News Archives: June, 2018
ICI's latest "Money Market Fund Assets" report shows money fund assets rebounded after falling sharply for two weeks in a row. Money fund assets turned positive for the year-to-date for the first time in 2018 two weeks ago, but they fell back into the red last week and climbed to almost flat this week. MMFs have decreased by $13 billion, or -0.5%, YTD, but they've increased by $207 billion, or 7.5%, over 52 weeks. We review the latest weekly assets, as well as ICI's monthly Trends and Portfolio Composition totals below. (Note: Conference materials and recordings from this week's Money Fund Symposium are now available to attendees and Crane Data subscribers via our Money Fund Symposium 2018 Download Center. Thanks again to those who attended and supported our event, and mark your calendars for next year's Symposium, which will be in Boston, June 24-26, 2019.)
ICI writes, "Total money market fund assets increased by $22.65 billion to $2.83 trillion for the week ended Wednesday, June 27, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $21.33 billion and prime funds increased by $984 million. Tax-exempt money market funds increased by $342 million." Total Government MMF assets, which include Treasury funds too, stand at $2.213 trillion (78.3% of all money funds), while Total Prime MMFs stand at $476.5 billion (16.9%). Tax Exempt MMFs total $135.8 billion, or 4.8%.
They explain, "Assets of retail money market funds decreased by $2.25 billion to $1.03 trillion. Among retail funds, government money market fund assets decreased by $3.31 billion to $627.32 billion, prime money market fund assets increased by $829 million to $272.58 billion, and tax-exempt fund assets increased by $231 million to $127.56 billion." Retail assets account for over a third of total assets, or 36.4%, and Government Retail assets make up 61.1% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $24.90 billion to $1.80 trillion. Among institutional funds, government money market fund assets increased by $24.63 billion to $1.59 trillion, prime money market fund assets increased by $155 million to $203.87 billion, and tax-exempt fund assets increased by $111 million to $8.18 billion." Institutional assets account for 63.6% of all MMF assets, with Government Inst assets making up 88.2% of all Institutional MMFs.
The Investment Company Institute also released its latest monthly "Trends in Mutual Fund Investing" report yesterday. Their numbers confirm that assets jumped in May after being flat in April. (Month-to-date in June through 6/27 assets have decreased by $27.4 billion, according to our MFI Daily.) ICI's latest Portfolio Holdings totals show a sharp drop in Treasury holdings and a jump in Repo in April. We review ICI's latest Trends and Portfolio Composition statistics below, and we also review our latest Weekly Money Fund Portfolio Holdings data.
The latest monthly "Trends in Mutual Fund Investing" report from ICI confirm that money fund assets jumped in May after a relatively flat April and a big drop in March. ICI's "May 2018 - Trends" shows a $58.3 billion jump in money market fund assets in May to $2.851 trillion. This follows a $0.4 billion decrease in April, a $50.1 billion decrease in March, and a $37.5 billion increase in February. In the 12 months through May 31, money fund assets have increased by $196.7 billion, or 7.4%.
ICI's monthly report states, "The combined assets of the nation’s mutual funds increased by $246.35 billion, or 1.3 percent, to $18.94 trillion in May, according to the Investment Company Institute’s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."
It explains, "Bond funds had an inflow of $7.10 billion in May, compared with an inflow of $6.57 billion in April.... Money market funds had an inflow of $56.41 billion in May, compared with an outflow of $2.20 billion in April. In May funds offered primarily to institutions had an inflow of $45.99 billion and funds offered primarily to individuals had an inflow of $10.42 billion."
The latest "Trends" shows that both Taxable and Tax Exempt MMFs gained assets last month. Taxable MMFs increased by $51.6 billion in May to $2.712 trillion, after increasing by $0.8 billion in April, decreasing by $47.4 billion in March, and increasing in February. Tax-Exempt MMFs increased $6.8 billion in May to $138.8 billion. Over the past year through 5/31/18, Taxable MMF assets increased by $87.0 billion (7.4%) while Tax-Exempt funds rose by $9.7 billion over the past year (7.5%). Bond fund assets decreased by $19.5 billion in May to $4.104 trillion; they rose by $235.0 billion (6.1%) over the past year.
Money funds now represent 15.1% (up from 14.9% the previous month) of all mutual fund assets, while bond funds represent 21.7%, according to ICI. The total number of money market funds fell by one to 382 in May, down from 417 a year ago. (Taxable money funds fell by one to 298 funds. Tax-exempt money funds were flat at 84 funds over the last month.)
ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed another drop in Treasuries and jump in Repos in May. Treasuries which lost their position as the largest portfolio segment two months ago, fell by $31.5 billion, or -4.1%, to $741.4 billion or 27.3% of holdings. Treasury Bills & Securities have increased by $85.1 billion over the past 12 months, or 13.0%. (See our June 12 News, "June Money Fund Portfolio Holdings: Repo Jumps Again, Treasuries Fall.")
Repurchase Agreements remained in first place among composition segments; they increased by $64.9 billion, or 7.4%, to $940.2 billion, or 34.7% of holdings. Repo holdings have risen by $43.5 billion, or 4.9%, over the past year. U.S. Government Agency Securities remained in third place; they rose by $4.1 billion, or 0.6%, to $660.7 billion, or 24.4% of holdings. Agency holdings have risen by $18.5 billion, or 2.9%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they decreased $10.8 billion, or -5.9%, to $173.3 billion (6.4% of assets). CDs held by money funds have fallen by $18.6 billion, or -9.7%, over 12 months. Commercial Paper remained in fifth place, increasing $10.1B, or 6.4%, to $168.6 billion (6.2% of assets). CP has increased by $47.2 billion, or 38.9%, over one year. Notes (including Corporate and Bank) were down by $95 million, or -1.6%, to $6.0 billion (0.2% of assets), and Other holdings increased to $21.1 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 219.5 thousand to 31.994 million, while the Number of Funds declined to 298. Over the past 12 months, the number of accounts rose by 6.322 million and the number of funds decreased by 19. The Average Maturity of Portfolios was 29 days in May, down 1 day from April. Over the past 12 months, WAMs of Taxable money funds have shortened by 3 days.
As we mentioned in a "Link of the Day" earlier this week ("Bloomberg on BIS Repo Study"), the Bank for International Settlements, or BIS, writes in its latest Annual Report about "Banks' window-dressing: the case of repo markets." The source BIS piece tells us, "Window-dressing refers to the practice of adjusting balance sheets around regular reporting dates, such as year- or quarter-ends. Window-dressing can reflect attempts to optimise a firm's profit and loss for taxation purposes. For banks, however, it may also reflect responses to regulatory requirements, especially if combined with end-period reporting." We review this brief below, and we also report more on the recent Senate testimony on bill S.1117.
The BIS writes, "One example is the Basel III leverage ratio. This ratio is reported based on quarter-end figures in some jurisdictions, but is calculated based on daily averages during the quarter in others. The former case can provide strong incentives to compress exposures around regulatory reporting dates – particularly at year-ends, when incentives are reinforced by other factors (eg taxation)."
They tell us, "Banks can most easily unwind positions around key reporting dates if markets are both short-term and liquid. Repo markets generally meet these criteria. As a form of collateralised borrowing, repos allow banks to obtain short-term funding against some of their assets – a balance sheet-expanding operation. The cash received can then be lent via reverse repos, and the corresponding collateral may be used for further borrowing. At quarter-ends, banks can reverse the increase in their balance sheet by closing part of their reverse repo contracts and using the cash thus obtained to repay repos. This compression raises their reported leverage ratio."
The report continues, "The data indicate that window-dressing in repo markets is material. Data from US money market mutual funds (MMMFs) point to pronounced cyclical patterns in banks' US dollar repo borrowing, especially for jurisdictions with leverage ratio reporting based on quarter-end figures.... Since early 2015, with the beginning of Basel III leverage ratio disclosure, the amplitude of swings in euro area banks' repo volumes has been rising – with total contractions by major banks up from about $35 billion to more than $145 billion at year-ends."
It adds, "While similar patterns are apparent for Swiss banks (which rely on quarter-end figures), they are less pronounced for UK and US banks (which use averages). Banks' temporary withdrawal from repo markets is also apparent from MMMFs' increased quarter-end presence in the Federal Reserve's reverse repo (RRP) operations, which allows them to place excess cash.... Despite the implicit floor provided by the rates on the RRP ... there are signs of volatility spikes in key repo rates around quarter-ends.... Such spikes may complicate monetary policy implementation and affect repo market functioning in ways that can generate spillovers to other major funding markets, especially if stress events coincide with regulatory reporting dates."
In other news, we mentioned the Bond Buyer's article, "Why issuers want to undo money market mutual fund rules," in our June 27 Link of the Day, and said to watch for more comments on this topic from Federated Investors CEO Chris Donahue from this week's Money Fund Symposium in coming days. But we also discovered a link to the Webcast and supporting documents from recent Senate Committee testimony in support of S.1117: The Consumer Financial Choice and Capital Markets Protection Act of 2017.
The Senate's statement says, "Committee on Banking, Housing and Urban Affairs will meet in open session to conduct a hearing entitled, 'Legislative Proposals to Increase Access to Capital.' The witnesses will be Mr. Raymond J. Keating, Chief Economist, Small Business & Entrepreneurship Council; Professor Mercer E. Bullard, Butler Snow Lecturer and Professor of Law, The University of Mississippi School of Law; and Mr. Chris Daniel, Chief Investment Officer of the City of Albuquerque, New Mexico, on behalf of the Government Finance Officers Association. All hearings are webcast live and will not be available until the hearing starts."
U.S. Senator Mike Crapo (R-Idaho), Chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs, issued this Statement" on "Legislative Proposals to Increase Access to Capital," "`Today's hearing will focus on several legislative proposals that will encourage capital formation and reduce burdens for smaller businesses and communities. My goal is to work with Ranking Member Brown and other Senators on this Committee to identify and move legislative proposals that achieve these aims. Many of the bills we will discuss in today's hearing have been considered in the House of Representatives earlier this Congress."
He continues, "Of those that the House has considered to date, all have passed the House Financial Services Committee with bipartisan support and some have passed the full House, including one with a vote of 419 to 0. “Many of my colleagues on this Committee are also interested in these issues and have introduced Senate companions to many of these bills as well as taking the lead in introducing bipartisan bills in the Senate.... Senators Toomey, Rounds and Menendez, among others, introduced a bill that would provide more financing options for state and local governments seeking to raise money.... I look forward to hearing from our witnesses on these legislative proposals."
The GFOA, or Government Finance Officer's Association, previously submitted a letter of support entitled, "Maintaining the Stable Net Asset Value Feature of Money Market Funds," which says, "The stable net asset value (NAV) is the predominant safety feature of money market funds. A stable NAV means that the chance of the fund losing principal or breaking a buck is minimized because it always maintains a $1.00 value (investors will receive $1.00 back for every $1.00 invested). The fund is managed towards that goal."
They explain, "State and local governments are a major purchaser of money market funds, holding $92 billion in stable NAV money market funds in 2009. Many governments choose to use - or are required to use as directed by state statutes, federal restrictions, and policies - money market funds as a cash management tool, as they carry little credit risk. Additionally, money market funds hold 65% of outstanding short-term municipal debt, making them the largest holder of short-term tax-exempt debt."
GFOA's "Policy Statement" said, "The Government Finance Officers Association (GFOA) strongly opposes changes to SEC Rule 2a-7 that would require or allow funds to use a floating NAV rather than the current stable NAV. Governments depend on the safety and liquidity of money market funds for their constantly flowing operating funds and as part of their cash management strategy. Without being able to invest in these funds, governments would have to look to other investment vehicles that would be less attractive, less liquid and may carry greater risks. Furthermore, if this major purchasing power of municipal bond were to exit the market, state and local governments would suffer higher borrowing costs on their short-term debt.
It added, "The GFOA also strongly believes that the SEC should consult with state and local governments regarding any changes to this market, and allow the opportunity for GFOA and others in our community to comment and provide analysis on any SEC changes to Rule 2a-7 that will have an effect on the public sector."
J.P. Morgan Securities writes in a recent "Short-Term Fixed Income: Mid-Year Outlook," "Though 3m Libor-OIS has retraced to more normalized levels since hitting a high in early April, pressures remain that will likely continue to favor elevated Libor-OIS levels in the near term. First, seasonal funding needs on the part of Treasury will likely prompt net bill issuance to increase again later this year. Currently, our Treasury strategists estimate net bill outstandings will grow by [about] $290bn in 2H18." We excerpt from parts of their latest update below. (Note: Our apologies for the lack of new commentary today. We were too busy at our Money Fund Symposium, which wraps up today in Pittsburgh, to update our News! Thanks to those who attended our show, and watch for coverage from our big show in coming days.)
