News Archives: March, 2018
The Investment Company Institute released its "Worldwide Regulated Open-Fund Assets and Flows, Fourth Quarter 2017" yesterday. The latest data collection on mutual funds in other countries (as well as the U.S.) shows that money fund assets globally rose by $180.8 billion, or 3.2%, in Q4'17, led by big jumps in U.S. and Chinese money funds. Money funds in Ireland, Luxembourg and Japan also rose. MMF assets worldwide have increased by $869.9 billion, or 17.3%, the past 12 months. France, India, Mexico and Brazil were the only countries showing noticeable decreases in Q4'17. We review the latest Worldwide MMF totals below.
ICI's release says, "Worldwide regulated open-end fund assets increased 4.0 percent to $49.29 trillion at the end of the fourth quarter of 2017, excluding funds of funds. Worldwide net cash inflow to all funds was $687 billion in the fourth quarter, compared with $802 billion of net inflows in the third quarter of 2017."
It explains, "The Investment Company Institute compiles worldwide open-end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations. The collection for the fourth quarter of 2017 contains statistics from 47 jurisdictions."
ICI tells us, "The growth rate of total regulated open-end fund assets reported in US dollars was increased by US dollar depreciation over the fourth quarter of 2017. For example, on a US dollar–denominated basis, fund assets in Europe increased by 3.9 percent in the fourth quarter, compared with an increase of 2.3 percent on a euro-denominated basis."
It continues, "On a US dollar-denominated basis, equity fund assets increased by 5.8 percent to $21.83 trillion at the end of the fourth quarter of 2017. Bond fund assets increased by 1.9 percent to $10.37 trillion in the fourth quarter. Balanced/mixed fund assets increased by 3.0 percent to $6.42 trillion in the fourth quarter, while money market fund assets increased by 3.1 percent globally to $5.90 trillion."
ICI writes, "At the end of the fourth quarter of 2017, 44 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 21 percent and the asset share of balanced/mixed funds was 13 percent. Money market fund assets represented 12 percent of the worldwide total. By region, 50 percent of worldwide assets were in the Americas in the fourth quarter of 2017, 36 percent were in Europe, and 14 percent were in Africa and the Asia-Pacific regions."
The release adds, "Net sales of regulated open-end funds worldwide were $687 billion in the fourth quarter of 2017. Flows into equity funds worldwide were $283 billion in the fourth quarter, after experiencing $142 billion of net inflows in the third quarter of 2017. Globally, bond funds posted an inflow of $162 billion in the fourth quarter of 2017, after recording an inflow of $228 billion in the third quarter…. `Money market funds worldwide experienced an inflow of $132 billion in the fourth quarter of 2017 after registering an inflow of $310 billion in the third quarter of 2017."
According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. maintained its position as the largest money fund market in Q4'17 with $2.847 trillion, or 48.3% of all global MMF assets. U.S. MMF assets increased by $99.6 billion in Q4'17 and increased by $119.2B in the 12 months through Dec. 31, 2017. China remained in second place among countries overall, breaking over $1 trillion, as assets continued surging in the latest quarter and year. China saw assets increase $86.5 billion (up 9.1%) in Q4 to $1,035.2 billion (17.5% of worldwide assets). Over the last 12 months through Dec. 31, 2017, Chinese MMF assets have risen by $418.3 billion, or 67.8%.
Ireland remained third among these country rankings, ending Q4 with $584.0 billion (9.9% of worldwide assets). Dublin-based MMFs were up $23.6B for the quarter, or 4.2%, and up $80.0B, or 15.9%, over the last 12 months. France remained in fourth place with $412.8 billion (7.0% of worldwide assets). Assets here decreased $21.3 billion, or -4.9%, in Q4, and were up $48.8 billion, or 13.4%, over one year. Luxembourg was in fifth place with $393.8B, or 6.7% of the total, up $9.1 billion in Q4 (2.4%) and up $41.2B (11.7%) over 12 months.
Japan remained in sixth place, rising by $5.6 billion to $115.3 billion, after dipping last quarter. Japanese MMFs are up a shocking $114.8 billion, or 20,491%, over the past 12 months. (We assume this was a reclassification of some sort.) Korea, the 7th ranked country, saw MMF assets fall $2.3 billion, or -2.3%, to $91.8 billion (1.6% of total) in Q4 and rose $4.8 billion (5.5%) for the year. Brazil remained in 8th place; assets decreased $4.2 billion, or -5.1%, to $79.2 billion (1.3% of total assets) in Q4. They've increased $7.1 billion (9.8%) over the previous 12 months.
ICI's statistics show Mexico in 9th place with $53.3B, or 0.9% of total, down $6.5B (-10.9%) in Q4 and up $5.9B (12.5%) for the year. India was in 10th place, decreasing $9.6 billion, or -17.7%, to $44.8 billion (0.8% of total assets) in Q4 and decreasing $627 million (-1.4%) over the previous 12 months. (Note also that ICI's data no longer includes money fund figures for Australia, but they would rank as the sixth largest market at $322 billion, their level of two years ago, if they were still included. Australia's MMF assets were shifted into the "Other" category two years ago.)
The United Kingdom ($27.4B, up $481M and up $16.9B over the quarter and year, respectively) staying ahead of Chinese Tapei ($26.8B, up $938M and up $82M), South Africa ($25.7B, up $2.5B and up $4.2B) moved back ahead of Switzerland ($22.3B, down $1.7B and up $4.0B), and Chile ($21.7B, down $1.3B and up $2.0B) ranked 11th through 15th, respectively. Sweden, Canada, Poland, Norway and Germany round out the 20 largest countries with money market mutual funds.
Note that Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. Contact us if you'd like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data, or if you'd like to see our MFI International product.
Today, we excerpt from the opening session at last week's Bond Fund Symposium in Los Angeles. The "State of the Bond Fund Marketplace" featured Crane Data's Peter Crane and the Investment Company Institute's Sean Collins, who set the stage for the day and a half event. Crane comments, "We're going to talk primarily about ultra short issues, but we're going to discuss bond fund issues in general and try to address a number of hot topics in the overall market. We'll talk about money funds too, since this audience is dominated by money fund people, either looking at the ultra-short and enhanced cash space or doing both [MMFs and ultra-short]." Note: The Powerpoints and recordings for Bond Fund Symposium are available to conference attendees and Crane Data subscribers at our BFS 18 Download Center.
Crane continues, "Bond funds in general seem like a tale of two industries ... the best of times, the worst of times. We're going to talk about flows, which have been absolutely gigantic and magnificent. But at the same time, we're going to talk about trends of passive versus active and expense ratios and fees being crushed and compressed. And, of course, looming higher rates pose a threat to all of that. So that's what we're going to focus on."
He tells the conference, "Just a couple of stats on bond funds: they broke over $4 trillion [in 2017], and ETFs add another $550 billion. The growth has just been spectacular. Money fund assets spiked up to almost $4 trillion at the tail end of the crisis, after Reserve broke the buck over Lehman Brothers.... They crashed back down and had been flat-lining for seven-plus years.... But bond fund assets have been on tear.... I believe last year was the biggest inflow ever."
Collins, the recently promoted to Chief Economist at the Investment Company Institute, comments, "Last year [bonds saw] record inflows about $381 billion. That includes bond mutual funds plus ETFs, split about two thirds between mutual funds and a third between ETFs. That actually wasn't a record for bond mutual funds; the record I believe was in 2009. But all in all it was a very good year for bond funds."
He continues, "I would say the biggest issue continues to be that regulators around the world, and central bankers in general, view bond funds as a systemic problem, despite all evidence to the contrary. So that continues to be a pretty huge issue for us [ICI]. [This] makes itself evident in a number of ways. One, for example, would be liquidity buckets. So that's a rule, it's finally coming to fruition, that stemmed originally from concerns about bond funds and other funds having enough liquidity in a market where liquidity may be drying up."
Commenting on a chart showing over $2 trillion of inflows since 2008, Collins comments, "We've had tremendous inflows in the last several years. This is part of the concern for regulators [who say], 'We've seen these vast inflows into bond funds and we don't know what bond fund investors are going to do.... There might be massive redemptions in the future if interest rates were to rise sharply.' [But] we don't think that that's what's going on."
He continues, "Generally speaking, flows tend to follow returns.... I wouldn't say people are necessarily chasing yield, but they tend to track returns.... Yet we saw record inflows into bond funds in 2017, so clearly in this case at least there were some other things going on. One thing we think that was going on was ... portfolio asset allocation and rebalancing programs ... in an environment where the stock market is up 20-30%. You have to buy an awful lot of bonds to keep a portfolio in balance that stays 60/40. So that's probably part of what's going on here."
Collins also says about demographics, "There are some fundamental things going on in the bond fund space that are going to create a natural and long-term demand for bond funds, irrespective of what's going on with interest rates.... The population is graying, and it's expected to do so for at least until about 2030. That's going to create a natural underlying demand for bond funds as people shift their portfolios more towards income. So that's sort of important, especially in this environment where we have Fed raising rates in and a lot of commentary in the media."
Crane comments on assets by type, "In general, the interesting thing about the bond fund flows is that they're still going primarily to the intermediate term. Flows like ETFs are rapidly growing there. Intermediate fund assets, as of January, are about 72%, long term around 13%, and short term is just 15%. Within this 15%, you have the ultra short conservative and ultra short those little slices. So the overall pie the ultra space is still very small in general."
Collins adds, "You're right, ultra-shorts and short term bond funds are still pretty small as a chunk of the market. But ... we saw $12 billion inflows into ultrashorts, which I was surprised that the number was that big ... and another $8 billion inflows into short term. Between short term and ultra short term, assets are approaching $300 billion dollars in 2017."
Crane told the LA crowd, "Short term bond funds in general have really had the same problem money market funds have had over the past decade until just recently [ultra-low yields]. I went through my life with 5% or 3% yields on cash. Bonds you were looking for 6-7%. We've had this starvation diet going out there where you've had yields of point something percent and the ultra-shorts in general [had been near 1%].... Now, of course, money funds are breaking well north of 1% [and ultra-short moving over 2%]."
Finally, he says, "February was really the first time you've seen losses in bond funds in a long time. Conversely, it's the first time you've seen a substantial move higher in yields. [H]igher yields in general are short term pain long term gain." Watch for more coverage of our Bond Fund Symposium in coming days and in the next issues of Money Fund Intelligence and Bond Fund Intelligence.
Crane Data hosted its second annual Bond Fund Symposium last week at the InterContinental Los Angeles Downtown. Our latest bond event attracted 110 bond fund managers, marketers, fixed-income issuers, investors and service providers. We briefly review some of the highlights and quotes below, but watch for more in coming days and in the April issue of our Money Fund Intelligence and our Bond Fund Intelligence newsletters. (We also review a new Bank for International Settlements paper on funding.) Note: The Powerpoints and recordings for Bond Fund Symposium Los Angeles are now available to conference attendees and Crane Data subscribers at our BFS 18 Download Center. Thank you again to those who attended and supported the event! (Next year's BFS will take place March 21-22, 2019 in Philadelphia. Watch for details later this year.)
The biggest topics of the day and a half event included: rising rates, risks and yields; repatriation; the surge in Treasury issuance; and the wave of "outside-in" money likely to fuel ultra-short bond funds' growth going forward. During Day One's State of the Bond Fund Marketplace, with Peter Crane, of Crane Data and Sean Collins of the Investment Company Institute, Crane said, "Bond funds in general seem like a tale of two industries ... the best of times, the worst of times. We're going to talk about flows which have been absolutely gigantic and magnificent, but at the same time we're going to talk about trends of passive versus active and expense ratios and fees being crushed and compressed. And of course looming higher rates poses a threat to all of that.... Just a couple of stats -- bond funds broke over $4 trillion, and ETFs add another $500 billion."
In the Keynote Discussion: Ultra-Shorts vs. SMAs with Dave Martucci of J.P. Morgan Asset Management and Jerome Schneider of PIMCO, Schneider commented, "This [ultra-short bond] is clearly a growing segment of the marketplace. The notion of liquidity management and capital preservation is something that's been on people's minds over the past 10 years, and it's taken a long time for people to actually think about how it should be articulated."
He explained, "We all work with [ultra-short funds] in different ways, and I think we would all agree that preferences is about managing capital is very unique. So, the purpose of these discussions the past year or two has been really focus on offering products, offering solutions to clients that help fill various risk factors that they feel are in the marketplace. The evolution of Pete's franchise is simply an acknowledgement that investors are moving around in there, and they're thinking more about more direct ways to manage capital."
Crane Data, which has been publishing its `Bond Fund Intelligence newsletter for 3 years, recently expanded its fixed-income offerings with the launch Bond Fund Wisdom and our new Bond Fund Portfolio Holdings data. (We just released our March Bond Fund Holdings data last week.) Our Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent and informal networking venue.
In other news, the Bank for International Settlements published a working paper entitled, "Business models and dollar funding of global banks." The Abstract says, "Since the eurozone crisis, there has been a stark divergence between European banks and Japanese banks in their dollar uses and sources. We show that these shifts have implications for the price of dollar funding. We document a "Japan Repo Premium." Japanese banks pay a premium for repos with US money market funds (MMFs), despite identical contract and risk characteristics."
Authors Inaki Aldasoro, Torsten Ehlers and Egemen Eren explain, "Using the US MMF reform as a natural experiment, we establish that Japanese banks' long maturity dollar assets generate a relatively inelastic demand for long maturity dollar borrowing. Differences in the demand for dollar funding combined with market and supply side frictions can explain these pricing differences. MMFs mainly provide short term repos and favor longer term clients for long maturity repos. Japanese banks concentrate their repo borrowing, reducing their bargaining power in order to extend their funding maturity. Our results have implications for the formation of global dollar funding networks. We provide evidence for European banks intermediating repos to Japanese banks, with economically significant estimated spreads from maturity transformation."
