News Archives: February, 2017
ICI released its latest monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds" updates yesterday. The first report showed that `money fund assets declined in January, and MMFs assets were down slightly over the 12 months through 1/31/17. ICI's second report confirmed that Treasury and Repo holdings plunged while Agencies and CDs jumped last month. (See our Feb. 10 News, "Feb. Money Fund Portfolio Holdings Show Repo Drop, Credit Rebound.") We review these latest reports, as well as a couple recent fund filings, below.
ICI's latest "Trends in Mutual Fund Investing - January 2017" shows a $46.6 billion decrease in money market fund assets in January to $2.682 trillion. The increase follows an increase of $6.5 billion in December and $55.3 billion in November, but a decrease of $12.1 billion in Oct. and $51.1 billion in Sept. In the 12 months through Jan. 31, money fund assets were down $54.4 billion, or 2.0%. (Month-to-date in February through 2/24/17, our Money Fund Intelligence Daily shows total assets up by $9.4 billion. `Govt MMFs are up $1.6 billion, while Prime MMFs are up $8.8 billion and Tax Exempt MMFs are down $881 million.)
The monthly report states, "The combined assets of the nation's mutual funds increased by $237.72 billion, or 1.5 percent, to $16.58 trillion in January, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $21.55 billion in January, compared with an outflow of $10.19 billion in December.... Money market funds had an outflow of $48.08 billion in January, compared with an inflow of $5.85 billion in December. In January funds offered primarily to institutions had an outflow of $38.47 billion and funds offered primarily to individuals had an outflow of $9.61 billion <b:>`_."
The latest "Trends" shows that Taxable MMFs fell sharply while Tax-Exempt MMFs increased slightly in January 2017. Taxable MMFs decreased by $46.8 billion, after rising $6.3 billion in Dec. and $53.4 billion in Nov., and dropping $11.7 billion the prior month. Tax-Exempt MMFs added $0.1 billion in Jan., after rising $0.3 billion in Dec. and $1.9 billion in Nov., after falling $0.4 billion in October.
Over 12 months through 1/31/17, MMFs showed $48.1 billion in outflows, with $48.2 billion flowing out of Taxable funds and $172 million flowing into Tax-Exempt funds. Money funds now represent 16.2% (down from 16.7% last month) of all mutual fund assets, while bond funds represent 22.3%. The total number of money market funds was down 1 to 420 in January, and down from 483 a year ago. (Tax exempt money funds have declined from 144 to 101 over the last year.)
ICI's Portfolio Holdings confirms a huge drop in Treasuries and Repo in January. Repo fell sharply but remained the largest portfolio segment, down by $35.6 billion, or 4.4%, to $764.6 billion or 30.0% of holdings. Repo increased by $227.1 billion over the past 12 months, or 42.3%. Treasury Bills & Securities remained in second place among composition segments, declining $36.1 billion, or -4.5%, to $760.0 billion, or 29.8% of holdings. Treasury holdings rose by $283.8 billion, or 59.6%, over the past year. U.S. Government Agency Securities remained in third place, rising $34.7 billion, or 5.1%, to $712.5 billion or 27.9% of holdings. Govt Agency holdings rose by $240.6 billion, or 51.0%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they increased $26.7 billion, or 18.1%, to $174.5 billion (6.8% of assets). CDs held by money funds fell by $402.4 billion, or 69.7%, over 12 months. Commercial Paper remained in fifth place but increased $8.2B, or 7.9%, to $112.0 billion (4.4% of assets). CP plummeted by $199.1 billion, or 64.0%, over one year. Notes (including Corporate and Bank) were up by $537 million, or 8.7%, to $6.7 billion (0.3% of assets), and Other holdings inched down to $20.8 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 11.5 thousand to 25.317 million, while the Number of Funds was flat at 319. Over the past 12 months, the number of accounts rose by 2.563 million and the number of funds declined by 20. The Average Maturity of Portfolios was 42 days in Jan., down 2 days from Dec. Over the past 12 months, WAMs of Taxable money funds have lengthened by 5 days.
In other news, a filing for Vanguard Ohio Tax-Exempt Money Market Fund says about the "Liquidation of Vanguard Ohio Tax-Exempt Money Market Fund," "On November 17, 2016, the board of trustees for Vanguard Ohio Tax-Exempt Money Market Fund (the Fund) approved a proposal to liquidate the Fund. Effective as of the close of business on February 15, 2017, the liquidation of the Fund is complete. In connection with the liquidation, shareholders may receive proceeds that are taxable. For most accounts, annual tax forms to assist you in preparing your income tax returns are distributed for each calendar year early in the following year. Please consult your tax advisor for detailed information about any tax consequences for you."
Another filing for the recently liquidated Trust for Credit Unions tells us, "At an in-person meeting held on February 10, 2017, the Board of Trustees of Trust for Credit Unions ... unanimously voted to change the investment adviser to ALM First Financial Advisors, LLC effective April 16, 2017.... At that meeting, the Board of Trustees of the Trust also approved an interim investment advisory agreement and a new investment advisory agreement with ALM First, on behalf of the Ultra-Short Duration Government Portfolio and Short Duration Portfolio.... The new investment advisory agreement contains substantially similar terms as the current investment advisory agreement with Goldman Sachs Asset Management, L.P., but includes lower investment advisory fees for the Portfolios of 0.12% of the first $250 million in assets, 0.10% of the assets between $250 million and $500 million, and 0.07% of the assets above $500 million, based on the aggregate average daily net assets of the Portfolios."
It adds, "The Board of Trustees of the Trust has also approved ALM First as the investment advisor pursuant to an investment advisory agreement for the Trust's Government Money Market Portfolio, effective as of the Effective Date. The Government Money Market Portfolio suspended its operations as of the close of business on May 30, 2014. For its services to the Government Money Market Portfolio, ALM First will be entitled to a fee of 0.10% of the first $50 million and 0.05% of the assets above $50 million, based on the average daily net assets of the Government Money Market Portfolio."
Federated Investors filed their latest "10-K Annual Report" with the Securities & Exchange Commission Friday. It says, "Federated Investors, Inc., a Pennsylvania corporation, together with its consolidated subsidiaries (collectively, Federated), is a leading provider of investment management products and related financial services. Federated has been in the investment management business since 1955 and is one of the largest investment managers in the United States (U.S.) with $365.9 billion in assets under management (AUM or managed assets) at December 31, 2016." We excerpt the highlights from the filing below, which provide an interesting look into the business and risks of the money market mutual fund industry.
The report says, "Federated provided investment advisory services to 124 sponsored investment companies and other funds (Federated Funds) as of December 31, 2016. Federated markets these funds to banks, broker/dealers and other financial intermediaries who use them to meet the needs of customers and/or clients (collectively, customers), including retail investors, corporations and retirement plans. The Federated Funds are domiciled in the U.S., with the exception of Federated International Funds Plc and Federated Unit Trust, both of which are domiciled in Ireland, the Federated Cash Management Funds, which are domiciled in the United Kingdom, the Federated Short-Term Daily U.S. Dollar Fund, Ltd., which is domiciled in the Cayman Islands."
It continues, "Of the 124 Federated Funds as of December 31, 2016, Federated's investment advisory subsidiaries managed 38 money market funds totaling $206.4 billion in AUM, 48 fixed-income funds with $39.5 billion in AUM and 38 equity funds with $36.2 billion in AUM. As of December 31, 2016, Federated provided investment advisory services to $83.8 billion in Separate Account assets. These Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit plans, corporations, trusts, foundations, endowments, sub-advised mutual funds and other accounts or products owned or sponsored by third parties."
Federated writes, "Throughout 2016, the FOMC deferred making increases in this target rate, but in December raised the federal funds target rate range by an additional 25 basis points to 0.50%-0.75%. The federal funds target rate, which drives short-term interest rates, had been close to zero for nearly seven years prior to the December 2015 increase. As a result of the long-term near-zero interest-rate environment, the gross yield earned by certain money market funds is not sufficient to cover all of the fund's operating expenses. Since the fourth quarter of 2008, Federated has voluntarily waived fees (either through fee waivers, reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields.... These fee waivers have been partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee Waivers."
They tell us, "Federated is one of the largest U.S. managers of money market assets, with $252.2 billion in such AUM at December 31, 2016. Federated has developed expertise in managing cash for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and competitive yields. Federated began selling money market fund products to institutions in 1974. Federated also manages retail money market products that are typically distributed through broker/dealers. At December 31, 2016, Federated managed money market assets in the following asset classes: government ($190.3 billion); prime ($46.8 billion); non-U.S. domiciled ($9.3 billion); and tax-free ($5.8 billion)."
The filing adds, "Federated's distribution strategy is to provide products and strategies geared toward financial intermediaries, primarily banks, broker/dealers and investment advisors and directly to institutions such as corporations and government entities. Federated provides comprehensive investment management to more than 8,500 institutions and intermediaries including corporations, government entities, insurance companies, foundations, endowments, banks and broker/dealers. Federated uses its trained sales force of over 200 representatives and managers to add new customer relationships and strengthen and expand existing relationships."
It also says, "Federated's investment products and strategies are distributed in four markets. These markets and the relative percentage of managed assets at December 31, 2016 attributable to such markets are as follows: wealth management and trust (40%); broker/dealer (34%); institutional (22%); and international (4%).... Federated pioneered the concept of providing liquidity management to bank trust departments through money market mutual funds in 1974, and has since expanded its services nationwide to institutional cash management and treasury professionals, as well as financial professionals.... The majority of Federated's managed assets from the wealth management channel are invested in money market funds.... Federated distributes its products and strategies in this market through a large, diversified group of over 1,300 national, regional and independent broker/dealers and bank broker/dealers.... Federated also offers money market mutual funds as cash management products designed for use by its broker/dealer customers."
Federated's 10-K states, "Increased regulation and oversight of the investment management industry in the U.S. continued in 2016. With the commencement of President Trump's administration in 2017.... Despite the regulatory moratorium and possibility for deregulation, additional regulation and oversight of the investment management industry is expected to continue in 2017, albeit possibly to a lesser extent. The increased regulation has required, and is expected to continue to require, additional internal and external resources to be devoted to technology, legal, compliance, operations and other efforts to address regulatory-related matters, and has caused, and may continue to cause, product structure, pricing, offering and development effort adjustments, as well as changes in asset flows and mix, customer relationships, revenues and operating income. The current regulatory environment has affected, and is expected to continue to affect, to varying degrees, Federated's business, results of operations, financial condition and/or cash flows."
It continues, "The implementation of changes stemming from the structural, operational and other requirements imposed pursuant to amendments to Rule 2a-7 under the 1940 Act (Rule 2a-7), and certain other regulations, adopted on July 23, 2014 (2014 Money Fund Rules), and related guidance (collectively, the 2014 Money Fund Rules and Guidance) was completed on or before October 14, 2016, the final compliance date for the 2014 Money Fund Rules. Subsequently, the SEC has announced that compliance with the structural, operational and other requirements imposed under the 2014 Money Fund Rules and Guidance will be an examination priority in 2017.... Given the regulatory moratorium and possibility for deregulation that exist in the current regulatory environment in the U.S., the degree of impact of the 2014 Money Fund Rules and Guidance, Final Fiduciary Rule and Other Regulatory Developments can vary and is uncertain."
Federated explains, "The current regulatory environment, including the SEC's 2014 Money Market Fund Rules and Guidance and the SEC's Final Fiduciary Rule, has impacted, and will continue to impact, Federated's business, results of operations, financial condition and/or cash flows. For example, the floating NAV for institutional and municipal (or tax-exempt) money market funds, and redemption fees and liquidity gates, required from and after October 14, 2016 under the 2014 Money Fund Rules and Guidance resulted in a shift in asset mix from institutional prime and municipal (or tax-exempt) money market funds to stable NAV government money market funds across the investment management industry and at Federated, which impacted its AUM, revenues and operating income. While management believes that, as interest rates rise, money market funds will benefit generally from increased yields, particularly as compared to deposit account alternatives and that, as spreads widen, investors who exited prime money market funds will likely reconsider their investment options over time, including Federated's prime private money market fund and prime collective fund, the degree of improvement to Federated's business can vary and is uncertain."
They add, "Federated has dedicated, and continues to dedicate, significant internal and external resources to analyze and address the 2014 Money Fund Rules and Guidance and the Final Fiduciary Rule, including considering and/or effecting legislation, regulation, product structure and development, information system development, reporting capability, business and other options that have been or may be available in an effort to minimize the potential impact of any adverse consequences. For example, Federated took steps to adjust its money market fund product line to offer a broad menu of institutional, municipal, prime, government, 60-day maximum maturity, 7-day maximum maturity and private and collective money market funds."
They also tell us, "Management believes that the floating NAV, and fees and gates, required by the 2014 Money Fund Rules, as well as the Final Fiduciary Rule and Other Regulatory Developments, will be detrimental to Federated's fund business. In addition to the impact on Federated's AUM, revenues, operating income and other aspects of Federated's business described above, on a cumulative basis, Federated's regulatory, product development and restructuring, and other efforts in response to the 2014 Money Fund Rules and Guidance, Final Fiduciary Rule and Other Regulatory Developments, including the internal and external resources dedicated to such efforts, have had, and may continue to have, a material impact on Federated's expenses and, in turn, financial performance."
Federated also comments on European money fund reforms, writing, "On December 7, 2016, the Committee of Permanent Representatives from Member States approved the initial draft of the EU money market fund reforms. On December 8, 2016, the European Parliament Committee on Economic and Monetary Affairs approved the initial draft of the reforms. Final approval of the reforms by the Council of Ministers and Plenary in the European Parliament is expected later in the first or second quarter of 2017. The final reforms provide for the following types of money market funds in the EU: (1) Government constant NAV (CNAV) funds; (2) Low volatility NAV (LVNAV) funds; (3) Short-term variable NAV (VNAV) funds; and (4) standard VNAV funds.... Unlike government CNAV and LVNAV funds, short-term VNAV and standard VNAV funds will not be subject to discretionary and mandatory redemption gates and/or liquidity fees.... Under the final EU money market fund reforms, sponsor support will be prohibited for all money market funds."
They state, "The EU money market fund reforms are expected to go into force 20 days after the publication of the final reforms in the Official Journal of the EU. The publication of the final reforms is expected to be published late in the second quarter of 2017 after the reforms receive final approval. If the EU money market reforms receive final approval in their current form, the EU money market fund reforms will be effective (i.e., must be complied with) in regards to new funds 12 months after the reforms go into force (or around late in the second quarter of 2018) and will be effective (i.e., must be complied with) in regards to existing funds 18 months after the reforms go into force (or around late in the fourth quarter of 2018). While the reforms will need to be complied with in 2018, government CNAV and LVNAV fund reforms will be subject to a future review by the European Commission in 2022.... [I]t is uncertain whether Brexit could delay implementation of the EU money market fund reforms."