The Outlook tells us, "Though this is slightly smaller than the $330bn increase we saw earlier this year, we note there is also less capacity on the part of money market investors to absorb this supply as evidenced by the lack of use of the RRP facility. To this end, as Treasury bills increasingly comprise a larger part of money market supply ([about] 20% currently), competition with other money market alternatives such as repo, agency discount notes, and CP/CD will naturally bias those rates higher."
It explains, "Against this backdrop, money market participants will likely continue to maintain a short duration profile given expectations of two more Fed hikes this year in September and December. Looking at prime MMFs as a proxy, WAMs and WALs across both onshore and offshore MMFs on average have fluctuated around 25-30 days and 55-60 days respectively during the past six rate hikes, four of which have occurred on a quarterly basis.... The desire of investors to purchase short-dated paper will likely continue to exert pressure in the short end of CP/CD markets, particularly for those issuers who are limited in their ability to access longer parts of the curve (i.e., 6m and longer)."
J.P. Morgan's piece says, "Taking our bill supply forecast into consideration as well as incorporating MMFs' behavior on the back of Fed expectations into our fair value model, this would seem to suggest that Libor-OIS has room to modestly widen between now and year-end.... On a macro level, this is consistent with our derivative strategists' expectations for FRA/OIS.... Tacking on our views on the Fed and EFFR, we look for 3mL to end the year at 2.90%."
It explains, "What are the risks to this view? Tax repatriation is a wildcard. For now, corporations are building liquidity in their cash portfolios by investing in money market instruments as a parking place for cash. However, at some point, buybacks, dividends, and other corporate purposes may prompt corporates to draw down this cash."
JPM adds, "While we believe that this will likely have a limited impact on the front end, as cash inflows from excess cash from operations and maturities of longer-term securities could also be used towards shareholder activities, to the degree the corporations decide to accelerate their returns to shareholders, this increases the risk of a greater drawdown, and MMFs running an even shorter duration profile."
They write, "There's also the issue of European MMF reform which is supposed to come into place on January 21, 2019 for existing funds. In general, we are not expecting significant redemptions to take place out of offshore USD prime MMFs. European regulators have ruled that offshore prime MMFs, which are currently CNAV, can convert to either a low volatility prime MMF (LVNAV) or a variable prime MMF (VNAV)."
The piece continues, "Government MMFs remain CNAV. Furthermore, liquidity fees and gates would be applied to both government CNAV and prime LVNAV MMFs. As a result, we suspect shareholders will likely stay put, as opposed to moving their cash from prime MMFs to government MMFs. However, to the degree that it prompts some outflows before the end of the year, this could also encourage offshore prime MMFs to further shorten their duration profile."
J.P. Morgan Securities comments, "MMF inflows should continue. Throughout the course of this year, MMF flows have been atypical relative to years past. YTD, MMFs have seen outflows of $49bn, compared to $96bn of outflows that normally occur by this time of year.... Not surprisingly, most of the flows have been driven by institutional MMFs, and little by retail MMFs."
They explain, "Part of the story is likely tax repatriation related, as corporations look to build more liquidity in their cash portfolios in anticipation of putting the cash to use in the near-term. But another part of it is likely due to deposits being repositioned in the financial system, driven either by banks looking to shed more non-operational institutional deposits or by corporations looking to pick up extra yield."
The piece tells us, "This makes sense: as the Fed has continued to raise rates, yields on MMFs are increasingly getting more competitive with bank deposit rates. Relative to deposit betas, MMF yields are much more sensitive to Fed rate hikes.... It's not surprising then that when we compare the year-over-year growth rate in institutional MMFs and institutional deposits over the past year, the growth rate of institutional deposits has slowed while that of institutional MMFs has increased recently."
Finally, they write, "Looking ahead to 2H18, as the Fed continues to raise rates, we suspect depositors will feel more compelled to shift their deposits into the money markets. To this end, we wouldn’t be surprised if we see overall MMF balances increase in 2H18, above and beyond the seasonal inflows that would typically take place during this time period, creating demand for money market products. Over the past six years, MMFs have seen on average about $150bn of inflows in 2H."
Late last week, Crane Data President Peter Crane spoke before the Commercial Paper Issuers Working Group quarterly meeting and gave a preview of issues that will be discussed at this week's Money Fund Symposium in Pittsburgh. At the CPIWG gathering, Crane also ran a Q&A with DWS Senior Credit Analyst Matt Plomin, who talked about their recent name change from Deutsche Bank Asset Management, the process of choosing names for fund approved lists and investments in separately managed accounts and other pools outside of money market funds. Excerpts from these two sessions follow. (Note: For those of you attending our 10th annual Crane's Money Fund Symposium, which takes place June 25-27 at the Westin Convention Center, welcome to Pittsburgh! Watch for reporting on the event in coming days, and see those of you attending at the show this afternoon!)
Crane says of hosting his conference in June, "It's a great time. It's awesome for the short-term investment community to get together, but bad things tend to happen in June. If you look back, Brexit was at the tail end of our conference several years back. The European debt crisis back in 2012 occurred then too. One of the reasons is that you have these seasonal flows ... we saw a gigantic outflow of $62 billion this week.... On June 15, you hear giant sucking sound as corporations pay their tax bills.... The week before, we saw almost a record inflow.... I think it just became clear [that] there are some giant tax bills [due to repatriation]."
On the Money Fund Symposium, we commented, "Chris Donahue, CEO of Federated, is going to give the keynote speech.... Money funds are such a big chunk of what they do.... Chris will probably talk a little bit about the rebound in revenues that goes along with rising rates. He'll talk a little bit about this bill in the House of Representatives, H.R. 2319, which is a long shot to overturn the floating NAV.... We're also going to discuss global and European money fund issues.... [Also] one of the big topics is 'alt-cash' ... ultrashort bond funds, private liquidity funds, and separately managed accounts."
Crane continued, "But the big theme this year at the conference is really going to be rising rates and the recuperation of revenues. [Though] providers in general won't be out celebrating. They'd be in great shape were it not for all the other factors that are weighing upon the asset management business. Mutual funds are scared about index funds [and other issues]. But from the money fund side, they're just happy to have made it through a brutal rate environment."
He added, "Year-to-date, assets are stronger than they've been in years, and they'll only get stronger as we go forward. One of the reasons for that and one of the big issues is money market mutual funds are again comparing favorably with bank deposits [which are now] over $9 trillion.... It's unclear how interest rate sensitive these assets are, but the history of money market mutual funds really shows that at some point cash investors will move over at a certain level, whether it is 10 basis points, 50 basis points, or a full percentage point. It varies for different types of investors. But if and when the $9 trillion in deposits moves, it could be a gigantic tailwind."
Crane explained, "There is some evidence that deposits are peaking. We have seen two down months out of the past five months. But it's still unclear that deposits are migrating en masse. It is, though, clear that some of the new money is shifting towards money market mutual funds. Sweeps, estimated to be up to $1 trillion [are one of the battlegrounds too]. So bank deposits are going to be a major issue to keep an eye on. [E]veryone here is also very anxious and interested in the recovery of prime assets.... In general, I still expect Prime to recover, but it's going to be a long, slow, painful process.... Now that the Fed's moving rates, their NAVs will be impacted if they move out. Prime money funds can't really extend until the threat of their NAVs being pressured by a Fed move has subsided."
On some other topics, he commented, "The same people that run money funds also buy [a lot of investments in] other vehicles, like separately managed accounts, ultra-short bond funds and securities lending reinvestment pools.... Just one observation on consolidation in general, is that it has slowed.... And there are actually are a handful of new entrants space ... so there are some tiny green shoots of interest around the edges." Crane also discussed how funds remain paranoid about their NAVs dipping to $0.9999 and their 'weekly' liquidity levels approaching 30%, the level at which emergency gates and fees could be triggered, and discussed the bullish and bearish cases for the growing class of conservative ultra-short bond funds.
We asked DWS's Plomin about the impact of European money fund reforms and repatriation, and he said, "DWS manages offshore euro, offshore sterling, offshore U.S. dollar funds, about $25 to $30 billion dollars.... We're going to go to the LVNAV [limited volatility net asset value] structure which basically [allows] transactions at a stable $1.00 unless your actual NAV deviates by 0.25%.... Broadly speaking, our client base is institutional [so] we have a lot of multinationals in our funds, and we have a lot of separate accounts that serve the same clients. They'll use a separate account for their more stable elements of their cash."
Plomin continued, "One thing that we did see initially from tax reform was that a few of our clients decided to move from the onshore government funds into the offshore funds because of the tax. Their tax opinion was that they could move to and fro without implications because of the tax system. So a few of the more sophisticated plans decided to do that and take advantage of the larger fund size offshore stable NAV offshore and the better yields.... Some of our clients are [also] somewhat skeptical that tax reform gives you years to pay the tax bill... If there's a change in the makeup of Congress or if there is a different President ... they would like to pay the bill now."
The DWS analyst told the CPIWG, "The front end is a lot more credit comfortable.... One of the reforms that came through in October 2016 was to reduce the reliance on ratings agencies and the analysis portion of the credit review. So there's no longer a limit on the Tier 2 credit if you go into a fund. A lot of these funds are triple-A rated, so [Tier 2 is] off the table for these. But for unrated funds ... you can see a bump up in Tier 2 issuance.... I mean these are good companies. They are strong companies."
He also said, "We switched a large Prime fund into Government, so fully half of our assets are Government assets. As an asset manager, we don't necessarily care where the money is managed, because we charge a fee on [either kind]. But as a credit analyst, selfishly I'd like to see a growth in Prime <b:>`_. We've been able to keep up our Prime or credit assets through use of SMAs -- we've had quite a few of these onboard this year -- and offshore funds.... We also run a billion or so in retail money that is unrated that we could get more credit aggressive in. We're not doing that, but we worry that others might. One of the things about money funds is that they're all perceived to be run so similarly, that if one person is a bad actor ... the entire industry is in trouble. So, we're closely monitoring our peers to make sure that that is not what's happening, or if it is that we prepare for it."
When asked about ESG [environmental, social and governance] issues, Plomin commented, "Yes, we're looking at that of course. You know as you see requests from clients … because we're a global firm, because we're German-based, there's always been ESG mindfulness within our processes. So even clients are just now getting around to asking about it, it's something we've been doing for years.... DWS has an ESG engine that aggregates and synthesizes different views for clients, particularly tech clients on the West Coast."
Finally, we asked "What are you buying?" He answered, "We like agency floaters and Treasury floaters a lot. We do quite a bit in Home Loan, and we try to find more Government supply in esoteric places.... You can't really find bank issuance in the front end outside of ABCP conduits, so we’re looking at new conduits that come to market.... But there are some aggressive policies in some of these conduits. It's not as bad as it was pre-crisis, but you're seeing a bit of envelope pushing."
Morningstar published the article, "Where's the Best Place to Park Your Cash?" Author Christine Benz explains, "Not so long ago, one cash investment seemed virtually indistinguishable from the next. With the Fed funds rate barely positive as recently as late 2016, most investors considered their low-yielding CDs and money market funds dead money -- a necessary parking place for near-term expenditures, or a place to hunker down if they were feeling fearful. Nothing more." We review their latest overview of cash options, and we also cover the latest on money market fund asset flows, below.
The piece says, "Yet thanks to the Federal Reserve's efforts to normalize interest rates, cash yields have been steadily rising. It would be a stretch to suggest that cash is going to be a return engine any time soon, as you're lucky to earn more than 2% on any sort of cash instrument today. But as yields have risen, we're starting to see greater yield differentiation among various cash vehicles."
Morningstar continues, "Just a few years ago, FDIC-insured online savings accounts were in many cases yielding more than non-FDIC-insured money market mutual funds, providing an arbitrage opportunity for opportunistic investors. Now, however, a more traditional relationship between risk and yield prevails; you're going to earn the highest yields by being willing to put up with some liquidity constraints and/or venturing into non-FDIC-insured investment types."
They tell us, "If you would like an ironclad guarantee against loss, it's wise to focus on those that are backed by the Federal Deposit Insurance Corporation. Such accounts provide the assurance that you'll be made whole if your account has a loss; FDIC insurance covers up to $250,000 per depositor per institution. On the short list of FDIC-insured investments include checking and savings accounts, CDs, money market accounts (not to be confused with money market mutual funds), and online savings accounts. Brokerage sweep accounts, which often offer paltry yields in exchange for the convenience of having your dough readily accessible for investing in your mutual fund or brokerage account, may also be FDIC-insured, depending on whether your money is being swept into a bank account or a money market mutual fund."