The paper's "Summary" tells us, "Non-US banks collectively hold $12.6 trillion of dollar-denominated assets -- almost as much as US banks. Since the Great Financial Crisis (GFC) and the eurozone crisis, however, there has been a stark divergence between European and Japanese banks' business models. We study the impact of this divergence on pricing of dollar funding and dollar funding networks. We use transaction-level data from the regulatory filings of US money market funds (MMFs) as well as quarterly regulatory filings of US branches and agencies of foreign banks, and BIS international banking statistics to develop a rich picture of the dollar funding landscape."
It continues, "Dollar funding stress of non-US banks was at the center of the GFC. The dollar funding landscape has changed dramatically since then, owing to the shifts in demand and differential implementation of Basel III regulations across jurisdictions. Our research shows how the demand for dollar funding has changed, how global banks obtain dollar funding and differential funding cost across banks for different funding instruments. This information is crucial in case of a new surge in dollar funding stress."
The BIS paper adds, "We find that Japanese banks pay a premium in their repurchase agreements ("repos") with US MMFs. We show that the bargaining power of MMFs fund families, together with the particular demand for long term funding of Japanese banks, help explain this premium. Our findings point to the existence of dollar funding networks. We derive implications from the existence of these networks and provide supporting evidence for them. Finally, we also show that disruptions in dollar repo markets spill over to other important dollar funding markets, such as that of foreign exchange swaps."
A recent filing for the Goldman Sachs Financial Square Funds reduced the management fees for the Goldman Sachs suite of money market mutual funds. Strategic Insight's SimFundFiling product explains, "On February 21, 2018, the Goldman Sachs Financial Square Federal Instruments, Goldman Sachs Financial Square Government, Goldman Sachs Financial Square Money Market, Goldman Sachs Financial Square Prime Obligations Money Market, Goldman Sachs Financial Square Treasury Obligations Money Market, Goldman Sachs Financial Square Treasury Instruments Money Market, Goldman Sachs Financial Square Treasury Solutions Money Market, Goldman Sachs Investor Money Market, and Goldman Sachs Investor Tax-Exempt Money Market funds will eliminate their advisory fee waivers at the same time as instituting an equivalent reduction in their contractual advisory fee schedule (see the Advisory Fee section for more changes to the funds)."
They explain, "Effective February 21, 2018, each of the Goldman Sachs Financial Square Government, Goldman Sachs Financial Square Prime Obligations, Goldman Sachs Financial Square Money Market, Goldman Sachs Investor Money Market, and Goldman Sachs Investor Tax-Exempt Money Market funds will reduce its management fee from 0.205% to 0.160%, and each of the Goldman Sachs Financial Square Federal Instruments, Goldman Sachs Financial Square Treasury Instruments, Goldman Sachs Financial Square Treasury Obligations, and Goldman Sachs Financial Square Treasury Solutions funds will reduce its management fee from 0.205% to 0.180%."
On a separate filing, the latest SimFund Filing bulletin adds, "Effective March 31, 2018, a front-end sales charge will no longer be assessed on purchases of Class A shares of $250,000 or more (previously, $500,000 or more) of the JPMorgan Floating Rate Income, JPMorgan Limited Duration Bond, JPMorgan Short Duration Bond, JPMorgan Short Duration Core Plus, JPMorgan Short-Intermediate Municipal Bond, and JPMorgan Ultra-Short Municipal funds. In addition, these funds will no longer charge a 0.75% contingent deferred sales charge (CDSC) if such shares (on which no sales charge was paid) are redeemed within the first 18 months after purchase and no finder's fees will be paid with respect to such shares. Class A shares purchased prior to March 31, 2018 will continue to be subject to the CDSC schedule currently in effect."
Another fee announcement, entitled, "First American Funds Announces Reduced Contractual Net Expenses for Treasury Obligations Fund Class P and Class Z Shares," explains, "The advisor has elected to make additional contractual fee waivers with the intended effect of lowering the fund's overall expenses. As of March 13, 2018, the advisor has introduced an additional two basis points (bps) of contractual fee waivers for the Class P and Class Z shares of the First American Treasury Obligations Fund, resulting in a contractual net expense ratio of 18 bps (24 bps gross). The advisor has contractually agreed to waive fees and reimburse fund expenses through March 14, 2019, so that the total annual fund operating expenses do not exceed as stated."
In other news, money market mutual fund assets rose slightly in the latest week, after falling sharply in the previous week. The Investment Company Institute's latest "Money Market Fund Assets" report shows that year-to-date, MMF assets have decreased by $17 billion, or -0.6%. Over 52 weeks they've increased by $171 billion, or 6.5%. ICI's numbers also show Prime money market fund assets increased for the second week in a row after two weeks of declines. Govt MMF assets rebounded after plunging last week.
ICI writes, "Total money market fund assets increased by $4.94 billion to $2.83 trillion for the week ended Wednesday, March 21, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.74 billion and prime funds increased by $1.42 billion. Tax-exempt money market funds decreased by $225 million." Total Government MMF assets, which include Treasury funds too, stand at $2.232 trillion (79.0% of all money funds), while Total Prime MMFs stand at $457.8 billion (16.2%). Tax Exempt MMFs total $135.1 billion, or 4.8%.
They explain, "Assets of retail money market funds increased by $129 million to $1.01 trillion. Among retail funds, government money market fund assets increased by $1.30 billion to $620.35 billion, prime money market fund assets decreased by $828 million to $264.16 billion, and tax-exempt fund assets decreased by $344 million to $128.33 billion." Retail assets account for over a third of total assets, or 35.9%, and Government Retail assets make up 61.2% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $4.81 billion to $1.81 trillion. Among institutional funds, government money market fund assets increased by $2.44 billion to $1.61 trillion, prime money market fund assets increased by $2.25 billion to $193.67 billion, and tax-exempt fund assets increased by $119 million to $7.02 billion." Institutional assets account for 64.1% of all MMF assets, with Government Inst assets making up 88.9% of all Institutional MMFs.
Finally, thank you to those of you who attended and supported our 2nd annual Bond Fund Symposium in Los Angeles! (The event ends Friday at noon.) The Powerpoints and materials for Crane's Bond Fund Symposium are now available to conference attendees and Crane Data subscribers at our BFS 18 Download Center. (Watch for the recordings to go up on Monday.)
The Federal Reserve raised short-term interest rates 1/4-point to the range of 1 1/2 to 1 3/4, which should pull money market fund rates, which have already risen steadily, higher in coming weeks. The Fed's release says, "Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low.... On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent." We review the Fed's statement below, and also quote from a new UBS piece on tax reform. (Note: We'd also like to welcome those of you who made it out to Los Angeles for our 2nd annual Bond Fund Symposium, which takes place today and tomorrow at the LA InterContinental Downtown.)
The FOMC statement continues, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely."
They explain, "In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation."
The Fed adds, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.... The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data."
In other news, UBS Asset Management writes in its latest "Liquidity Perspectives 1Q18" about "US tax reform: What corporate treasurers need to know." They tell us, "The tax reform bill signed into law late last year was the most extensive overhaul of the US tax code in more than 30 years, making significant changes to both individual and corporate tax rates. But now that tax reform is here, corporate treasurers are sifting through the law to determine its effect."
UBS explains, "In this year's inaugural piece, we examine how these reforms may trigger a strategic shift in how treasurers manage their balance sheets, with differing consequences depending on a company's industry, sources of revenue and corporate development strategy.... In the broadest sense, corporate tax reforms encompass three main components. The first component constitutes a paradigm shift, with a move from a global taxation system to a territorial system, where companies will be subject to US taxes only on profits they generate domestically (in the United States). The second important component lowers the statutory corporate tax rate from 35% to 21%."
They tell us, "A third component, however, will provide an important boost to companies that currently have untaxed profits held offshore. Prior to tax reform, foreign subsidiaries of US headquartered companies did not pay US taxes on earnings from abroad until that money was returned home (repatriated), at which point they were subject to the same tax rate as their domestic counterparts. At 35%, the US corporate tax rate was among the highest in the world.... As a result, total overseas earnings for all US multinationals swelled and were recently estimated at $2.6 trillion. However, a provision in the new tax code will allow companies with cash trapped overseas to pay a one-time mandatory tax of 8% for illiquid assets (such as factories and equipment) and 15.5% for cash and cash equivalents when repatriating the cash. Corporations can opt to pay the tax in installments over an eight-year period."
UBS states, "A well-designed cash management strategy supports a company's objectives and should be flexible to meet key strategic imperatives. The following table examines how these imperatives may be impacted by tax reforms, and how cash management strategies could adapt. One broader concern to the global treasury community is the market repercussions that tax reforms may have in 2018. Most cash balances that are subject to repatriation are primarily USD-denominated and held in US Treasuries and corporate bonds. Shifting these assets onshore to fund shareholder programs could increase the supply of available securities in a year when the US Treasury is expected to significantly raise bill issuance to meet rising deficits."
They write, "Both of these factors may put an upward pressure on yields, further accelerating the process of raising interest rates already put in motion by the Federal Reserve. However, given that not all corporations will repatriate at once, nor will they all immediately shift into shorter-dated vehicles, we believe that repatriation is unlikely to cause a supply shock. In any case, the pace of shifting from onshore to offshore should be monitored as the year unfolds."
UBS adds, "Another interesting dynamic to monitor closely in 2018 concerns the offshore money market fund complex, as US tax reforms may present both opportunities and challenges for these important cash-management vehicles. Companies may consider a higher allocation to offshore money market funds as they slowly unwind longer-dated strategies while maintaining significant balances overseas. Rising short-term rates may further bolster the case for holding balances in these shorter-dated vehicles. However, the challenge remains that some assets, albeit small, may shift to the US, which poses another interesting dynamic to monitor closely, especially in a year in which European funds are preparing to implement new reforms."
Finally, the update concludes, "US tax reform presents corporate treasurers with cash-management challenges and opportunities. While clearly US multinational corporations will be the most immediately affected by the reforms, global treasury community will surely feel some of the repercussions. Cash managers worldwide will find it more important than ever to monitor developing dynamics and prepare for their outcomes."
This month, MFI interviews SEI Managing Director and Senior Portfolio Manager Sean Simko and Portfolio Manager Daisy Lac. We discuss SEI’s use of outside managers as subadvisors, their move to offer only Government MMFs, and their focus on separately managed accounts. Our latest Q&A follows. (Note: This interview is reprinted from the March issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue. Note too: The Powerpoints and materials for this week's Bond Fund Symposium in Los Angeles are now available to conference attendees and Crane Data subscribers at our BFS 18 Download Center. We hope to see you in LA Thursday!)
MFI: Tell us about your history. Simko: SEI debuted its money market offering back in 1981. The first funds were launched in our subadvisor program as our money funds are today. In this offering, we hire outside money managers and delegate security selection to take advantage of economies of scale. The program has continued to evolve over the years, with the most recent significant change taking place as a result of the Security & Exchange Commission's decision to require institutional prime money market funds to maintain a floating net asset value and the imposition of an option to impose liquidity fees and redemption gates under certain circumstances.
As a result, we liquidated three prime obligation and two municipal money market funds and transitioned assets to other offerings in our subadvisory program. The program includes two sets of funds. The first is the SEI Daily Income Trust (SDIT) Government Money Market Fund. The complex includes four funds that act as the cash sweep component of accounts for institutional and high-net-worth clients and do not charge redemption gates or liquidity fees. The SDIT Funds have assets of just under $10 billion.
The second is a pair of funds (one taxable and one tax free) in the SEI Institutional Managed Trust (SIMT) complex. These are meant to provide low-risk, highly liquid exposure in client portfolios. While the funds target short weighted-average maturities, they are not money market funds, and their NAVs will fluctuate.... These funds are able to purchase short-term securities at attractive valuations and offer yields above money market strategies. For those investors who do not need daily access to liquid strategies, these could be an attractive investment. The SIMT Fund has assets of $400 million. Daisy and I are not involved in the manager selection within our sub-advised money market solution. There are dedicated analysts that carry that responsibility [and] focus on the research, analysis and due diligence. The additional value we bring to the process is through our oversight and risk meetings.
In 2000, SEI also started offering cash management solutions through SEI Fixed Income Management, the in-house team that I manage. Daisy is a senior leader on the team. We have the ability to construct custom portfolio to fit all types of investor risk levels and goals. Historically, money market funds were used by investors who desired liquidity and safety from their investments -- two characteristics that are also achievable through a fixed-income separate-account implementation. Today the SEI FIM team manages in excess of $10 billion across a range of strategies that include cash management solutions along with traditional fixed income mandates across the yield curve. The end goal is always the same. Through our analysis we look to build a well-diversified very liquid portfolio that focuses on purchasing high-quality credits.
MFI: What's your biggest challenge? Lac: Navigating the ebb and flow of supply is a big challenge money market portfolio managers have faced historically and continue to confront in today's market environment. The regulatory framework post-financial crisis dramatically altered supply and demand dynamics. Large bank issuers were mandated to reduce reliance on short-term wholesale funding, and they noticeably curbed short-term issuance. The tremendous levels of liquidity the Fed injected into the system further blunted the need for banks to issue in the short-end. Low interest rates allowed companies to borrow longer-term funds at attractive levels and thereby diminish their use of commercial paper issuance.
Meanwhile money market investors are operating with intensified liquidity requirements. So you have a great deal of money chasing short-dated assets which are not as abundantly accessible, and this is the context those who manage cash are faced with daily. Since the start of 2018 there have been a couple of new antagonists in the supply-demand interplay. With the suspension of the debt ceiling and an increasing need to fund the government, we are in the midst of a significant [increase in] Treasury bill issuance. This supply injection has been a catalyst in pushing short-term yields higher.
As a counterpoint to this, the 2017 Tax Cuts and Jobs Act (which offers U.S. multinationals an impetus to repatriate large sums of cash currently held overseas) prompts the consideration that there could be a resultant drop in issuance from these corporations as they retire outstanding commercial paper with the cash they have brought back to the U.S. The forces that impact supply are ever changing and compelling factors in influencing cash management strategies.