Finally, the comment on "Risk of Federated's Money Market Products' Ability to Maintain a Stable Net Asset Value." The report explains, "Approximately 45% of Federated's total revenue for 2016 was attributable to money market assets. An investment in money market funds is neither insured nor guaranteed by the FDIC or any other government agency. Federated's retail and government money market funds, as well as its private and collective money market funds, seek to maintain a stable NAV.... It is possible for an investor to lose money by investing in these funds. Federated devotes substantial resources, such as significant credit analysis and attention to security valuation in connection with the management of its products and strategies. However, there is no guarantee that a money market fund will be able to preserve a stable NAV in the future.... If the NAV of a Federated stable NAV money market fund were to decline to less than $1.00 per share, such Federated money market fund would likely experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated's business, results of operations, financial condition and/or cash flows. It is also possible that, if an institutional prime or municipal (or tax-exempt) money market fund's fluctuating NAV consistently or significantly declines to less than $1.0000 per share, such Federated money market fund could experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated's business, results of operations, financial condition and/or cash flows."
State Street Global Advisors hosted a "State of the Markets 2017" webinar yesterday entitled, "Divergence & Opportunity in Global Cash Markets." Hosted by Portfolio Strategist Will Goldthwait, it featured Global Head Cash Management Pia McCusker and European Head of Cash Distribution Gunjan Chauhan, and featured rate hikes, the US debt ceiling and money fund reform in Europe. Goldthwait explains, "We hope you find today's discussion informative and useful. Today we are going to discuss three topics -- economic data and market developments, money market reform in Europe, and money market reform in the US." We excerpt many of the highlights below.
McCusker says, "With regards to rate hikes ... the Fed has been encouraged by the jobs data here in the US. [F]or the past 5 years the country has added, on average over 200k jobs per month, but we all know that and this has not been a concern. I think the key piece to the puzzle has been inflation.... These are all welcome signals for the Fed and should allow them to slowly move rates higher in 2017. In addition, politics aside, we have an administration that has promised a trifecta with of infrastructure spending and stimulus, tax cuts, and deregulations. These actions should be bearish for bonds and should continue to support the Fed gradually moving short term interest rates higher, to cool what might be an overheating economy. Nevertheless, we still remain cautious ... recall that at the end of 2015, the Fed was setting up for 4 interest rate hikes for 2016, only to achieve one."
On the debt ceiling, she comments, "Ultimately, under the language of the debt limit suspension, the Treasury has to get its cash balances down to $23B by March 15th. To date, the Treasury has cut bill issuance significantly slower than expected.... Either way, we expect to see issuance ramp back up immediately as soon as they meet the cash target on the date.... The Treasury will utilize their extraordinary measures to gain borrowing authority in the short term period. How long they can issue before exhausting their extraordinary measures will depend on the strength of the tax receipts in April. Most market participants are anticipating not hitting a drop-dead default day until late September or early October."
McCusker adds, "It is also possible that since the new Treasury Secretary Mnuchin has been confirmed, he can convince Congress to pass either a new debt limit or a new suspension, avoiding the whole mess totally. This is not the current base-case scenario but has to be assigned a non-zero probability."
Goldthwait then asked about European MMF reforms. SSGA's Chauhan responded, "Let's frame the discussion with some stats. First, we know VNAV funds tend to be concentrated in France ... that's a market that is a little over 300 billion. But the rules regarding that market are going to stay in place, so let's assume this remains relatively as is. So that turns our attention on to the CNAV funds, of which there is a little more than $650 billion. Two-thirds of those assets are in US dollars. `Given the behavior of what US prime clients last year actually experienced, we will be keen to understand how CNAV dollar clients respond to reform. That leaves approximately 90 billion sterling assets and approximately 170 billion in Euro CNAV balances."
She continues, "Now let's consider the potential rule changes. EU money fund reform divides MMFs into four broad categories: 1) Public Debt C-NAV funds, maintaining a constant share price to 2 decimal places, and will be largely made up of government debt; 2) Low Volatility NAV funds (LVNAV)– investing in prime assets, seeking to retain constant share price with 2 decimal places; 3) Short-Term VNAV – Features less conservative diversification and liquidity requirements; and, 4) Standard VNAV – Identical to ST VNAV funds, with longer maturity and asset life constraints. CNAV and LVNAV will be subject to liquidity gates and redemption fees however, VNAV funds will not.... It's the exact opposite of what happened in the states to some extent."
Chauhan asks, "So how will clients react? Those clients that are in VNAV funds now should carry on business as usual, right? Well we will see. Whilst there is a high level view on what clients are possibly signaling, I feel it is too early to state for certain. The devil will be in the details around how important gates and fees will be versus a V-NAV construct, albeit in government or LVNAV structures. As implementation draws closer, we would expect to see clients begin to move assets appropriately into their chosen go-forward strategies, and we are spending a great deal of time ensuring we are positioned to support clients through this decision making process at SSGA."
Goldthwait responded to a Crane Data question on the timing of the European changes after the call, explaining, "The rule changes have been announced and are in the process of being translated into the various languages. Then legal will review, and it's hoped to have it published by the end of March 2017. From that date, new products will have 12 months to become compliant with the rule changes and existing products will have 18 months. So that puts us at end of Q3 or beginning of Q4 2018 ... [but] still no firm date."
He then asked McCusker about money returning to Prime funds. She answered, "It's interesting and a little bit puzzling. We have had over 100 face to face clients meetings so far this year (2017) and many of those clients are talking about moving back to prime. However, it has been a pretty gradual process. Thus far we have only seen about 16 billion move back into prime. `We have seen the spread between prime and government funds, on average, move to 35 basis points, with some fund spreads being as wide as 40 basis points."
McCusker continues, "We have also been monitoring NAVs and liquidity levels.... NAVs on the 5 largest prime MMFs [have] been tracking in a tight range, never moving more than 2 basis points in a single day and often moving back to the previous point the next day or a few days later. The other aspect we have been keeping a close eye on is liquidity.... [It] has been, as expected, hovering right around 50%.... These are all positive attributes for investors, so the opportunity is there. Whether it's a prime fund or an ultra-short term bond fund, the market is willing to pay a larger premium than it has prior to reform."
She says, "Prior to reform over the course of 10 years prime funds on average were yielding approximately 10-15 basis points above government funds. Granted much has changed around the structure of a prime fund, but for many investors a yield pickup of 30-40 basis points is significant to their budget. Ultra-short term bond funds also provide an interesting opportunity. We have seen reasonable growth in the sector of ultra-shorts. And those funds we manage here at SSGA have provided good relative value for our clients."
Goldthwait adds, "I was just visiting with three clients yesterday and they all talked about moving back into prime for some portion of their cash, but had no time line in mind. All three were interested in seeing the flows before they made any adjustments to their allocations."
Finally, they discuss negative returns in Europe. Chauhan states, "In the EUR market, much like in the CHF market negative yield have become a new reality and one that cash investors have come to accept as the price of holding liquidity. There are opportunities to mitigate, but at the compromise of either credit quality or additional duration. Ultimately it comes down to why clients are holding liquidity and remembering a cash investor's objective. We understand cash at SSGA, and we appreciate that negative yields are absolutely painful. But we also take on board how incrementally important holding liquidity is for our clients.... [T]herefore we see it as our role to protect that capital, liquidity and access to cash for our clients."
The SEC's latest "Money Market Fund Statistics" data summary shows that total assets decreased in January, with Prime funds gaining $11.7 billion, Tax Exempt MMFs gaining $0.9 billion and Government funds losing $53.8 billion. Gross yields continued higher for Prime MMFs and Govt MMFs, but declined for Tax Exempt MMFs. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. Money market fund assets decreased by $41.1 billion in January to $2.917 trillion. (The SEC's series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies, though we're in the process of adding many of these to our collections.) Overall assets decreased by $16.6 billon in December, increased by $60.1 billion in November, and fell $30.0 billion in October. Over 12 months through 1/31/17, total MMF assets declined by $146.7 billion, or 4.8%.
Of the $2.917 trillion in assets, $562.1 billion was in Prime funds, which increased by $11.7 billion in Jan., after decreasing $15.5 billion in December, increasing $3.4 billion in Nov., and falling $177.4 billion in October, $293.2 billion in Sept., and $201.3 billion in August. Prime funds represented 19.3% of total assets at the end of January. They've declined by $1.003 trillion the past 12 months, or 64.1%.
Government & Treasury funds totaled $2.220 billion, or 76.1% of assets,, down $53.8 billion in January, after falling $10.2 billion in Dec., and rising $56.4 billion in November, $148.0 billion in October, $268.3 billion in Sept., and $212.0 billion in August. Govt & Treas MMFs are up $977 billion over 12 months (78.7%). Tax Exempt Funds increased $0.9 billion to $135.4 billion, or 4.6% of all assets. The number of money funds was 411, down 2 from last month and down 86 from 1/31/16.
Yields increased in January for Taxable MMFs. The Weighted Average Gross 7-Day Yield for Prime Funds on Jan. 31 was 0.91%, up 4 basis point from the previous month, and more than double the 0.49% of January 2016. Gross yields increased to 0.60% for Government/Treasury funds, up 0.04% from the previous month and up 0.26% since 1/16. Tax Exempt Weighted Average Gross Yields decreased 0.05% in January to 0.72%, but they've risen 65 bps since 1/31/16).
The Weighted Average Net Prime Yield was 0.67%, up 0.05% from the previous month and up 0.38% since 1/16. Over 12 months, 7-day gross yields for Prime are up 42 basis points (to 0.91%) and up 4 basis points the past month. The Weighted Average Prime Expense Ratio was 0.24% in January (down one bps from December). Prime expense ratios have risen from 0.20% in January 2016. (Note: These averages are asset-weighted.)
Weighted Average Maturities shortened and liquidity moved lower in January. The average Weighted Average Life, or WAL, was 60.4 days (down 1.1 days from last month) for Prime funds, 96.2 days (up 0.1 days) for Government/Treasury funds, and 26.9 days (down 1.6 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 30.8 days (down 0.5 days from the previous month) for Prime funds, 43.5 days (down 2.1 days) for Govt/Treasury funds, and 24.5 days (down 1.9 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 33.6% in January (down 2.0% from previous month). Total Weekly Liquidity was 50.0% (down 1.2%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $64.2 billion, followed by the US with $58.0 billion. France was third with $55.0B, followed by Japan with $43.6 billion, Sweden ($38.9B), Australia/New Zealand with $33.0B, Germany ($25.3B) and the UK ($24.1B). The Netherlands ($16.8B) and Switzerland ($11.8B) rounded out the top 10.
The only gainers among Prime MMF bank related securities for the month included: Sweden (up $15.5 billion), France (up $13.4B), the UK (up $10.5B), Belgium (up $6.0B), Germany (up $5.5B), and the Netherlands (up $4.4B). The biggest drops came from Canada (down $6.3B), Australia/New Zealand (down $1.5B), Japan (down $1.2B), and the US (down $477M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $191.9B (up $59.6B from last month), while the Eurozone subset had $107.6 billion (up $29.1B). The Americas had $122.8 billion (down from $129.7B), while Asian and Pacific had $86.1 billion (down from $88.7B).
Of the $562.1 billion in Prime MMF Portfolios as of Jan. 31, $232.3B (41.5%) was in CDs (up from $191.4B), $105.9B (18.9%) was in Government securities (including direct and repo), down from $138.1B, $104.0B (18.6%) was held in Non-Financial CP and Other Short Term Securities (down from $104.5B), $86.9B (15.5%) was in Financial Company CP (up from $78.6B), and $31.3B (5.6%) was in ABCP (down from $32.5B).
The Proportion of Non-Government Securities in All Taxable Funds was 16.8% at month-end, up from 15.0% the previous month. All MMF Repo with Federal Reserve decreased to $165.2B in January from $403.4B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 38.1% were in maturities of 60 days and over (up from 37.4%), while 6.9% were in maturities of 180 days and over (unchanged).
This month, Money Fund Intelligence speaks with Eric Thole, CEO of U.S. Bancorp Asset Management and President of First American Funds, and Jeff Plotnik, Director of Money Market Fund Management for First American Funds. We look back at the implementation of reforms and changes in 2016, and we discuss the current environment and future of money funds. Our Q&A follows. (This interview is reprinted from the February issue of our flagship Money Fund Intelligence newsletter; e-mail info@cranedata.com to request the full issue.)
MFI: What is your biggest priority? Thole: Our biggest priority today is very similar to what it's been in past years. We continue to diligently work with our shareholders. Money fund reform hit its finish line back in October of last year, but it's certainly the starting line for a new way of thinking about cash management. The operational pieces have been successfully completed. But we continue to see money in motion and our goal is to ensure we have the products to meet our shareholder's needs.
Plotnik: From a management standpoint, we're still adjusting to the new universe. We have more government cash than we once had, so we're really focused on putting that to work. It's harder to add value in that space, so you're always hunting and pecking to find product. We're also adjusting to the new prime environment.... It's early and we're still getting feedback through communications with our shareholders in regards to what’s important and what they want to see.
Thole: We're focused on having as many conversations as possible with various shareholders while making sure they understand the new pieces of money fund reform. We do expect, at least over time, shareholders are going to be excited about the yield differential they may pick up in a prime product and may -- at least for a portion of their money -- look to move back into the prime space.
MFI: What's your biggest challenge? Plotnik: We're approaching our 35th anniversary this year. Historically, pre-2009, as a manager my biggest concern was, 'Where can you get that extra basis point for your shareholders?' That was what we focused on ... and that's changed. In today's world, I find the biggest challenge, at least for me, comes from the regulatory and compliance side. As a portfolio manager, it's my job to deliver the best performance I can for our shareholders. But we're also dealing with additional regulatory restrictions from the SEC, from our own internal guidelines, from the rating agencies, etc., like never before and they all come with a heightened sense of scrutiny.
At the same time, we're thinking about the floating NAV, and the perceptions of gates and fees. So a lot goes into each trade. We have the processes that check, double-check, and triple-check all our activities. Even though these processes are very thorough and dependable, when it comes to compliance, seeking perfection is the only outcome that's acceptable. We as managers are ultimately responsible for the portfolios, and all of the regulatory requirements that have been implemented are additions to the job that require an extra layer of diligence.
Thole: We at First American hit the reform deadlines on time, but it wasn't without its complexity. During reform, we were constantly in touch with the board of directors. We still are today, but as we move into 2017, we're talking with the board about growth and shareholder needs from a cash management perspective. So our focus has returned to more forward-looking business considerations and making sure we have the right products that meet our shareholder's needs.
MFI: What are you buying? Plotnik: We obviously buy the most product in the government space. The bigger challenges are getting our government portfolios invested efficiently with large growth assets as a result of money fund reform. There's a larger reliance on the Fed's reverse repurchase program (RRP) as part of your portfolio, especially in the government and Treasury funds. We are buying the same products we have historically purchased in these funds, but finding enough has become the challenge.