The piece adds, "Not on the list: money market mutual funds, or any mutual funds, for that matter. While money market fund yields have edged above FDIC-insured investments in many cases, these products are not FDIC-insured. That said, regulations that went into effect in 2016 tightened up the rules for money market mutual fund management, making a repeat of the Reserve Primary fund debacle unlikely. The new regulations also carry caveats for investors: As of 2016, prime and municipal money market funds--both retail and institutional--are required to impose redemption fees and install "gates" when liquidity has dropped below certain levels, in an effort to stem high redemptions in periods of market duress."
Benz writes, "Government-focused money market funds for both institutional and retail investors are not required to impose fees or install redemption gates, but they can do so at the discretion of their boards. Government-focused money market funds are the safest money market mutual funds, as they invest virtually all of their assets in government-issued securities--from a practical standpoint, they're very safe, even if they're not FDIC-insured. The trade-off is that their yields are typically lower than nongovernment money market mutual funds."
Finally, she says, "If you're seeking the safety of FDIC protection and need regular access to your funds, CDs won't cut it; you'll be on the hook for a penalty if you need to gain access to the money in a CD prior to the CD maturing. Instead, you have a few key options: a savings account or a money market account offered through a bank (bricks and mortar or online) or a credit union. You might also consider a money market mutual fund; just bear in mind the lack of FDIC protections, as discussed above."
In other news, ICI's latest "Money Market Fund Assets" report shows money fund assets fell sharply for the second week in a row after rising for 6 weeks in a row. Money fund assets turned positive for the year-to-date for the first time in 2018 two weeks ago, but they fell back into the red this week due to oversized corporate tax payments. MMFs have decreased by $36 billion, or -1.3%, YTD, but they've increased by $185 billion, or 7.1%, over 52 weeks.
ICI writes, "Total money market fund assets decreased by $52.55 billion to $2.80 trillion for the week ended Wednesday, June 20, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $51.62 billion and prime funds increased by $620 million. Tax-exempt money market funds decreased by $1.55 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.194 trillion (78.2% of all money funds), while Total Prime MMFs stand at $475.5 billion (17.0%). Tax Exempt MMFs total $135.4 billion, or 4.8%.
They explain, "Assets of retail money market funds decreased by $581 million to $1.03 trillion. Among retail funds, government money market fund assets decreased by $1.47 billion to $630.63 billion, prime money market fund assets increased by $2.56 billion to $271.75 billion, and tax-exempt fund assets decreased by $1.67 billion to $127.33 billion." Retail assets account for over a third of total assets, or 36.7%, and Government Retail assets make up 61.2% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds decreased by $51.97 billion to $1.77 trillion. Among institutional funds, government money market fund assets decreased by $50.15 billion to $1.56 trillion, prime money market fund assets decreased by $1.94 billion to $203.71 billion, and tax-exempt fund assets increased by $117 million to $8.07 billion." Institutional assets account for 63.3% of all MMF assets, with Government Inst assets making up 88.1% of all Institutional MMFs.
This month, Money Fund Intelligence interviews Jason Granet, Deputy Head of Liquidity Solutions for Goldman Sachs Asset Management, and Kathleen Hughes, Global Head of GSAM's Liquidity Solutions Client Business. Goldman Sachs Asset Management is one of the top 5 money fund managers globally, and we discuss the firm's history in cash, their latest priorities and challenges, and developments in Europe and in the world just beyond money markets. Our interview follows. (Note: This article is reprinted from the June issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue.)
MFI: Tell us about your history. Granet: We entered the business in 1981 with $2 billion in assets. Over our 37-year history, we have grown the franchise into $280 billion-plus of money market fund assets across a range of fund families globally. In 1996, we launched our Dublin-domiciled Liquid Reserves family and we consolidated our U.S. funds into the Financial Square family in 2010. We recently launched our Liquid Reserves Plus funds in dollars, euros, and sterling, which is an extension of our Liquid Reserves range. We manage taxable, tax exempt and tax advantaged money funds both onshore and offshore, and we have funds domiciled in dollars, euros, sterling, and yen, as well as a suite of separate accounts and short duration products. Money markets have a long legacy here and are an important part of our global franchise.
We believe our credit process is a strong contributing factor to our business. We're unique in the sense that we run an independently constructed list of between 600 and 1,000 issuers -- depending on the day or week -- that is maintained by Goldman Sachs' credit risk team. They've been doing that since the day we started in the early 1980s. It is the cornerstone of our franchise and something that we are very proud of.
Personally, I am just finishing 18 years at Goldman Sachs. I was responsible for our Liquidity Solutions business in Europe and Asia, and I've just recently relocated back to New York as the deputy head of the business globally <b:>. `Hughes: I've been with GSAM for nearly eight years. I joined in September of 2010, and I've been in the money market space in Europe since 2001.
MFI: What are your big priorities? Hughes: When we think about priorities, the overarching theme has always been to understand our clients and aim to align our product offerings with their biggest needs or challenges. So, one of our biggest priorities right now won't be a surprise to you or your readers: it's European money market regulatory reform. We're engaging with clients, helping them understand how that reform will impact them and making sure that we are evolving our products to meet their needs.
Another theme that we're very engaged with clients on right now is the impact of tax reform in the U.S. and how to navigate the potential effects of repatriation. Some other things that we have been focused on are changes in technology, and how we can use technology to help our clients and drive more efficiencies for them, whether it's efficiencies around trading, moving money, or even risk management. As Jason said, we have also recently launched some new products. Those are clearly products and opportunities that were created by pending European money market fund reform and client feedback. Again, we are focused on seeing how can we help clients.
MFI: What are your big challenges? Granet: We believe different cycles bring different challenges. The first is obviously when there is stress in the system, whether it was in '94, '98, clearly '07-'08, or the early 2010's with stress in Europe. So, there are different points in times that require that we adapt to those challenges. Right now, negative rates continue to be a challenge in some parts of the world and interest rates remain relatively low globally. In this environment, just showing some differentiation can be a challenge. Lastly, bank regulation has been another challenge. As ratios are introduced and then get tweaked, adjusting can create different challenges on the investment side for our clients and different types of clients.
The overarching credit quality of the investment universe also goes through different cycles. In managing money market funds, we are investing the highest quality, most liquid part of the investment spectrum. So there is always pressure on sourcing appropriate investments and making sure we have robust, bulletproof portfolios in the highest quality, best, and most liquid markets. Different backdrops, political and regulatory changes, idiosyncratic company events and tax changes can all play into that, and it's something we are regularly navigating.
MFI: What are you buying? Granet: Markets at the front end of the curve have been volatile in 2018. That's created lots of different opportunities for us in our different strategies. As one example, with the reconciliation of some negotiations in Washington, T-bill issuance has increased massively versus years past. Market dynamics are always fluid, so when it comes to the portfolio we are always evaluating the relative value of different assets. The overarching perspective that we take doesn’t change, but every day or every week can provide some micro-differences.
MFI: What are clients asking about? Hughes: I'll mention three different things. First, clients are always acutely attuned to the interest rate environment. When we talk to clients in the U.S., they are wondering how to take advantage or think about the rising rate environment and what is happening in the short end of the yield curve, thinking about that with respect to cash on their balance sheets or cash within the ecosystem that they may be managing.
Second, and in contrast the U.S., clients in Europe are still dealing with the pain of negative interest rates. Those clients that have excess cash may not want to keep it all in money market funds and are looking for alternatives. Are there ways to use other strategies in the short duration space that can help to offset some of that negativity?
Third, tax reform is top of mind for many of our clients, certainly clients in the U.S. Their outlook on structural cash within their system has changed. Cash that used to be thought of as sitting in another jurisdiction with kind of an unlimited investment horizon allowed you to think differently about risk and return. Now that U.S. tax reform has been passed and is underway, that cash is no longer trapped and many are thinking about their options.... There is definitely money in motion as a result of tax reform.
Another theme, which is maybe a little bit more out there but is starting to come up, is ESG [environmental, social and governance issues]. Certain institutional investors have been focused on ESG for a long time, but we are starting to see it come up more in dialogues with corporate treasurers. Companies are being rated and scored on ESG factors by third-party providers. A company treasurer wants to know what is driving those scores and how they are being viewed.... There are lots of different ways that businesses are asking us about that topic and we are engaged on that one as well.
MFI: What about recent flows? Granet: There are a couple of things happening with flows. The first is, we are definitely seeing a shift -- somewhere between a trickle and a flow -- back into prime funds. There have clearly been opportunities in the markets as yields, indicated by LIBOR, have moved to levels that are attractive to investors, especially relative to other indices.... Money is also moving from offshore to onshore, and investors are shortening investment durations.
MFI: Tell us more about European funds? Granet: The European regulations have two styles -- short term money market funds and standard money market funds. The short-term have 60/120 day WAM/WAL limits, while the standards have 180/360 WAM/WAL limits. Our new Plus funds fall under the 180/360 limits.... This was a product completion exercise for us -- we didn't have any real offerings in the 180/360 bucket.... We also have offerings beyond too, [which] would fall outside of money market fund regulations.
Hughes: In Europe, everything is going to change. Doing nothing or sitting it out is not an option. What clients have shared with us as we have engaged them is that the low volatility NAV product feels closest to what they enjoy today from a utility perspective -- being able to trade in and out at a dollar or a euro or one pound. So client feedback seems to be coalescing around the LVNAV product.
MFI: What about your outlook? Hughes: I am optimistic. The industry since 2008 has definitely been tested with two rounds of reforms in the U.S., negative interest rates, etc. That certainly [attests] to the robustness of the market. We are optimistic about what is coming down the road in Europe, and we feel optimistic with respect to the importance of this product for our clients. We continue to hear that this is something they rely on every day. So we want to make sure that we are preserving the utility of the product and responding to our client’s needs and challenges.
Granet: This environment provides a tremendous opportunity for us right now to engage with clients. With rates moving, tax changes, and reform, we are rolling up our sleeves a little higher and digging in a little deeper. It's just an awesome time for us to be even more engaged and solve client issues.
Money fund assets plunged in the week ended June 18, falling $67.6 billion to $2.878 trillion, according to Crane Data's Money Fund Intelligence Daily, presumably driven by massive quarterly tax payments inflated by now taxable offshore holdings. Yields moved higher in the latest week too, as our Crane 100 Money Fund Index rose by 6 basis points to 1.68% (as of Monday) and our broader all taxable Crane Money Fund Average rose by 6 bps to 1.49%. As was widely reported, money fund assets jumped the previous week. But this appears to be merely a cash buildup in preparation for Friday's June 15 tax payments. Yields are beginning to reflect the Federal Reserve's 7th interest rate hike from a week ago, but they still have a ways to go to reflect the full quarter-point increase. We review our most recent asset and yield totals below, and we also review our latest Weekly Money Fund Portfolio Holdings data below.
Total money fund assets covered by our MFI Daily increased by $3.4 billion June 18, but they've decreased by $67.6 billion the past week to $2.877 trillion. Government MMFs plunged, falling $66.7 billion over the week ended Monday to $2.134 trillion, while Prime MMF assets inched higher, rising $451 million to $604.0 billion. Tax Exempt MMFs fell $1.4 billion to $139.4 billion. Month-to-date, total money fund assets have decreased by $50.5 billion.
The highest-yielding money market funds are now paying over 2.0% (see the Top 5 tables on the homepage), and the overall averages range from 1.17% to 1.74%. Prime Institutional money funds are averaging 7-day yields of 1.74%, up 6 bps from a week ago, while Prime Retail money funds yield 1.62% on average (up 6 bps). Treasury Institutional money funds now have a 7-day yield of 1.55%, while Treasury Retail MMFs yield 1.26%. Govt Inst MMFs yield 1.57% on average while Govt Retail MMFs yield 1.17%.
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary yesterday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of June 15) includes Holdings information from 68 money funds (down from 76 on June 1), representing $1.142 trillion (down from $1.437 billion on June 1) of the $2.925 (39.0%) in total money fund assets tracked by Crane Data.
