. The investment minimum to establish an account is $5 million, the filing states."

Ignites adds, "The 2014 reforms, which required firms to classify funds as retail or institutional depending on their investor base, mandated that institutional prime and municipal funds adopt fluctuating net asset values and have the ability to impose liquidity fees and redemption gates. Many investors responded by yanking their money from institutional prime and municipal products and moving it to government ones, which were allowed to maintain a stable net asset value and don't operate under the specter of liquidity fees and redemption gates.... Firms that opted to offer institutional municipal money funds include BlackRock, Federated, Wells Fargo and Invesco."

Our December MFI XLS, with Nov. 30, 2017, data, shows total assets increased $46.4 billion in November to $2.988 trillion after decreasing $2.2 billion in October, increasing $32.0 billion in September and $68 billion in August, and decreasing $32.6 billion in July. Our broad Crane Money Fund Average 7-Day Yield was up 4 basis points to 0.75% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 3 bps to 0.93%.

On a Gross Yield Basis (7-Day) (before expenses were taken out), the Crane MFA rose 3 bps to 1.19% and the Crane 100 rose 3 bps to 1.21%. Charged Expenses averaged 0.45% and 0.28% (unchanged) for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 29 days (down one day from last month) and for the Crane 100 was 29 days (down one from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

OFR Reports on Risks to Financial Stability: MMFs, Repo No Longer Big

Dec 06 17

The U.S. Treasury's OFR issued a press release entitled, "Office of Financial Research Reports on Risks to Financial Stability," which tells us that, "Overall risks to financial stability remain moderate, similar to a year ago, the U.S. Office of Financial Research said in releasing its 2017 Annual Report to Congress and 2017 Financial Stability Report today." Retiring OFR Director Richard Berner says, "We assess threats to financial stability by weighing vulnerabilities in the financial system against its resilience." While money funds, repos and 'shadow banking' weren't major topics like in last year's update, there were a few mentions. We review the reports below. (See also Crane Data's Dec. 14, 2016 News, "Report Shows OFR Still Focused on Shadow Banking, Money Funds, Pools," and our July 21, 2016 News, "OFR Introduces Money Market Fund Monitor.")

The release explains, "As required by the Dodd-Frank Act, the 2017 Annual Report to Congress assesses the state of the United States financial system, including: analysis of threats to the financial stability of the United States, key findings from the OFR's research and analysis of the financial system, and the status of the efforts of the OFR in meeting its mission, including how the OFR supports the Financial Stability Oversight Council, or FSOC, and other key stakeholders."

One of the key findings in the report involves a "LIBOR Alternative." They tell us, "Alternatives to LIBOR are needed. LIBOR is an interest rate benchmark, formerly the London Interbank Offered Rate and now ICE LIBOR (Intercontinental Exchange LIBOR). Among the many steps needed to achieve a smooth transition to these alternatives, officials and market participants must help develop active derivatives markets that use the new rate."

The OFR's "2017 Annual Report to Congress" mentions, "In collaboration with the Federal Reserve, we advanced plans to begin collecting data on bilateral repurchase agreements and to publish new reference rates that are alternatives to LIBOR."

The paper examines vulnerabilities that arise from "structural changes in markets and industry." Among the structural changes the OFR is watching, one is "the danger of a difficult transition to a new reference rate to replace the London Interbank Offered Rate (LIBOR)." They also say, "A lack of substitutability is an aspect of market structure that can pose a threat.... For example, the increasing reliance on a single institution for settlement of Treasury securities and related repurchase agreements (repos) is a key vulnerability. An interruption in Treasury settlement services would disrupt the Treasury market and potentially a range of other markets."

It continues, "Another potential threat comes from the transition from LIBOR to an alternative. The risks and costs of using LIBOR make the move essential, but failure to make a timely and smooth transition could impair the functioning of markets that now rely on LIBOR. LIBOR reflects transactions in a shrinking market. Most of the responses by traders to the LIBOR survey are based on judgment rather than actual trades. LIBOR tracks unsecured transactions, which represent a small share of banks' wholesale funding."

The OFR also says, "The new U.S. benchmark rate, the Secured Overnight Financing Rate, will be produced by the Federal Reserve Bank of New York in cooperation with the OFR. It will be based on trading activity in repos backed by Treasury securities, not bank surveys.... The OFR joined the effort, and [they] have worked closely with the Federal Reserve to create a set of benchmarks based on data on overnight repurchase agreements, or repos. The Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee, made up of banks active in the derivatives market, to inform the process."