In terms of the prime space, we obviously have smaller portfolios to work with now. When considering the institutional fund, we're more sensitive to NAV volatility and the perception of gates and fees, as opposed to the retail fund which just has the gates and fees considerations. Although our liquidity metrics have been consistent, we find it prudent to try and find value in shorter tenor securities, as we are more focused on potential price volatility. We're also more focused on finding value with securities in the three-to-seven month area with really good credit and a clean structure vs. pre-reform when 13-month tenors were much more common.
Getting invested efficiently back in October when floating NAV was being implemented was easier because issuers were really focused on getting funded ahead of reform. But today, only a few months after reform, I am finding that issuers once again are becoming more selective. I think they have adjusted well to the new environment. Nonetheless, we have been able to get invested with the liquidity and credit structure that we're looking for, so the yield opportunity is still there, providing an attractive yield for prime fund investors.
MFI: Are there pros and cons to size now on the Govt fund side? Plotnik: Yes. One of the cons is prior to reform we were able to get nearly the entire portfolio invested in government-sponsored enterprises (GSE) and dealer repos. Today the supply just isn't there to satisfy the size of the universe. I think everyone is struggling to a certain extent to fill those buckets.... The RRP is often our biggest single repo exposure. The sheer demand for the GSE product has forced a yield spread differential of a basis point or two in many cases. On the pro side, government funds are a simple and easy product for institutional investors. They are a great liquidity tool for our shareholders and their increased size allows us to accommodate investors of almost any size.
MFI: Can you touch on the debt ceiling? Plotnik: We've been through a couple of these debt ceiling fire drills before. Typically, we try to avoid those particular notes and bills surrounding key debt ceiling dates. At this point ... there hasn't been a lot of negative impact attributed directly to the upcoming debt ceiling debate, and we don't see any noticeable market stress at this time. I expect that at some point, as we approach the debt ceiling date, it will hit the headlines and there will be some market reaction. But we're not there yet. We are aware of it and are investing around it as best we can.
MFI: What are customers concerned about? Thole: We're hearing about yields <b:>`_. Shareholders and investment professionals tell us they're excited about potential for increased investment yields. There hasn't been a lot of noise around the floating NAV in prime funds. We continue to educate around fees and gates to make sure the shareholders understand how they work. For the most part, shareholders are focused on the utility of money funds as well as the yield. Many of our shareholders are enjoying the increase they received from the latest rate hike. If the trajectory of the market continues -- and we are forecasting multiple rate hikes this year -- the yield pickup for shareholders will continue. It may take more time before significant assets flow back into the prime space.
MFI: What about fee waivers and costs? Thole: Think about institutional prime and the fact that many institutional prime products are striking multiple NAVs per day. The operational costs have gone up in those particular products in general. If you think about the first two rate hikes, they absolutely were important not only from a shareholders perspective, but also from a business perspective. We're not out of the woods yet. Like many in the industry, we need another rate hike from a fee waiver perspective. The shareholders are going to continue to enjoy the benefit of the rising rate environment. This is important for both us and our shareholders; it continues to put a positive tailwind on money funds in general throughout 2017 and into the future.
MFI: What's your outlook for 2017? Plotnik: We expect higher rates this year, so that's certainly going to be attractive to our shareholders.... I would speculate that if you give it time, more NAV history and 40 or 50 basis points in yield spread, those investors that are allowed to will move back from government to prime funds.... I believe there is a sizeable client segment that can move back when they feel the environment is right [and] I believe 2017 is going to be good year. It's going to be a solid future for the money fund industry, as well as investors and managers on the short end of the curve. Thole: Higher rates translate into higher yields for shareholders, and that's a good thing for the money fund industry.
PIMCO posted a brief Friday entitled, "Encroaching Risks to Capital Preservation." Written by Jerome Schneider, head of short-term portfolio management, the piece discusses rising rates and inflation and the benefits of moving beyond money markets. It says, "Positive economic data continue apace in the U.S., from firming employment to renewed consumer spending. The latest news on inflation confirms the trend: The Consumer Price Index (CPI) showed inflation running at 2.5% year-over-year." We review this below, along with excerpts from Fidelity's Annual Report. (Note: PIMCO's Jerome Schneider is scheduled to give the keynote talk at next month's Bond Fund Symposium, which is scheduled to take place March 23-24 at the Boston Hyatt Regency.)
PIMCO's piece explains, "The data do not even tell the whole story: Also in play are the Trump administration's growth-oriented fiscal stimulus and tax policies. Despite the long road from policy articulation to policy implementation, the Federal Reserve is eager not to be perceived to be "behind the curve," as Fed Chair Janet Yellen recently reiterated the Fed's commitment to continue on the path toward interest rate normalization. As the signs of growth quietly mount, investors should prepare for the shift toward a rising rate environment by focusing on income and capital preservation."
It continues, "The costs of capital preservation have been rising for some time due to low interest rates. Investors using traditional cash liquidity management instruments such as money market funds may want to consider the ramifications of remaining in strategies that offer liquidity but little in income or return, especially in the face of rising rates."
Schneider writes, "We urge investors focused on capital preservation to consider whether it makes sense for them to limit their exposure to the combination of low returns and creeping inflation during the Fed's rate normalization process. The combination could potentially erode the purchasing power of a pure capital preservation portfolio, including traditional money market strategies, throughout 2017 and beyond. Instead, actively managing cash and short-term allocations may help maximize returns and thus aim to mitigate the impact of inflation on the purchasing power of invested capital."
He adds, "An improving growth picture gives fodder to the Fed to increase rates this year -- possibly several times. It should also be a signal for capital preservation and liquidity investors to read between the data lines: The improving economy may silently undermine their strategic objectives. Without prudent action and vigilant monitoring, investors with $1 today may find they have 98 cents of purchasing power, or even less, next year."
In other news, Fidelity Investments released its "2016 Shareholder Report" on Friday. It comments on money market and bond funds, "The fixed income division continued to post strong results. For the one-, three-, and five-year periods, our investment-grade bond funds beat 67%, 71%, and 61% of their peers, respectively, while our industry-leading money market funds beat 80%, 75%, and 74% of peers over the same periods."
It also says, "Mirroring the industry-wide movement from active strategies toward passive ones, Fidelity's actively managed equity mutual funds saw $57.7 billion in net outflows during the year. These outflows were offset by $19.1 billion of flows into our managed account products, $22.6 billion of flows into money market funds, and $16.1 billion of flows into Fidelity index funds. In June, we announced a series of enhancements to our index mutual fund lineup, including expanded customer eligibility for institutional share classes and three new funds. We also reduced total expenses on 27 of our equity and bond index mutual funds and ETFs."
Fidelity tells us, "Asset Management's Bond team continued to do an outstanding job of delivering strong, consistent risk-adjusted long-term performance. For the one-, three-, and five-year periods ending December 31, FMRCo investment grade bond funds beat 67%, 71%, and 61% of peers, respectively. Fidelity's bond products posted inflows of $14.8 billion in 2016. In investment-grade bond -- by far the largest fixed income category in the marketplace -- Fidelity captured 8% of industry flows, outpacing its 6% market share."
They continue, "AM also saw continued success in its money market fund franchise, following a series of changes to industry rules by the Securities and Exchange Commission. Fidelity implemented a product plan designed to offer investors choice and to position the business for future growth, while ensuring compliance with the new rules. During 2016, Fidelity increased its industry-leading market share to 18%, with $485.8 billion in AUM."
The report adds, "The FIAM team also successfully navigated the federally mandated changes to institutional money market funds, which, after a two-year preparation process, were implemented in October. With average institutional money market assets of $142 billion, FIAM averaged market share of 8% in 2016."
Finally, it says, "Certificates of deposit (CDs) continued to be popular in the current low interest rate environment. During the year, FCM added 30 new banks, bringing the total number of banking relationships to more than 100, and originated $19.2 billion in CDs for Fidelity customers, a new high."
The Investment Company Institute released its latest weekly "Money Market Mutual Fund Assets" report and monthly "Money Market Fund Holdings" summary (with data as of Jan. 31, 2017) yesterday. The former shows Prime assets increasing for the second week in a row, while the latter, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds, also shows Prime assets and European-related holdings increasing. (See our Feb. 10 News, "Feb. Money Fund Portfolio Holdings Show Repo Drop, Credit Rebound.")
ICI's MMF Assets release says, "Total money market fund assets decreased by $2.03 billion to $2.67 trillion for the week ended Wednesday, February 15, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $4.77 billion and prime funds increased by $2.45 billion. Tax-exempt money market funds increased by $290 million." `Total Government MMF assets, which include Treasury funds too and which represent 80.5% of all money funds, stand at $2.152 trillion, while Total Prime MMFs, which total 14.6%, stand at $390.5 billion. Tax Exempt MMFs total $131.8 billion, or 4.9%.
It explains, "Assets of retail money market funds decreased by $3.21 billion to $976.15 billion. Among retail funds, government money market fund assets decreased by $2.55 billion to $599.16 billion, prime money market fund assets decreased by $150 million to $251.03 billion, and tax-exempt fund assets decreased by $510 million to $125.96 billion." `Retail assets account for over a third of total assets, or 36.5%, and Government Retail assets make up 61.4% of all Retail MMFs.
The release continues, "Assets of institutional money market funds increased by $1.18 billion to $1.70 trillion. Among institutional funds, government money market fund assets decreased by $2.22 billion to $1.55 trillion, prime money market fund assets increased by $2.60 billion to $139.42 billion, and tax-exempt fund assets increased by $790 million to $5.80 billion." Institutional assets account for 63.5% of all MMF assets, with Government Inst assets making up 91.5% of all Institutional MMFs.
ICI's statistics show Prime money fund assets rising to their highest level since October 12, 2016, just prior to Money Fund Reforms going into effect. They've increased in seven of the past eight weeks, rising by $15.6 billion, or 4.2% since 12/21/16. Government money market fund assets have fallen in six of these same eight weeks, declining by $54.6 billion, or 2.5%. Institutional assets accounted for all of the gains in Prime (up $16.3 billion), and almost all Government declines (down $49.7 billion).
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in January, prime money market funds held 24.0 percent of their portfolios in daily liquid assets and 44.6 percent in weekly liquid assets, while government money market funds held 57.0 percent of their portfolios in daily liquid assets and 73.8 percent in weekly liquid assets." Prime DLA fell from 31.2% last month and Prime WLA fell from 45.6% last month.
It explains, "At the end of January, prime funds had a weighted average maturity (WAM) of 35 days and a weighted average life (WAL) of 68 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 44 days and a WAL of 97 days." Prime WAMs were up one day from the prior month, and WALs were also up by one day, while Govt WAMs decreased by 2 days and WALs were flat.
On Holdings By Region of Issuer, it adds, "Prime money market funds' holdings attributable to the Americas declined from $192.64 billion in December to $165.15 billion in January. Government money market funds' holdings attributable to the Americas declined from $2,002.11 billion in December to $1,812.90 billion in January."
The Prime Money Market Funds by Region of Issuer table shows Americas at $165.2 billion, or 43.0%; Asia and Pacific at $75.1 billion, or 19.5%; Europe at $141.2 billion, or 36.7%; and Other (including Supranational) at $2.8 billion, or 0.08%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.813 trillion, or 83.1%; Asia and Pacific at $79.0 billion, or 3.6%; and Europe at $288.9 billion, or 13.2%.
The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data. The report includes all money market funds registered under the Securities Act of 1933 and the Investment Company Act of 1940, that are publicly offered. All master funds are excluded, but feeders are apportioned from the corresponding master and included in the report."
Treasury Strategies published a statement entitled, "Questions for the Record," following MD Tony Carfang's earlier appearance at a Congressional hearing on, "The Impact of Regulations on Short-Term Financing," before the "Subcommittee on Capital Markets and Government Sponsored Enterprises." (See our Dec. 16 News, "Money Fund Assets Rise Again, Prime Up; Carfang Testifies on Impacts," and see the press release, "Treasury Strategies Testifies on 'The Impact of Regulations on Short-Term Financing' to the U.S. Congress.") We summarize the letter below, and we also cover Reuters' story on the OFR's Floating NAV brief.
Carfang says in the letter, "Thank you for the opportunity to supplement testimony from the hearing. In this letter, I address the specific question from Representative Rothfus regarding the recently implemented Money Market Fund (MMF) regulations and also fill in some blanks from the original hearing."
In his "Overview," he explains, "New regulations which went into effect on October 14 will NOT achieve their stated objective of preventing bailouts and maintaining market stability, since most money market assets are not subject to the rule. The entire treasury and government MMF market, Local Government Investment Pools, retail MMFs of all types, and bank short term investment funds are all exempt. Of all the investors in the marketplace and all the investment options available (tens of trillions of dollars), the rule singles out just one segment -- "non-natural persons" investing in Prime Funds and Tax Exempt Funds for draconian regulation."
Carfang continues, "Prime money funds (PMMFs) are a key source of funding for the private sector. Both banks and corporations have relied upon Prime MMF funding for decades. Tax Exempt funds (TEMMFs) are a key source of funding for municipalities, universities and hospitals.... $1.17 trillion or 73% of the market has left PMMFs. $130 billion or 50% of the market has left TEMMFs. So the rule essentially eradicated the part of the market it tried to "improve," while leaving far larger segments of the market unaddressed."
He tells us, "One especially onerous part of the regulation prohibits the use of standard accounting methods (amortized cost) for funds with non-natural persons as investors. It was this broadly accepted accounting principal which enabled funds to maintain a constant net asset value (CNAV) of $1.00 per share to investors. Because of this prohibition, the institutional Prime and Tax Exempt MMFs must now float their net asset values. Reinstating amortized cost accounting for all MMF investors, both natural persons and non-natural persons, is such an obvious and benign remedy for the deleterious $1.3 trillion market shift we have just experienced, that it should be done immediately. Amortized cost accounting is an accounting principal used by almost all banks, almost all corporations and most other investors including all Treasury MMFs and all Government MMFs for their own portfolios."
Carfang adds, "While some are calling for further study before deciding how to proceed, others ask if there are some obvious fixes to implement immediately. As stated above, immediately reinstating a constant NAV for all investors in all MMFs is an obvious and benign remedy for these threshold issues. We continue to be concerned about the implementation of multiple simultaneous regulations affecting corporate finance and investment. We do believe further study of the simultaneous impact is required, but not at the expense of delaying the action recommended above. With the regulatory-induced demise of Prime and Tax Exempt MMFs, the market has lost a $1.3 trillion shock absorber, and America's businesses and municipalities have lost a $1.3 trillion primary source of capital."
Finally, he writes, "FSOC recently applauded itself for the orderly flow of funds out of Prime Funds as the October regulations took hold. But we observe with great concern that is hardly a market test of the implications of the rule. That test comes in some unknown future stress scenario, not during a transition which was signaled two years in advance. Not until that next stress event occurs, will we be able to observe how markets react and adjust, absent the $1.3 trillion shock absorbing capacity of the MMFs that have disappeared."