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $422.3 billion (down from $543.5 billion on June 8), or 37.0%, Treasury debt totaling $372.8 billion (down from $436.8 billion) or 32.7%, and Government Agency securities totaling $232.9 billion (down from $298.3 billion), or 20.4%. Commercial Paper (CP) totaled $35.9 billion (down from $53.1 billion), or 3.1%, and Certificates of Deposit (CDs) totaled $25.2 billion (down from $43.6 billion), or 2.2%. A total of $23.9 billion or 2.1%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $28.7 billion, or 2.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $372.8 billion (32.7% of total holdings), Federal Home Loan Bank with $190.4B (16.7%), BNP Paribas with $65.2 billion (5.7%), Federal Farm Credit Bank with $36.7B (3.2%), RBC with $31.4B (2.7%), Wells Fargo with $30.5B (2.7%), Credit Agricole with $26.8B (2.3%), HSBC with $22.9B (2.0%), Societe Generale with $21.9B (1.9%), and Natixis with $21.9B (1.9%).
The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($126.1B), BlackRock Lq FedFund ($104.2B), Goldman Sachs FS Govt ($90.5B), Wells Fargo Govt MMkt ($76.1B), BlackRock Lq T-Fund ($72.1B), Dreyfus Govt Cash Mgmt ($61.4B), Morgan Stanley Inst Liq Govt ($57.6B), Goldman Sachs FS Trs Instruments ($54.6B), JP Morgan Prime MM ($41.0B), and JP Morgan 100% US Trs MMkt ($35.6B).(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.)
Finally, Morningstar recently wrote a piece entitled, "Cash is Not Always King," which says, "Cash is only one facet of liquidity management.... Cash is always helpful to meet redemptions, but it should not be the first -- and certainly not the only -- variable you look at when evaluating the liquidity of a fund. Indeed, the diversification of a portfolio and its overall investment process will usually prove more useful in assessing liquidity risks."
They write, "For instance, the high-yield segment of the credit market is often considered illiquid. Instinctively, one might think avoiding the largest funds in that Morningstar Category and opting for one with plenty of cash in the portfolio should help mitigate liquidity risk. Unfortunately, history has proven those instincts insufficient."
Morningstar explains, "The rise and fall of Third Avenue Focused Credit (TFCIX) is the perfect illustration of why keeping high cash levels is a short-term patch that can't make up for a concentrated portfolio, even for a comparatively small fund. When investors yank money out of a fund and its cash is used to fund those outflows, its portfolio concentration increases at every level, whether defined by credit quality, issue, or issuer, for example. To make things worse, TFCIX was lacking diversification at each of these levels even before it suffered major redemptions."
The website Lexology posted an update entitled, "UK Money Market Funds Regulations 2018 Published," which was written by law firm Katten Muchin Rosenman LLP and which discusses how the U.K. will implement European Money Fund Reforms. They write, "On June 11, the Money Market Funds Regulations 2018 (MMFR) were published and set to go into effect on July 21. The MMFR relates to the EU Regulation on Money Market Funds (EU MMF Regulation), and ensures the UK Financial Conduct Authority (FCA) can authorize money market funds (MMFs) and enforce the MMFR from the day that the EU MMF Regulation goes into effect."(See also our May 25 News, "Euromoney Cites Cross, Goldthwait on European Reforms.")
Katten Muchin Rosenman's Neil Robson tell us, "The MMFR amends the Financial Services and Markets Act 2000 (FSMA) to allow the FCA to authorize funds as MMFs, as well as to exercise regulatory powers over MMFs. It further amends FSMA to grant the FCA powers to authorize, and intervene in respect of, unit trusts and contractual schemes (both being subsets of MMFs)." (See the full, indecipherable, Money Market Funds Regulation here.)
The brief continues, "The MMFR also introduces changes to the following delegated legislation: Open-Ended Investment Companies Regulations 2001 to permit open-ended investment companies (OEICs) to apply to become MMFs, or those applying to be OEICs to simultaneously apply to be authorized as an MMF; Alternative Investment Fund Managers Regulations 2013 to enable the FCA to prescribe the application process for an alternative investment fund (AIF) to be authorized as an MMF, the procedure for refusal of an application and the process if the FCA decides to revoke authorization of an AIF which is an MMF; and, Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013 to enable the FCA to investigate and bring enforcement action against funds directly for breach of the EU MMF Regulation."
An accompanying "Explanatory Memorandum" says, "This explanatory memorandum has been prepared by HM Treasury and is laid before Parliament by Command of Her Majesty.... The instrument is being made in relation to Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds."
It continues, "The EU MMF Regulation will apply in the UK from 21 July 2018. Although the Regulation is directly applicable, HM Treasury must make legislative changes to ensure that the Financial Conduct Authority ("FCA") is able to authorise money market funds ("MMFs") and enforce the provisions of the Regulation from the day that the EU MMF Regulation comes into force."
On "Policy background, the piece comments, "MMFs are fund vehicles that invest in highly liquid, short-term debt instruments (e.g. government bonds and corporate debt). Through their investments, MMFs provide a short-term, stable cash management function to financial institutions, corporations and local governments; this allows investors to spread their credit risk and exposure, rather than relying upon bank deposits."
It adds, "These Regulations seek to provide the FCA with the powers to authorise authorized unit trusts, authorised contractual schemes, open-ended investment companies and alternative investment funds as MMFs. It also provides the FCA with the powers to enforce the provisions of the Regulation and levy fees for the purpose of supervising MMFs."
While we're unclear what impact "Brexit" will have on pending money fund reforms in Europe, it appears that regulators in the U.K. are proceeding as if it's business as usual. The Financial Times addresses the potential for a split between funds in European and those in the U.K. in the article, "Brexit contingencies: asset managers put plans into action." They write, "Asset managers are losing patience with politicians over the slow pace of Brexit negotiations, with several deciding it is better to assume the worst and fire the starting gun on their contingency plans."
In other news, a press release entitled, "Moody's assigns Aaa-mf rating to Pacific Capital U.S. Government Fund" tells us, "Moody's Investors Service ... assigned a Aaa-mf rating to Bank of Hawaii's Pacific Capital U.S. Government Money Market Fund. The newly established money market fund seeks to maintain a constant net asset value of $1.00 per share while employing an investment strategy to maximize current income consistent with the preservation of capital and liquidity."
They explain, "The Aaa-mf rating reflects our view of the Fund's very strong ability to meet the dual objectives of preserving capital and providing liquidity. This view is supported by the Fund's high scores across key rating factors including asset quality and liquidity. We expect the Fund to maintain its high credit quality by investing primarily in US government and agency obligations, US Treasury securities, obligations issued by US government-sponsored entities, and repurchase agreements backed by the same."
Moody's adds, "The Fund also scores high with respect to market risk exposure. Under our net asset value stress test, the model portfolio provided by Fund's adviser, exhibited minimal exposure to market risk. The Asset Management Group of Bank of Hawaii, is the registered investment adviser of the Fund. At 30 April 2018, the Asset Management Group had approximately $1.3 billion in assets under management."
Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary" discusses the Federal Reserve's recent discussions on rates and monetary policy. They write, "Money market investors, while obviously caring deeply about the Fed's potential interest rate path, also have occasionally found gems in the minutes about monetary policy implementation, details that might matter greatly to the money markets but are afterthoughts to longer-term investors. For example, the development and evolution of the Fed's reverse repurchase program (RRP) over the past five years was revealed bit by bit over time in the minutes."
The commentary continues, "The minutes of the May 1–2 meeting, during which the Federal Open Market Committee (FOMC) took no actions on interest rates and just tweaked its statement, were released on May 23. They contained one of those implementation gems -- a proposed 'small technical realignment of the interest on excess reserves (IOER) rate relative to the top of the target range for the federal funds rate,' as the minutes reported."
Wells Fargo says, "In the end, this adjustment is about keeping the federal funds effective (FFE) rate, lately at 1.70%, comfortably in the Fed's target range, currently set at 1.50% to 1.75%. [This commentary was prior to the Fed's latest hike.] If the FFE rate were to consistently stray from the target range -- which it could, given that the federal funds market is, after all, ultimately governed by the actions of many individual participants -- investors could begin to doubt the Fed's ability to credibly implement monetary policy. Essentially, the FFE rate had lately begun trading nearer to the top of the target range than the Fed was comfortable with, and it expects to take a modest step to move the FFE rate back down in the range."
They continue, "As noted earlier, with the FFE rate currently at 1.70%, the spread between it and the IOER has shrunk to 5 basis points (bps; 100 bps equal 1.00%), down from 9 bps just in the past six months.... As the FFE rate rose in the range and that spread narrowed, the Fed apparently felt the heat, and its technical adjustment is the result. Specifically, the proposed technical realignment would keep the RRP rate at the bottom of the FFE range but move the IOER rate down 5 bps, setting it 5 bps below the top of the FFE range."
Commenting more on the recent rate increase, Wells tells us, "If the realignment happens concurrently with an expected June rate hike, and it should, as the minutes note that the many have blessed such a move, then the new FFE target range in mid-June will be 1.75% to 2.00%, with the RRP set at 1.75% and the IOER set at 1.95%. The Fed apparently feels that the relative lowering of IOER will help keep the FFE well within the target range by bringing the rates on all short term instruments down."
The PMs also discuss LIBOR, saying, "The London Interbank Offered Rate-Overnight Investment Swap (LIBOR-OIS) spread continued to narrow off its dramatic March widening. We saw the spread decrease 6 bps in the second half of April and another 9 bps in May as the supply/demand imbalances continue to work out of the system. Some of the factors that caused the dramatic widening have played themselves out or the actual news wasn't as impactful as expected. For example, the ramp up in T-bill issuance in March ($332 billion) after the resolution of the debt ceiling was followed by a $120 billion reduction of issuance in April as tax receipts reduced the need to issue bills, allowing demand to catch up with supply. And May was a fairly ordinary T-bill issuance month with roughly $17 billion of net new supply meeting sufficient demand to keep yields in check."
Finally, they add on the Municipal sector, "After experiencing outflows of roughly $4 billion during March and April due to seasonal tax payments, municipal money market fund assets staged a remarkable turnaround during the month of May, increasing an astounding $6.2 billion, according to Crane Data. Investors looked to take advantage of the sudden increase in attractiveness of municipals as the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index spiked to a multiyear high of 1.81% on April 18, up from 1.58% at the end of March. Crossover and traditional investors alike were quickly attracted to the municipal sector following the meteoric rise in rates that resulted in the SIFMA/1-week LIBOR breaking the 100% barrier during the month of April. But, as they say, all good things must come to an end."
In other news, Charles Schwab has filed to liquidate another money market fund, close on the heels of eliminating its Schwab Money Market Fund. A Prospectus Supplement for Schwab Advisor Cash Reserves tells us, "At a meeting held on June 5, 2018, the Board of Trustees of The Charles Schwab Family of Funds … approved the liquidation of, and the related Plan of Liquidation for, Schwab Advisor Cash Reserves." (See our May 29 News, "`Schwab Money Market Fund Liquidates, Shift to Bank Deposits Continues.")
It explains, "In accordance with the Plan of Liquidation, the Fund will redeem all of its outstanding shares on or about October 31, 2018, and distribute the proceeds to the Fund's shareholders in an amount equal to the shareholder's proportionate interest in the net assets of the Fund.... Additionally, the Fund anticipates making a distribution of any taxable dividends and capital gains of the Fund prior to or on the Liquidation Date."
Schwab comments, "As the Fund approaches the Liquidation Date, the Fund will wind up its business and affairs, and will cease investing its assets in accordance with its stated investment policies. On or before the Liquidation Date, all portfolio holdings of the Fund will be converted to cash, cash equivalents or other liquid assets. As a result, the Fund will not be able to achieve its investment objective and will deviate from its investment policies during the period as it approaches the Liquidation Date."
Additionally, they say, "The Fund's investment adviser will bear all expenses associated with the liquidation other than transaction costs associated with winding down the Fund's portfolio and effective September 5, 2018 through the Liquidation Date, the Fund's investment adviser will waive the Fund’s management fee. The liquidation is not expected to be a taxable event for the Fund."
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), falling sharply in the latest week (but just slightly in June overall) after rising in May and April. Offshore US Dollar MMFs have been rising and falling in waves since December 2017. They rose sharply in January, fell in February and March, rose in April and May and fell in June. Last year, assets of all three currencies combined increased by $100 billion, or 13.7%, to $831 billion. Year-to-date in 2018 (through 6/13/18), MFII assets are up $1 billion to $832 billion, but USD assets are down noticeably. U.S. Dollar (USD) funds (158) account for about half ($408.9 billion, or 49.2%) of the total, while Euro (EUR) money funds (98) total E90.6 billion and Pound Sterling (GBP) funds (110) total L218.7 billion. USD funds are down $16 billion, YTD, but were up $27B in 2017. Many are watching these totals closely for signs that US dollar are being repatriated, but the data only show minor outflows so far.