They explains, "The repo market is a key source of secured short-term funding for the financial system. In a repo transaction, a security owner sells a security to raise cash. The agreement requires the seller of the security to repurchase it on a specific date for a prearranged price. If the seller is unable to repurchase the security, the cash provider is entitled to liquidate the security for repayment."

The OFR writes, "In late August 2017, the Federal Reserve sought public comment on three daily rates based on repo transactions with U.S. Treasury securities that would be published by the Federal Reserve Bank of New York in cooperation with the OFR.... The Alternative Reference Rates Committee selected the Secured Overnight Financing Rate in June 2017 as its preferred alternative to U.S. dollar LIBOR. The new benchmarks would be more reliable and viable than LIBOR because they are based on actual secured transactions, rather than quotes, and would bring necessary transparency to the repo market."

They also say, "During fiscal year 2017, we improved our U.S. Money Market Fund Monitor, which tracks the investment portfolios of money market funds and shows trends and developments across the money market fund industry. The monitor uses data converted from the SEC Form N-MFP and presents the information in a graphic, user-friendly format on the OFR website. It makes the underlying data freely available for download by the industry and public for monitoring and analysis. The monitor is one of the most viewed items on the OFR website, with more than 14,000 page views in the year after its launch."

They explain, "Our pilot work to collect and anonymize repo data to produce reports about the bilateral repo market has been widely cited by market participants as a success. In addition, the industry Alternative Reference Rates Committee has expressed support for the repo-based reference rate (to replace LIBOR) that the OFR and the Federal Reserve Bank of New York would produce."

Finally, the OFR comments, "In FY 2018, we plan to undertake a rulemaking to establish an ongoing data collection covering some repo transactions. These data might be useful in calculating the selected LIBOR alternative, called the Secured Overnight Financing Rate."

Fitch: Bank Deposits Feel Online Pressure; European MMFs Still Cash?

Dec 05 17

Fitch Ratings published two articles recently of interest to the money markets. The first, entitled "Shock Scenarios: U.S. Bank Deposits," says that "a rise in retail bank deposit rates would dampen bank profitability" and that "high online bank rates could pressure traditional banks." The second release, entitled, "European MMF Reform Won't Affect Corporate Cash Analysis," tells us that European money market funds should still be "cash" under pending regulatory changes. We excerpt from both updates below.

Fitch's first paper tells us that "The interest on deposits offered by commercial banks in the U.S. remains at historically low levels, despite recent Fed Funds rate increases. In 3Q17, U.S. depository institutions offered 7bps in interest on retail savings deposits and money market deposit accounts (MMDAs) of less than $100,000 on average compared to 118bps on savings accounts and MMDAs at U.S. online banks, according to Federal Deposit Insurance Corporation (FDIC) disclosures."

It continues, "Fitch has conducted two hypothetical scenarios on depository institutions that envision immediate increases in rates paid on retail savings deposits and MMDAs solely as a result of pressure from online bank competition. These scenarios assume no change in the general level of market rates and, therefore, do not affect asset yields. The shock scenarios considered in the report differ greatly from Fitch Ratings' current base and stress case expectations and are not intended to question the assumptions underpinning Fitch's existing credit ratings or outlooks."

This could lead to "Mounting Pressures for Banks," they say, explaining, "The gap between the simple average retail savings deposit rate offered by U.S. commercial banks and the weighted average rate offered by online banks has widened since the Federal Reserve began raising the Fed Funds rate in December 2015. The difference was 111bps as of 3Q17, up from 77bps at the time of the first Fed Funds rate increase in 4Q15.... Fitch does not currently expect large commercial banks in the U.S. to be pressured to match the retail deposit rate offered by online banks <b:>`_. However, Fitch anticipates some increase in deposit costs in the near- to intermediate term for these banks independent of the scenarios outlined below."

The paper states, "Retail deposits are an important source of funding for banks, given their favorable regulatory treatment, historically low cost relative to other funding sources and stability under most situations. Post-crisis regulations from Basel III, such as the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), provide additional incentives for banks to finance their operations through these deposits by treating them as the most stable source of funding. Should online banks pose a threat to either the cost or stability of these deposit balances, large commercial banks may be pressured to raise their retail deposit rates to retain savings deposits and MMDAs."