In other news, Reuters writes "`Money market funds calm since rule on floating values began: government." The article explains, "Money market funds have kept an even keel since a new U.S. rule on their net asset values went into effect last October, according to federal research released on Tuesday, indicating that it may help create stability in a market that experienced large runs in the 2007-09 financial crisis." (See our Feb. 15 Link of the Day, "OFR Blog: NAVs Barely Floating.")
The article explains, "Last Oct. 14, institutional prime funds, which mostly invest in corporate debt, had to be in full compliance with the rule requiring them to float their net asset values, or NAVs. Leading up to the deadline, money raced out of prime funds into ones invested in government securities, and policymakers and some buyers grew anxious about long-term rockiness."
Reuters quotes the Office of Financial Research (ORF) report "Money Market Funds' Floating NAVs Stay in Narrow Range for Now," "Since NAVs began floating, money markets have been calm.... The extent to which floating NAVs might vary during market cycles will not be known until money market funds again come under stress.... Some industry observers worry that variation in floating NAVs might raise investors' concerns and still create runs."
The piece adds, "The rule was created to prevent runs on the funds seen during the crisis when the NAV of a large money market fund fell below $1 per share and spooked large investors into rapidly pulling money from the funds. So far, floating NAVs, which are market-based, have not varied much from an even $1, said the research office." (Note: OFR also recently updated its "Money Fund Monitor chart of money fund manager assets with Jan. 31, 2017 data.)
The February issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Tuesday, features the lead story, "JP Morgan on Ultra-Short Bond 'Alt-Cash' Space," which reviews a recent J.P. Morgan Securities' "Short Term Market Outlook and Strategy". It also includes the article, "BFU: Crane & Hiatt on Ultra-Shorts," which excerpts from our recent Money Fund University session on short-term bond funds. In addition, we recap the latest Bond Fund News, including the brief, "Bond Fund Returns Higher in Jan.; Yields Move Lower." BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the latest BFI below. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS data spreadsheet. Also, for those planning on attending, please register soon and make hotel reservations for our upcoming Bond Fund Symposium, March 23-24 in Boston.)
Our lead Bond Fund Intelligence story says, "J.P. Morgan Securities comments in a recent 'Short Term Market Outlook and Strategy' about ultra-short bond funds and the new 'alt-cash' space. Authors Alex Roever, Teresa Ho and John Iborg write, "Ultrashort and short-term bond funds are one subsector of the non 2a-7 space that have received a relatively increased amount of attention post-MMF reform. These 'alt-cash' vehicles are comprised of ETFs and open-ended mutual funds that invest primarily in high grade fixed income securities maturing anywhere between 6 months to 3.5 years -- well beyond what most consider to be the traditional money market arena."
It continues, "They say, '`We consider a fund to be ultrashort if its average portfolio duration is between 0.5-1.5 years. Funds with average portfolio durations of 1.5-3.5 years are grouped into the short term bond category. Furthermore, within each category, we have identified four prevalent investing strategies -- government, conservative credit, credit, and multi-sector."
JPM tells us, "Government funds invest the majority of their portfolios into US Treasury securities and/or agencies or securities backed by agencies. Conservative credit funds mainly buy A-rated or higher corporate bonds. Credit funds are somewhat risker, in that they invest in corporates down to BB. Lastly, multi-sector funds allocate their respective portfolios across corporates, securitized products, Treasuries and cash at their own discretion."
BFI's BFU Profile says, "Last month, Crane Data hosted its 'basic training' Money Fund University event, which included a segment on ultra-short bond funds entitled, 'Bond Fund University.' This last session featured our `Peter Crane, as well as Eric Hiatt, Director & PM at BlackRock. We excerpt from some of the comments and issues discussed during this segment below."
Crane explained, "One of the things we're going to hit and focus on is just trying to find definitions within the ultra-short bond fund category. My clients, money market funds, issuers, everybody is looking for what's next.... A lot of people are placing big bets on segmentation on money moving outside money market mutual funds. We'll talk about the success they've had to date, and also why they haven't had greater success. One of the big reasons has been that the yield advantage just hasn't been there to date, but now with the Fed moving this may change."
Our profile adds, "The MFU host commented on the overall growth of bond fund assets, 'Bond fund assets ... surpassed the level of money fund assets in 2010.... Bond fund assets have been on absolute tear. They currently total over $3.5 trillion. There's $425 billion in ETF assets, that aren't on there as well. So, the bond fund and ETF total is almost $4.0 trillion." Crane adds, "You have seen a couple of periods, the Taper Tantrum, in November just ahead of the Trump victory, you had some outflows, but the inflows came right back. Bond funds have been a juggernaut as far as the amount of money they've been getting."
A Bond Fund News brief on "Bond Fund Returns" explains, "Returns rose across most of the Crane BFI Indexes. Our BFI Total Index averaged a 1-month return of 0.49% and gained 3.90% over 12 months. The BFI 100 had a return of 0.49% in Jan. and rose 4.62% for the year. The BFI Conservative Ultra-Short Index returned 0.11% and was up 1.17% in '16; the BFI Ultra-Short Index had a 1-month return of 0.15% and 1.55% for the year. Our BFI Short-Term Index returned 0.35% and 2.74% for the month and year. The BFI High Yield Index increased 1.08% in Jan. and is up 14.83% in 2016."
Another brief, explains, "ICI's latest "Combined Estimated Long-Term Fund Flows and ETF Net Issuance" shows bond fund assets rising for the 5th week in a row. Bond funds had estimated inflows of $9.39 billion for the week, compared to estimated inflows of $8.16 billion during the previous week. Taxable bond funds saw estimated inflows of $8.52 billion, and municipal bond funds had estimated inflows of $878 million."
A sidebar entitled, "Thomson Reuters Lipper Flow Data," explains, "The net inflows for taxable bond funds were relatively evenly split between mutual funds (+$4.5 billion) and ETFs (+$3.0 billion). It was the sixth straight weekly net inflows for taxable bond mutual funds and the third straight for ETFs. For mutual funds the loan participation peer group once again led the way with net inflows of almost $750 million."
Finally, Morningstar recently featured an article entitled, "The Nominees for Fixed-Income Fund Manager of the Year," writing, "The two big bond stories of 2016 were the sharp reversal in the path of bond yields midyear and an impressive rally in corporates. [B]ond yields shifted down during the first part of 2016. By the 3rd quarter, though, bond yields were edging upward, a trend that accelerated following the election. The Fed hiked rates by 25 bps in mid-December, and most bond funds were in negative territory for the 4th quarter."
They add, "This year's nominees for Fixed-Income Fund Manager of the Year are as follows: Mary Ellen Stanek and Team, Baird Core Plus Bond (BCOIX); Fixed-Income Investment Policy Committee, Dodge & Cox Income (DODIX); Ford O'Neil and Team, Fidelity Total Bond (FTBFX); Ray Kennedy, Mark Hudoff, Patrick Meegan, and Richard Mak, Hotchkis & Wiley High Yield (HWHIX); Michael Hasenstab and Sonal Desai, Templeton Global Bond (TGBAX); Templeton Global Total Return (TTRZX), and Templeton Global Income."
Capital Advisors Group writes "Using Separately Managed Accounts (SMAs) to Ride the Tides of Uncertainty," which explains, "Recent events serve as a prelude to what is to come from the new administration. Active cash portfolio management with a separate account solution helps manage policy uncertainty, market volatility, headline and geopolitical risk. Fiscal and monetary policies, international relations and political conflicts may bring more uncertainty in 2017 than in other recent years. SMAs deserve a closer examination as active risk management tool in this age of uncertainty." We review this update below, and also excerpt from a Wells Fargo Securities piece on portfolio holdings and a Wells Fargo Asset Management piece on Prime and Muni MMFs.
CAG's Director of Investment Research & Strategy, Lance Pan, writes, "Without repeating too much from our recent commentaries, we are mindful of a number of sources of uncertainty that may impact cash investment decisions.... While the general market consensus is for interest rates to move higher, we do not know how soon or how much federal infrastructure spending and tax cuts will work their way through interest rates. The pace of rate hikes by the federal open market committee (FOMC), consisting of a fresh set of voting members and the administration’s appointments to the two vacant seats, remains an open question. We cannot quantify how much monetary tightening may counteract fiscal stimulus. In the event of policy failures, or successes for those impeding growth, interest rates could reverse directions. In short, uncertainty exists for both short and long term rates and anywhere along the yield curve."
He continues, "As a separate account manager of institutional cash for more than two decades, it has been our philosophy that SMAs are appropriate for institutional treasury organizations primarily as a risk management tool. Besides higher income potential over money funds and bank deposits, it is portfolio customization that makes them a valuable cash alternative. With the passing of prime money market funds as the predominant institutional cash vehicle of choice, SMAs deserve a closer examination…. There exists an erroneous conception in the cash management world that separate accounts actively trade securities beyond traditional money market credits with substantially longer portfolio duration and total return objectives. While these products can prove valuable for a segment of the market, SMAs also can exist as liquidity vehicles constructed primarily with money market securities, with minimal trading and with income objectives."
The latest Capital Advisors paper tells us, "Uncertainties are by definition difficult to forecast. Without a crystal ball to tell which and how a number of risk factors may affect financial markets, we as liquidity managers will want to be mindful of evaporating market liquidity in uncertain times and equip ourselves with a high quality, diversified portfolio of assets…. Liquidity risk often arises from one of two sources -- perceived credit problems with specific issuers or asset classes and the reluctance to trade by nervous market participants for fear of disappearing liquidity. For example, the Federal Reserve pointed out the risk in the repurchase agreement (repo) market when bond dealers or investors may be forced to sell asset collateral either before or after their counterparties experience liquidity problems. Commingled investments such as prime money market funds and ultra-short bond funds may experience liquidity crunches and contagion trying to satisfy waves of sell orders. SMA investors may set aside a portion of their portfolios in highly liquid government securities as backup liquidity."
It also states, "Regardless of objectives or asset choices, diversification remains a key risk management tool for uncertain times. A sufficiently diversified portfolio among asset types, industry sectors, and geographical locations may greatly reduce the impact from a specific unexpected event. For example, high-grade sovereign and supranational securities may be viable supplemental investments in a corporate bond portfolio. Similarly, a portfolio of unsecured bonds may weather risk better with asset-backed securities, which offer the double benefits of instant diversification and asset collateral.... Born out of investment policy requirements, most liquidity portfolios justifiably have a high credit quality bias to provide a ratings cushion against negative credit events. Recent credit market performance, we think, anticipates the implementation of Trump’s economic policies that suggest more down side risk from policy disappointments. The additional yield benefit from lower quality bonds in the current environment may not justify the added credit and liquidity risks."
Finally, Capital Advisors' Pan comments, "While there remains much debate on the net effect of Trumponomics on risk assets, many stock and bond strategists urge caution and recommend active portfolio management to cope with policy and event uncertainties and steer clear of looming risks. We recommend the same for short-duration cash portfolios. We should note that this year’s landscape is not all about the new administration’s policies. One needs to keep an open eye on the Federal Reserve and interest rates, post-money market fund reform asset movements, the states of the European Union and China and their respective financial institutions, property markets in Australia, Canada and the UK and their banks, credit performance of energy portfolios in distress … the list goes on. While dealing with uncertainty is nothing new in treasury investment management, this year may bring more surprises than in recent memory. For investors switching out of prime money market funds and unsure about the alternative liquidity vehicles, SMAs deserve a closer examination as an active risk management tool in an age of uncertainty."
In other news, Wells Fargo Securities' Garret Sloan and Vanessa Hubbard commented Friday on the latest Money Fund Portfolio Holdings, writing, "The breakout in holdings for the first month of 2017 shows that in the government institutional space, durations extended slightly, with a decrease in overnight maturities of five percent and an increase of weekly maturities by approximately the same amount. Agency holdings rose by 3 percent to 42 percent of overall exposure, split between discount notes and agency floaters. The Treasury repo holdings fell from 25 percent to 21 percent of holdings, or just under $51 billion. Repo holdings fell primarily at the Fed, falling from $191 billion to $69 billion. By contrast, now that year-end has passed, private-market repo has ramped back up significantly. At year-end Nomura was the largest private-market repo counterparty to the government funds, offering $26.3 billion in collateral, followed by RBC with $25.3 and BNP Paribas with $24.5 billion. BNP Paribas surged higher in the January data, offering $47.8 billion in repo to the government funds, or almost doubling its total repo exposure. Total repo outstanding fell in institutional government funds, from $428 billion to $404 billion."
They tell us, "U.S. non-Fed counterparties accounted for $61 billion in government institutional funds in December, which climbed to $68.7 billion in January. Non-dealer/bank counterparties are rising in the repo space as well, with Harvard, and two branches of Prudential delivering collateral to funds in December. In January, Met Life Insurance was added to the mix, with $700 million given to the 2a-7 funds. While a number of repo counterparties increased their total offered collateral in January, the almost doubling of repo collateral by BNP Paribas from $24.5 billion to $47.8 billion stands alone as a stark example of calendar-based balance sheet contraction and expansion."
The update adds, "On the prime side, looking at the entire prime universe, CD holdings in January rose from 29 percent to 33 percent, and financial CP rose from 13.4 percent to 16.3 percent. Declines in the prime funds were seen in Treasury repo, ABCP and VRDNs, though we would note that the allocation to VRDNs only dropped from 5 percent to 4.6 percent…. France pulled into second place this month behind Canada for single biggest non-U.S. exposure in prime funds. Canada fell from 14.7 percent to 12.9 percent and France rose from 8.9 percent to 11.1 percent. This is likely partially the result of BNP Paribas's jump in repo market activity. Japanese exposure dipped slightly from 9.7 percent to 9.5 percent, with CD exposure maintaining the lion’s share of Japanese product in the funds, climbing from 62.6 percent in December to 68.7 percent of Japanese exposure in January."
Wells Fargo Asset Management also commented on Prime MMFs in their latest “Portfolio Manager Commentary." They write, "The prime money market space continued its stabilizing trend during the month of January as industry assets moderately rebounded and yields continued to adjust higher, reflecting both ongoing support for the product and a positive sloping yield curve. According to Crane Data, prime money market fund assets -- including retail funds -- increased by roughly $8 billion to $381 billion during the month. The positive slope to the yield curve for nongovernment assets can mainly be attributed to a few items: the anticipated future path of Fed policy; upcoming regulations that could force issuers to lengthen liability profiles; and the subdued demand resulting from a reduced buyer base as assets shifted from prime to government funds."