MFI: What are you buying now? Lac: Running a cash mandate is akin to saying we are guardians of liquidity, and carefully preserving liquidity is the primary driver of our management strategy. With this goal in mind, we are constantly analyzing and assessing where we deploy our funds. Our banking sector exposure primarily consists of large global institutions in the U.S., Canada, Australia, and the Nordic region. In terms of corporate commercial paper, we favor A-rated issuers that maintain sizeable programs, have a regular presence in the market, and are distributed by multiple dealers. These are the attributes that we feel enhance the liquidity characteristics of the paper that we would be buying.
MFI: Are things too calm? Lac: While the overall credit environment has been relatively benign, I would offer that this perceived "calmness" shouldn't be taken at face value. We continue to feel comfortable about our investment exposures, but we are always thinking underneath the surface. For example, a couple of worrisome trends: household debt figures hit the highest level on record at the end of 2017, and credit card and auto loan delinquencies have also been spiking since 2017. While signs aren't necessarily calling for an imminent crisis, it's worthwhile to watch for signs of deterioration in various sectors as the means to stay proactive in assessing our exposures.
On the corporate side, repatriation of large sums of cash engenders many angles of analysis. While corporations likely would deploy some of these funds toward paying down debt and bolstering balance sheets, it is equally plausible that the cash influx would be funneled toward more shareholder friendly initiatives or M&A and other corporate restructuring. To this end, would the initiatives have a detrimental impact on credit ratings? Our concern of course, is that a hit to ratings would impact pricing and ultimately liquidity strength of issuers.
MFI: What are customers talking about? Simko: The straightforward and common concern heard over the past few years is the need to find value, or yield, in this low interest rate environment. We are in the middle of a dynamic policy shift from an ultra-low to low interest rate environment courtesy of the FOMC. One of the bigger challenges in today's environment is continuing to ... reign in your credit risk. In a deteriorating credit environment similar to what we witnessed in 2009, the potential pitfalls of credit risk are straight forward. Today's environment is more benign. It is easy to develop a false sense of tranquility [and become] complacent. It is in this environment that it is imperative to remain strong and stick to your investment thesis. [You need to run] multiple 'what-if' scenarios around your positions, even when there is remote … chance of disruption.
MFI: What is your outlook going forward? Simko: We are optimistic as it relates to the money market landscape. The environment is conducive for the FOMC to stay on course with its methodical march higher in removing accommodation. Steady economic growth combined with little inflationary pressures provides the FOMC a green light and investors the ability to capture higher yields. Global synchronized growth is a term that continues to get utilized.... Going forward, global removal of accommodation is another phrase that should find a home within investor's vocabulary and playbook. The money market arena should see little disruption if the removal of global accommodation is done with transparency and proper communication.
Lac: Our outlook for the coming year is favorable but we do remain circumspect. The five rate hikes since December 2015 have, without a doubt, heralded the return of a stronger investment landscape for money market portfolio managers. With the Fed poised to move multiple times this year, even higher yields are in the offing for this asset class. Having survived the years of ZIRP, and weathered regulatory reform and its crosscurrents, money market funds and mandates are still standing, and their relevance is further supported as interest rates rise. The near term focus for us is proactive positioning of our cash mandates ahead of the expectation of more rate hikes.
We will also be following the evolution surrounding the transition away from LIBOR to SOFR. LIBOR has been a mainstay in the money market world and its wind-down will certainly impact the asset class. So while the headwinds for money market participants may not be as dire as compared to a few years back, the market continues to evolve, and we remain vigilant in monitoring the developments and how they would impact the cash management space.
Rates have been moving solidly higher in recent weeks, and they should continue higher as the Fed prepares to raise rates again later this week. Treasury bill yields have been leading the charge higher. We quote from two recent pieces on the topic -- Federated Investors' "Rate Watch: Increases aren't just about inflation & Fed hikes", and Bloomberg's "Sea Change Is Underway in Money Markets for Banks, Investors". Federated writes "Yields on U.S. Treasury bills and notes have been rising more than might be expected in a period of still relatively low inflation. We asked two of our portfolio managers responsible for intermediate- and short-term fixed-income strategies, Don Ellenberger and Sue Hill, respectively, for their perspectives."
Hill, Senior PM & Head of the Government Money Market Group, says, "In the last few weeks we've seen yet another chapter in the atypical behavior of the Treasury market since the financial crisis and multiple rounds of Fed quantitative easing (QE). One would expect the shortest end of the yield curve to climb toward the new federal funds target range of 1.50-1.75% that policymakers are widely anticipated to announce next week, and that has been happening. In fact, the 1-month Treasury bill actually has been above 1.50% since the days after new Fed Chair Jerome Powell testified before Congress in late February."
She explains, "But the recent surge in yields isn't just due to anticipated Fed moves -- enormous Treasury issuance also has played a starring role. In addition to the aforementioned reasons (to finance governmental spending and make up for lost tax revenue), the Treasury has wanted to hold a more robust cash-balance position as a matter of prudent policy in order to protect against a potential interruption in market access. Debt-ceiling battles have scuttled previous attempts to build and subsequently maintain this stockpile, so when the debt ceiling was suspended in early February, the Treasury ratcheted up issuance out of the gate as soon as they got the green light."
Hill adds, "For the money markets, it's not just that the Fed is buying fewer bonds as part of the taper but as the Fed holdings roll off, the Treasury needs to reissue to the private sector in order to pay the Fed back. Treasury officials have indicated that a quarter to a third of the total tapering repayments could be reissued in the form of Treasury bills, adding to the supply at the front end of the yield curve. This has pushed repo rates higher and made collateral so plentiful that few participants need to use the Fed's reverse repo facility that sets the floor on overnight trading. As the Fed hikes rates, a key will be that how much the ongoing issuance is absorbed in the market."
Bloomberg wrote last week, "Sea Change Is Underway in Money Markets for Banks, Investors." They explain, "While many fixed-income investors may be focused on the specter of higher long-term Treasury yields, there's a sea change afoot at the shorter end -- in U.S. money markets."
The piece tells us, "The London interbank offered rate, or Libor, and rates on Treasury bills are around levels not seen since 2008. The Federal Reserve's move to tighten policy forms the backdrop for the increase, but an added force behind the surge this year has come from a deluge of supply as U.S. deficits widen. Higher short-term borrowing costs have implications for investors and also for banks, which find themselves paying up to borrow through the commercial-paper market as they compete to lure cash."
Bloomberg quotes Jerome Schneider, head of the short-term and funding desk at PIMCO, "We are in a new paradigm.... The clear focus for the market is where will incremental demand come from to meet this supply." (Note: Schneider will be featured in the "Keynote Discussion: Ultra-Shorts vs. SMAs" at our upcoming Bond Fund Symposium, which is March 22-23 in Los Angeles.)
The article also says, "The Treasury has been jacking up debt sales this quarter: Net issuance is slated to exceed $400 billion, with the bulk coming in bills. The Treasury increased the size of the four-week bill sale to $65 billion, from as low as $15 billion earlier in the year, and bidding has had some difficulty in keeping pace. The bid-to-cover ratio at Tuesday's auction was just 2.58, the second-lowest at the tenor since 2009, while borrowers demanded a yield of 1.65 percent, the most since 2008."
It adds, "For investors, there may be a silver lining. After years of near-zero returns, the rise in rates is boosting demand for money-market funds. Assets in U.S. government-only money funds, which include bills among key holdings, have risen to $2.26 trillion, from $2.07 trillion last year. As the Fed keeps hiking, with the next move likely this month, the influx may continue. But for banks, the increasing appeal of T-bill rates is making them pay up to compete, through offering better returns on the commercial paper they use for short-term borrowing."
Crane Data's Money Fund Intelligence Daily shows our Crane 100 Money Fund Index rising from 1.23% on Feb. 28 to 1.31% as of March 18. Our broader Crane Money Fund Average has risen from 1.07% to 1.14%.
The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary late last week. It shows that total money fund assets rose by $40.7 billion in February to $3.122 trillion, but Prime funds inched lower (after rising in 12 of the last 13 months). Prime MMF assets fell by $2.8 billion to $666.6 billion (after rising by $3.2 billion in January, falling $13.6 billion in December, and rising $14.3 billion in November). Government money funds increased by $44.9 billion, while Tax Exempt MMFs fell by $1.4 billion. Gross yields rose again for Prime and Government funds, but dipped 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. We review their latest numbers below.
Overall assets increased by $40.7 billion in February, after decreasing by $44.3 billion in January, and increasing by $45.2 billion in December. Total MMFs increased by $55.4 billion in November, $46.2 billion in September, and $71.2 billion in August. Over the 12 months through 2/28/18, total MMF assets increased $190.5 billion, or 6.5%. (Note that the SEC's series includes a number of private and internal money funds not reported to ICI or others, though Crane Data also now tracks many of these.)
Of the $3.122 trillion in assets, $666.6 billion was in Prime funds, which decreased by $2.8 billion in February. Prime MMFs increased by $3.2 billion in January, decreased by $13.6 billion in December, and increased by $14.3 billion in November, $1.0 billion in October, and $22.8 billion in September. Prime funds represented 21.4% of total assets at the end of February. They've increased by $79.6 billion, or 13.6%, over the past 12 months. But they've decreased by $920.1 billion over the past 2 years. (Over $1.1 trillion shifted from Prime to Government money market funds in the year leading up to October 2016's Money Fund Reforms.)
Government & Treasury funds totaled $2.315 billion, or 74.2% of assets,. They were up $44.9 billion in February, but down $54.7 billion in January. Govt MMFs were up by $57.3 billion in December and $40.8 billion in November, but down $11.2 billion in October. Govt & Treas MMFs are up $105.5 billion over 12 months (4.8%). Tax Exempt Funds decreased $1.4B to $140.2 billion, or 4.5% of all assets. The number of money funds is 379, down one fund from last month and down 32 from 2/28/17.
Yields rose in February for Taxable MMFs after jumping in December (following the Fed move) and rising in January. The Weighted Average Gross 7-Day Yield for Prime Funds on February 28 was 1.63%, up 5 basis points from the previous month and up 0.72% from February 2017. Gross yields increased to 1.45% for Government/Treasury funds, up 0.07% from the previous month, and up from 0.61% in February 2017. Tax Exempt Weighted Average Gross Yields dipped 2 bps in February (after spiking in December and plunging in January) to 1.16%; they've increased by 46 bps since 2/28/17.
The Weighted Average Net Prime Yield was 1.44%, up 0.06% from the previous month and up 0.76% since 2/28/17. The Weighted Average Prime Expense Ratio was 0.20% in February (unchanged from the previous month). Prime expense ratios are down by 3 bps over the past year. (Note: These averages are asset-weighted.)
WALs were lower but WAMs were mixed across all categories in February. The average Weighted Average Life, or WAL, was 59.3 days (down 0.9 days from last month) for Prime funds, 90.1 days (down 0.5 days) for Government/Treasury funds, and 25.2 days (down 0.8 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 26.5 days (down 0.5 days from the previous month) for Prime funds, 31.3 days (up 0.2 days) for Govt/Treasury funds, and 23.1 days (down 0.9 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 30.5% in February (up 2.8% from previous month). Total Weekly Liquidity was 50.6% (up 0.8%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $89.3 billion, followed by the US with $63.8 billion, France with $63.5B, Japan ($55.2B), and Sweden with $40.1B. Australia/New Zealand ($39.2B), the UK ($35.5B), the Netherlands ($33.1B), Germany ($27.2B) and Switzerland ($24.0B) rounded out the top 10 countries.
The gainers among Prime MMF bank related securities for the month included: Japan (up $5.0B), Switzerland (up $3.1B), the UK (up $2.9B), France (up $1.5B), Sweden (up $1.1B), China (up $608M), Canada (up $524M), Other (up $518M), and Singapore (up $443M). The biggest drops came from the US (down $8.5B), the Netherlands (down $3.6B), Australia/NZ (down $3.2B), Germany (down $1.5B), Belgium (down $1.4B), Norway (down $710M), and Spain (down $69M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $246.5B (up $1.7B from last month), while the Eurozone subset had $135.4B billion (down $5.2B). The Americas had $153.7 billion (down $8.0B), while Asian and Pacific had $107.3 billion (up $3.0B).
Of the $666.6 billion in Prime MMF Portfolios as of Feb. 28, $256.6B (38.4%) was in CDs (down from $265.8B), $123.7B (18.5%) was in Government securities (including direct and repo), up from $120.8B, $104.0B (15.6%) was held in Non-Financial CP and Other Short Term Securities (up from $104.0B), $143.6B (21.5%) was in Financial Company CP (up from $141.6B), and $40.2B (6.0%) was in ABCP (down from $42.0B). The Proportion of Non-Government Securities in All Taxable Funds was 18.2% at month-end, down from 18.7% the previous month. All MMF Repo with Federal Reserve dropped to $30.9B in February (the lowest level in over 2 years) from $55.1B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 36.2% were in maturities of 60 days and over (up from 35.1%), while 8.3% were in maturities of 180 days and over (down from 8.6%).
A press release entitled, "J.P. Morgan Global Liquidity Announces Timeline for Intended Money Market Fund Changes in Response to New European Regulations," explains, "Following an industry first mover announcement in November 2017 of the new fund range that J.P. Morgan Asset Management (JPMAM) would offer as a result of the incoming European Union Money Market Fund (MMF) Regulations, JPMAM is disclosing their intended timeline for implementation. Funds will transition to the new regime over the weekend of 30 November 2018, subject to regulatory approvals." (See our Nov. 16, 2017 News, "JP Morgan To Offer All European Fund Options; ICI MMF Holdings Update.") We excerpt from their release below, and we also report on ICI's latest money fund asset totals.
JPMAM's release tells us, "The new regulations require providers to make a number of changes to their funds in terms of structure, composition, valuation, liquidity requirements and information reporting. Under the new rules, MMFs will be split into two types, with three structural options available to investors. The new regulations will also preserve Constant Net Asset Value (CNAV) for government funds and will create a new type of fund -- Low Volatility Net Asset Value (LVNAV)."