Among the "key takeaways" from the Fitch scenario is: "The pricing sensitivity of online deposits still remains relatively untested during periods of rising rates. Although deposit rate increases have been modest to date, Fitch expects additional U.S. rate hikes to result in more increases in deposit costs at online banks."

They add, "The combination of further Fed rate hikes, the beginning of the unwind of the Fed's balance sheet and the growing presence of high-yield online savings banks could pressure large U.S. commercial banks to increase deposit rates faster than historical experience. Retail deposit balances at online banks have grown 36% since year-end 2015, compared to 10% for large U.S. commercial banks over the same period. However, online banks still only have a 6% market share of U.S. retail deposits."

Finally, Fitch writes, "All banks could potentially experience less stickiness from retail deposits in the future due to disruptive technology. Services and resources that can help easily identify the highest savings deposit rates for consumers could aid in pressuring banks to offer more competitive rates to avoid losing this source of funding."

Fitch's release on European MMF Reform says, "Holdings in new forms of European money market funds will still typically be considered as equivalent to cash in Fitch Ratings' calculations of corporate net debt metrics and immediate liquidity resources."

It continues, "MMFs are typically treated as cash under our corporate rating criteria when they are located in developed jurisdictions and used by a corporate with broadly conservative financial policies. This reflects our view that they allow timely, unconditional availability of cash to the rated entity and offer reasonable certainty that the attributable value at par will be available. European MMF reforms being introduced could appear to challenge this view because they require some funds to either impose a fee or temporarily suspend redemptions if the fund's liquidity is too low. However, analysis of our rated European MMF portfolio suggests the likelihood of this happening will be very low."

Fitch writes, "The cash equivalence of MMFs is also a key question for companies' own financial reporting. Under IFRS, a "cash equivalent" instrument requires a very strong credit rating, WAM of not more than 90 days, insignificant risk of changes in value, a highly diversified portfolio, low liquidity risk and a way for the funds to benchmark returns (for example by reference to short-term money market interest rates)."

Finally, they comment, "The attractiveness of money funds to cash investors could be significantly reduced if there were a stricter application of the cash equivalent definition driven by management/auditor judgement or industry practice. But the reclassification of MMFs to the "investment" category from "cash equivalent" in a company's financials generally would not affect Fitch's classification of MMFs as cash in its corporate analysis."

Crane's Bond Fund Symposium Going West to LA for 2nd Annual Event

Dec 04 17

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, invites you to join us for our second annual Bond Fund Symposium conference. Crane's Bond Fund Symposium will be held March 22-23, 2018 at the InterContinental Los Angeles Downtown. Our first event last year in Boston attracted 150 bond fund managers, marketers, fixed-income issuers, investors and service providers, and we expect our LA show to be even bigger. We review the preliminary agenda and details below, and we also give an update on our 2018 conference calendar, including next month's Money Fund University in Boston (1/18-19/18). (As a reminder, please make hotel reservations soon if you plan on attending MFU.)

Crane Data, which is celebrating the third anniversary of its Bond Fund Intelligence publication and BFI XLS bond fund information service and benchmarks, continues to expand its fixed income fund product offerings. We recently launched Bond Fund Wisdom, a product suite which includes our new Bond Fund Portfolio Holdings data. Our Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Registration for Bond Fund Symposium is $750; 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 BFS's Day One agenda includes: State of the Bond Fund Marketplace, with Peter Crane, of Crane Data and Sean Collins of the Investment Company Institute; Keynote Discussion: Ultra-Shorts vs. SMAs with Dave Martucci of J.P. Morgan Asset Management and Jerome Schneider of PIMCO; Bond Strategists: Outlook for Rates & Spreads, with Mark Cabana of Bank of America Merrill Lynch and Michael Cloherty of RBC Capital Markets; and, Bond Fund Ratings & USBF Market Overview, with Greg Fayvilevich of Fitch Ratings and Peter Rizzo of Standard & Poor's Ratings.