The piece says, "The stabilization of the asset base has allowed fund managers to opportunistically redeploy excess liquidity to add incremental yield without taking a disproportionate amount of risk. Throughout the implementation period and heading into year-end, we maintained an overweight to municipal variable-rate demand notes (VRDNs) as this product offered an attractive trade-off between liquidity and yield…. Since the New Year, as VRDN yields held steady and LIBOR (London Interbank Offered Rate) continued to increase, we began to reposition a portion of our portfolios out of this product and into floating-rate notes and longer-dated fixed-rate products to capture incremental yield offered by the positive sloping yield curve."
It adds, "The municipal money market sector got off to a strong start this year as seasonal reinvestment cash drove demand for tax-exempt paper throughout the short end of the curve. Investors were able to take advantage of elevated tax-exempt yields that had adjusted higher in response to the FOMC policy shift in mid-December. After closing out the year at 0.72%, the Securities Industry and Financial Markets Association Municipal Swap Index (SIFMA Index) settled into a comfortable range between 0.66% and 0.68%, indicating evenly balanced supply and demand dynamics. The SIFMA Index continued to reset at roughly 92% of one-week LIBOR during the month, preserving the relative attractiveness of tax-exempt floating-rate securities for both traditional and crossover buyers. Further out on the municipal curve, incremental demand resulted in tighter yields on tax-exempt commercial paper, notes, and bonds. Yields on one-year high-grade paper fell slightly to 0.90% from 0.97% at year-end."
Crane Data was saddened to learn recently that the original money fund "guru," Bill Donoghue, passed away last month. Donoghue's Obituary explains, "William E. Donoghue, 75, of Seattle, Washington, died January 16, 2017 in Healdsburg, California. Donoghue was a respected author and investment expert best known for the growth of money market mutual funds, of which he raised awareness through newsletters, investment conferences, books, and television appearances." We excerpt from the obituary and reflect on our Peter Crane's relationship and history with Donoghue below.
The obituary continues, "While in graduate school, Donoghue met a professor who encouraged him to focus on cash management. He quickly became a leading expert on the subject, chairing financial management seminars and serving as editor of Donoghue's MoneyLetter. The periodical came out during a time of unusually high interest rates. In the 1980s, Donoghue was the leading analyst and monitor of the budding money market mutual fund industry. Along with MoneyLetter, he founded "Donoghue's Money Fund Average," a rating system for these interest-sensitive Investment vehicles."
It adds, "In 1981, he authored William E. Donoghue's Complete Money Market Guide (Harper & Row), which reached #3 on The New York Times best seller list, and he followed that successful first guide with a series of similar books. Establishing himself as a mutual fund expert, he began speaking on the topic and in 1994 started "Donoghue's Mutual Fund SuperStars," conferences that brought leading mutual fund investment advisors to the public."
Crane Data's Peter Crane comments on the Guest Book, "I had the pleasure of working with Bill in the 1990's after he had sold his Money Fund Report and Moneyletter newsletters to IBC. (I eventually became Editor of these publications for a time, working for what was then IBC/Donoghue.) The dramatic growth of money market mutual funds and mutual funds overall were in no small part driven by Bill's relentless preaching of their benefits. Those involved and invested in the $2.7 trillion money fund space owe him a debt of gratitude. His mantra of "safety, liquidity and yield" is still the cornerstone of cash investing today. Thanks Bill, and enjoy the big Blues show in the sky. We'll miss you."
Crane explains his relationship with Donoghue, "I started as an assistant editor for IBC/Donoghue in late 1993, and Bill was still involved though he had sold the business a few years earlier. He had run the business out of Holliston, Mass., originally, but it was based in Ashland, Mass. by the time I started working there. (Bill had moved out to Seattle by this time and would talk with us via speakerphone most of the time.) As I learned it, Bill had purchased the Money Fund Report newsletter in 1975 from Dan Butler. Money funds then rode a wave of popularity as interest rates rose to almost 20% during the two oil price and inflation spikes in the late 1970's and start of the '80's."
He continues, "Bill sold MFR and his newsletter and data business to International Business Communications (IBC), which later became Informa PLC, in the late '80's. The IBC/Donoghue unit became IBC Financial Data, then eventually iMoneyNet. (They sold away the Moneyletter newsletter around this time too.) I worked there for 13 years, 1993-2006, before leaving 11 years ago to form my own firm, Crane Data." (Note: Crane Data now competes with iMoneyNet in the money market fund rankings, averages and information space.)
Crane explains, "The first conference I attended was a 'Money Show' event in Orlando, where I met Bill in person. He was quite a character, holding court with all the mutual fund managers and representatives. But by this time he was on his way out of the money fund business. (As many founders that sell discover, you can't sell your company and run it too.) Bill moved on to the broader mutual fund world, running a money management firm and eventually writing for MarketWatch. But people referred to him and his money fund averages as the "Donoghue's numbers" for years afterwards."
He adds, "He deserves major credit for helping popularize money market funds, speaking and writing about the fast-growing new product tirelessly. Money fund managers and investors owe him a debt of gratitude for educating the broader public about the benefits and safety, liquidity and yield that these products brought. Our deepest condolences go out to his friends, business associates and family. We will miss him."
Tony Carfang, Managing Director of Treasury Strategies, comments, "Always larger than life, Bill was a cash management pioneer. His cash management seminars in Ft. Lauderdale in the late '70s and early '80s put a spotlight on this emerging field. He quickly understood that money funds, in an era of 13% interest rates, were well suited for corporate treasurers and became an unrelenting promoter. His newsletter was a 'must read' for bankers, treasurers and fund managers."
Finally, the obituary adds, "A visitation will be held at Bonney Watson Funeral Home, 1732 Broadway, Seattle, Washington, on Friday, March 3, 2017 from 2:00 to 5:00 p.m. The funeral will be held in the Chapel of Bonney Watson on Saturday, March 4, 2017 at 10:00 a.m. Interment will be at Mount Pleasant Cemetery on Queen Anne Hill in Seattle, Washington. In lieu of flowers, contributions can be made to the "William E. Donoghue Fund in memory of the great Blues Musician Sonny Boy Williamson II, aka Alex Rice Miller" at the B.B. King Museum and Delta Interpretative Center in Indianola, Mississippi."
Crane Data released its February Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of Jan. 31, 2017, shows declines in Repo and Treasuries, and increases in Agencies and CDs. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $7.2 billion to $2.665 trillion last month, after decreasing by $34.7 billion in Dec., and increasing by $106.5 billion in November and $32.0 billion in Oct. Repo edged out Treasuries as the largest portfolio segment, though both fell following quarter-end. Agencies, which jumped, remained the third largest segment. CDs also rose and were in fourth place, followed by Commercial Paper, 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 a sample of our latest Portfolio Holdings Reports.)
Among all taxable money funds, Treasury securities fell $37.8 billion (-4.6%) to $784.8 billion, or 29.5% of holdings, after falling $59.4 billion in Dec. and rising $101.6 billion in November and $112.2 billion in Oct. Repurchase Agreements (repo) dropped $43.6 billion (-5.2%) to $788.8 billion, or 29.6% of holdings, after rising $56.3 billion in Dec. and falling $21.1 billion in Nov. and $65.2 billion in Oct. Government Agency Debt increased $35.3 billion (5.4%) to $687.8 billion, or 25.8% of all holdings, after falling $7.7 billion in Dec., but increasing $20.3 billion in Nov. and $32.3 billion in Oct. Repo, Treasuries and Agencies in total retreated from last month's record levels, but they still represent a massive 84.9% of all taxable holdings. Govt and Treasury MMFs lost assets and Prime MMFs recovered slightly last month.
CDs, CP and Other (Time Deposits) segments all rebounded last month, climbing off of record low levels last month. Certificates of Deposit (CDs) were up $22.4 billion (15.8%) to $170.0 billion, or 6.4% of taxable assets, after declining $0.2 billion in Dec., $1.0 billion in Nov., and $13.6 billion in Oct. Commercial Paper (CP) was up $16.9 billion (13.7%) to $140.6 billion, or 5.3% of holdings (after decreasing $9.5 billion in Dec. and increasing $5.8B in Nov.), while Other holdings, primarily Time Deposits, rose $15.8 billion (35.9%) to $59.8 billion, or 2.2% of holdings. (Time Deposits normally rise after quarter-end as Repo falls.) VRDNs held by taxable funds decreased by $1.8 billion (-5.1%) to $33.1 billion (1.2% of assets).
Prime money fund assets tracked by Crane Data rose to $515 billion (up from $501 billion last month), or 19.3% (up from 18.2%) of taxable money fund holdings' total of $2.665 trillion. Among Prime money funds, CDs represent a third of holdings at 33.0% (up from 29.4% a month ago), followed by Commercial Paper at 27.3% (up from 27.1%). The CP totals are comprised of: Financial Company CP, which makes up 16.3% of total holdings, Asset-Backed CP, which accounts for 5.9%, and Non-Financial Company CP, which makes up 5.1%. Prime funds also hold 2.1% in US Govt Agency Debt, 7.9% in US Treasury Debt, 6.4% in US Treasury Repo, 3% in Other Instruments, 9.2% in Non-Negotiable Time Deposits, 6.3% in Other Repo, 2.1% in US Government Agency Repo, and 4.6% in VRDNs.
Government money fund portfolios totaled $1.517 trillion (56.9% of all MMF assets), down from $1.531 trillion in December, while Treasury money fund assets totaled another $633 billion (23.8%) in January, up from $625 billion the prior month. Government money fund portfolios were made up of 44.8% US Govt Agency Debt, 16.1% US Government Agency Repo, 18.7% US Treasury debt, and 19.5% in US Treasury Repo. Treasury money funds were comprised of 72.7% US Treasury debt, 26.9% in US Treasury Repo, and 0.2% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.150 trillion, or over 80% (80.7%) of all taxable money fund assets, down from 81.1% last month.
European-affiliated holdings increased $215.5 billion in January to $473.4 billion among all taxable funds (and including repos); their share of holdings increased to 17.8% from 9.7% the previous month. Eurozone-affiliated holdings increased $152.6 billion to $329.0 billion in Jan.; they now account for 12.4% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $11.8 billion to $171.6 billion (6.4% of the total). Americas related holdings decreased $220.2 billion to $2.020 trillion and now represent 75.8% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $74.7 billion, or 13.0%, to $499.2 billion, or 18.7% of assets; US Government Agency Repurchase Agreements (up $39.4 billion to $256.2 billion, or 9.6% of total holdings), and Other Repurchase Agreements ($33.4 billion, or 1.3% of holdings, down $8.2 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $16.8 billion to $83.8 billion, or 3.1% of assets), Asset Backed Commercial Paper (down $1.9 billion to $30.2 billion, or 1.1%), and Non-Financial Company Commercial Paper (up $2.0 billion to $26.5 billion, or 1.0%).
The 20 largest Issuers to taxable money market funds as of Jan. 31, 2017, include: the US Treasury ($784.8 billion, or 29.5%), Federal Home Loan Bank ($516.4B, 19.4%), Federal Reserve Bank of New York ($155.7B, 5.8%), BNP Paribas ($103.1B, 3.9%), Federal Farm Credit Bank ($68.7B, 2.6%), Federal Home Loan Mortgage Co. ($66.2B, 2.5%), Credit Agricole ($58.4B, 2.2%), Wells Fargo ($53.7B, 2.0%), RBC ($51.9B, 1.9%), Societe Generale ($41.8B, 1.6%), JP Morgan ($39.7B, 1.5%), Nomura ($38.1B, 1.4%), Mitsubishi UFJ Financial Group Inc. ($37.0B, 1.4%), Bank of America ($35.1B, 1.3%), Federal National Mortgage Association ($33.1B, 1.2%), Bank of Nova Scotia ($32.4B, 1.2%), HSBC ($29.5B, 1.1%), Citi ($29.4B, 1.1%), ` Barclays PLC <b:>`_ ($29.2B, 1.1%), and Bank of Montreal ($26.5B, 1.0%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($155.7B, 19.7%), BNP Paribas ($92.4B, 11.7%), Credit Agricole ($44.1B, 5.6%), Wells Fargo ($41.9B, 5.3%), RBC ($40.4B, 5.3%), Nomura ($38.1B, 4.8%), Societe Generale ($35.3B, 4.5%), JP Morgan ($33.9B, 4.3%), Bank of America ($31.8B, 4.0%), and HSBC ($24.2B, 3.1%). The 10 largest Fed Repo positions among MMFs on 1/31 include: Northern Trust Trs MMkt ($14.8B), Fidelity Cash Central Fund ($12.9B), Federated Gvt Oblg ($9.3B), Vanguard Fed MMkt ($9.1B), JP Morgan US Govt ($8.5B), ` Morgan Stanley Inst Lq Gvt Sec <b:>`_ ($8.5B), Goldman Sachs FS Gvt ($7.0B), Vanguard Market Liquidity Fund ($6.4B), BlackRock Lq FedFund ($5.5B), and ` UBS Select Treas <b:>`_ ($5.4B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($16.6B, 5.1%), Credit Agricole ($14.3B, 4.4%), Toronto-Dominion Bank ($12.5B, 3.8%), Wells Fargo ($11.8B, 3.6%), Svenska Handelsbanken ($11.5B, 3.5%), RBC ($11.5B, 3.5%), BNP Paribas ($10.7B, 3.3%), Bank of Montreal ($10.7B, 3.3%), Bank of Nova Scotia ($10.7B, 3.3%), and Sumitomo Mitsui Banking Co ($9.6B, 2.9%).
The 10 largest CD issuers include: Toronto-Dominion Bank ($11.7B, 6.9%), Wells Fargo ($11.5B, 6.8%), Mitsubishi UFJ Financial Group Inc. ($11.5B, 6.8%), Bank of Montreal ($10.2B, 6.0%), Svenska Handelsbanken ($8.1B, 4.8%), Sumitomo Mitsui Banking Co ($7.9B, 4.6%), RBC ($7.6B, 4.5%), KBC Group NV ($7.0B, 4.1%), Bank of Nova Scotia ($6.2B, 3.7%), and Citi ($5.9B, 3.5%). The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($7.6B, 6.1%), Credit Agricole ($7.0B, 5.6%), Societe Generale ($5.9B, 4.7%), BNP Paribas ($5.1B, 4.1%), Westpac Banking Co ($4.9B, 3.9%), National Australia Bank Ltd ($4.8B, 3.9%), JP Morgan ($4.6B, 3.7%), Bank of Nova Scotia ($4.4B, 3.5%), NRW.Bank ($4.1B, 3.3%), and Canadian Imperial Bank of Commerce ($4.0B, 3.2%).
The largest increases among Issuers include: BNP Paribas (up $47.5B to $103.1B), Credit Agricole (up $42.3B to $58.4B), Federal Home Loan Bank (up $33.1B to $516.4B), Barclays PLC (up $21.2B to $29.2B), Societe Generale (up $18.8B to $41.8B), JP Morgan (up $17.5B to $39.7B), Credit Suisse (up $15.7B to $24.3B), Deutsche Bank AG (up $9.0B to $21.0B), HSBC (up $8.2B to $29.5B), and ING Bank (up $7.8B to $21.0B).