Jim Fuell, Head of Global Liquidity Sales, International at J.P. Morgan Asset Management, comments, "We are pleased to be leading the industry in announcing our timeline for implementing these changes. In providing our clients complete optionality under the re-categorisation required by the new regulations, we're well positioned to continue to offer clients the benefits of short-term liquidity investing with a comprehensive range of products."
JPMAM's Head of Product Development, International Kerrie Mitchener-Nissen adds, "We are committed to ensuring that our clients experience a smooth process as we transition to meet the new rules and that they have plenty of time to review their investment options."
The release shows a table of options, writing, "As previously communicated, subject to regulatory approvals JPMAM anticipates making the following short-term options available: USD treasury CNAV, USD government CNAV, USD credit LVNAV, US credit VNAV, GBP gilt CNAV, GBP credit LVNAV, GBP credit VNAV, EUR credit LVNAV EUR credit VNAV, AUD credit LVNAV and SGD credit LVNAV." They're also "continuing to evaluate investor demand" for USD treasury VNAV, USD government VNAV, GBP gilt VNAV and EUR government CNAV funds.
It states, "As a global leader in the liquidity space, J.P. Morgan Asset Management's Global Liquidity group manages USD 616.6 billion in asset under management (as of 31 December 2017). The team is made up of 149 dedicated global liquidity professionals with 20 average years of portfolio management and credit research industry experience, 15 locations in 7 countries and 6 global service centers ensuring 24 hour coverage.... J.P. Morgan Asset Management's clients include institutions, retail investors and high-net worth individuals in every major market throughout the world."
For a summary of pending European Money Fund Reforms, see our August 23, 2017 News, "Dillon Eustace Reviews European Money Market Reforms; Disclosures."
In other news, money market mutual fund assets fell sharply in the latest week, which ended one day prior to March 15, a big quarterly tax payment date. The Investment Company Institute's latest "Money Market Fund Assets" report shows that year-to-date, MMF assets have decreased by $22 billion, or -0.8%. Over 52 weeks they've increased by $143 billion, or 5.3%. ICI's numbers also show Prime money market fund assets increased after declining for two weeks in a row, while Govt MMF assets plunged.
ICI writes, "Total money market fund assets decreased by $37.77 billion to $2.82 trillion for the week ended Wednesday, March 14, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $37.56 billion and prime funds increased by $262 million. Tax-exempt money market funds decreased by $469 million." Total Government MMF assets, which include Treasury funds too, stand at $2.228 trillion (79.0% of all money funds), while Total Prime MMFs stand at $456.4 billion (16.2%). Tax Exempt MMFs total $135.6 billion, or 4.8%.
They explain, "Assets of retail money market funds increased by $877 million to $1.01 trillion. Among retail funds, government money market fund assets increased by $83 million to $619.05 billion, prime money market fund assets increased by $1.21 billion to $264.99 billion, and tax-exempt fund assets decreased by $413 million to $128.68 billion." Retail assets account for over a third of total assets, or 35.9%, and Government Retail assets make up 61.1% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds decreased by $38.64 billion to $1.81 trillion. Among institutional funds, government money market fund assets decreased by $37.64 billion to $1.61 trillion, prime money market fund assets decreased by $945 million to $191.42 billion, and tax-exempt fund assets decreased by $56 million to $6.90 billion." Institutional assets account for 64.1% of all MMF assets, with Government Inst assets making up 89.0% of all Institutional MMFs.
Crane Data's MFI International shows total assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), rising in March after falling in February. Offshore US Dollar MMFs had been up sharply in January but fell $16 billion in February and $13 billion over the past week. Last year, assets of all 3 currencies combined increased by $100 billion, or 13.7%, to $831 billion. Year-to-date in 2018 (through 3/13/18), MFII assets are up another $27 billion to $858 billion. U.S. Dollar (USD) funds (158) account for over half ($436 billion, or 50.8%) of the total, while Euro (EUR) money funds (98) total E95 billion and Pound Sterling (GBP) funds (110) total L215 billion. USD funds are up $11 billion, YTD, and were up $27B in 2017. Many are watching these totals closely for signs of possible "repatriation" of US dollar assets held in Europe.
Euro funds are down E3 billion YTD but were up E3B in 2017, while GBP funds are down L4B YTD after rising L29B in 2017. USD MMFs yield 1.38% (7-Day) on average (as of 3/13/18), up from 1.19% at the end of 2017 and 0.56% at the end of 2016. EUR MMFs yield -0.50 on average, up from -0.55% on 12/29/17 and -0.49% on 12/30/16, while GBP MMFs yield 0.32%, up from 0.24% at the end of 2017 and 0.19% at the end of 2016. We review our latest MFI International Portfolio Holdings statistics, and also review ICI's latest MMF Holdings report, below.
Crane's latest MFI International Money Fund Portfolio Holdings, with data (as of 2/28/18), shows that European-domiciled US Dollar MMFs, on average, consist of 17% in Treasury securities, 29% in Commercial Paper (CP), 20% in Certificates of Deposit (CDs), 17% in Other securities (primarily Time Deposits), 14% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 29.6% of their portfolios maturing Overnight, 13.7% maturing in 2-7 Days, 24.1% maturing in 8-30 Days, 12.2% maturing in 31-60 Days, 7.8% maturing in 61-90 Days, 10.2% maturing in 91-180 Days, and 2.3% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (26.5%), France (15.7%), Japan (10.1%), Canada (10.0%), Germany (5.7%), United Kingdom (5.0%), The Netherlands (5.0%), Australia (5.0%), Sweden (4.4%), Singapore (2.9%), China (2.5%) and Belgium (2.1%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $84.4 billion (17.0% of total assets), BNP Paribas with $20.7B (4.2%), Credit Agricole with $16.8B (3.4%), Societe Generale with $14.1B (2.8%), Mitsubishi UFJ Financial Group Inc with $13.0B (2.6%), Barclays PLC with $11.9B (2.4%), Toronto-Dominion Bank with $11.7B (2.4%), RBC with $11.5B (2.3%), Wells Fargo with $11.3B (2.3%), and Mizuho Corporate Bank Ltd with $9.6B (1.9%).
Euro MMFs tracked by Crane Data contain, on average 47% in CP, 23% in CDs, 22% in Other (primarily Time Deposits), 7% in Repo, 0% in Treasuries and 1% in Agency securities. EUR funds have on average 22.5% of their portfolios maturing Overnight, 8.8% maturing in 2-7 Days, 19.4% maturing in 8-30 Days, 12.9% maturing in 31-60 Days, 12.6% maturing in 61-90 Days, 19.5% maturing in 91-180 Days and 4.3% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (28.6%), Japan (12.7%), US (9.9%), The Netherlands (8.5%), Sweden (7.5%), Switzerland (6.2%), Belgium (6.1%), Germany (5.7%), the United Kingdom (4.0%), and China (2.8%).
The 10 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.0B (5.5%), Credit Agricole with E3.7B (4.1%), ING Bank with E3.7B (4.0%), Svenska Handelsbanken with E3.5B (3.9%), Rabobank with E3.3B (3.7%), Mizuho Corporate Bank Ltd with E3.1B (3.4%), BPCE SA with E2.9B (3.2%), Nordea Bank with E2.9B (3.2%), Credit Mutuel with E2.9B (3.2%), and Societe Generale with E2.7B (3.0%).
The GBP funds tracked by MFI International contain, on average (as of 2/28/18): 40% in CDs, 26% in Other (Time Deposits), 24% in CP, 8% in Repo, 1% in Treasury, and 1% in Agency. Sterling funds have on average 25.3% of their portfolios maturing Overnight, 9.0% maturing in 2-7 Days, 13.8% maturing in 8-30 Days, 15.4% maturing in 31-60 Days, 19.3% maturing in 61-90 Days, 13.4% maturing in 91-180 Days, and 4.0% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (19.5%), Japan (16.5%), United Kingdom (12.7%), The Netherlands (10.8%), Canada (6.2%), Germany (6.0%), Sweden (4.5%), the US (4.5%), Australia (3.3%), and Singapore (2.9%).
The 10 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L7.0B (4.3%), Rabobank with L6.6B (4.0%), BPCE SA with L6.5B (4.0%), Sumitomo Mitsui Banking Co. with L6.4B (3.9%), BNP Paribas with L6.0B (3.6%), ING Bank with L5.8B (3.5%), Mitsubishi UFJ Financial Group Inc. with L5.7B (3.5%), Toronto Dominion Bank with L5.5B (3.4%), Sumitomo Mitsui Trust Bank with L5.2B (3.1%), and DZ Bank AG with L5.1B (3.1%).
In other news, the Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of Feb. 23, 2018) yesterday. This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See also Crane Data's March 12 News, "March Money Fund Portfolio Holdings: Treasuries Jump, Repo, CD Down.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in February, prime money market funds held 23.4 percent of their portfolios in daily liquid assets and 44.7 percent in weekly liquid assets, while government money market funds held 57.8 percent of their portfolios in daily liquid assets and 76.6 percent in weekly liquid assets." Prime DLA increased from 23.1% last month and Prime WLA decreased from 44.8% last month. Govt MMFs' DLA increased from 57.2% last month and Govt WLA decreased from 77.5% last month.
ICI explains, "At the end of February, prime funds had a weighted average maturity (WAM) of 27 days and a weighted average life (WAL) of 66 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 31 days and a WAL of 91 days." Prime WAMs were unchanged from last month, and WALs were also unchanged. Govt WAMs were also unchanged from January and Govt WALs too were the same as last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $181.00 billion in January to $184.80 billion in February. Government money market funds’ holdings attributable to the Americas rose from $1,716.82 billion in January to $1,785.29 billion in February."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $184.8 billion, or 40.3%; Asia and Pacific at $87.2 billion, or 19.0%; Europe at $182.5 billion, or 39.8%; and, Other (including Supranational) at $4.2 billion, or 1.0%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.785 trillion, or 77.9%; Asia and Pacific at $111.9 billion, or 4.9%; and Europe at $386.9 billion, or 16.9%.
The March issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Wednesday, features the lead story, "Bond ETFs Drawing Attention; Shorter-Duration Hot Lately," which reviews recent the recent growth and news on fixed-income ETFs, and the profile, "BlackRock Blogs on Short Treasuries, Indexes, Volatility," which excerpts from several recent BlackRock Blogs on bond fund issues. Also, we recap the latest Bond Fund News, including losses in February for most funds and the latest on the continued move higher in rates. BFI also includes our Crane BFI Indexes, which showed decreases in February in most sectors except conservative ultra-short and ultra-short funds. 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. Note: We look forward to seeing some of you next week at our 2nd annual Bond Fund Symposium, which will take place at the Los Angeles InterContinental Downtown, March 22-23. Please feel free to stop by if you're in the area!)
Our lead Bond Fund Intelligence story says, "Bond ETFs continue growing rapidly, rising by $126.2 billion, or 29.5%, in 2017, to $553.3 billion, according to the ICI. This compares to growth of 11.2%, or $410.1 billion to $4.060 trillion for bond funds). We look at the growth of bond ETFs and the types of bond ETFs that are growing the fastest. (See the chart below for bond ETF assets by type.)"
It continues, "The Wall Street Journal writes, "Investors Warm Up to Bond ETFs," which is subtitled, "After many years of lagging behind stock-focused funds, bond ETFs draw attention." They tell us, "Fixed-income exchange-traded funds are late bloomers compared with their equities-based cousins. But their popularity has surged in recent years -- with funds focused on shorter-duration bonds drawing interest lately -- as investors look to marry the benefits of fixed income with the advantages of an ETF.""
They explain, "According to an October report from BlackRock Inc., assets under management in bond-focused ETFs have grown 25% annually for the past five years and are likely to reach $1.5 trillion by 2022. As of mid-March, there was $780 billion in these products, representing 15% of the total ETF market, according to BlackRock's iShares division, the biggest U.S. ETF firm by assets."
BFI's BlackRock Blogs piece says, "This month, BFI focuses on a recent paid of BlackRock Blogs, one of which focuses on the attractiveness of short-term Treasuries, one that discusses fixed-income ETFs, another than deals with market volatility. BlackRock has been posting Blog stories for a number of months, it's become an excellent source of news and analysis on the bond fund marketplace. We review and quote from these recent blog updates below."
We explain, "In his latest post, BlackRock Chief Fixed Income Strategist Jeffrey Rosenberg writes "The appeal of shorter-term U.S. Treasuries." He explains, "A rapid rise in short-term yields in U.S. government debt is restoring their appeal. This marks a major shift away from the post-crisis era of near-zero yields on such instruments. The upshot: Investors now have a viable alternative to cash with yields finally above inflation levels.""
The article adds, "Rosenberg tells us, "The steady increase in shorter-maturity bond yields provides a thicker cushion against concerns around further rises in interest rates. The light green line in the chart above shows interest rates would need to jump more than one percentage point to wipe out a year of income in the two-year Treasury note. This is nearly double the cushion on offer two years ago -- and far larger than the thin insulation provided by longer-term bonds today. We believe the short end offers relatively compelling income along with a healthy buffer against the prospects of further increases in yields."
A Bond Fund News brief entitled, "Yields Rise Again in February," explains, "Most bond fund categories again showed losses last month, except Conservative Ultra-Short and Ultra-Short. Yields rose for all types of funds in February. The BFI Total Index averaged a 1-month return of -0.44% and the 12-month gain fell to 1.98%. The BFI 100 returned -0.61% in Feb. and 1.77% over 1 year. The BFI Conservative Ultra-Short Index returned 0.12% over 1 month and 1.20% over 1-year; the BFI Ultra-Short Index averaged 0.06% in Feb. and 1.14% over 12 mos. Our BFI Short-Term Index returned -0.15% and 0.94%, and our BFI Intm-Term Index returned -0.77% and 0.98% for the month and year. The BFI High Yield Index rose -0.64% in Feb. and 3.87% for 1 year."