Day One's afternoon agenda includes Senior Portfolio Manager Perspectives, with James McNerny of J.P. Morgan A.M., Morten Olsen of Northern Trust Asset Mgmt, and Mary Beth Syal of Payden & Rygel. Also on the agenda: Major Issues in Fixed-Income Investing with Alex Roever from J.P. Morgan Securities as moderator, Jeff Weaver of Wells Fargo Funds and Tony Wong of Invesco; and, EFT Trends & Bond Fund Investors featuring James Meyers of Invesco PowerShares. The day concludes with Corporate Credit & Index Fund Issues, with George Bory of Wells Fargo Securities.

Day Two's agenda includes: Money Fund Update & Conservative USBFs with Crane and Michael Morin of Fidelity Investments; Regulatory Update: Form N-PORT, Liquidity with Stephen Cohen of Dechert LLP and John Hunt of Sullivan & Worcester LLP. The second day also features: Government Bond Fund Discussion with Sue Hill of Federated Investors; Municipal Bond Fund Issues with Kristian Lind of Neuberger Berman. (Note: The agenda is still in flux and some 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 will benefit from our comprehensive program. A block of rooms has been reserved at the Intercontinental Los Angeles. We'd like to thank our 2017 sponsors -- Fitch Ratings, Federated Investors, Fidelity Investments, J.P. Morgan Asset Management, Wells Fargo, Invesco, S&P Global Ratings, INTL FCStone, Bank of America Merrill Lynch, Goldman Sachs, PIMCO, Payden & Rygel, Investortools, Barclays, State Street Global Advisors, and S&P Dow Jones Indices -- for their support, and we're still accepting sponsors for our 2018 show. E-mail Pete Crane for more details.

Crane Data is also making final preparations and still accepting registrations for our "basic training" Money Fund University. Our eighth annual MFU will be held at the Boston Hyatt Regency in Boston, Massachusetts, January 18-19, 2018. 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 soon; our discounted room rates expire December 20th or until our room block is filled.

Note: We're introducing "free Fridays" for our Money Fund University (and other conferences) and would like to invite anyone in the Boston area to attend the final day sessions without a ticket. So feel free to visit the Boston Hyatt Regency on Friday, January 19, and to "crash" any or all of our sessions, which include Money Fund Regulations, European MMF Reforms, Ultra-Short Bond Funds & SMAs, and Money Fund Data & Wisdom Training.

Finally, mark your calendars for our "big show," Money Fund Symposium, which will be held June 25-27, 2018, at the Westin Convention Center in Pittsburgh, Pa. 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 have also set the dates and location for our next European Money Fund Symposium, which is scheduled for Sept. 20-21, 2018, in London, England. Watch for more details in early 2018.... We wish all of our readers a Happy Holiday season, and we hope to see you at one of our events in 2018!

JPM Securities 2018 Short-Term F-I Outlook: Non-2a-7 Buyers Remain

Dec 01 17

J.P. Morgan Securities published its "Short-Term Fixed Income 2018 Outlook" last week, and discussed "developments that will shape short-term fixed income" next year. Authors Alex Roever, Teresa Ho, and Ryan Lessing write, "Post MMF reform, the investor base is more diversified, the maturity profile of the CP/CD market is longer, and there has been more repo funding. In 2018, we don't anticipate these dynamics to change anytime soon." They explain, "The first year following money market reform proved an eventful one for short-term fixed income markets. While the 2016 US MMF reforms directly prompted important changes in market structure like the $1tn+ asset rotation from prime to government MMFs, other developments like the growth of the government repo markets over the past two years and the increased footprint of SMAs and low duration funds were also influenced by reform, one or two ripples removed from the center of the splash.” We excerpt from their update below.

J.P. Morgan's "U.S. Fixed Income" publication tells us, "[T]his past October marked the first anniversary of MMF reform. Since its implementation, the regulation profoundly transformed the money markets, changing the ways issuers look for funding and the balance of buying power among short duration investors. The fact was prime MMFs no longer held a dominant presence in the money markets. Issuers could no longer rely on them as a source of short-term funding. Even so, one year later, there continues to be plenty of liquidity in the money markets. Somewhat surprisingly, volumes and spreads have increased and narrowed, respectively, even as the markets have evolved. To that end, it's worth considering how the money markets have changed since last October."

It notes, "One of the biggest developments over the past year has been the increased participation from non-2a-7 investors. While prime MMFs historically dominated credit in the money markets, this year we have seen increased participation from securities lenders, short-term bond funds, and separately managed accounts (SMAs). In fact, their participation has more than filled the gap left behind by prime MMFs over the past year. Year over year, CP/CD outstandings have grown by nearly $200bn, even as the size of prime MMFs is less than a third of what it was before.... With the exception of ABCP which saw a slight decline in balances, outstandings of non-financial CP, financial CP and Yankee CDs all saw growth over the past year."