Euro funds are down E7 billion YTD but were up E3B in 2017, while GBP funds are flat YTD after rising L29B in 2017. `USD MMFs yield 1.72% (7-Day) on average (as of 6/13/18), up from 1.19% at the end of 2017 and 0.56% at the end of 2016. EUR MMFs yield -0.49 on average, up from -0.55% on 12/29/17 and -0.49% on 12/30/16, while GBP MMFs yield 0.39%, 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 ICI's latest Portfolio Holdings summary, below.
Crane's latest MFI International Money Fund Portfolio Holdings, with data (as of 5/31/18), shows that European-domiciled US Dollar MMFs, on average, consist of 16% in Treasury securities, 29% in Commercial Paper (CP), 22% in Certificates of Deposit (CDs), 14% in Other securities (primarily Time Deposits), 16% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 29.4% of their portfolios maturing Overnight, 12.6% maturing in 2-7 Days, 20.0% maturing in 8-30 Days, 15.5% maturing in 31-60 Days, 10.4% maturing in 61-90 Days, 9.7% maturing in 91-180 Days, and 2.4% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (26.3%), France (16.7%), Japan (10.0%), Canada (9.3%), United Kingdom (6.0%), The Netherlands (5.2%), Sweden (4.8%), Germany (4.9%), Australia (4.5%), China (2.9%), Switzerland (2.4%), and Singapore (2.3%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $73.8 billion (16.2% of total assets), BNP Paribas with $22.2B (4.9%), Credit Agricole with $14.7B (3.2%), Wells Fargo with $13.6B (3.0%), Mitsubishi UFJ Financial Group Inc with $11.1B (2.4%), Toronto-Dominion Bank with $10.8B (2.4%), Barclays PLC with $10.5B (2.3%), Mizuho Corporate Bank Ltd with $9.5B (2.1%), ING Bank with $9.3B (2.0%), Societe Generale with $9.0B (2.0%), and Natixis with $8.6B (1.9%).
Euro MMFs tracked by Crane Data contain, on average 46% in CP, 21% in CDs, 25% in Other (primarily Time Deposits), 7% in Repo, 0.2% in Treasuries and 1% in Agency securities. EUR funds have on average 26.0% of their portfolios maturing Overnight, 11.2% maturing in 2-7 Days, 20.9% maturing in 8-30 Days, 11.8% maturing in 31-60 Days, 12.0% maturing in 61-90 Days, 15.2% maturing in 91-180 Days and 2.9% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (27.7%), Japan (13.9%), The US (10.8%), The Netherlands (9.5%), Germany (7.4%), Sweden (6.5%), Switzerland (4.3%), the United Kingdom (3.8%), Belgium (3.5%), and Canada (3.7%).
The 10 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E4.6B (5.0%), Credit Agricole with E4.4B (4.8%), ING Bank with E3.9B (4.2%), Mizuho Corporate Bank Ltd with E3.7B (3.9%), Svenska Handelsbanken with E3.3B (3.5%), Rabobank with E3.0B (3.3%), Credit Mutuel with E2.7B (2.9%), Mitsubishi UFJ Financial Group Inc. with E2.7B (2.9%), Toronto Dominion Bank with E2.6B (2.8%), and BPCE SA with E2.5B (2.7%).
The GBP funds tracked by MFI International contain, on average (as of 5/31/18): 40% in CDs, 28% in Other (Time Deposits), 21% in CP, 9% in Repo, 2% in Treasury, and 0% in Agency. Sterling funds have on average 28.2% of their portfolios maturing Overnight, 9.9% maturing in 2-7 Days, 13.9% maturing in 8-30 Days, 11.0% maturing in 31-60 Days, 17.4% maturing in 61-90 Days, 15.8% maturing in 91-180 Days, and 3.7% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (18.8%), Japan (16.1%), United Kingdom (12.6%), The Netherlands (10.6%), Canada (7.1%), the US (5.2%), Germany (4.8%), Sweden (4.5%), Australia (4.1%), and Singapore (3.5%).
The 10 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L7.9B (4.6%), Mizuho Corporate Bank Ltd with E7.0B (4.1%), Rabobank with L6.9B (4.0%), Mitsubishi UFJ Financial Group Inc. with L6.7B (3.9%), ING Bank with E6.3B (3.7%), Toronto-Dominion Bank with L6.3B (3.6%), Credit Agricole with L6.1B (3.6%), BNP Paribas with L6.1B (3.6%), BPCE SA with L6.0B (3.5%), and Sumitomo Mitsui Banking Co with L5.8B (3.4%).
In other news, the Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary yesterday. Their 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 our June 12 News, "June Money Fund Portfolio Holdings: Repo Jumps Again, Treasuries Fall.")
The ICI MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in May, prime money market funds held 26.6 percent of their portfolios in daily liquid assets and 43.3 percent in weekly liquid assets, while government money market funds held 59.9% percent of their portfolios in daily liquid assets and 75.6% in weekly liquid assets." Prime DLA increased from 25.4% last month to 26.6%, and Prime WLA increased from 41.9% last month to 43.3%. Govt MMFs' DLA decreased from 60.1% to 59.9% last month, and Govt WLA decreased from 77.1% last month to 75.6%.
ICI explains, "At the end of May, prime funds had a weighted average maturity (WAM) of 28 days and a weighted average life (WAL) of 65 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 29 days and a WAL of 86 days." Prime WAMs remained the from last month, and WALs were up by one day. Govt WAMs were down two days from April and Govt WALs were down by three days from last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas declined from $181.75 billion in April to $188.22 billion in May. Government money market funds' holdings attributable to the Americas declined $1,709.08 billion in April, but rose to $1,722.18 billion in May." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $188.2 billion, or 40.9%; Asia and Pacific at $86.8 billion, or 18.9%; Europe at $180.3 billion, or 39.2%; and, Other (including Supranational) at $4.6 billion, or 1.0%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.722 trillion, or 76.8%; Asia and Pacific at $107.2 billion, or 4.8%; and Europe at $408.1 billion, or 18.2%.
The June issue of our Bond Fund Intelligence, which will be sent out to subscribers Thursday morning, features the lead story, "Vanguard Launches Total World Bond ETF Amidst Pain," which reviews recent troubles with Global bond funds and the launch of a new Vanguard ETF, and the profile, "JPMAM's McNerny Talks on Ultra-Short Income ETF," which reviews a recent J.P. Morgan Asset Management Webcast. Also, we recap the latest Bond Fund News, including how most bond fund yields inched higher in the latest month. BFI also includes our Crane BFI Indexes, which show returns higher in May for all categories except Global and High Yield funds. We excerpt from the latest BFI below. (Contact us if you'd like to see a copy of Bond Fund Intelligence and our BFI XLS spreadsheet "complement," and watch for our next Bond Fund Portfolio Holdings data set to be sent out next Thursday (6/21).
Our lead BFI story says, "A press release titled, "Vanguard Announces Plans To Launch Total World Bond ETF," explains, "Vanguard today filed a preliminary registration statement with the Securities and Exchange Commission for Vanguard Total World Bond ETF. The ETF will be the industry's first U.S.-domiciled index product offering investors access to the entire global investment-grade bond universe in a single portfolio. It is expected to launch in the third quarter of this year.""
They tells us, "The fund will be structured as an ETF of ETFs, investing directly in two existing low-cost ETFs: Vanguard Total Bond Market ETF (BND) and Vanguard Total International Bond ETF (BNDX). This structure enables the Vanguard Total World Bond ETF to achieve immediate scale by using existing exposure from the underlying ETFs and is expected to result in tighter bid/ask spreads and lower operating expenses than investing directly in the benchmark's constituents. The approach is similar to Vanguard Total Corporate Bond ETF (VTC), which launched in November, 2017, and invests in Vanguard's existing short-, intermediate-, and long-term corporate bond ETFs."
Vanguard CIO Greg Davis comments, "With the Total World Bond ETF, Vanguard will be the first firm to offer U.S. investors a single index product with exposure to the entire global investment-grade bond universe. It will be simple, convenient, and highly diversified, with an expense ratio in line with our current low-cost fixed income ETFs."
Our piece quoting JPMAM's McNerny says, "Recently, J.P. Morgan Asset Management hosted a Webcast entitled, "Targeting lower duration amid today's higher rates," which featured JPMorgan's Ultra-Short Income ETF (JPST). The description tells us, "While rates continue to rise, core bond duration remains near record highs. The videocast discusses how JP Morgan Ultra-Short Income ETF (JPST) can help clients reduce duration risks without sacrificing yield potential. The experts share their latest market views and investment themes."
Portfolio Manager James McNerny comments, "We think about ultra-short here at J.P. Morgan Asset Management as a part of the global liquidity business, which is anchored by our $460 billion money market fund complex. While JPST is relatively new, ultra-short is not new to us. We manage about $60 billion in ultra-short strategies that we brand as 'Managed Reserves.'"
He asks, "What does it mean to be a part of global liquidity? We approach the ultra-short space as the 'next step out' from money market funds. We employ many of the best practices of our money market fund business, which tends to be conservative in nature. We're just taking them slightly out the curve. Given the size and importance of this business to JP Morgan, it affords us tremendous amounts of resources. We have four portfolio managers on JPST with an average industry experience of twenty-one years."
A Bond Fund News brief, entitled, "Yields and Returns Mixed in May," explains, "Most bond fund category yields inched higher last month and returns were up for all but Global and High-Yield. The BFI Total Index averaged a 1-month return of 0.31% and the 12-month gain fell to 0.85%. The BFI 100 returned 0.33% in May and 0.77% over 1 year. The BFI Conservative Ultra-Short Index returned 0.11% over 1 month and 1.28% over 1-year; the BFI Ultra-Short Index averaged 0.19% in May and 1.17% over 12 mos. Our BFI Short-Term Index returned 0.24% and 0.65%, and our BFI Intm-Term Index returned 0.36% and -0.04% for the month and year. BFI's Long-Term Index returned 0.33% in May and 0.26% for 1 yr; BFI's High Yield Index returned -0.01% in May and 2.24% for 1 yr."
Another brief quotes a Kiplinger's article on PIMCO Low Duration Income," entitled, "This Short-Term Bond Fund Provides Protection From Rising Rates." It comments, "At last, short-term bonds offer respectable yields that surpass 2% -- and it only took six interest-rate hikes over three years by the Federal Reserve. With more increases to come, short-term bonds have an added bonus: Their prices sink less than those of longer-dated debt when interest rates rise.... Pimco Low Duration Income (PFIAX) boasts a duration of 1.4 years.... Managers Daniel Ivascyn, Alfred Murata and Eve Tournier want to generate income and keep interest-rate sensitivity in check."
In other news, Barron's "5 Smart Places to Park Cash" article tells us, "One of the benefits of a steady dose of interest-rate hikes by the Federal Reserve -- six since late 2015 -- is better returns on cash.... Some money-market accounts offer yields in the 1.7% range, a big improvement from the days when the Fed kept rates at near zero.... Money-market accounts aren't the only way to take advantage of this. Short-term bond exchange-traded funds are an even higher-yielding alternative, though they do bear some risk."
A sidebar on the "New Hartford Short ETF," explains, "New entries in the short-term and ultra-short space continue. A press release entitled, "Hartford Funds Continues ETF Rollouts with Launch of Hartford Short Duration ETF," tells us that, "Hartford Funds today announced the launch of Hartford Short Duration ETF (HSRT), which seeks to provide current income and long-term total return by investing in fixed income securities. HSRT, along with another recently launched fixed income ETF in April 2018, the Hartford Schroders Tax-Aware Bond ETF (HTAB), adds to Hartford Funds' ETF suite of six fixed income and seven multifactor ETFs."
The piece quotes Vernon Meyer, CIO of Hartford Funds, who adds, "Lower duration and more frequent reinvestment are strong tools to help address rising rates within a fixed income allocation, and our actively-managed Short Duration ETF is designed to deliver both. We see fixed income ETFs as being well-positioned for the current market, with the goals of providing income and stability to help round out a portfolio."
Capital Advisors Group published a research brief entitled, "Deposit Betas Rising but Still Falling Short," which discusses how bank deposit rates have lagged money fund and market rates since the Fed began hiking rates 2 1/2 years ago. Author Lance Pan writes, "After almost a decade of near-zero investment returns, liquidity investors are beginning to reap the benefits of higher rates. This is true for investments in capital markets, where rates have risen along with the Federal Reserve's actions. On the other hand, depositors may need to wait a bit longer -- a lot longer if banks have their way." (Note: The Federal Reserve is expected to raise short-term interest rates for the 7th time since December 2015 today. Watch for details tomorrow and watch for money fund rates to rise again in the coming weeks.)