The largest decreases among Issuers of money market securities (including Repo) in Dec. were shown by: the Federal Reserve Bank of New York (down $234.2 to $155.7B), the US Treasury (down $37.9B to $784.8B), Canadian Imperial Bank of Commerce (down $3.8B to $13.1B), RBC (down $3.5B to $51.9B), Australia & New Zealand Banking Group Ltd (down $2.2B to $7.7B), Federal Home Loan Mortgage Co (down $1.6B to $66.2B), Bank of Montreal (down $1.4B to $26.5B), Toronto-Dominion Bank (down $1.0B to $21.8B), Sumitomo Mitsui Trust Bank (down $0.9B to $7.4B), and National Australia Bank Ltd (down $0.3B to $8.6B).
The United States remained the largest segment of country-affiliations; it represents 70.0% of holdings, or $1.866 trillion. France (8.9%, $236.2B) moved up to second place ahead of Canada (5.7%, $152.8B), now in 3rd. Japan (4.8%, $128.4B) stayed in fourth, while the United Kingdom (2.7%, $70.9B) remained in fifth place. Germany (1.7%, $45.3B) moved up to sixth, ahead of The Netherlands (1.4%, $37.2B). Sweden (1.4%, $37.2B) moved into eighth place ahead of Australia (1.3%, $33.9B). Switzerland (1.0%, $26.8B) was tenth. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Jan. 31, 2017, Taxable money funds held 29.3% (down from 35.5%) of their assets in securities maturing Overnight, and another 14.2% maturing in 2-7 days (up from 10.0%). Thus, 43.5% in total matures in 1-7 days. Another 19.2% matures in 8-30 days, while 11.5% matures in 31-60 days. Note that almost three-quarters, or 74.3% of securities, mature in 60 days or less (down from last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 10.9% of taxable securities, while 10.5% matures in 91-180 days, and just 4.4% matures beyond 180 days.
The preliminary agenda is available and registrations are now being taken for Crane's Money Fund Symposium, which will take place June 21-23, 2017 at The Hyatt Regency Atlanta, in Atlanta, Ga. Money Fund Symposium is the largest gathering of money market fund managers and cash investors in the world. Last summer's event in Philadelphia attracted a record 575 attendees, and we expect another robust turnout for our 9th annual event in Atlanta this June. (Money Fund Symposium participants include money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators.) Visit the MF Symposium website at www.moneyfundsymposium.com) for more details. Registration for attendees is $750, and discounted hotel reservations are also now available. We review the agenda and conference details below. (E-mail us at info@cranedata.com to request the full brochure, or click here to download.) We also review the rest of Crane Data's 2017 conference calendar, including next month's Bond Fund Symposium.
Our June 21 Opening (afternoon) Agenda kicks off with "Welcome to Money Fund Symposium 2017" from Peter Crane, President & Publisher of Crane Data. Then our keynote talk will feature Invesco President & Chief Executive Officer Martin Flanagan, who will discuss "The Elevation of Money Market Funds." The rest of the Day One agenda includes: "Private Money Funds, SMAs and ETFs," with Deborah Cunningham of Federated Investors, Rich Mejzak of BlackRock, and Andrew Wittkop of PIMCO; "Corporate Investment & Issuance Issues," moderated by Treasury Strategies' Tony Carfang, and featuring Jeff Glenzer of the Association for Financial Professionals, a speaker from Coca-Cola and another Corporate Investor; "Major Money Fund Issues 2017," moderated by Peter Crane and featuring John Donohue of J.P. Morgan AM, Dave Fishman of Goldman Sachs, and Tracy Hopkins of BNY Mellon Cash Investment Strategies. (The opening day's refreshments will be sponsored by Fidelity and the opening evening's reception will be sponsored by Bank of America Merrill Lynch.)
Day 2 of Money Fund Symposium 2017 begins with "State of the Money Fund Industry" with Peter Crane and Alex Roever of J.P. Morgan Securities. This is followed by "Senior Portfolio Manager Perspectives" panel, which includes Kevin Gaffney of Fidelity Investments, Jeff Plotnik of First American Funds, and Rob Sabatino of UBS Asset Mgmt; a session on "Government and Treasury Money Fund Issues," featuring Mike Bird of Wells Fargo Funds and another PM to be named later; and, a "Muni & Tax Exempt Money Fund Update" with Justin Schwartz of Vanguard and John Vetter of Fidelity. (Day 2's breakfast is sponsored by BlackRock and the coffee break is sponsored by Wells Fargo.)
The Afternoon of Day 2 (after a Dreyfus-sponsored lunch) features: a "Dealer & Issuer Panel; Looking at Supply," moderated by Laurie Brignac of Invesco and including Stewart Cutler of Barclays, John Kodweis of J.P. Morgan Securities and Jean-Luc Sinniger of Citi Global Markets; a "Ratings Agency Roundtable: Criteria, Risks, NAVs," with Robert Callagy from Moody's Investors Service, Greg Fayvilevich from Fitch Ratings, and Michael Masih from S&P Global Ratings; a segment on "MMFs in Ireland, France & China," with Reyer Kooy of IMMFA, Jonathan Curry of HSBC Global AM, and Alastair Sewell of Fitch Ratings; and a presentation on "Brokerage Sweep Options & Issues" with Ted Hamilton of Promontory Interfinancial and Sunil Kothapalli of Wells Fargo Advisors. (The Day 2 break is sponsored by Invesco and the reception is sponsored by Barclays.)
The third day of Symposium (after a Federated-sponsored breakfast) features the sessions: "Strategists Speak '17: Rising Rates & Fed RRP," presented by Mark Cabana of Bank of America Merrill Lynch, Garret Sloan of Wells Fargo Securities, and Rob Zambarano of Guggenheim Securities; a "Treasury & Agency Supply Outlook, with John Dolan of the U.S. Dept. of Treasury and Dave Messerly of the FHLBanks - Office of Finance; and, the "Pros & Cons of Ultra-Short Bond Funds," with Michael Morin of Fidelity Investments and Morten Olsen of Northern Trust AM. (The coffee break is sponsored by First American Funds.) Finally, the last session, entitled, "Money Fund Trading, Technology & Data," is an optional lunch workshop with Peter Crane presenting on the latest money fund information tools, Michael Berkowitz of Citi discussing the portal market, and James Morris of Investortools reviewing Rule 2a-7 compliance and trading software.
We hope you'll join us in Atlanta this June! (We'd also like to encourage attendees, speakers and sponsors to register early and make hotel reservations in coming weeks.) Note that a few of our speakers have yet to confirm their participation, and the agenda is still in the process of being finalized.
In other conference news, final preparations are being made for the inaugural Crane's Bond Fund Symposium, which will be held next month (March 23-24) in Boston. (Click here to see the PDF agenda.) Bond Fund Symposium, the first conference devoted entirely to bond mutual funds, will bring together bond fund managers, marketers, and professionals with fixed-income issuers, investors and service providers. The vast majority of the content will be aimed at the growing ultra-short and conservative ultra-short bond fund marketplace. (As a reminder, please register for BFS and make hotel reservations for BFS soon if you plan on attending!)
Crane Data, which recently celebrated the second anniversary of its Bond Fund Intelligence publication and BFI XLS bond fund information service and benchmarks, continues to expand its fixed income fund offerings with the launch of our first conference in this space. Bond Fund Symposium will offer fixed-income portfolio managers, bond investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Registration for Bond Fund Symposium is $500; exhibit space is $2,000 (includes 2 tickets); and sponsorship opportunities are $3K, $4K, $5K and $6K. (Complimentary tickets are available for corporate investors too; contact Pete for details.) Our mission is to deliver the best possible conference content at an affordable price to bond fund professionals and investors.
Finally, Crane's 5th annual "offshore" money fund event, European Money Fund Symposium, will be held in Paris, France, September 25-26, 2017. This website (www.euromfs.com) will be updated with the 2017 information soon. (Contact us to inquire about sponsoring or speaking.) Our next Money Fund University "basic training" event is also tentatively scheduled for Jan. 19-20, 2018, in Providence, RI. Watch www.cranedata.com for more details on these events, and please let us know if you have any questions or feedback on our growing conference business.
Crane Data's latest Money Fund Market Share rankings show modest asset decreases for the majority of U.S. money fund complexes in January, as total assets decreased by $43.2 billion, or -1.6%. Overall assets rose by $97.0 billion, or 3.7%, over the past 3 months. Over the past 12 months through Jan. 31, they've increased by $50.4 billion, or 1.9%. (Note: December's asset totals were inflated by the addition of $110 billion in "internal" money funds to our collections.) The biggest gainers in January were Northern, whose MMFs rose by $5.6 billion, or 6.2%, UBS, whose MMFs rose by $2.8 billion, or 7.3%, and Vanguard, whose MMFs rose by $2.1 billion, or 0.8%.
Oppenheimer, T Rowe Price and First American also saw assets increase in January, rising by $925M, $365M, and $354M, respectively. The biggest declines were seen by Federated, Morgan Stanley, Fidelity and Goldman Sachs. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.) We review these market share totals below, and we also look at money fund yields the past month, which moved higher again for Taxable funds.
Over the past year through Dec. 31, 2016, Vanguard (up $73.4B) and Fidelity (up $50.0B) were the largest gainers, but Goldman Sachs would have been the largest gainer (up $26.0B, or 15.7%) had we adjusted for the added Vanguard ($52.0B) and Fidelity ($42.0B) internal fund assets. These were followed by BlackRock (up $22.3B, or 10.2%), JP Morgan (up $12.0B, or 5.2%), First American (up $6.5B, or 16.1%), PNC (up $6.2B, or 115.3%) and TIAA-CREF (up $5.5B). Vanguard, Fidelity, Goldman Sachs, Dreyfus, and TIAA-CREF had the largest money fund asset increases over the past 3 months, rising by $55.8B, $53.4B, $11.0B, $7.3B and $5.4B, respectively.
Other asset gainers for the past year include: Northern (up $5.2B, or 5.8%) AB (Alliance Bernstein, up $4.1B, or 203.4%), Invesco (up $3.0B, or 5.5%), UBS (up $1.8B, or 4.6%), Oppenheimer (up $983M, 9.6%), and USAA (up $968M, 11.0%). The biggest decliners over 12 months include: Federated (down $24.6B, or -11.6%), Wells Fargo (down $20.3B, or -17.3%), Dreyfus (down $13.2B, or -8.1%), SSGA (down $11.5B, or -12.5%), Deutsche (down $8.3B, or -28.7%), and Schwab (down $7.0B, or -4.2%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $497.9 billion, or 18.4% of all assets (down $8.1 billion in Jan., up $53.4 billion over 3 mos., and up $49.9B over 12 months). Vanguard ranked second with $254.2 billion, or 9.4% of assets (up $2.1B, up $55.8B, and up $73.4B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock is third with $242.4 billion, or 8.9% market share (down $4.7B, down $11.5B, and up $22.3B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan is in fourth with $241.6 billion, or 8.9% of assets (down $3.1B, down $3.9B, and up $12.0B).
Goldman Sachs moved up to 5th with $191.6 billion, or 7.1% of assets (down $7.6B, up $11.0B, and up $25.9B). Federated dropped down to sixth place with $186.8 billion, or 6.9% (down $9.2B, down $5.5B, and down $24.5B). Schwab ($159.5B, or 5.9%) was in seventh place, followed by Dreyfus in eighth place ($149.5B, or 5.5%), Morgan Stanley in ninth place ($126.1B, or 4.7%), and Wells Fargo in tenth place ($97.5B, or 3.6%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($96.4B, or 3.6%), SSGA ($80.0B, or 3.0%), Invesco ($55.9B, or 2.1%), First American ($46.6B, or 1.7%), UBS ($41.1B, or 1.5%), Western ($35.6B, or 1.3%), Deutsche ($20.6B, or 0.8%), Franklin ($18.8B, or 0.7%), American Funds ($16.8B, or 0.6%), and T. Rowe Price ($15.9B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except UBS moved ahead of Western. Crane Data currently tracks 64 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for JPMorgan moving ahead of BlackRock and Vanguard, BlackRock and Goldman Sachs moving ahead of Vanguard, Dreyfus/BNY Mellon moving ahead of Schwab to 7th, and Northern and SSGA moving ahead of Wells Fargo into 10th and 11th place.
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"), the largest money market fund families include: Fidelity ($506.9 billion), JP Morgan ($394.8B), BlackRock ($359.7B), Goldman Sachs ($289.0B), and Vanguard ($254.2B). Federated ($195.4B) was sixth and Dreyfus/BNY Mellon ($173.5B) was seventh, followed by Schwab ($159.6B), Morgan Stanley ($156.9B), and Northern ($110.0B), 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 February issue of our Money Fund Intelligence and MFI XLS, with data as of 1/31/17, shows that yields continued rising in January across our Taxable Crane Money Fund Indexes following the Fed hike on Dec. 14. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 728), was up 3 bps to 0.29% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 6 bps to 0.28%. The MFA's Gross 7-Day Yield moved higher to 0.67% (up 6 bps), while the Gross 30-Day Yield was up 9 bps to 0.66%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.47% (up 4 bps) and an average 30-Day Yield of 0.46% (up 8 bps). The Crane 100 shows a Gross 7-Day Yield of 0.73% (up 5 bps), and a Gross 30-Day Yield of 0.72% (up 9 bps). For the 12 month return through 1/31/17, our Crane MF Average returned 0.15% and our Crane 100 returned 0.27%. The total number of funds, including taxable and tax-exempt, decreased to 973, down 2 from last month. There are currently 728 taxable and 245 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 0.55% (up 6 bps) as of Jan. 31, while the Crane Govt Inst Index was 0.31% (up 4 bps) and the Treasury Inst Index was 0.27% (up 3 bps). Thus, the spread between Prime funds and Treasury funds is 28 basis points, up 3 bps from last month. The Crane Prime Retail Index yielded 0.38% (up 3 bps), while the Govt Retail Index yielded 0.07% (up 2 bps) and the Treasury Retail Index was 0.08% (up 1 bp). The Crane Tax Exempt MF Index yield declined to 0.22% (down 4 bps).
The Gross 7-Day Yields for these indexes in January were: Prime Inst 0.92% (up 8 bps), Govt Inst 0.59% (up 6 bps), Treasury Inst 0.55% (up 5 bps), Prime Retail 0.90% (up 6 bps), Govt Retail 0.56% (up 8 bps), and Treasury Retail 0.52% (up 8 bps). The Crane Tax Exempt Index decreased 1 basis point to 0.70%. The Crane 100 MF Index returned on average 0.04% for 1-month, 0.10% for 3-month, 0.04% for YTD, 0.27% for 1-year, 0.11% for 3-years (annualized), 0.08% for 5-years, and 0.76% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The February issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Tuesday morning, features the articles: "Time for Prime Comeback Say MMF Managers; Rates Higher," which revisits the $1 trillion question: will investors return to Prime?; "Money Funds First (American) at US Bancorp A.M.," which "profiles" First American Funds' Jeff Plotnik and Eric Thole; and, "MF University Features Big Shift, New Frontiers in ’17," which reviews our latest "basic training" conference. We have updated our Money Fund Wisdom database query system with Jan. 31, 2017, performance statistics, and also sent out our MFI XLS spreadsheet Monday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our February Money Fund Portfolio Holdings are scheduled to ship Thursday, Feb. 9, and our Feb. Bond Fund Intelligence is scheduled to go out Tuesday, Feb. 14.