Another brief, entitled, "Wiener Says "Don't Bury Bonds." The Independent Adviser for Vanguard Investors writes in its March issue, "If you own short-maturity bonds, you should welcome more, rather than fewer Fed interest rate hikes. Why? They translate into higher yields. Take [Vanguard] Ultra-Short-Term Bond, the funds I've called a money-market substitute and which turned three years old this month."
Yet another brief comments, "CNBC.com Writes "Bets against junk bond funds reach record levels on rising rate fears." They say, "The renaissance in high-yield bonds looks like it's over, at least judging by the behavior of short sellers. Demand to borrow ETFs that track junk bonds indexes, a key metric determining short interest, has reached a monetary value of $7 billion, its highest level ever recorded, according to IHS Markit analyst Sam Pierson."
A sidebar entitled, "MW on Western's Leech" tells us, "MarketWatch posted the article, "Veteran manager of $22 billion bond fund spots the 'No. 1 opportunity'." It explains, "Investors have been selling bonds on expectations that inflation will push up interest rates, eroding the value of fixed-income securities. Ken Leech, who manages a $22 billion bond fund that’s ranked in the top percentile in its category over the past 10 years, says that could be a serious mistake."
It adds, "The piece tells us, "Leech is the investment chief of Western Asset Management in Pasadena, Calif., which has about $442 billion in assets under management. He's led the team-based management of the $22 billion Western Asset Core Plus Bond Fund (WACPX) since it was established in 1998."
SIFMA, the Securities Industry Financial Markets Association (formerly the Bond Market Association), published its latest "Research Quarterly, Fourth Quarter 2017" yesterday, which contains a brief update on various money market instruments." The section on "Funding and Money Market Instruments" comments on "Total Repurchase Activity," saying, "The average daily amount of total repurchase (repo) and reverse repo agreement contracts outstanding was $4.13 trillion in 4Q’17, an increase of 3.3 percent from 3Q’17’s $4.00 trillion and an increase of 1.1 percent y-o-y. For the full year, the average daily amount of total repo and reverse agreements was $4.01 trillion." We review SIFMA's update below, and we also quote from Wells Fargo Funds' latest monthly commentary.
SIFMA explains, "Average daily outstanding repo transactions totaled $2.31 trillion in 4Q'17, an increase of 3.4 percent q-o-q and an increase of 2.8 percent y-o-y. Reverse repo transactions in 4Q’17 averaged $1.82 trillion daily outstanding, an increase of 3.08 percent and a decline of 1.1 percent q-o-q and y-o-y, respectively."
Regarding "GCF Repo Rates," SIFMA writes, "DTCC general collateral finance (GCF) repo rates increased again for Treasuries and MBS in 4Q’17 on a q-o-q basis and y-o-y basis: the average repo rate for Treasuries (30-year and less) rose to 122.4 basis points (bps) from 3Q’17’s average rate of 110.6 bps and 4Q’16’s average of 43.5 bps. The average MBS repo rate rose to 124.3 bps from 113.4 bps in the previous quarter and 46.0 bps in 4Q’16."
On "Financial and Nonfinancial 3-Month Commercial Paper Interest Rates," they tell us, "Interest rates for nonfinancial commercial paper (CP) rose to 153 bps end-December 2017 from 125 bps end-September 2017 and from 74 bps end-December 2016. Financial CP increased to 143 bps end-December 2017 from 118 bps end-September 2017 and also rose from 87 bps end-December 2016."
Finally, the update addresses, "Total Money Market Instruments Outstanding," saying, "Preliminary outstanding volume of commercial paper stood at $965.9 billion at the end of the fourth quarter, down 1.7 percent from the prior quarter’s $982.4 billion and an increase of 9.2 percent y-o-y."
In other news, Wells Fargo Asset Management writes about SFIG, regulations and LIBOR in its latest "Portfolio Manager Commentary." The piece, entitled, "Viva Las Vegas!," says, "The Structured Finance Industry Group held its 2018 conference in Las Vegas from February 25–28. [W]ith well over 7,000 attendees the event remains the largest structured finance conference in the world, drawing professionals from rating agencies, issuers, dealers, the investing and legal communities, and other participants in the structured finance marketplace. The optimism on display at last year’s conference largely carried over to the conference this year, given the continued strong credit and market environments. In addition to conversations about credit, themes from this year’s conference included the impacts of easing regulation, tax reform, and benchmark, as well as the continued maturation of less-established securitized asset classes."
Wells explains, "In the commercial paper market, as of February 28, the amount of asset-backed commercial paper (ABCP) outstanding as tracked weekly by the Federal Reserve (Fed) currently stands at $240.5 billion, versus $246.9 billion a year ago (not seasonally adjusted). Looking forward, expected 2018 volume for U.S. ABS, excluding CLOs and CMBS, appears to be similar to, if not slightly lower than, 2017, with continued shifts in composition as asset classes other than credit cards and autos become a larger portion of the mix. However, higher-than-expected increases in rates may slightly pressure forecasted volumes and credit. The ABCP market remains well anchored with liquidity from large, internationally active banks funding assets such as trade receivables or assets ultimately placed in the term ABS market."
In a brief "Regulatory update," the piece tells us, "Issuers and investors largely have implemented many of the crisis-driven regulatory changes addressing capital, liquidity, and securitization standards, including some still in the pipeline, and they now may be able to shift their focus as they enter an environment that seems to be marked by an easing of some of those very same regulations. Congress, the U.S. Department of the Treasury, and the Fed have multiple work-streams to modify banking and capital market regulations, and additional changes may come from other sources, such as the courts. For example, the recent decision by the U.S. Court of Appeals to exempt CLO managers from Dodd-Frank’s risk-retention requirements was viewed as a positive for the business and may spur other sectors to seek relief, although it is not clear how issuance volume may be affected in other sectors to the extent relief does not occur.
Wells Fargo Funds adds, "Benchmark reform also was a topic of conversation. Replacing the London Interbank Offered Rate (LIBOR) with a new benchmark presents a sizable task on a number of different fronts. Participants were particularly focused on ensuring that the economics of legacy transactions are not skewed to benefit one party, at the expense of another, upon transition to the new index. Presently, it is a challenge to compare the current benchmark with the proposed, and adding to the difficulty in this analysis is the fact that there is no curve yet available for a proposed benchmark…. As the 2021 implementation date nears, these and other tasks create a sense that the market has significant milestones to reach before a change is possible. Some issuers even stated that they believe the implementation could be delayed as a result of the complexity of building a replacement benchmark out the curve. It may be a bumpy path."
The update continues, "Speculation on the impacts of tax reform signed into law in December 2017 was a frequent discussion. Corporations still appear to be evaluating both how their business operations may change and what changes might take place with their investment portfolios. While much speculation abounds on where flows may migrate, the consensus was that it may be too soon to draw concrete conclusions on how the investing space might be altered."
Finally, Wells writes, "After spending last year getting acclimated to a Fed hiking cycle, the money markets have handled February's supply surge relatively smoothly, with investors welcoming the higher yields. Other financial markets, nearly without exception, have seen a marked increase in volatility as they grapple with newly awakened market forces. Crisis management had been the name of the game for nearly a decade, and as central banks step back and fiscal authorities ease some restrictions, it seems as though markets may be free to chart their own messy course. As for the Fed, so far its new voices sound like its old ones. Its normalization path seems set, with a systematic balance sheet wind-down underway combined with quarterly rate hikes, but the combination of a new cast of characters, not only in the leadership but also throughout the board and regional districts, with a robust economy and a pulsing new fiscal policy makes the monetary policy path uncertain."
Crane Data released its March Money Fund Portfolio Holdings Friday, and our most recent collection of taxable money market securities, with data as of Feb. 28, 2018, shows a huge jump in Treasuries and a drop in Repo, CDs and Agencies. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $70.6 billion to $2.967 trillion last month, after increasing $3.2 billion in January, $37.2 billion in December, and $18.4 billion in November. Repo remained the largest portfolio segment, though it dropped for the second month straight. It was followed by Treasuries and Agencies. CP remained a distant fourth ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us to see our latest Money Fund Portfolio Holdings reports.)
Among all taxable money funds, Repurchase Agreements (repo) dropped $21.9 billion (-2.4%) to $906.8 billion, or 30.6% of holdings, after plunging $80.9 billion in January but jumping $70.5 billion in December. Treasury securities jumped $104.6 billion (14.2%) to $843.2 billion, or 28.4% of holdings, after falling $1.5 billion in January, rising $3.8 billion in December, and falling $3.0 billion in November. Government Agency Debt declined $9.4 billion (-1.3%) to $712.6 billion, or 24.0% of all holdings, after rising $25.3 billion in January, $21.5 billion in December and $10.5 billion in November. Repo, Treasuries and Agencies total $2.463 trillion, representing a massive 83.0% of all taxable holdings.
CP rose, CDs fell and Other (mainly Time Deposits) securities were flat in the second month of the year. Commercial Paper (CP) was up $6.5 billion (3.1%) to $218.2 billion, or 7.4% of holdings (after jumping $23.1 billion in January, decreasing $8.1 billion in December, and increasing $14.9 billion in November). Certificates of Deposits (CDs) fell by $9.5 billion (-5.2%) to $174.0 billion, or 5.9% of taxable assets (after increasing $13.3 billion in January, decreasing $23.4 billion in December, and increasing $8.9 billion in November). Other holdings, primarily Time Deposits, inched up $0.4 billion (0.4%) to $103.2 billion, or 3.5% of holdings. VRDNs held by taxable funds decreased by $0.1 billion (-0.8%) to $8.4 billion (0.3% of assets).
Prime money fund assets tracked by Crane Data rose to $649 billion (down from $650 billion last month), or 21.9% (down from 22.4%) of taxable money fund holdings' total of $2.966 trillion. Among Prime money funds, CDs represent under a third of holdings at 26.8% (down from 28.2% a month ago), followed by Commercial Paper at 33.6% (up from 32.5%). The CP totals are comprised of: Financial Company CP, which makes up 21.4% of total holdings, Asset-Backed CP, which accounts for 6.1%, and Non-Financial Company CP, which makes up 6.1%. Prime funds also hold 2.3% in US Govt Agency Debt, 6.9% in US Treasury Debt, 4.1% in US Treasury Repo, 2.0% in Other Instruments, 12.3% in Non-Negotiable Time Deposits, 5.1% in Other Repo, 2.3% in US Government Agency Repo, and 1.0% in VRDNs.
Government money fund portfolios totaled $1.601 trillion (54.0% of all MMF assets), up from $1.546 trillion in January, while Treasury money fund assets totaled another $717 billion (24.2%), up from $700 billion the prior month. Government money fund portfolios were made up of 42.6% US Govt Agency Debt, 20.2% US Government Agency Repo, 18.6% US Treasury debt, and 18.3% in US Treasury Repo. Treasury money funds were comprised of 69.9% US Treasury debt, 29.9% in US Treasury Repo, and 0.1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.318 trillion, or 78.2% of all taxable money fund assets, up from 77.6% last month.
European-affiliated holdings rose $2.9 billion in February to $656.9 billion among all taxable funds (and including repos); their share of holdings fell to 22.1% from 22.6% the previous month. Eurozone-affiliated holdings fell $10.1 billion to $418.3 billion in February; they account for 14.1% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $7.7 billion to $235.3 billion (7.3% of the total). Americas related holdings rose $60.0 billion to $2.073 trillion and now represent 69.9% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $35.0 billion, or -6.2%, to $534.6 billion, or 18.0% of assets; US Government Agency Repurchase Agreements (up $13.4 billion to $338.6 billion, or 11.4% of total holdings), and Other Repurchase Agreements ($33.6 billion, or 1.1% of holdings, down $0.3 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $1.2 billion to $139.0 billion, or 4.7% of assets), Asset Backed Commercial Paper (down $1.4 billion to $39.7 billion, or 1.3%), and Non-Financial Company Commercial Paper (up $6.6 billion to $39.5 billion, or 1.3%).
The 20 largest Issuers to taxable money market funds as of Feb. 28, 2018, include: the US Treasury ($843.2 billion, or 28.4%), Federal Home Loan Bank ($572.6B, 19.3%), BNP Paribas ($123.4B, 4.2%), RBC ($81.1B, 2.7%), Federal Farm Credit Bank ($75.7B, 2.6%), Credit Agricole ($68.4B, 2.3%), Wells Fargo ($62.1B, 2.1%), Barclays PLC ($57.0B, 1.9%), HSBC ($50.4B, 1.7%), Societe Generale ($49.4B, 1.7%), Sumitomo Mitsui Banking Co ($42.3B, 1.4%), Nomura ($41.7B, 1.4%), Federal Home Loan Mortgage Co ($40.5B, 1.4%), Natixis ($38.8B, 1.3%), Mitsubishi UFJ Financial Group Inc ($37.1B, 1.2%), JP Morgan ($36.3B, 1.2%), Bank of Nova Scotia ($35.9B, 1.2%), Credit Suisse ( $33.7B, 1.1%), ING Bank ( $33.4B, 1.1%), and Bank of America ($33.3B, 1.1%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: BNP Paribas ($109.8B, 12.1%), RBC ($60.2B, 6.6%), Credit Agricole ($52.9B, 5.8%), Wells Fargo ($47.3B, 5.2%), Barclays PLC ($45.5B, 5.0%), HSBC ($43.6B, 4.8%), Societe Generale ($42.5B, 4.7%), Nomura ($41.7B, 4.6%), Sumitomo Mitsui Banking Co ($31.6B, 3.5%), and Federal Reserve Bank of New York ($31.1B, 3.4%).