CAG's Pan tells us, "We wrote last August about how deposit rates have failed to keep pace with rising short-term interest rates. The benchmark fed funds rate has risen another 50 basis points (bps, or 0.50%) since then, while the national average money market account (MMA) rate has increased just 5 bps. This results in a 'deposit beta' of 10% (change in deposit rate over change in benchmark rate) for the period."
He explains, "While deposit betas have been stubbornly low in recent quarters, all hopes are not lost. Transcripts from recent earnings calls at several of the largest regional banks indicate that betas may move materially higher soon. In this month's report, we provide another update on the state of deposit rates, with a sample of deposit betas among major US banks. Additionally, we end with a suggestion for liquidity investors to look to capital markets for yield opportunity."
Capital Advisors' piece continues, "Businesses have used deposit accounts to manage liquidity for as long as the modern banking system has existed. Starting in the mid-1990s, money market mutual funds (MMFs) gained popularity among institutional liquidity accounts as a preferred cash management tool. For a brief period around the 2008 financial crisis, MMF balances surpassed deposits. The crisis and ensuing regulatory issues resulted in stagnant MMF balances while deposits surged.... At the end of 2017, total deposit and currency balances at 'nonfinancial corporate businesses' stood at $1.5 trillion, while MMF shares held by the same entities totaled $472 billion, for a ratio of roughly 3:1."
It goes on to say, "Higher deposits immediately after the financial crisis were attributed to the extraordinary government measure of deposit guarantees. Regulatory scrutiny into MMFs in later years left major institutions with few alternatives other than deposits for liquidity management."
The piece adds, "To conclude, despite the 1.50% rise in the fed funds rate over the last 28 months, money market and short-term CD rates have barely budged. Historically, these rates tended to rise with the policy rate, sometimes exceeding benchmark increases. In contrast, short-term market-based rates rose along with FFR in all three periods by about the same magnitude."
It also comments, "In our August 2017 research piece, we discussed several possible causes for banks' muted reaction to rate increases in this current cycle. We reproduce the summary in bullet form: Abundant reserves: Banks have more deposits than they need; Restrictive regulations: The costs of holding deposits have increased; Banks keeping the first cut: Banks want to pay themselves before depositors; Investor inertia: They have not adjusted expectations after a long period of yield drought; and, MMF reform: A natural market-based substitute is not as attractive now."
Pan asks, "Are higher deposit rates in sight? Are banks simply delaying an increase or will they pay below-market rates on deposits permanently?" He answers, "Based on information obtained from bank executives and investors, we expect banks to raise deposit rates more rapidly this year, although the increases are likely to remain less competitive than market rates until reserves are drained sufficiently, and lending picks up substantially. We were able to get some confirmation of this from transcripts of senior bank executives at first quarter 2018 earnings conferences."
The paper concludes, "It is undisputable that banks have not rewarded their depositors sufficiently as rates move higher. With improved profitability, friendlier regulatory treatment of deposits and a smaller Fed balance sheet, one would expect demand for deposits to rise, which would in turn lead to higher betas. Both anecdotal and empirical evidence point to the validity of this line of thinking. However ... deposit betas in the current cycle have a long way to climb to reach their historical averages."
Finally, they state, "We cannot end this commentary without addressing the credit risk associated with deposits. In the institutional context, most deposit balances are in excess of the FDIC's deposit insurance level. Thus, investors must evaluate the risk of being exposed to a limited number of bank counterparties versus a diversified portfolio of names with similar credit characteristics, or even non-bank corporate credits. In short, depositors may need to wait a while longer for materially higher rates unless they are willing to consider market-based instruments. There, several options may exist to suit their liquidity and credit needs."
Crane Data released its June Money Fund Portfolio Holdings Monday, and our most recent collection of taxable money market securities, with data as of May 31, 2018, shows a drop in Treasuries and a jump in Repo for the second straight month. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $16.7 billion to $2.925 trillion last month, after increasing $46.4 billion in April, decreasing $105.0 billion in March, and increasing $70.6 billion in February. Repo continued to be the largest portfolio segment, followed by Treasury securities then Agencies. CP remained 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 Portfolio Holdings reports.)
Among taxable money funds, Repurchase Agreements (repo) jumped $67.1 billion (7.3%) to $984.2 billion, or 33.7% of holdings, after increasing $99.9 in April, dropping $89.6 billion in March and $21.9 billion in February. Treasury securities fell again, down $50.9 billion (-6.1%) to $779.3 billion, or 26.6% of holdings, after dropping $108.3 billion in April and jumping $95.3 billion in March. Government Agency Debt rose by $5.5 billion (0.8%) to $683.5 billion, or 23.4% of all holdings, after rising by $23.4 in April and falling $58.1 billion in March. Repo, Treasuries and Agencies total $2.447 trillion, representing a massive 83.7% of all taxable holdings.
CP rose in the fifth month of the year, while CDs and Other (mainly Time Deposits) securities decreased. Commercial Paper (CP) was up $13.2 billion (6.3%) to $223.9 billion, or 7.7% of holdings, after rising $8.8 billion in April and falling $16.2 billion in March. Certificates of Deposits (CDs) dropped by $1.2 billion (-0.7%) to $167.8 billion, or 5.7% of taxable assets (after rising $1.7 billion in April and falling $6.7 billion in March). Other holdings, primarily Time Deposits, fell by $13.9 billion (-15.2%) to $77.7 billion, or 2.7% of holdings. VRDNs held by taxable funds decreased by $3.0 billion (26.7%) to $8.4 billion (0.3% of assets).
Prime money fund assets tracked by Crane Data dipped to $662 billion (down from $664 billion last month), or 22.6% (down from 22.8%) of taxable money fund holdings' total of $2.925 trillion. Among Prime money funds, CDs represent a quarter of holdings at 25.3% (down from 25.4% a month ago), followed by Commercial Paper at 33.8% (up from 31.7%). The CP totals are comprised of: Financial Company CP, which makes up 21.4% of total holdings, Asset-Backed CP, which accounts for 6.3%, and Non-Financial Company CP, which makes up 6.1%. Prime funds also hold 6.6% in US Govt Agency Debt, 6.7% in US Treasury Debt, 5.4% in US Treasury Repo, 1.6% in Other Instruments, 8.5% in Non-Negotiable Time Deposits, 5.1% in Other Repo, 4.5% in US Government Agency Repo, and 1.0% in VRDNs.
Government money fund portfolios totaled $1.589 trillion (54.3% of all MMF assets), up from $1.560 trillion in April, while Treasury money fund assets totaled another $673 billion (23.0%), down from $683 billion the prior month. Government money fund portfolios were made up of 40.2% US Govt Agency Debt, 19.1% US Government Agency Repo, 16.7% US Treasury debt, and 23.8% in US Treasury Repo. Treasury money funds were comprised of 69.6% US Treasury debt, 30.3% in US Treasury Repo, and 0.1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.262 trillion, or 77.3% of all taxable money fund assets, up from 77.1% last month.
European-affiliated holdings rose $13.7 billion in May to $677.5 billion among all taxable funds (and including repos); their share of holdings rose to 23.2% from 22.8% the previous month. Eurozone-affiliated holdings rose $21.1 billion to $435.5 billion in May; they account for 14.9% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $0.9 billion to $233.3 billion (8.0% of the total). Americas related holdings rose $0.1 billion to $2.013 trillion and now represent 68.8% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $67.1 billion, or 12.2%, to $617.3 billion, or 21.1% of assets; US Government Agency Repurchase Agreements (down $0.8 billion to $333.1 billion, or 11.4% of total holdings), and Other Repurchase Agreements ($33.7 billion, or 1.2% of holdings, up $0.7 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $3.5 billion to $141.6 billion, or 4.8% of assets), Asset Backed Commercial Paper (up $3.9 billion to $41.8 billion, or 1.4%), and Non-Financial Company Commercial Paper (up $5.7 billion to $40.5 billion, or 1.4%).
The 20 largest Issuers to taxable money market funds as of May 31, 2018, include: the US Treasury ($779.3 billion, or 26.6%), Federal Home Loan Bank ($555.7B, 19.0%), BNP Paribas ($139.7B, 4.8%), RBC ($82.9B, 2.8%), Federal Farm Credit Bank $78.5B, 2.7%), Credit Agricole ($66.5B, 2.3%), Wells Fargo ($66.5B, 2.3%), Barclays PLC ($58.7B, 2.0%), HSBC ($55.0B, 1.9%), JP Morgan ($52.5B, 1.8%), Societe Generale ($51.3B, 1.8%), Fixed Income Clearing Corp ($47.0B, 1.6%), Natixis ($43.3B, 1.5%), Mitsubishi UFJ Financial Group Inc ($42.7B, 1.5%), Sumitomo Mitsui Banking Co ($42.2B, 1.4%), Bank of America ($34.8B, 1.2%), Bank of Montreal ($34.8B, 1.2%), Nomura ($34.4B, 1.2%), Toronto-Dominion ($33.1B, 1.1%), and ING Bank ($32.8B, 1.1%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: BNP Paribas ($129.3B, 13.1%), RBC ($65.2B, 6.6%), Wells Fargo ($53.9B, 5.5%), Credit Agricole ($53.7B, 5.5%), Barclays PLC ($47.5B, 4.8%), Fixed Income Clearing Corp ($47.0B, 4.8%), HSBC ($46.6B, 4.7%), Societe Generale ($45.4B, 4.6%), JP Morgan ($44.8B, 4.6%), and Natixis ($35.4B, 3.6%).
The 9 largest Fed Repo positions among MMFs on 5/31/18 include: JP Morgan US Govt ($16.5B in Fed Repo), Morgan Stanley Inst Liq Govt Sec ($3.0B), Northern Trust Trs MMkt ($1.4B), Franklin IFT US Govt MM ($0.2B), First American Trs Oblg ($0.1B), Northern Inst Govt ($0.1B), First American Govt Oblg ($0.1B), and Northern Inst Govt Select ($0.5B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($17.7B, 4.5%), Toronto-Dominion Bank ($17.4B, 4.4%), Credit Suisse ($15.7B, 4.0%), Mitsubishi UFJ Financial Group Inc. ($15.0B, 3.8%), Credit Agricole ($12.9, 3.3%), Wells Fargo ($12.6B, 3.2%), Sumitomo Mitsui Banking Co ($12.4, 3.1%), Canadian Imperial Bank of Commerce ($12.4B, 3.1%), Bank of Montreal ($11.8B, 3.0%) and Swedbank AB ($11.4B, 2.9%).
The 10 largest CD issuers include: Wells Fargo ($12.5B, 7.5%), Bank of Montreal ($11.0B, 6.6%), RBC ($10.5, 6.3%), Mitsubishi UFJ Financial Group Inc ($9.6B, 5.8%), Svenska Handelsbanken ($9.6B, 5.8%), Mizuho Corporate Bank Ltd ($8.0B, 4.8%) Sumitomo Mitsui Banking Co ($7.5B, 4.5%), Swedbank AB ($7.2B, 4.3%), Canadian Imperial Bank of Commerce ($6.9B, 4.1%), and Sumitomo Mitsui Trust Bank ($6.2B, 3.7%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Toronto-Dominion Bank ($10.6B, 5.6%), Credit Suisse ($9.0B, 4.8%), JPMorgan ($7.7B, 4.1%), Commonwealth Bank of Australia ($7.6B, 4.1%), RBC ($6.9B, 3.7%), Australia & New Zealand Banking Group Ltd ($6.3B, 3.3%), Bank of Nova Scotia ($5.7B, 3.1%), BPCE SA ($5.6B, 3.0%), Societe Generale ($5.6B, 3.0%), and Toyota ($5.6B, 3.0%).
The largest increases among Issuers include: Fixed Income Clearing Co (up $27.4B to $47.0B), JP Morgan (up $9.7B to $52.5B), Federal Reserve Bank of New York (up $7.7B to $21.5B), Societe Generale (up $5.7B to $51.3B), Federal Home Loan Bank (up $5.4B to $555.7B), BNP Paribas (up $5.2B to $139.7B), Bank of Montreal (up $5.2B to $34.8B), Barclays PLC (up $4.6B to $58.7B), Federal Home Loan Mortgage Co (up $4.2B to $32.7B), and Bank of Nova Scotia (up $3.8B to $30.0B).