MFI's lead "Time for Prime Comeback" article says, "As interest rates continue inching higher on money market mutual funds, and as the spread between Prime and Government money funds continues to widen, money has slowly but surely begun to trickle back to Prime funds. Fund managers are encouraging this trend by publishing papers and attempting to re-educate investors on gates, fees and floating NAVs, and by extolling the benefits of segmenting cash. We revisit the new $1 trillion question: will investors return to Prime? While we're not predicting a Patriots-style comeback, things are looking up."
It adds, "Prime assets increased by $9.0 billion in January, after being flat in December. (We showed Prime up $88.0 billion in December, but this was due to the addition of a number of internal and private money funds to our collection.) Spreads also continued widening, rising from 25 to 28 bps in January (the difference between Prime Inst MMFs and Treasury Inst MMFs), and up from 18 bps in November 2016 (and 11 bps in Dec. 2015)."
Our First American Funds profile reads, "This month, Money Fund Intelligence speaks with Eric Thole, CEO of U.S. Bancorp Asset Management and President of First American Funds, and Jeff Plotnik, Director of Money Market Fund Management for First American Funds. We look back at the implementation of reforms and huge changes of 2016, and we discuss the current environment and outlook for money funds going forward. Our Q&A follows."
MFI asks, "What's your biggest priority?" Thole says, "I would say that our biggest priority today is very similar to what it's been in past years. We continue to diligently work with our shareholders.... Money fund reform hit its finish line back in October of last year, but it's certainly the starting line for a new way of thinking about cash management. So we're busy talking with shareholders, just like we were all of last year. The operational pieces are done. But we're trying to take advantage of the 'money in motion'.... We've had growth in our AUM numbers, and we're looking to continue to take advantage of some of that as the year progresses."
Plotnik adds, "From a management standpoint, we're adjusting to the new universe. We have a lot more 'Govie' cash than we once had, so we're really focused on putting that to work. It's a lot harder, as [there's] a shortage of product, so you're always hunting and pecking there. We're also getting used to the different prime environment...."
Our "MF University '17" article explains, "Crane Data recently hosted its 7th annual Money Fund University, which took place Jan. 19-20 in Jersey City. The 'basic training' event, targeted at those new to the money fund industry, featured primers on interest rates, money market securities, the Federal Reserve, ratings, portfolio management, and money fund regulations. The big themes this year were the massive shift from Prime into Government MMFs, the realization of rising rates and the possible return to Prime, or shift into alternatives, in 2017."
It explains, "Host Peter Crane kicked off the event with a session called, 'History and Current State of Money Funds,' commenting, "The composition of money funds has shifted dramatically over the past year. Right now treasuries, repos and agencies, the main investments for government MMFs, really dominate.... A trillion dollars in 2016 shifted from prime general purpose into government MMFs."
In a sidebar, we discuss, "Invesco: The Case for Prime," saying, "Invesco Fixed Income posted a recent 'Investment Insights,' entitled, "Prime Institutional funds may offer renewed value in a post-ZIRP, post-reform world." Written by Robert Corner, senior client portfolio manager, it says, "Yields of floating net asset value (FNAV) prime institutional money market funds have increased and may now offer an attractive relative value opportunity. Following many years of zero interest rate policy (ZIRP) and recent money market fund reform implementation, we believe the yield advantage of prime institutional funds has increased enough to compensate investors for political fluctuations in FNAVs. And to reduce the risk of being subject to potential liquidity fees and redemption gates (fees and gates), we believe investors should consider segmenting their cash investments."
Our February MFI XLS, with Jan. 31, 2017, data, shows total assets decreased $43.0 billion in January to $2.711 trillion after increasing $107.8 billion in December (this includes the addition of $110.3 billion in new funds), $32.1 billion in November, and decreasing $3.1 billion in October and $48.5 billion in September. Our broad Crane Money Fund Average 7-Day Yield was up 3 bps to 0.29% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) rose 4 bps to 0.47% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA rose 0.06% to 0.67% and the Crane 100 rose 5 bps to 0.73%. Charged Expenses averaged 0.39% and 0.26% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 37 days (up 1 day from last month) and for the Crane 100 was also 37 days (unchanged). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
BlackRock posted a new publication entitled, "The BlackRock Advantage: Cash Management Solutions for Institutions." The piece explains, "Over multiple interest rate cycles and varying market conditions, BlackRock has managed cash portfolios for corporations, banks, foundations, insurance companies and public funds. Today, we are one of the largest cash management providers in the world. As a leader in this asset class, BlackRock has U.S. $403.6 billion in global liquidity assets across multiple currencies. With one of the most experienced teams in the industry, BlackRock is able to offer clients an investment approach that has been tested through time and a variety of solutions designed to meet the needs of today's cash investor." We excerpt from this below, and we also review Federated's new "Month in Cash" and a Citi update on Treasury supply.
BlackRock writes, "A broad range of products and strategies BlackRock considers cash management a unique investment discipline requiring a distinct skill set for effective management. While our investment strategy is conservative by nature, we strive to deliver competitive, consistent returns over time."
On "Money market funds," they say, "Our liquidity funds are specifically designed to meet the cash management needs of institutional investors. They satisfy the most conservative investment policies by consistently focusing on high-quality investments and providing same-day liquidity with competitive yields. Our U.S. products include both taxable and tax exempt money market funds, all of which comply with Rule 2a-7 requirements."
Regarding "Separate accounts," BlackRock comments, "We believe separate account strategies should be as unique as our clients themselves. Together, we work with our separate account clients to build portfolios that are designed to meet their company's objectives. We consider our client's investment goals, guidelines, risk tolerance, currency requirements and cash flow needs. Clients select us not only for our expertise and flexibility, but also for our creativity in tackling business challenges."
Finally, they add, "For clients looking beyond money market funds, we have the breadth and depth of BlackRock to offer. We have strategies for investing core and strategic cash assets through both commingled vehicles and separate accounts. We offer these solutions through many types of investment products. We offer a range of solutions in multiple currencies, available to qualified investors."
In Federated Investors' latest "Month in Cash: Likelihood of 3 hikes fading," Money Market CIO Deborah Cunningham writes, "The dots may have just run into reality. That's our take on the Federal Reserve's economic projections released at December 2016's Federal Open Market Committee meeting. The dot plot implied the Fed could be compelled to hike the target federal funds rate three times this year. We have taken a more conservative stance, still expecting only two moves, in March and September, with a third only as a possibility in December."
She continues, "It's all well and good that the dots showed policymakers optimistic about how the U.S. economy will fare this year. Chair Janet Yellen and other officials' rhetoric also points in that direction. Cash managers such as us would certainly love for the positive momentum to translate into wage gains and increased prices that could push inflation to the Fed's 2% inflation target, and provide a bump in yield in the process. But we see enough uncertainty in the economic and political spheres to question that this will happen."
Federated adds, "Simply put, economic statistics have not been bad but they have not been great, either.... On the other hand, inflation does appear to be picking up a bit. The consumer price index (CPI) is squarely above 2% at this point, the producer price index (PPI) is approaching 2% and the personal consumption expenditures index (PCE) -- data Yellen is said to pay particular attention to -- now hovers near that mark. Increasing inflation isn't bad, as long as it is orderly and is accompanied by measured gross domestic product (GDP) growth. But we are not convinced we are going to see enough to trigger a third move, and, again, economic data has been mixed lately."
They also write, "Then you have the political wild cards. While these may not have a huge impact economically, the more that people and business leaders get caught up in expecting the unexpected, the less likely they are going to reach in terms of investing or planning for the future. You can see that easily enough in the stock market, which hit great heights last week but has tanked given the past weekend's crisis around President Trump's executive order on immigration. In fact, what happened has clarified to us that the next four years are not going to be 100% rosy.... It is more of a balanced picture now, which solidifies our conviction that the Fed will undertake only two moves and not necessarily three in 2017."
Next, Citi's Steve Kang published, "Cash management bills to the rescue." It states, "The Treasury announced issuance of Cash Management Bills to engineer $23bn in cash balances by March 15, while ensuring high cash balance levels the days prior. Further supply of CMBs would limit richening in bill-OIS spreads going forward. We also discuss opportunities in the bills market past the debt ceiling reinstatement."
The "Short-End Notes" explains, "From the Q1 refunding announcement this week, our take ... was that (1) the Treasury is expecting higher deficits for Q1 than us (more on this later) and (2) CMBs are still likely to be issued despite their absence in TBAC projections, as it is a way to meet two goals at once – ensuring high cash balance/liquidity going into the March 15 deadline while honoring the $23bn cash balance. The cash balance limit is for the closing balance of March 15, therefore CMBs maturing on March 15 followed by another CMB issuance on March 16 would ensure a high cash balance on other dates, while mechanically meeting the cash target on closing of March 15.... Indeed, this seems like that is what they intend to do. The Treasury announced a $50bn CMB auction for next Tuesday, to mature on March 15."
The update adds, "Depending on how the auction goes, another round of CMB issuance maturing on March 15 cannot be ruled out. At the time of this report, when-issued CMB was trading at 49bp, trading 5bp at a discount to Mar 16 bill at 44bp. CMBs tend to offer concessions vs regulars and are therefore more expansive from the Treasury's perspective. However, it seems likely to us that keeping cash balance levels (their intended minimum balance is $150bn) seems to have taken a priority. We penciled in another $50bn CMB to be issued as 1M bill size is cut in mid-Feb."
State Street Global Advisors' published a "Q4 Global Cash Update, which looks at "potential effects of policy changes in the wake of Donald Trump's election and "ongoing issues challenging the European banking sector." They tells us, "As we probe the state of cash and credit across sectors and geographies, a major focus this year will be the impact of the incoming administration on still-new bank regulations established in the wake of 2008." We review SSGA's Update below, and we also discuss the first AAA rating of an FDIC-insured deposit program and review the latest asset flows from the ICI.
State Street's "Global Credit Research Update" explains, "As it pertains to the Global Cash business, Trump policy impact on US bank regulation will be a major focus of the Credit Research team in 2017. While the Trump administration is unlikely to prioritize the repeal of Dodd-Frank (since it is unlikely to muster the 60-vote supermajority needed to pass in the Senate), it is likely to take measures to weaken its enforcement, through appointments and the budget process."
It continues, "Further, US banks don't favor a full repeal. Rather the preference amongst US bank management teams is to make regulation simpler and less costly, rather than returning banking to the "Wild West days" that preceded the 2008 financial crisis. Bank management teams have acknowledged the benefits of the new rules, noting they have helped improve the way firms manage risks and view their businesses. They also generally recognize that having been forced to hold more capital, and build it quickly after the financial crisis, made their firms stronger than troubled European peers.... As such, we don't anticipate that the capital materially, which is positive for their respective credit profiles."
They tell us, "Outside of US banks, other significant components of the Global Cash investment universe will be challenged by persistent risk factors. European and UK banks will continue to face difficult operating environments. Persistently low interest rates, anemic loan growth, challenging trading conditions, and a re-calibrating of scale in capital-intensive businesses have all materially suppressed the earnings power of these banking sectors. These profitability pressures are ill-timed as they make it more difficult for the banks to build capital to meet regulatory requirements as they are phased in."
The piece says, "Deutsche Bank has been the 'poster child' for the difficulties facing European banks due to these noted factors, and we expect banks like it to continue to be in the headlines in 2017. In addition, upcoming elections in France, Germany and Holland (and possibly Italy), as well as the beginning of the UK Brexit process, pose risks to bank funding conditions in these jurisdictions in 2017 -- although we expect the ECB and the BOE to continue to be exceptionally accommodative in order to support funding dynamics."
SSGA adds, "Lastly, we'd note that the October US money market reform date proved to be a 'non event' for credit issuers, as expected. Despite the +$1 trillion shift in short term investment assets from prime funds into government money market funds, issuers and fund managers used the significant lead time to adjust their funding and investment strategies, well in advance of the implementation date. While credit spreads in the universe widened, the driver behind the move can be attributable to market technicals, rather than for fundamental credit reasons. Indeed, most metrics that are commonly followed as key indicators of market stress demonstrated the continuance of relatively accommodative funding conditions in the short term credit markets."
In other news, a press release entitled, "Kroll Bond Rating Agency Assigns AAAkf Fund Rating to StoneCastle Federally Insured Cash Account (FICA)," explains, "Kroll Bond Rating Agency (KBRA) has assigned a AAAkf Fund Rating to the StoneCastle Federally Insured Cash Account (FICA). The AAAkf rating reflects the Program's Primary Quantitative Rating (PQR) as measured by the KBRA Funds Credit Quality Rating Matrix, which is based on the credit quality of the underlying instruments that comprise the portfolio. Additionally, the fund rating is influenced by the results of the qualitative assessment of the investment advisor, StoneCastle Cash Management (SCCM). The qualitative shadow rating (QSR) for the fund was found to be strong."
It continues, "FICA's investment objective is to provide a high level of current income while maintaining liquidity and providing maximum safety. To meet this objective, FICA utilizes an investment strategy built entirely around investing exclusively in deposit accounts backed by the full faith and credit of the U.S. Government." (See also yesterday's "Link of the Day," "StoneCastle to Enter Sweeps Market.")
Finally, KBRA adds, "FICA meets Federal Deposit Insurance Corp. (FDIC) requirements for agency pass-through deposit insurance coverage, as well as meeting similar requirements as defined by the National Credit Union Administration (NCUA). As such, investment in the form of deposits at FICA network banks in the amount of $250,000 or less per depositor per bank meet FDIC and NCUA requirements for deposit insurance. Thus, FICA investments (deposits) are considered backed by the full faith and credit of the U.S. Government." (See also our March 11, 2010 News, "Standard and Poor's Weighs in on CDARS, Pooled FDIC Insured Accounts.")
Finally, ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $5.65 billion to $2.68 trillion for the week ended Wednesday, February 1, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $5.51 billion and prime funds decreased by $700 million. Tax-exempt money market funds increased by $560 million." Total Government MMF assets, which include Treasury funds too and which represent 80.7% of all money funds, stand at $2.164 trillion, while Total Prime MMFs, which total 14.3%, stand at $384.5 billion. Tax Exempt MMFs total $131.5 billion, or 4.9%.