The 10 largest Fed Repo positions among MMFs on 2/28/18 include: Franklin IFT US Govt MM ($5.2B in Fed Repo), Fidelity Cash Central Fund ($4.5B), Morgan Stanley Inst Liq Govt Sec ($4.2B), JP Morgan US Govt ($4.1B), Northern Trust Trs MMkt ($3.8B), Goldman Sachs FS Treas Sol ($3.2B), Northern Inst Govt Select ($3.2B), Fidelity Sec Lending Cash Central ($1.8B), Western Asset Inst Govt ($0.7B), and First American Govt Oblg ($0.2B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($20.9B, 4.9%), Credit Agricole ($15.5, 3.7%), Toronto-Dominion Bank ($15.5B, 3.7%), Canadian Imperial Bank of Commerce ($15.1B, 3.6%), Wells Fargo ($14.7B, 3.5%), BNP Paribas ($13.6B, 3.2%), Credit Suisse ($13.4B, 3.2%), Mitsubishi UFJ Financial Group Inc. ($13.1B, 3.1%), Bank of Nova Scotia ($12.9B, 3.0%), and Australia & New Zealand Banking Group Ltd ($12.8, 3.0%).
The 10 largest CD issuers include: Wells Fargo ($14.7B, 8.5%), Bank of Montreal ($12.2B, 7.0%), RBC ($12.1, 7.0%), Sumitomo Mitsui Banking Co ($8.8B, 5.1%), Svenska Handelsbanken ($8.7B, 5.0%), Mitsubishi UFJ Financial Group Inc ($8.4B, 4.9%), Sumitomo Mitsui Trust Bank ($7.7B, 4.5%), Mizuho Corporate Bank Ltd ($7.4B, 4.3%), Toronto-Dominion Bank ($6.8B, 3.9%), and Canadian Imperial Bank of Commerce ($6.8B, 3.9%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Credit Suisse ($8.0B, 4.3%), Commonwealth Bank of Australia ($7.9B, 4.3%), JPMorgan ($7.9B, 4.2%), Toronto-Dominion Bank ($7.8B, 4.2%), Bank of Nova Scotia ($7.7B, 4.2%), Bank Nederlandse Gemeenten ($7.6B, 4.1%), Credit Agricole ($6.3B, 3.4%), Societe Generale ($6.2B, 3.4%), Westpac Banking Co ($6.1B, 3.3%), and UBS AG ($5.6B, 3.1%).
The largest increases among Issuers include: US Treasury (up $104.6B to $843.2B), Sumitomo Mitsui Banking Co (up $9.6B to $42.3B), Credit Agricole (up $6.1B to $68.4B), HSBC (up $5.5B to $50.4B), Lloyds Banking Group ($2.4B to $13.1B), Svenska Handelsbanken (up $2.1B to $11.2B), Credit Suisse (up $2.0B to $33.7B), Bank of Nova Scotia ($1.8B to $35.9B), Toronto-Dominion Bank (to $1.7B to $32.4B), and Mizuho Corporate Bank Ltd (up $1.6B to $21.3B).
The largest decreases among Issuers of money market securities (including Repo) in February were shown by: Federal Reserve Bank of New York (down $23.9B to $31.1B), Deutsche Bank AG (down $13.4B to $20.8B), Federal Home Loan Bank (down $6.9B to $572.6B), RBC (down $4.5B to $81.1B), JP Morgan (down $4.0B to $36.3B), Bank of Montreal (down $3.4B to $26.7B), Nomura (down $2.6B to $41.7B), Swedbank AB (down $2.3B to $10.5B), Federal Home Loan Mortgage Co (down $2.1B to $40.5B), and National Australia Bank Ltd (down $1.5B to $9.9B).
The United States remained the largest segment of country-affiliations; it represents 62.7% of holdings, or $1.859 trillion. France (9.9%, $292.2B) remained in the No. 2 spot and Canada (7.2%, $213.7B) remained No. 3. Japan (6.1%, $181.5B) stayed in fourth place, while the United Kingdom (4.6%, $136.4B) remained in fifth place. The Netherlands (2.1%, $61.5B) moved ahead of Germany (1.8%, $53.2B) into sixth place, and Switzerland (1.6%, $46.2B) moved up to No. 8 ahead of Australia (1.4%, $41.2B). Sweden (1.4%, $40.1B) ranked in tenth place. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Feb. 28, 2017, Taxable money funds held 31.2% (down from 32.1%) of their assets in securities maturing Overnight, and another 14.6% maturing in 2-7 days (down from 15.1%). Thus, 45.8% in total matures in 1-7 days. Another 27.2% matures in 8-30 days, while 9.4% matures in 31-60 days. Note that over three-quarters, or 82.4% of securities, mature in 60 days or less (down slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 6.8% of taxable securities, while 8.8% matures in 91-180 days, and just 1.9% matures beyond 181 days.
Money market mutual fund assets broke above $2.85 trillion, reaching their highest level since early 2010. The Investment Company Institute's latest "Money Market Fund Assets" report shows that year-to-date, MMF assets have increased by $14 billion, or 0.5%. Over 52 weeks they've increased by $190 billion, or 7.0%. ICI's numbers also show Prime money market fund assets declined for the 2nd week in a row, while Govt MMF assets jumped. We review ICI's latest money fund numbers, as well as the Federal Reserve's latest Z.1 statistics, the latter of which confirm a big jump in money fund assets in the 4th quarter of 2017 (led by securities lenders and corporates), below.
ICI writes, "Total money market fund assets increased by $14.33 billion to $2.86 trillion for the week ended Wednesday, March 7, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $16.73 billion and prime funds decreased by $2.48 billion. Tax-exempt money market funds increased by $79 million." Total Government MMF assets, which include Treasury funds too, stand at $2.264 trillion (79.3% of all money funds), while Total Prime MMFs stand at $456.1 billion (16.0%). Tax Exempt MMFs total $136.1 billion, or 4.8%.
They explain, "Assets of retail money market funds increased by $2.05 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $1.77 billion to $617.54 billion, prime money market fund assets increased by $345 million to $263.78 billion, and tax-exempt fund assets decreased by $69 million to $129.09 billion." Retail assets account for over a third of total assets, or 35.4%, and Government Retail assets make up 61.1% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $12.28 billion to $1.85 trillion. Among institutional funds, government money market fund assets increased by $14.95 billion to $1.65 trillion, prime money market fund assets decreased by $2.83 billion to $192.36 billion, and tax-exempt fund assets increased by $147 million to $6.96 billion." Institutional assets account for 64.6% of all MMF assets, with Government Inst assets making up 89.2% of all Institutional MMFs.
In other news, the Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") yesterday. Among the 4 tables it includes on money market mutual funds, the Fourth Quarter, 2017 edition shows that the Household Sector remains the largest investor segment at over $1.0 trillion; assets here rose in Q4 after also rising in Q3. The next largest segment, Funding Corporations (primarily Securities Lending money) also saw assets increase again in the 4th quarter, while the third largest, Nonfinancial Corporate Businesses, saw jump after declining the previous quarter.
The Rest of the World, State & Local Governments, Nonfinancial Noncorporate Business, and State and Local Govt Retirement categories all saw assets rise slightly in Q4, while Life Insurance Companies and Private Pension Funds' holdings of money funds were flat in the latest quarter. Over the past 12 months, Funding Corporations, the Household Sector, State & Local Govt Retirement, Nonfinancial Corporate Businesses, and State & Local Governments' holdings increased, but `Nonfinancial Corporate Businesses, Life Insurance Companies and Private Pension Funds showed decreases.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows that total assets increased by $100 billion, or 3.6%, in the fourth quarter to $2.847 trillion. Over the year through Dec. 31, 2017, assets were up $119 billion, or 4.4%. The largest segment, the Household sector, totals $1.054 trillion, or 37.0% of assets. The Household Sector increased by $12 billion, or 1.1%, in the quarter, after increasing $65 billion in Q3'17. Over the past 12 months through Q4'17, Household assets were up $31 billion, or 3.0%.
Funding Corporations, which became the second largest segment in Q1'17 according to the Fed's data series, held $584 billion, or 21.3% of the total. Securities lending reinvestment (aka funding corporations) assets in money funds jumped by $55 billion in the quarter, or 9.3%, and they've increased by $194 billion, or 43.5%, over the past year. Nonfinancial Corporate Businesses remained the third largest investor segment with $472 billion, or 16.6% of money fund shares. They rose by $23 billion, or 5.2%, in the latest quarter, after dipping in Q3'17 (down $14 billion). Corporate money fund holdings decreased $111 billion, or -19.0%, over the previous 12 months.
The fourth largest segment, State and Local Governments held 6.6% of money fund assets ($189 billion) -- up $3 billion, or 1.3%, for the quarter, and up $5 billion, or 2.9%, for the year. Private Pension Funds, which held $149 billion (5.2%), remained in 5th place. The Rest Of The World category was the sixth largest segment in market share among investor segments with 4.0%, or $113 billion, while Nonfinancial Noncorporate Businesses held $103 billion (3.6%), State and Local Government Retirement Funds held $69 billion (2.4%), Life Insurance Companies held $42 billion (1.5%), and Property-Casualty Insurance held $19 billion (0.7%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.683 trillion, or 59.1%. Debt securities includes: Open market paper ($148 billion, or 5.2%; we assume this is CP), Treasury securities ($702 billion, or 24.7%), Agency and GSE backed securities ($683 billion, or 24.0%), Municipal securities ($142 billion, or 5.0%), and Corporate and foreign bonds ($7 billion, or 0.3%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($956 billion, or 33.6%) and Time and savings deposits ($179 billion, or 6.3%). Money funds also hold minor positions in Foreign deposits ($4 billion, or 0.1%), Miscellaneous assets ($3 billion, or 0.1%), and Checkable deposits and currency ($22 billion, 0.8%). Note: The Fed also recently added a new breakout line to this table which lists "Variable Annuity Money Funds;" they currently total $32 billion, down $1 billion in the quarter.
During Q4, Treasury Securities (up $52 billion), Security Repurchase Agreements (up $47 billion), Agency- and GSE-Backed Securities (up $16 billion), and Open market paper (up $15 billion), and Municipal Securities (up $7 billion) showed gains, while Time and Savings Deposits (down $20 billion) and Checkable Deposits and Currency (down $14 billion) showed a decrease. Over the 12 months through 12/31/17, Security Repurchase Agreements (up $156B), Agency- and GSE-Backed Securities (up $5B), and Open Market Paper (up $44B) all showed big gains over the 12 months through Q4'17. Treasury Securities (down $94B), Municipal Securities (down $20B) and Checkable deposits and currency (down $8B) all showed declines.
Crane Data's latest Money Fund Market Share rankings show assets rose for the majority of U.S. money fund complexes in February. Money fund assets overall rose by $36.9 billion, or 1.2% last month, and assets have increased by $43.9 billion, or 1.9%, over the past 3 months. They've also increased by $259.8 billion, or 9.4%, over the past 12 months through February 28, 2018, but note that our asset totals have been inflated slightly by the addition of a number of funds. The biggest gainers in February were J.P. Morgan, whose MMFs rose by $19.5 billion, or 7.7%, Vanguard, whose MMFs rose by $8.2 billion, or 2.9%, and BlackRock, whose MMFs rose by $7.6 billion, or 2.6%.
SSGA, Goldman Sachs, Federated, Wells Fargo and Fidelity also saw assets increase in February, rising by $6.1B, $5.0B, $2.9B, $2.8B, $1.5B, respectively. Declines among the 25 largest managers were seen by Morgan Stanley, Schwab, First American, Dreyfus and AB. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. 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 continued higher in February.
Over the past year through Feb. 28, 2018, Fidelity (up $65.0B, or 12.8%), BlackRock (up $51.3B, or 20.7%), Vanguard (up $30.8B, or 11.7%), Dreyfus (up $20.1B, or 13.2%), J.P. Morgan (up $19.9B, or 7.9%), T. Rowe Price (up $19.3B, or 120.7%) and Wells Fargo (up $15.6B, or 16.4%) were the largest gainers. These 1-year gainers were followed by Columbia (up $13.9B, or 1305.0%), Prudential (up $13.1B, or 2233.7%), Federated (up $12.9B, or 6.9%), Northern (up $11.8B, or 12.3%) and SSgA (up $10.7B, or 13.2%).
BlackRock, J.P. Morgan, Federated, SSgA, Vanguard and Northern had the largest money fund asset increases over the past 3 months, rising by $18.7B, $16.2B, $9.3B, $8.6B, $6.1B, and $6.1 respectively. The biggest decliners over 12 months include: Morgan Stanley (down $14.0B, or -11.0%), Goldman Sachs (down $10.1B, or -5.6%), Western (down $8.7B, or -24.6%), Schwab (down $7.5B, or -4.7%), and RBC (down $2.7B, or -30.5%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $574.1 billion, or 19.0% of all assets. It was up $1.5 billion in Feb., up $5.2 billion over 3 mos., and up $65.0B over 12 months. BlackRock remained in second with $299.4 billion, or 9.9% market share (up $7.6B, up $18.7B, and up $51.3B for the past 1-month, 3-mos. and 12-mos., respectively), while Vanguard remained in third with $293.0 billion, or 9.7% market share (up $8.2B, up $6.1B, and up $30.8B). JP Morgan ranked fourth with $273.3 billion, or 9.0% of assets (up $19.5B, up $16.2B, and up $19.9B for the past 1-month, 3-mos. and 12-mos., respectively), while Federated was ranked fifth with $198.7 billion, or 6.6% of assets (up $2.9B, up $9.3B, and up $12.9B).
Dreyfus was in sixth place with $172.5 billion, or 5.7% of assets (down $1.6B, down $3.5B, and up $20.1B), while Goldman Sachs was in seventh place with $171.3 billion, or 5.7% (up $5.0B, up $1.7B, and down $10.1B). Schwab ($151.8B, or 5.0%) was in eighth place, followed by Morgan Stanley in ninth place ($112.4B, or 3.7%) and Wells Fargo in tenth place ($110.7B, or 3.7%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($108.2B, or 3.6%), SSgA ($92.0B, or 3.0%), Invesco ($64.1B, or 2.1%), First American ($49.7B, or 1.6%), UBS ($43.6B, or 1.4%), T Rowe Price ($35.2B, or 1.2%), DFA ($26.8B, or 0.9%), Western ($26.7B, or 0.9%), Deutsche ($26.7B, or 0.9%), and Franklin ($20.3B, or 0.7%). The 11th through 20th ranked managers are the same as last month, except Wells moved ahead of Northern. Crane Data currently tracks 66 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except JPMorgan moves ahead of BlackRock and Vanguard, and Goldman Sachs moves ahead of Federated and Dreyfus. Our Global Money Fund Manager Rankings include the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products.