The largest decreases among Issuers of money market securities (including Repo) in May were shown by: the US Treasury (down $50.9B to $779.3B), Goldman Sachs (down $9.2B to $16.7B), HSBC (down 6.9B to $55.0B), Credit Suisse (down 4.4B to $29.3B), Swedbank AB (down $4.1B to $11.4B), Skandinaviska Enskilda Banken AB (down $3.8B to $7.5B), Federal National Mortgage Association (down $3.8B to $11.4B), Citi (down $3.0B to $30.7B), Sumitomo Mitsui Banking Co (down $2.9B to $42.2B), and ING Bank (down $2.5B to $32.8B).
The United States remained the largest segment of country-affiliations; it represents 61.4% of holdings, or $1.796 trillion. France (10.7%, $314.1B) remained in the No. 2 spot and Canada (7.4%, $216.7B) remained No. 3. Japan (6.3%, $185.3B) stayed in fourth place, while the United Kingdom (5.0%, $146.3B) remained in fifth place. The Netherlands (2.0%, $57.9B) remained ahead of Germany (1.9%, $56.5B) in sixth and seventh place, respectively. Switzerland (1.5%, $43.2B) and Sweden (1.3%, $38.8B) moved ahead of Australia (1.2%, $34.7B) to rank 8th, 9th and 10th 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 May 31, 2018, Taxable money funds held 32.0% (up from 31.6%) of their assets in securities maturing Overnight, and another 16.2% maturing in 2-7 days (up from 14.2%). Thus, 48.3% in total matures in 1-7 days. Another 25.0% matures in 8-30 days, while 9.0% matures in 31-60 days. Note that over three-quarters, or 82.3% 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 7.6% of taxable securities, while 8.8% matures in 91-180 days, and just 1.3% matures beyond 181 days.
The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") late last week. Among the 4 tables it includes on money market mutual funds, the First Quarter, 2018 edition shows that Total MMF Assets declined by $54 billion to $2.793 trillion in Q1. The Household Sector remained the largest investor segment with $998 billion; though assets here dipped back below $1 trillion in Q1 (after breaking over this level in Q3'17). The next largest segment, Funding Corporations (this is mainly Securities Lending reinvestment cash we believe) jumped again in the first quarter, while State and Local Govt Retirement and Nonfinancial Corporate Businesses holdings declined slightly. We review the latest Z.1 stats below, and we also remind you about and recap details about our upcoming big show, Crane's Money Fund Symposium in Pittsburgh, June 25-27. (Tickets are still available -- we hope to see you there!)
The Fed's latest Z.1 numbers, which contain one of the few looks at money fund investor segments available, also show assets inching higher for the State & Local Governments, Life Insurance Companies, Nonfinancial Noncorporate Business, Property-Casualty Insurance, and Private Pension Funds categories. The Rest of the World category saw assets fall slightly in Q1. Over the past 12 months, Funding Corporations showed a jump in assets, while the Household Sector showed a decrease.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows that total assets decreased by $54 billion, or -1.9%, in the first quarter to $2.847 trillion. Over the year through March 31, 2018, assets were up $129 billion, or 4.8%. The largest segment, the Household sector, totals $938 billion, or 33.6% of assets. The Household Sector decreased by $116 billion, or -11.0%, in the quarter, after increasing $12 billion in Q4'17. Over the past 12 months through Q1'18, Household assets were down $60 billion, or -6.0%.
Funding Corporations, the second largest segment according to the Fed's data series, held $709 billion, or 25.4% of the total. Funding Corporations' assets in money funds jumped by $71 billion in the quarter, or 11.0%, and they've increased by $179 billion, or 33.6%, over the past year. Nonfinancial Corporate Businesses remained the third largest investor segment with $467 billion, or 16.7% of money fund shares. They fell by $5 billion, or -1.1%, in the latest quarter. Corporate money fund holdings have decreased by $2 billion, or -0.4%, over the previous 12 months.
The fourth largest segment, State and Local Governments held 6.8% of money fund assets ($191 billion) -- up $3 billion, or 1.5%, for the quarter, and up $9 billion, or 4.8%, for the year. Private Pension Funds, which held $150 billion (5.4%), remained in 5th place. The Rest Of The World category was the sixth largest segment in market share among investor segments with 4.0%, or $111 billion, while Nonfinancial Noncorporate Businesses held $104 billion (3.7%), State and Local Government Retirement Funds held $59 billion (2.1%), Life Insurance Companies held $44 billion (1.6%), and Property-Casualty Insurance held $20 billion (0.7%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.824 trillion, or 65.3% of the total. Debt securities includes: Open market paper ($154 billion, or 5.5%; we assume this is CP), Treasury securities ($879 billion, or 31.5%), Agency and GSE backed securities ($644 billion, or 23.1%), Municipal securities ($141 billion, or 5.0%), and Corporate and foreign bonds ($6 billion, or 0.2%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($783 billion, or 28.0%) and Time and savings deposits ($171 billion, or 6.1%). Money funds also hold minor positions in Foreign deposits ($1 billion, or 0.1%), Miscellaneous assets ($3 billion, or 0.1%), and Checkable deposits and currency ($10 billion, 0.4%). Note: The Fed also lists "Variable Annuity Money Funds;" they currently total $33 billion, or 0.5% in the quarter.
During Q1, Debt Securities were up $142 billion. This subtotal included: Open Market Paper (up $6 billion), Treasury Securities (up $177 billion), Agency- and GSE-backed Securities (down $39 billion), Municipal Securities (down $2 billion), and Corporate and Foreign Bonds (down $1 billion). In the first quarter of 2018, Security Repurchase Agreements were down $173 billion, Foreign Deposits were down $3 billion, Checkable Deposits and Currency were down $12 billion, Time and Savings Deposits were down $8 billion, and Miscellaneous Assets were down $1 billion.
Over the 12 months through 3/31/18, Debt Securities were up $169B, which included Open Market Paper up $45B, Treasury Securities up $139B, Agencies (flat), Municipal Securities (down $13B), and Corporate and Foreign Bonds (down $2B). Foreign Deposits were down $2B, Checkable Deposits and Currency were down $4B, Time and Savings Deposits were down $8B, Securities repurchase agreements were down $25B, and Miscellaneous Assets were down $1B.
In other news, there are just two weeks until the largest gathering of money market fund managers and cash investors in the world! We expect over 500 to attend our 10th Annual Money Fund Symposium. We're still accepting registrations ($750) for our June 25-27 conference at The Westin Convention Center Pittsburgh. The conference lineup features a keynote from Federated Investors' President & CEO Chris Donahue and a 'who's who' of speakers in the money market mutual fund industry. We hope you'll join us in Pittsburgh! (See here for the latest agenda, and see here to register.)
Also, we're making plans for Crane's 6th annual "offshore" money fund event, European Money Fund Symposium, which will be held in London, England, September 20-21, 2018. This website (www.euromfs.com) is now taking registrations and the preliminary agenda has been posted, and we expect a robust turnout in the U.K. due to pending regulatory changes and Brexit. (Contact us to inquire about sponsoring or speaking. A couple slots are still available.)
Finally, our next Money Fund University "basic training" event has shifted dates slightly -- it is scheduled for Jan. 17-18, 2019, in Stamford, Conn. The MFU website, as well as our Bond Fund Symposium site, will be taking registrations soon, and we'll be publishing these agenda late this summer. Our 3rd Bond Fund Symposium will be March 25-26, 2019, in Philadelphia, Pa. Watch www.cranedata.com for more details on these events, and please let us know if you have any questions or feedback on our growing conference business.
Crane Data's latest Money Fund Market Share rankings show assets were up sharply for a number of U.S. money fund complexes in May. Money fund assets overall rose by $63.6 billion, or 2.1% last month to $3.067 trillion, and assets have risen by $40.5 billion, or 1.3%, over the past 3 months. They have increased by $251.6 billion, or 8.9%, over the past 12 months through May 31, 2018. Increases among the 25 largest managers last month were seen by JP Morgan, Goldman Sachs, Fidelity, Wells Fargo, and Vanguard, who increased assets by $25.6 billion, $11.4B, $8.4B, $8.0B, and $4.3B, respectively. We review these market share totals below, and we also look at money fund yields the past month, which continued higher in May.
The only notable declines in May among the largest complexes were seen by Morgan Stanley, whose MMFs fell by $1.9 billion, or -1.5%, Schwab, whose MMFs fell by $1.7 billion, or -1.2%, and Western, whose MMFs fell by $1.3 billion, or -0.2%. 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.
Over the past year through May 31, 2018, Fidelity (up $61.0B, or 11.6%), BlackRock (up $40.6B, or 15.7%), Vanguard (up $39.1B, or 14.2%), JP Morgan (up $25.1B, or 9.7%), SSgA (up $15.4B, or 20.2%), Columbia (up $14.4B) and Goldman Sachs (up $12.6B, or 7.3%) were the largest gainers. These 1-year gainers were followed by Deutsche (up $12.2B, or 69.8%), Wells Fargo (up $12.0B, or 12.3%), Dreyfus (up $9.9B, or 6.2%), and Federated (up $8.7B, or 4.8%).
Vanguard, Fidelity, Goldman Sachs, J.P. Morgan, Morgan Stanley, and Franklin had the largest money fund asset increases over the past 3 months, rising by $21.4B, $15.4B, $13.7B, $10.5B, $7.4B, and $3.1 respectively. The biggest decliners over 12 months include: Schwab (down $18.1B, or -11.6%), Western (down $6.0B, or -19.3%), T Rowe Price (down $4.5B, or -12.4%), HSBC (down $3.2B, or -21.1%), and American Funds (down $788M, or -4.6%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $589.3 billion, or 19.2% of all assets. It was up $8.4 billion in May, up $15.4 billion over 3 mos., and up $61.0B over 12 months. Vanguard moved into second with $314.6 billion, or 10.3% market share (up $4.3B, up $21.4B, and up $39.1B for the past 1-month, 3-mos. and 12-mos., respectively), while BlackRock was third with $299.2 billion, or 9.8% market share (up $1.85B, down $42M, and up $40.3B). JP Morgan ranked fourth with $283.9 billion, or 9.3% of assets (up $25.6B, up $10.5B, and up $25.1B for the past 1-month, 3-mos. and 12-mos., respectively), while Federated was ranked fifth with $191.8 billion, or 6.3% of assets (up $661M, down $6.9B, and up $8.7B).
Goldman Sachs was ranked in sixth place with $185.4 billion, or 6.0% of assets (up $11.4B, up $13.7B, and up $12.6B), while Dreyfus held seventh place with $168.3 billion, or 5.5% (up $580M, down $5.7B, and up $9.9B). Schwab ($137.1B, or 4.5%) was in eighth place, followed by Morgan Stanley in ninth place ($119.8B, or 6.5%) and Wells Fargo in tenth place ($109.5B, or 3.6%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($99.2B, or 3.2%), SSgA ($91.5B, or 3.0%), Invesco ($65.9B, or 2.1%), First American ($51.6B, or 1.7%), UBS ($45.3B, or 1.5%), T Rowe Price ($32.1B, or 1.0%), Deutsche ($29.6B, or 1.0%), DFA ($28.4B, or 0.9%), Franklin ($25.2B, or 0.8%), and Western ($24.8B, or 0.8%). The 11th through 20th ranked managers are the same as last month. Crane Data currently tracks 67 U.S. MMF managers, up one from 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 BlackRock and J.P. Morgan move ahead of Vanguard, Goldman moves ahead of Federated, Morgan Stanley moves ahead of Schwab, and Northern moves ahead of Wells Fargo. 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 ($598.6 billion), BlackRock ($443.4B), J.P. Morgan ($443.2B), Vanguard ($314.6B), and Goldman Sachs ($283.7B). Federated ($200.3B) was sixth and Dreyfus/BNY Mellon ($186.2B) was in seventh, followed by Morgan Stanley ($155.2B), Schwab ($137.1B), and Northern ($127.1B), 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 May issue of our Money Fund Intelligence and MFI XLS, with data as of 5/31/18, shows that yields were up again in May across almost all of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 765), was up 6 bps to 1.41% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 6 bps to 1.38%. The MFA's Gross 7-Day Yield increased 5 bps to 1.86%, while the Gross 30-Day Yield was up 6 bps to 1.78%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.61% (up 5 bps) and an average 30-Day Yield of 1.58% (up 5 bps). The Crane 100 shows a Gross 7-Day Yield of 1.88% (up 5 bps), and a Gross 30-Day Yield of 1.82% (up 4 bps). For the 12 month return through 5/31/18, our Crane MF Average returned 0.88% and our Crane 100 returned 1.08%. The total number of funds, including taxable and tax-exempt, was down 1 fund to 964. There are currently 765 taxable and 199 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 1.68% (up 4 bps) as of May 31, while the Crane Govt Inst Index was 1.47% (up 5 bps) and the Treasury Inst Index was 1.48% (up 7 bps). Thus, the spread between Prime funds and Treasury funds is 20 basis points, up 3 bps from last month, while the spread between Prime funds and Govt funds is 21 basis points, down 2 bps from last month. The Crane Prime Retail Index yielded 1.49% (up 5 bps), while the Govt Retail Index yielded 1.14% (up 7 bps) and the Treasury Retail Index was 1.20% (up 6 bps). The Crane Tax Exempt MF Index yield dropped in May to 0.72% (down 47 bps).