It explains, "Assets of retail money market funds decreased by $1.41 billion to $976.76 billion. Among retail funds, government money market fund assets decreased by $1.56 billion to $599.67 billion, prime money market fund assets decreased by $250 million to $250.95 billion, and tax-exempt fund assets increased by $400 million to $126.14 billion." Retail assets account for over a third of total assets, or 36.4%, and Government Retail assets make up 61.4% of all Retail MMFs.
The release continues, "Assets of institutional money market funds decreased by $4.24 billion to $1.70 trillion. Among institutional funds, government money market fund assets decreased by $3.95 billion to $1.56 trillion, prime money market fund assets decreased by $460 million to $133.56 billion, and tax-exempt fund assets increased by $160 million to $5.35 billion." Institutional assets account for 63.6% of all MMF assets, with Government Inst assets making up 91.8% of all Institutional MMFs.
Moody's Investors Service published a report entitled, "Prime Money Market Funds -- Sterling Money Funds Keep Attracting Assets Despite Lower Yields," and one entitled, "Prime Money Market Funds -- Euro: Temporary Reversal of Flows in Prime Funds." A press release entitled, "Moody's: Political risk will drive assets toward sterling, euro money funds in 2017, despite declining yields," explains, "In 2017, euro CNAV and sterling prime money funds (MMFs) will attract assets, amid potential volatility driven by political risk, says Moody's Investors Service." We review their release below, and also give an update on the latest assets and holdings of European or "offshore" money funds.
The release states, "Moody's says sterling prime money market funds' (MMF) assets under management (AUM) reached a 12 month-high of GBP142 billion (+GBP3.7 billion, or +2.7%) in Q4 2016, despite a slow-but-steady decrease in yields. Seven-day net yield of 0.26% was down by six basis points from end of Q3 2016. Liquidity of 26.5% is below the annual average of 28%. Sterling funds have also taken on more credit risk, with 63% shifting to securities rated Aa3 or lower in Q4 2016. However, a shortening in average durations offsets the additional credit risk."
It continues, "Moody's says yields on euro MMFs, being at record lows, will likely fall even further, amid the European Central Bank's accommodative monetary policy. In Q4 2016, seven-day net yields fell to -43 basis points, 4 bps lower than the previous quarter. Euro assets fell in Q4 2016, but remained above the average for the year. AUM fell by 2.3% to 67.6 billion during the final quarter of 2016, but remained above the 62 billion average for the year as a whole. However, in 2017, Moody's expects euro CNAV MMFs to continue attracting assets, amid volatility driven by political risk."
Finally, Moody's comments, "Euro CNAV MMFs increased their credit, liquidity and obligor risk profiles in Q4. In Q4 2016, 76% of AUM in euro prime funds shifted into securities rated Aa3 or lower. Liquidity fell to a 12-month low (23.5% of assets), driven by a reduction in repos and government securities. The top three obligor concentration ratio rose to a 12-month high of 23.4% of assets, illustrating the difficulty of finding counterparties at year-end."
Crane Data's Money Fund Intelligence International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Dublin or Luxemburg and denominated in USD, Euro and GBP (sterling), flat (-$2 billion) year-to-date in 2017 at $729 billion as of 1/31/17, but assets increased in 2016 by $32 billion. U.S. Dollar (USD) funds (156) account for over half ($404.4 billion, or 55.5%) of the total, while Euro (EUR) money funds (97) total E91.2 billion and Pound Sterling (GBP) funds (107) total L185.8.
USD funds are up $6 billion YTD in 2017, and were up $6 billion in 2016. Euro funds are down E4 billion YTD through 1/31/17, but up E19 billion in 2016. GBP funds are down L4B in 2017, but they jumped by L39 billion in 2016. USD MMFs now yield 0.62% (7-Day) on average (1/31/17), up 6 bps YTD and up 46 basis points from 12/31/15. EUR MMFs yield -0.49% on average, unchanged YTD but down 30 basis points since 12/31/15. GBP MMFs yield 0.19%, unchanged YTD but down 18 bps since 12/31/15.
Crane's latest Money Fund Intelligence International Portfolio Holdings data (as of 12/31/16) shows that European-domiciled US Dollar MMFs, on average, consist of 25% in Treasury securities, 22% in Commercial Paper (CP), 21% in Certificates of Deposit (CDs), 15% in Other securities (primarily Time Deposits), 14% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 33.3% of their portfolios maturing Overnight, 10.4% maturing in 2-7 Days, 18.0% maturing in 8-30 Days, 13.5% maturing in 31-60 Days, 9.8% maturing in 61-90 Days, 11.4% maturing in 91-180 Days, and 3.6% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (38.0%), France (12.3%), Canada (10.7%), Japan (9.6%), Australia (5.4%), Germany (4.7%), Sweden (3.5%), Great Britain (2.9%), The Netherlands (2.8%), Singapore (2.6%) and China (2.3%).
The 15 Largest Issuers to "offshore" USD money funds include: the US Treasury with $113.9 billion (25.5% of total assets), BNP Paribas with $17.1B (3.8%), Mitsubishi UFJ with $13.7B (3.1%), Federal Reserve Bank of New York with $11.9B (2.7%), Toronto-Dominion Bank with $10.0B (2.2%), Bank of Nova Scotia with $9.1B (2.0%), Wells Fargo with $9.1B (2.0%), RBC with $8.1B (1.8%), Natixis with $8.1B (1.8%), Credit Agricole with $7.7B (1.7%), Sumitomo Mitsui Banking Co with $7.6B (1.7%), Bank of Montreal with $7.6B (1.7%), Societe Generale with $7.4B (1.6%), Nordea Bank with $7.4B (1.6%), Canadian Imperial Bank of Commerce with $7.2B (1.6%), and Sumitomo Mitsui Trust Bank with $7.2B (1.6%).
Euro MMFs tracked by Crane Data contain, on average 42% in CP, 33% in CDs, 17% in Other (primarily Time Deposits), 4% in Repo, 3% in Treasury securities and 1% in Agency securities. EUR funds have on average 18.6% of their portfolios maturing Overnight, 6.0% maturing in 2-7 Days, 20.1% maturing in 8-30 Days, 19.3% maturing in 31-60 Days, 16.9% maturing in 61-90 Days, 16.6% maturing in 91-180 Days and 2.4% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (27.0%), Japan (14.6%), US (13.6%), Germany (8.0%), Netherlands (7.4%), Sweden (6.3%), Belgium (6.1%), Switzerland (3.8%), Great Britain (3.0%), China (2.0%), and Finland (1.8%).
The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E4.4B (4.8%), Proctor & Gamble with E3.9B (4.2%), Rabobank with E3.8B (4.1%), Mitsubishi UFJ Financial Group Inc with E3.6B (3.9%), Sumitomo Mitsui Banking Co. with E3.6B (3.8%), Credit Agricole with E3.2B (3.5%), Credit Mutuel with E3.2B (3.4%), BPCE SA with E3.1B (3.3%), Nordea Bank with E2.8B (3.1%), Societe Generale with E2.8B (3.0%), Credit Suisse with E2.7B (2.9%), DZ Bank AG with E2.7B (2.9%), Republic of France with E2.6B (2.8%), Dexia Group with E2.4B (2.6%), and KBC Group NV with E2.3B (2.4%).
The GBP funds tracked by MFI International contain, on average (as of 12/31/16): 43% in CDs, 23% in Other (Time Deposits), 21% in CP, 8% in Repo, 5% in Treasury, and 0% in Agency. Sterling funds have on average 21.0% of their portfolios maturing Overnight, 7.5% maturing in 2-7 Days, 15.9% maturing in 8-30 Days, 19.6% maturing in 31-60 Days, 15.3% maturing in 61-90 Days, 17.0% maturing in 91-180 Days, and 3.7% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: Japan (17.4%), France (14.7%), Great Britain (13.7%), Netherlands (7.9%), Australia (7.6%), Germany (7.1%), US (6.6%), Sweden (6.0%), Canada (5.7%), and Belgium (2.2%).
The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L8.2B (5.7%), Mitsubishi UFJ Financial Group Inc. with L7.8B (5.5%), Sumitomo Mitsui Banking Co. with L6.1B (4.3%), Credit Mutuel with L5.0B (3.5%), Nordea Bank with L4.7B (3.3%), Bank of America with L4.5B (3.1%), Sumitomo Mitsui Trust Bank with L4.4B (3.1%), DZ Bank AG with L4.3B (3.0%), Commonwealth Bank of Australia with L4.2B (3.0%), Rabobank with L4.0B (2.8%), BNP Paribas with L3.8B (2.7%), BPCE SA with L3.5B (2.5%), ABN Amro Bank with L3.4B (2.4%), Credit Agricole with L3.4B (2.4%), and Erste Abwicklungsanstalt with L3.3B (2.3%).
Promontory Interfinancial Network, which produces the FDIC sweep service Insured Network Deposits (IND) and Certificate of Deposit Account Registry Service (CDARS), recently published its "2017 Funding & Deposits Report," which discusses bank funding and deposits and which contains a section on money fund reforms. Promontory President and CEO Mark Jacobsen explains, "Over the last two years, we have reached out to Promontory Network members and asked them to share their opinions and insights.... The response has been heartening as almost 1,000 bank CEOs, presidents, and CFOs have participated in our quarterly Bank Executive Business Outlook Survey.... With that, I am pleased to announce the launch of an annual Funding & Deposits Report, a new outgrowth of the Bank Executive Business Outlook Survey."
The Executive Summary says, "The marketplace for deposits remained relatively stable throughout 2016. The small increase in the federal funds rate at the end of 2015 did raise the cost of funding, but, overall, funding costs stayed at historically low rates and most banks -- money center institutions, large regional banks, and community banks -- remained fairly flush with deposits.... Sixty-nine percent of respondents reported that they expect to experience a moderate increase in funding costs within the next 12 months.... In particular, larger community banks are aggressively pursuing corporate deposits."
It discusses "Money Market Mutual Fund Reform," saying, "Most community banks reported seeing little impact on deposit availability from the change in money market mutual fund (MMMF) rules. Larger community banks were more likely to report that the MMMF rule change has increased deposit availability. These larger community banks were also more optimistic that MMMF reform would increase availability of deposits in the future."
On "Composition and Accessibility of Bank Funding," the report says, "For most community banks, retail deposits are the primary source of bank funding. On average, Q4 2016 survey respondents indicated that they prefer funding from retail depositors to make up the majority (53%) of total bank funding, corporate deposits to make up 29% of bank funding, deposits from public funds to make up 11%, and wholesale funding to make up the final 8% of bank funding."
A section on "Money Market Mutual Fund Reform," comments, "The October 2016 enactment of the new SEC rules governing money market mutual funds (MMMFs) has transformed the money fund industry. The change has led to a dramatic shift in fund placements from prime funds to government funds. Data from Crane Data's Money Fund Intelligence shows that, between October 2015 and October 2016, more than $1 trillion moved from prime funds to government funds. At some point, investors may get hungry for more yield and consider a return to prime funds or a move elsewhere. In the latest Bank Executive Business Outlook Survey, bankers indicated that, so far, little impact has been felt from the change in money market fund rules when it comes to increasing deposit availability."
It continues, "Larger community banks with between $1 billion and $10 billion in assets were more likely to report that the MMMF rule change has impacted deposit availability.... Larger community banks were much more likely to see the rule change as eventually making deposits more available for their institutions.... The increased availability of corporate deposits that were once kept in money market funds could make a substantial difference for banks, particularly larger community banks, which have indicated that they are eager to add corporate deposits to their funding mix. Of the various depositor types (retail, corporate, public funds), corporate deposits are perceived to be the least accessible by community banks."
Promontory's report also includes, "A Conversation with Peter Crane on the Impact of MMMF Change" The Q&A says: "Q. How has the MMMF rule change affected the total assets in money market funds and the yields of these funds? A. Prime assets declined by seventy-five percent; $1.1 trillion moved. Everyone and their brother sold prime and moved to government. The move has essentially inverted the prior asset allocations of those fund categories."
Crane continues, "For now, the yield spreads between prime funds and government funds are tighter than usual because you actually had two big factors going on at the same time. Normally, as money left prime and went into government, one would have expected the spreads to grow. But the prime funds were restricted ahead of the October 14 date when the rule went into effect. The prime funds were getting as short as possible to prepare for redemptions, which led to lower yields. Going forward, the yield spreads between prime and government funds are expected to return to historical levels, which has generally been about 25 bps."
The Q&A also asks, "Q. Have government funds been offering better yields to attract the cash moving from prime funds and are those yields going to continue moving forward? A. Certainly, some funds have cut their expense ratios to make their government funds more attractive and to catch a bigger share of the assets flooding into the government segment -- JP Morgan being the biggest example of that. Whether that's temporary or not is a different question. It could be more permanent, because government money funds have just gotten an enormous boost to their economies of scale. In general, a $60 billion fund doesn't have to charge as much as a $4 billion fund. On the other hand, you still have remnants of fee waivers where a lot of funds, more retail-ish funds in particular, are still only charging a part of their fees because of the ultra-low rate environment. So as the Federal Reserve raises rates, you're going to see the second leg of this fee unwinding."
It adds, "Q. Are investors going to stay in government funds or will they move back to prime funds or move out to other investment options? A. That's the trillion dollar question. But nobody knows. For now, clearly, the bulk of the assets have shown a preference for government money funds. But as yields change, if spreads grow, there's a possibility some investors will move back. Everyone is still re-pricing what the costs of safety are and what kind of yield and premiums they're going to need. Even though a gate going up on a money fund is an extremely low-probability, disaster-only scenario, people just can't afford to lock up their cash. Nobody wants their transaction pipeline getting clogged up or broken because so many other pieces of so many businesses are dependent on those transactions flowing smoothly."
Crane explains, "Surveys have said investors will need 40-50 bps to consider a move back to prime, and we're barely at half of that now. Spreads are going to have to go up to get people to consider such a move. Even at those levels, it's unclear whether or not investors are going to move back. In the meantime, investors have been looking at alternatives and other options that give them the safety, liquidity, and yield that prime funds used to give them. But they either haven't found that solution yet, or the path of least resistance was to switch, then prepare to find other options."
Finally, Promontory asks, "Q. What kind of impact might this have on the availability of institutional deposits for banks? A. So far, the move into government funds has appeared to be almost entirely a one-to-one move. Very little money appears to have left money funds altogether. Over time, though, I would assume that bank deposits will increase. Bank deposits have grown since the financial crisis and have shown no sign of abating. You look at the Fed's H6 Money Stock Measures data and it has been a straight line up since 2008. 16 going on 20 years brokerages have moved money back from money market mutual funds -- their default sweep vehicle -- into bank deposit products. The zero yield environment and the MMMF regulatory changes have only accelerated that trend. People tend to look at the world as a zero-sum game, but money is being created and destroyed and added and removed everywhere. So even though it looks like a one-to-one swap, the new money clearly is being redirected in other places."