The largest Global money market fund families include: Fidelity ($583.0 billion), JP Morgan ($446.7B), BlackRock ($431.5B), Vanguard ($293.0B), and Goldman Sachs ($271.1B). Federated ($207.4B) was sixth and Dreyfus/BNY Mellon ($197.6B) was in seventh, followed by Schwab ($151.8B), Morgan Stanley ($149.2B), and Northern ($136.8B), 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 March issue of our Money Fund Intelligence and MFI XLS, with data as of 2/28/18, shows that yields were up again in February across all of our Crane Money Fund Indexes (except Tax Exempt). The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 758), was up 7 bps to 1.05% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 7 bps to 1.02%. The MFA's Gross 7-Day Yield increased 6 bps to 1.50%, while the Gross 30-Day Yield was up 4 bps to 1.45%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.24% (up 7 bps) and an average 30-Day Yield of 1.21% (up 6 bps). The Crane 100 shows a Gross 7-Day Yield of 1.52% (up 6 bps), and a Gross 30-Day Yield of 1.46% (up 5 bps). For the 12 month return through 2/28/18, our Crane MF Average returned 0.66% and our Crane 100 returned 0.85%. The total number of funds, including taxable and tax-exempt, was down 1 funds to 958. There are currently 758 taxable and 200 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 1.31% (up 6 bps) as of February 28, while the Crane Govt Inst Index was 1.11% (up 6 bps) and the Treasury Inst Index was 1.17% (up 9 bps). Thus, the spread between Prime funds and Treasury funds is 14 basis points, down 3 bps from last month, while the spread between Prime funds and Govt funds is 20 basis points, up one bps from last month. The Crane Prime Retail Index yielded 1.11% (up 8 bps), while the Govt Retail Index yielded 0.78% (up 7 bps) and the Treasury Retail Index was 0.86% (up 8 bps). After spiking in December, the Crane Tax Exempt MF Index yield fell again in February to 0.63% (down 3 bps).
Gross 7-Day Yields for these indexes in February were: Prime Inst 1.69% (up 6 bps), Govt Inst 1.43% (up 6 bps), Treasury Inst 1.46% (up 9 bps), Prime Retail 1.64% (up 4 bps), Govt Retail 1.40% (up 4 bps), and Treasury Retail 1.44% (up 7 bps). The Crane Tax Exempt Index decreased 3 basis points to 1.14%. The Crane 100 MF Index returned on average 0.09% for 1-month, 0.28% for 3-month, 0.18% for YTD, 0.85% for 1-year, 0.40% for 3-years (annualized), 0.25% for 5-years, and 0.33% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The March issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Wednesday morning, features the articles: "Friend or Foe to Cash? Money Markets Focus on Repatriation," which discusses the new hot topic in the money markets; "Guardians of Liquidity: SEI's Simko & Lac," which interviews SEI's Sean Simko and Daisy Lac; and, "Deposits Peak at $9 Trillion; MMFs Up, Drive Cash to $12T," which reviews the recent peak and slight decline in bank deposits. We've also updated our Money Fund Wisdom database with Feb. 28, 2018, statistics, and sent out our MFI XLS spreadsheet Wednesday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our March Money Fund Portfolio Holdings are scheduled to ship on Friday, March 9, and our March Bond Fund Intelligence is scheduled to go out Wednesday, March 14.
MFI's "Repatriation" article says, "Next to higher rates, repatriation has become the hottest topic of discussion among money marketeers so far in 2018. Strategists, PMs and market watchers are now guessing how much cash might shift from offshore to onshore, or from onshore to elsewhere. Because corporates keep making more, we think the total impact of repatriation will be minimal and overall a net positive for "cash" and money market funds. We review recent comments and the many moving parts below."
Our lead piece continues, "Invesco's Matt Bubriski, Joe Madrid and Robert Corner wrote recently, 'How will repatriation impact money markets?' Bubriski says, 'We estimate that US companies currently hold USD3 trillion in unremitted foreign earnings, but only half is held in liquid cash and investments.... [W]e estimate that money market instruments account for a relatively small portion of total cash, at about 8%."
MFI's latest Profile reads, "This month, MFI interviews SEI Managing Director and Senior Portfolio Manager Sean Simko and Portfolio Manager Daisy Lac. We discuss SEI's use of outside managers as subadvisors, their move to offer only Government MMFs, and their focus on separately managed accounts. Our latest Q&A follows."
MFI says, "Tell us about your history." Simko answers, "SEI debuted its money market offering back in 1981. The first funds were launched in our subadvisor program as our money funds are today. In this offering, we hire outside money managers and delegate security selection to take advantage of economies of scale. The program has continued to evolve over the years, with the most recent significant change taking place as a result of the Security & Exchange Commission's decision to require institutional prime money market funds to maintain a floating net asset value and the imposition of an option to impose liquidity fees and redemption gates under certain circumstances."
He continues, "As a result, we liquidated three prime obligation and two municipal money market funds and transitioned assets to other offerings in our subadvisory program. The program includes two sets of funds. The first is the SEI Daily Income Trust (SDIT) Government Money Market Fund. The complex includes four funds that act as the cash sweep component of accounts for institutional and high-net-worth clients and do not charge redemption gates or liquidity fees. The SDIT Funds have assets of just under $10 billion."
Simko adds, "The second is a pair of funds (one taxable and one tax free) in the SEI Institutional Managed Trust (SIMT) complex. These are meant to provide low-risk, highly liquid exposure in client portfolios. While the funds target short weighted-average maturities, they are not money market funds, and their NAVs will fluctuate.... These funds are able to purchase short-term securities at attractive valuations and offer yields above money market strategies. For those investors who do not need daily access to liquid strategies, these could be an attractive investment. The SIMT Fund has assets of $400 million."
Our "Deposits" article says, "The Federal Reserve's latest statistics show that bank deposits are finally starting to peak out and decline, while money market funds have begun to rise after years of being flat. Overall cash, including bank deposits (in banks and thrifts), money fund assets and small time deposits, broke above the $12 trillion level recently for the first time in history."
It continues, "Our chart on page 1 shows the growth of money market deposit accounts (MMDAs) in banks and thrifts vs. assets in money market funds. Below, we show the last 4 months of asset changes for MMMFs, MMDAs and Small TDs (time deposits), and we show changes over the past 1-, 5- and 10-years. We subtotal the three, calling this 'cash'. Our totals using Fed data show that cash, the combination of MMMFs, MMDAs, and Small TDs, broke over $12 trillion recently, in October 2017."
The recap adds, "Bank deposits (MMDAs) have more than doubled since September 2008, rising by over $5.0 trillion to $9.1 trillion as of January 2018. Money fund assets fell from $3.3 trillion to $2.6 trillion (according to the Fed's data) during this time, a drop of 20.9%. Small Time Deposits (or CDs) have withered from $1.3 trillion to $409 billion since Sept. 2008."
Our March MFI XLS, with Feb. 28, 2018, data, shows total assets increased $37.2 billion in February to $3.027 trillion, after decreasing $54.3 billion in January, but increasing $57.9 billion in December and $46.4 billion in November. Our broad Crane Money Fund Average 7-Day Yield was up 7 basis points to 1.05% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 7 bps to 1.24%.
On a Gross Yield Basis (7-Day) (before expenses were taken out), the Crane MFA rose 7 bps to 1.50% and the Crane 100 rose 7 bps to 1.52%. Charged Expenses averaged 0.45% and 0.28% (unchanged), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA was 29 days (the same as last month) and for the Crane 100 was 29 days (up one bps from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The Alternative Reference Rates Committee (ARRC), a group led by the Federal Reserve Bank of New York, published its "Second Report on Transition from LIBOR." The release explains, "The Alternative Reference Rates Committee (ARRC) today issued a new report summarizing the choice of the Secured Overnight Financing Rate (SOFR) as its recommended alternative to U.S. dollar LIBOR and enhancing the ARRC's Paced Transition Plan seeking to promote the use of SOFR on a voluntary basis." We review the latest on this new money market index, and we also quote from a recent article on ultra-short bond ETFs, below. (Note: Our upcoming Bond Fund Symposium, which is March 22-23 in Los Angeles, will discuss ultra-short bond fund and ETF issues in depth. We hope you'll join us!)
The NY Fed's release explains, "SOFR is a fully transactions based rate that will have the widest coverage of any Treasury repo rate available and it will be published on a daily basis by the Federal Reserve Bank of New York beginning April 3, 2018. Because of its range of coverage, SOFR is a good representation of the general funding conditions of the overnight Treasury repo market. As such it will reflect an economic cost of lending and borrowing relevant to a wide array of market participants active in these markets, including broker dealers, money market funds, asset managers, insurance companies, securities lenders and pension funds."
It tells us, "The report estimates the size of activity that currently references U.S. dollar LIBOR at $200 trillion dollars, 25 percent higher than previous estimates. While nearly 95 percent of this activity is in derivatives contracts, the report also shows that U.S. dollar LIBOR is used in cash products including loans, floating rate debt, and securitizations. The vast scale and broad scope of this activity underscores the necessity of promoting robust alternatives to LIBOR."
The full report comments, "In June 2017, the ARRC announced a broad Treasury repo financing rate, SOFR, as its recommended alternative to USD LIBOR. The ARRC considered a comprehensive list of potential alternatives, including other term unsecured rates, overnight unsecured rates such as the effective fed funds rate (EFFR) and overnight bank funding rate (OBFR), secured repo rates, Treasury bill and bond rates, and overnight index swap (OIS) rates linked to EFFR. After extensive discussion, the ARRC preliminarily narrowed this list to ... an overnight unsecured rate (the OBFR) and some form of overnight Treasury repo rate.... The ARRC made its final choice of SOFR after incorporating feedback from the consultation and from the members of the Advisory Group."
It states, "SOFR is a fully transactions-based rate incorporating tri-party repo data, the Fixed Income Clearing Corporation's (FICC) GCF Repo data, and bilateral Treasury repo transactions cleared through FICC.... It will have the widest coverage of any Treasury repo rate available. [T]he transactions underlying SOFR regularly exceeded $700 billion in daily volumes last year and have been growing. Over the first half of 2017, the average daily volume of transactions underlying SOFR was $754 billion, representing the largest rates market at any given tenor in the United States.... The volumes underlying SOFR are far larger than the transactions in any other U.S. money market and dwarf the volumes underlying LIBOR or other term unsecured funding rates."
The report also says, "Because of its range of coverage, SOFR is a good representation of general funding conditions in the overnight Treasury repo market. As such, it will reflect an economic cost of lending and borrowing relevant to the wide array of market participants active in these markets.... Although the ARRC seriously considered OBFR as its other leading candidate, a Treasury repo rate like SOFR was seen as potentially more resilient both by the ARRC and by the ARRC's Advisory Group of end users, a clear majority of whom preferred a repo rate.... Money market fund reforms have also led to some decline in unsecured overnight transactions volumes since 2016. In contrast, Treasury repo markets were seen as more resilient and an active source of funding for a wide range of market participants."
Finally, the release describes ARRC as a "group of private-market participants convened by the Federal Reserve Board and Federal Reserve Bank of New York in cooperation with the U.S. Department of the Treasury, the U.S. Commodity Futures Trading Commission, and the Office of Financial Research. Its mission is "to identify a set of alternative reference interest rates that are more firmly based on transactions from a robust underlying market."
In other news, The Wall Street Journal featured an article yesterday, entitled, "Investors Warm Up to Bond ETFs." It says, "Fixed-income exchange-traded funds are late bloomers compared with their equities-based cousins. But their popularity has surged in recent years -- with funds focused on shorter-duration bonds drawing interest lately -- as investors look to marry the benefits of fixed income with the advantages of an ETF."
The piece explains, "According to an October report from BlackRock Inc., assets under management in bond-focused ETFs have grown 25% annually for the past five years and are likely to reach $1.5 trillion by 2022. As of mid-February, there was $780 billion in these products, representing 15% of the total ETF market, according to BlackRock's iShares division, the biggest U.S. ETF firm by assets."
The Journal continues, "Bond ETFs attracted $138 billion in new assets in 2017, up from $112 billion in 2016, according to ETFdb.com analyst Neelarjo Rakshit, who says a number of factors are driving the growth. For starters, he says, an overall boom in passive-investing strategies means there are simply more options available for ETF investors.... Additionally, while fixed-income ETFs usually pay regular interest payments like bonds, they also offer the benefits of an ETF, such as intraday trading, liquidity, transparency and a relatively low cost compared with mutual funds."
The article tells us, "Individual investors have grown more comfortable with fixed-income ETFs, says Kathy Jones, senior vice president and chief fixed-income strategist at the Schwab Center for Financial Research. Schwab says assets under management in the U.S. fixed-income ETFs on its brokerage platform rose to $64.1 billion in 2017 from $49.4 billion the year before. Schwab saw inflows of $12.6 billion into the fixed-income funds over the course of 2017, just over a quarter of the total flows into ETFs.
It adds, "Most of the money flowing into these products now is going into ETFs focused on shorter-duration bonds, Ms. Jones says, a trend noted by other ETF providers. That is due to interest-rate increases by the Federal Reserve and the expectation of more to come this year, she says. Rising interest rates have a negative impact on the price of existing bonds, particularly those with a longer duration. By buying shorter-term funds, investors can stay invested in fixed income, but mitigate some of the impact of rising rates, she notes."
Crane Data is preparing to host its second annual Bond Fund Symposium, which will be held in less than 3 weeks, March 22-23, 2018 at the InterContinental Los Angeles Downtown. Our inaugural event in Boston attracted almost 150 bond fund managers, marketers, fixed-income issuers, investors and service providers, and we expect our first LA show to rival last year's gathering. We review the final agenda and details below, and we also give an update on our 2018 conference calendar, including our big show, Money Fund Symposium (June 25-27 in Pittsburgh). Please register ASAP if you plan on attending our LA Bond Fund Symposium, and we hope to see you in California later this month!