Roever explains, "To be sure, their involvement has helped to continue to support the CP/CD markets and allowed issuers to tap a broader set of investors for funding. At this point last year, we were unsure whether they would remain active participants given their longer duration mandates relative to MMFs. They became engaged in the very front-end of the money markets largely for opportunistic reasons, only becoming involved when credit spreads widened beyond historic norms. Interestingly, even as credit spreads tightened significantly this year, they remained engaged in the markets, squashing any concerns that capacity in the CP/CD market would decrease as cash migrated out of prime MMFs."

He points out, "In 2018, we suspect issuers will continue to benefit from the expanded investor base. Assets under management for many of these liquidity investors have grown over the past year, albeit slowly, and we don't anticipate this dynamic to change anytime soon. For prime MMFs, balances increased $70bn YTD, in what seemed like a rotation out of government MMFs as their balances fell $55bn. Investors appear to be gradually getting more comfortable with floating NAVs. And as the Fed continues to raise rates, the increased yield on prime MMFs versus government MMFs and/or bank deposits will likely attract a little more cash into prime MMFs."

The update tells us, "For securities lenders, cash reinvestment balances have also seen a rise this year, following years of steady decline. Securities lending activity has increased $80bn YTD as dealers have become more efficient in optimizing their balance sheets, thereby providing more cash collateral to reinvest.... Meanwhile, short-term bond funds and SMAs have also seen increased demand.... The noise around MMF reform in recent years as well as the rising interest rate environment prompted liquidity-focused investors to consider alternatives to MMFs, and many have deployed new cash to these products. It's not surprising then that data from Morningstar as well as our SMA survey show that assets in short-term bond funds and SMAs grew 12% and 16% respectively over the past year."

It continues, "With the expanded investor base, we've also seen a shift in the maturity profile of money market issuance. Recall the tug of war that used to exist between banks that want to issue longer-term and prime MMFs that want to stay short. Differences in regulations were driving issuers and investors in opposite directions from a maturity perspective. That said, this year we have seen a notable extension in issuer WAMs. In the bank space in particular, based on data from DTCC, we estimate WAMs of unsecured bank CP/CD in the money markets are about 50 days longer now than last summer."

The JP Morgan piece adds, "Away from credit, the amount of repo funding has also seen a significant increase this year. The shift in assets from prime MMFs to government MMFs changed the way issuers access money market funds for funding. Mirroring the shift in assets, banks began significantly borrowing from government MMFs on a secured basis. Year over year, dealer repo balances with MMFs grew about 30%, from $542bn as of last September to now slightly over $700bn.... From the perspective of government MMFs, the additional repo supply was welcomed. It came at a time when Treasury could not issue as many bills as it worked its way through the debt ceiling. With $2.0tn of AUM, government MMFs turned to repo as a source of supply. From the perspective of dealers, the increased demand for repo was also welcomed. Not only was it a cheaper source of funding, but it also allowed dealers to monetize their GC flows, by borrowing GC collateral in the tri-party market and lending it out in the GCF market. Dealers earn the spread in between."

It continues, "We think this type of trade is one of the reasons why we’ve seen such a large increase in repo balances with government MMFs among the French and Canadian banks. Indeed, a look at their US branch balance sheets shows similar growth in their reverse repo (asset) and repo (liabilities) balances.... It's also the case that we have seen government MMFs take on a more active role in centrally cleared repo, particularly in the form of sponsored repo programs. Though usage remains small (as of October month-end, only $12bn traded between FICC and government MMFs), we suspect this program will continue to grow as investors see this as an alternate source of supply to bills and discos."

Finally, they comment, "Ultimately, the implementation of MMF reform brought about significant changes to the money markets. We believe most of these changes have been positive: the investor base is more diversified, and the maturity profile of the CP/CD market is longer, both of which suggests less liquidity risk in the marketplace. The increased amount of repo funding has also been helpful against a backdrop of less bill supply, which in turn likely provided more liquidity to the Treasury markets. And based on what we know now, we don't anticipate these positive dynamics to change anytime soon."