Crane Data, which has been publishing its `Bond Fund Intelligence newsletter for 3 years, recently expanded its fixed-income offerings with the launch Bond Fund Wisdom and our new Bond Fund Portfolio Holdings data. Our Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Registration for Bond Fund Symposium is $750; exhibit space is $2,000 (includes 2 tickets); and sponsorship opportunities are $3K, $4K, $5K and $6K. Our mission is to deliver the best possible conference content at an affordable price to bond fund professionals and investors.
The morning of BFS's Day One agenda includes: State of the Bond Fund Marketplace, with Peter Crane, of Crane Data and Sean Collins of the Investment Company Institute; Keynote Discussion: Ultra-Shorts vs. SMAs with Dave Martucci of J.P. Morgan Asset Management and Jerome Schneider of PIMCO; Bond Strategists: Outlook for Rates & Spreads, with Mark Cabana of Bank of America Merrill Lynch and Michael Cloherty of RBC Capital Markets; and, Bond Fund Ratings & USBF Market Overview, with Greg Fayvilevich of Fitch Ratings and Peter Rizzo of Standard & Poor's Ratings.
Day One's afternoon agenda includes a Senior Portfolio Manager Perspectives panel, with James McNerny of J.P. Morgan A.M., Morten Olsen of Northern Trust Asset Mgmt, and Mary Beth Syal of Payden & Rygel. Also on the agenda: Major Issues in Fixed-Income Investing with Alex Roever from J.P. Morgan Securities, Jeff Weaver of Wells Fargo Funds and Tony Wong of Invesco; and, EFT Trends & Bond Fund Investors featuring Will Goldthwait of State Street Global Advisors. The day concludes with Corporate Credit & Bond Index Issues, with George Bory of Wells Fargo Securities and James Rieger of S&P Dow Jones Indices.
Day Two's agenda includes: Money Fund Update & Conservative USBFs with Crane, Jason Granet from Goldman Sachs Asset Management, and Michael Morin of Fidelity Investments; Regulatory Update: Form N-PORT, Liquidity with Stephen Cohen of Dechert LLP and John Hunt of Sullivan & Worcester LLP. The second day also features: Government Bond Fund Discussion with Liam O'Connell of Federated Investors; Municipal & Taxable Bond Fund Issues with Kristian Lind and Michael Foster of Neuberger Berman, and Bond Fund Data, Statistics & Software with Crane and James Morris of Investortools.
Portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of bond funds and fixed-income investing will benefit from our comprehensive program. A handful of rooms are still available at the Intercontinental Los Angeles. We'd like to thank our 2018 sponsors -- Dechert LLP, Fitch Ratings, Wells Fargo Securities, Fidelity Investments, Investortools, J.P. Morgan Asset Management, Wells Fargo A.M., S&P Global Ratings, Payden & Rygel, PIMCO, INTL FCStone, and Goldman Sachs -- for their support.
We've also published the preliminary agenda and have begun taking registrations for Crane's Money Fund Symposium, which will be held June 25-27, 2018, at the Westin Convention Center in Pittsburgh, Pa. Visit www.cranesmfsymposium.com/register to register and for more details, and let us know if you'd like to see the full brochure or information on sponsoring this event. We have also set the dates and location for our next European Money Fund Symposium, which is scheduled for Sept. 20-21, 2018, in London, England, and for our next Money Fund University, which is scheduled for Jan. 24-25 in Stamford, Conn.
We hope you'll join us in LA or Pittsburgh! We'd like to encourage attendees, speakers and sponsors to register and make hotel reservations for MF Symposium early. Note that the agenda is still in the process of being finalized. E-mail us at info@cranedata.com to request the full brochure, or click here to see the latest.
Note: For those in the Los Angeles area, you're welcome to drop by for our "free Friday" to attend the final day's sessions without a ticket. So feel free to visit the InterContinental Los Angeles Downtown on Friday, March 23, and to "crash" any or all of the sessions, which include: Money Fund Update & Conservative USBFs, Regulatory Update: Form N-PORT, Liquidity, Government Bond Fund Discussion, Municipal & Taxable Bond Fund Issues and Bond Fund Data, Statistics & Software.
Money fund assets dipped in the latest week on month-end, after rising for 3 weeks in a row, according to the Investment Company Institute's latest "Money Market Fund Assets" report. Prime assets showed their sharpest drop in over a year. ICI writes, "Total money market fund assets decreased by $2.04 billion to $2.84 trillion for the week ended Wednesday, February 28, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $6.90 billion and prime funds decreased by $6.67 billion. Tax-exempt money market funds decreased by $2.27 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.248 trillion (79.1% of all money funds), while Total Prime MMFs stand at $458.6 billion (16.1%). Tax Exempt MMFs total $136.0 billion, or 4.8%. We review ICI's latest numbers below, and also quote from a Bloomberg article on Chinese money market funds.
ICI's weekly press release explains, "Assets of retail money market funds decreased by $6.18 billion to $1.01 trillion. Among retail funds, government money market fund assets decreased by $2.74 billion to $615.76 billion, prime money market fund assets decreased by $1.31 billion to $263.43 billion, and tax-exempt fund assets decreased by $2.13 billion to $129.16 billion." Retail assets, which were at their highest levels in 2 years last week, account for over a third of total assets, or 35.5%, and Government Retail assets make up 61.1% of all Retail MMFs.
It adds, "Assets of institutional money market funds increased by $4.14 billion to $1.83 trillion. Among institutional funds, government money market fund assets increased by $9.64 billion to $1.63 trillion, prime money market fund assets decreased by $5.35 billion to $195.19 billion, and tax-exempt fund assets decreased by $148 million to $6.81 billion." Institutional assets account for 64.5% of all MMF assets, with Government Inst assets making up 89.0% of all Institutional MMFs.
For February, Crane Data's Money Fund Intelligence Daily data series shows money market fund assets up by $35.0 billion but all Prime MMFs down by $6.1 billion. Over the past week, the largest asset declines were shown by Dreyfus Inst Treas & Agen Liq MMF (down $2.3B to $11.7B), Schwab Cash Reserves Fund (down $2.0B to $24.6B), JPMorgan Prime MM Capital (down $1.9B to $24.6B), Northern Trust Treasury MMkt Prem (down $1.7B to $33.7B), BlackRock Lq TempFund In (down $1.6B to $10.5B), Fidelity Inv MM: Govt Port Inst (down $1.1B to $103.6B), Wells Fargo Govt MM Sel (down $1.1B to $48.9B), and First American Treas Obligs Z (down $1.1B to $5.3B).
Offshore USD assets have declined by $15.6 billion in February to $444.4 billion, according to our `Money Fund Intelligence International. Overall offshore assets fell by $18.2 billion for the month to $851.6B. (This translates the E89.8 billion in Euro MMFs and L209.1 billion in Pound Sterling MMFs into U.S. dollars.) Year-to-date, USD MMFs remain up by $19 billion. While we've yet to see substantial flows related to "repatriation," we have seen several mini bubbles of USD asset buildups then distributions in December, January and now February.
In other news, Bloomberg writes "China Plans Curbs on $1 Trillion in Money-Market Funds." It says, "China plans to expand its unprecedented crackdown on financial risk to money-market funds by capping how much investors can redeem in a day, people familiar with the matter said."
The article explains, "The limit for same-day redemption will be set at 10,000 yuan ($1,580), said the people, who asked not to be identified as they're not authorized to speak publicly. The same restriction will apply when investors use their assets in money-market funds directly for payment and consumption, the people said. The move by regulators brings them into areas once seen as less risky. The country's money-market funds expanded to a total value of almost $1.1 trillion by the end of 2017, up from $680 billion the previous year, according to the Asset Management Association of China."
Bloomberg tells us, "Some Chinese money-market funds allow investors to use the money they hold in the fund directly for purchasing online and in traditional retail stores, such as the Ant Financial-controlled Tianhong Yu'E Bao Money Market Fund, China's largest such entity."
The piece continues, "The central bank last year urged Ant, a financial affiliate of Alibaba Group Holding Ltd., to reduce the maximum amount individuals can invest in Yu'E Bao to limit financial market risk, people with knowledge of the matter said in May."
Finally, Bloomberg adds, "The PBOC revised the statistics methodology for calculating the M2 broad money supply last month to better gauge the scale of money market funds."
Invesco features a piece in their latest "Global Fixed Income Strategy" entitled, "How will repatriation impact money markets?" Written by Matt Bubriski, Joe Madrid and Robert Corner, the update says, "As discussed in this issue's Global Credit Strategy article, the repatriation of foreign earnings could materially impact the US investment grade yield curve. However, Invesco Global Liquidity believes it will likely have a limited impact on money markets. Below, we speak with three members of the Global Liquidity team about why repatriation is unlikely to disrupt US and offshore money markets and money market interest rates." We quote from Invesco's Q&A below, and we also summarize our latest Weekly Money Fund Portfolio Holdings statistics.
Invesco asks, "What is the size and allocation of unremitted foreign earnings?" Bubriski answers, "We estimate that US companies currently hold USD3 trillion in unremitted foreign earnings, but only half is held in liquid cash and investments. The remainder appears to be held in less liquid "operating assets" and is unlikely to be liquidated. The five largest holders of cash and investments, all technology firms, hold a large portion of these assets, and by using their holdings as a proxy, we estimate that money market instruments account for a relatively small portion of total cash, at about 8%."
They also ask, "How much will likely be repatriated? Will all earnings be returned in 2018?" Bubriski replies, "While headlines have suggested we'll see trillions of dollars return to US markets in a relatively short period, we believe this is being overestimated. Based on our estimates, the amount of cash available to be repatriated is around USD 1.5 trillion. Because companies can elect to pay the repatriation tax in installments over an eight-year period, we anticipate funds to flow back over several years. Also, because the majority of holdings are in 1-5 year securities, we expect repatriation flows to be distributed over time as companies allow them to gradually roll off to meet tax liabilities or be put toward other uses."
Invesco's piece queries, "What effect will repatriation likely have on US money market funds?" Corner tell us, "The overall amount of cash and investments that is ultimately repatriated could be meaningful and most likely will find its way into bank deposits, US money market funds, and other short-term investments. As Matt mentions, the amount of cash and investments repatriated could reach USD1.5 trillion. However, since there is no actual deadline, or requirement to immediately bring cash back onshore, except to pay the tax, we don't necessarily expect a flood of cash to come back to the US all at once. We think asset flows back to the US should be orderly and resulting onshore investments to be relatively short-lived as companies eventually redeploy their cash to reward shareholders, pursue M&A, or capital expenditures, among other things. Regardless of the ultimate uses, US money market funds should be an important parking spot for newly repatriated cash."
The piece continues, "Q: What are the implications for offshore money market funds?" Corner comments, "Similar to US money market funds, offshore money market funds could be a valuable parking spot for corporations prior to repatriating cash. These balances were remarkably stable over the four-year period ending in 2016 and likely reflect companies' actual working capital needs. Balances increased in 2017, but we think companies may be adding liquidity to help cover tax bills. We expect companies to draw down these balances as they prepare for initial tax payments, but we expect balances to be rebuilt to previous levels to meet working capital needs. There could be some large, one-off transactions that cause companies to tap their cash balances, but we would similarly expect them to be rebuilt as securities mature."
Finally, they ask, "What will be the likely impact of repatriation on money market interest rates?" Madrid answers, "We do not foresee a significant impact on money market interest rates due to repatriation. This is due to the small allocation to money market instruments relative to the total size of liquid offshore holdings, and based on our expectation that fund flows will likely be distributed over several years. As a guide, we look to 2016 US money market reform, which led to massive flows out of prime money market funds into government money market funds. In the year leading up to the compliance deadline, an estimated USD1 trillion flowed out of prime money market funds, with the bulk switching to government funds. This flow represents more than eight times our estimate of offshore cash in non-government money market instruments that could potentially be liquidated and repatriated to US markets."
He adds, "If we scale for the relative difference in the size of potential repatriation flows, this would imply a widening in the 3-month Libor OIS spread well below the 25-basis point move we saw in 2016. Given this potentially limited impact of repatriation, we would anticipate other factors, such as Fed interest rate hikes, to have a much greater influence on money market interest rates in the near-to-medium term."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary late Tuesday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of Feb. 23) includes Holdings information from 67 money funds (same as last week), representing $1.584 trillion (up from $1.326 trillion the prior week) of the $2.990 (53.0%) in total money fund assets tracked by Crane Data. (For our monthly Holdings recap, see our Feb. 12 News, "Feb. Money Fund Portfolio Holdings: TD, CP, CDs Jump; Repo Plummets.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $590.0 billion (up from $448.2 billion), or 37.2%, Treasury debt totaling $475.3 billion (up from $401.1 billion) or 30.0%, and Government Agency securities totaling $329.6 billion (up from $280.5 billion), or 20.8%. Commercial Paper (CP) totaled $62.6 billion (up from $48.2 billion), or 4.0%, and Certificates of Deposit (CDs) totaled $45.7 billion (up from $42.0 billion), or 2.9%. A total of $41.2 billion or 2.6%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $40.0 billion, or 2.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $475.3 billion, Federal Home Loan Bank with $255.9B, BNP Paribas with $76.9 billion, Federal Farm Credit Bank with $45.1B, RBC with $38.5B, Wells Fargo with $36.6B, Societe Generale with $34.3B, Credit Agricole with $34.2B, Nomura with $33.2B, and Natixis with $31.6B.
The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($147.7B), Fidelity Inv MM: Govt Port ($105.9B), BlackRock Lq FedFund ($90.2B), Goldman Sachs FS Govt ($86.6B), Federated Govt Obligs ($76.2B), Wells Fargo Govt MMkt ($73.7B), Blackrock Lq T-Fund ($71.3B), Dreyfus Govt Cash Mgmt ($64.3B), State Street Inst US Govt ($54.7B), and Goldman Sachs FS Trs Instruments ($48.5B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