Gross 7-Day Yields for these indexes in May were: Prime Inst 2.06% (up 3 bps), Govt Inst 1.77% (up 5 bps), Treasury Inst 1.80% (up 7 bps), Prime Retail 2.05% (up 5 bps), Govt Retail 1.76% (up 6 bps), and Treasury Retail 1.78% (up 6 bps). The Crane Tax Exempt Index decreased 48 basis points to 1.24%. The Crane 100 MF Index returned on average 0.14% for 1-month, 0.37% for 3-month, 0.56% for YTD, 1.08% for 1-year, 0.55% for 3-years (annualized), 0.32% for 5-years, and 0.31% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The June issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Thursday morning, features the articles: "MMF Assets Turn Positive in '18, Despite Brokerage Sweeps," which discusses how the assets of money market mutual funds are beginning to see inflows; "Goldman Sachs AM's Granet & Hughes Talk Liquidity," which interviews Jason Granet and Kathleen Hughes of Goldman Sachs Asset Management; and, "ICI 2018 Fact Book Sparse on Money Fund Commentary," which excerpts from the annual compilation of statistics and commentary on the mutual fund industry. We've also updated our Money Fund Wisdom database with May 31, 2018, statistics, and sent out our MFI XLS spreadsheet this a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our June Money Fund Portfolio Holdings are scheduled to ship on Monday, June 11, and our June Bond Fund Intelligence is scheduled to go out Thursday, June 14.
MFI's "Assets Positive" article says, "Assets of money market mutual funds are beginning to see the benefits of higher yields. Year-to-date, money funds are now positive, the earliest that they've overcome their seasonal first-half weakness since 2008. While money funds are beginning to take back assets from bank deposits and other alternatives, brokerage sweep providers continue to shift assets away from MMFs and into banks."
Our lead piece continues, "ICI's latest 'Money Market Fund Assets' report shows money fund assets rising for 5 weeks in a row. Money fund assets turned positive for the year-to-date for the first time in 2018 last week. They've increased by $2 billion, or 0.1%, YTD, and they've increased by $192 billion, or 7.2%, over 52 weeks. Over the prior 3 years, MMFs have averaged declines of $75 billion, or 2.7% through the end of May, and over 5 years MMFs (prior to 2018) have averaged declines of $92 billion, or 3.4%, YTD."
MFI's latest Profile reads, "This month, MFI interviews Jason Granet, Deputy Head of Liquidity Solutions for Goldman Sachs Asset Management, and Kathleen Hughes, Global Head of GSAM's Liquidity Solutions Client Business. Goldman Sachs Asset Management is one of the top 5 fund money managers globally, and we discuss the firm's history in cash, their latest priorities and challenges, and developments in Europe and in the world just beyond money markets. Our interview follows."
MFI says, "MFI: Tell us about your history." Granet tells us, "We entered the business in 1981 with $2 billion in assets. `Over our 37-year history, we have grown the franchise into $280 billion-plus of money market fund assets across a range of fund families globally. In 1996, we launch our Dublin-domiciled Liquid Reserves family and we consolidated our US funds into the Financial Square family in 2010. We recently launched our Liquid Reserves Plus funds in dollars, euros, and sterling, which is an extension of our Liquid Reserves range. We manage taxable, tax exempt and tax advantaged money funds both onshore and offshore, and we have funds domiciled in dollars, euros, sterling, and yen, as well as a suite of separate accounts and short duration products. Money markets have a long legacy here and are an important part of our global franchise."
He adds, "We believe our credit process is a strong contributing factor to our business. We're unique in the sense that we run an independently constructed list of between 600 and 1,000 issuers -- depending on the day or week -- that is maintained by Goldman Sachs' credit risk team. They've been doing that since the day we started in the early 1980s. It is the cornerstone of our franchise and something that we are very proud of."
Our "Fact Book" article says, "The Investment Company Institute recently released its '2018 Investment Company Fact Book,' an annual compilation of statistics and commentary on the mutual fund industry. The latest edition reports that money market funds had their strongest inflows in almost 10 years in 2017. Overall, money funds assets were $2.847 trillion at year-end 2017, making up 15% of the $18.7 trillion in overall mutual fund assets."
It continues, "On `Worldwide Regulated Funds, ICI says, 'Money market funds, which are generally defined throughout the world as regulated funds that are restricted to holding only short-term, high-quality money market instruments, had $5.9 trillion in total net assets, or 12% of worldwide regulated fund total net assets.... Worldwide net sales of money market funds totaled $598 billion in 2017, a sharp increase from the $82 billion ... in 2016.'"
The book tells us, "The pattern of net sales over 2016 and 2017 primarily owed to developments in the Asia Pacific region, where money market funds had net sales of $404 billion in 2017, after experiencing net outflows of $14 billion in the previous year. Investor demand for Chinese money market funds strongly influenced net sales of money market funds in the Asia Pacific region. Nearly 80% of Asia-Pacific's total net assets in money market funds were held in funds domiciled in China at year-end 2017.'"
The piece adds, "Investor demand for money market funds in the Asia-Pacific region appears to be related to changes in the total return on the short-term money market instruments held by these funds.... Investors pulled back from Asia-Pacific money market funds as the total return on Chinese money market instruments declined from 4.3% in 2015 to 2.6% in 2016. As the total return on these money market instruments rose throughout 2017, investor demand for Asia-Pacific money market funds increased."
Our June MFI XLS, with May 31, 2018, data, shows total assets increased $63.5 billion in May to $3.068 trillion, after increasing $19.9 billion in April <b:>`_, and decreasing $42.9 billion in March. Our broad Crane Money Fund Average 7-Day Yield was up 6 basis points to 1.41% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 6 bps to 1.61%.
On a Gross Yield Basis (7-Day) (before expenses were taken out), the Crane MFA stayed at 1.80% and the Crane 100 also stayed 1.84%. 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 and Crane 100 were both 28 days, respectively (down from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Morgan Stanley is changing the terms of its brokerage "sweep" options to direct more parked cash into its bank deposits programs and away from its money market mutual funds. In a letter to investors and on its website, the company explains, "Deposit balances above $2 million in an account are swept, without limit, to MGPXX [the $15.0 billion Morgan Stanley Inst Liq Govt Sec Part]. Beginning June 6, 2018, deposit balances above $20 million in an account will be swept, without limit, to MGPXX." Going forward, balances from $2 million to $20 million will now be swept into banks instead of the higher-yielding money market fund -- currently, MGPXX is yielding 1.23% vs. rates of 0.10% to 0.70% for the bank deposit options. (See also our May 29 News, "Schwab Money Market Fund Liquidates, Shift to Bank Deposits Continues.")
Morgan Stanley's "Bank Deposit Program Disclosure Statement" explains, "Under the Bank Deposit Program, free credit balances in your Active Assets Account [and a number of other accounts] ... will be automatically deposited into deposit accounts established for you by and in the name of Morgan Stanley Smith Barney LLC at Morgan Stanley Bank, N.A., and Morgan Stanley Private Bank, National Association, ... and for free credit balances above $2,000,000, Morgan Stanley will sweep such balances into a sweep fund.... Your monthly Account statement will reflect your balances in each Sweep Bank and, if applicable, the Sweep Fund. Beginning June 6, 2018, Morgan Stanley will be raising the 'Deposit Maximum' from $2,000,000 to $20,000,000 so that, as described under 'Deposit Procedures,' any free credit balance above $20,000,000 will be swept into a Sweep Fund."
It continues, "Currently, the Deposit Maximum is a total deposit amount of $2,000,000. As a reminder, beginning June 6, 2018, funds will be deposited into the Deposit Accounts up to the new Deposit Maximum amount of $20,000,000 across both Sweep Banks.... Once your deposits reach the Deposit Limit at both the Primary and Secondary Sweep Banks, available cash will be deposited into your Deposit Accounts at the Primary Sweep Bank, up to the Deposit Maximum, even if the amounts in the Deposit Accounts at the Primary Sweep Bank exceed the Maximum Applicable Insurance Limit."
The disclosure adds, "If your Account is eligible, the Sweep Fund available for your Account is the Morgan Stanley Institutional Liquidity Funds Government Securities Portfolio (symbol MGPXX). The Deposit Maximum and the Sweep Fund are subject to change with prior notice to you from Morgan Stanley.... As a reminder, beginning June 6, 2018, funds will be deposited into your Deposit Accounts at the Sweep Banks up to the new Deposit Maximum of $20,000,000."
A letter to shareholders explains, "Clients with balances between $2 million and $20 million in MGPXX as of June 6, 2018 will have those balanced placed by Morgan Stanley with the Sweep Banks (one or more depository institutions affiliate with Morgan Stanley) with a preferred interest rate (the 'Preferred Deposit' that will track the MGPXX yield for an interim period no less than six months. After the interim period, the rates will be set consistent with prevailing market conditions."
It adds, "As a result of this change, clients with balances in excess of $2 million as of June 6, 2018 will have available free credit balances swept for to Morgan Stanley Private Bank, National Associate up to the deposit limit, then to Morgan Stanley Bank, N.A. up to the revised $20 million deposit maximum."
In other news, this week's Pensions & Investments published an article entitled, "Retirement plan sponsors tread lightly with capital preservation." Subtitled, "No matter which option they choose, they risk getting hit with lawsuits," the piece says, "In providing capital preservation options for investment menus, some defined contribution plan executives have wound up in the crosshairs of participants' lawsuits alleging fiduciary breaches of the Employee Retirement Income Security Act."
It explains, "Some sponsors have been sued because they offered a money market fund instead of a higher-return stable value fund. Sponsors and providers have been sued for offering a stable value fund whose fees were too high. Or because the funds were too conservative. Or because the funds were too aggressive."
The P&I report continues, "Despite some settlements -- such as the preliminary agreement this month by Philips North America to pay $17 million -- many defendants have prevailed as federal district court judges and appeals court judges have rejected plaintiffs' arguments. For example, judges have rebuffed complaints that the CVS Health Corp. stable value fund was too conservative and that Chevron Corp. should have offered a stable value fund instead of a money market fund."
It tells us, "ERISA lawsuits attacking the offering of money market funds instead of stable value funds allege the latter produce higher returns than the former, especially in recent years of low interest rates. However, DC consultants said stable value might not be appropriate or desirable for some plans."
The article comments, "Stable value is harder to explain to participants, more difficult to administer than money market funds and might have multiple restrictions imposed by the provider and, especially, the wrap provider, which offers insurance to maintain book value for investors in the underlying bonds."
Finally, it adds, "Wrap contracts can restrict a plan's offering so-called competing investments such as money market funds and short-term bond funds. Wrap providers can impose penalties and restrictions based on employer-generated events, which can be a merger, a spinoff, bankruptcy, a re-enrollment or the adding of a self-directed brokerage account depending on the contract."
Credit Suisse's Zoltan Pozsar recently wrote an article entitled, "The Safe Asset Gulf," which tells us, "Governments tend to do the right thing at the wrong time. Trillions of deficit spending at full employment and just when the Fed is removing liquidity is one example. Issuing hundreds of billions of U.S. Treasury bills when the world no longer needs them is another. The shortage of safe assets has been the focus of academics and policymakers for the past decade. Yours truly contributed to the debate with a working paper while taking intellectual refuge as a visiting scholar at the IMF. The paper argued that the rise of the shadow banking system was inextricably linked to the rise of institutional cash pools -- large, concentrated pools of cash in the hands of corporate treasurers, reserve managers, asset managers' central liquidity desks and hedge fund treasurers -- whose natural habitat is not deposits, but the money market."
The paper continues, "Cash pools are too large to qualify for deposit insurance and have a tendency to seek refuge from unsecured bank credit risk in the sovereign Treasury bill market and the secured asset-backed commercial paper (ABCP) and repo markets. The inelastic supply of Treasury bills contributed to the massive growth of ABCP and repos before 2008, which drove the excessive maturity transformation and leverage that magnified mortgage-related credit losses during the Great Financial Crisis."
Pozsar comments, "The $400 billion in bills which were issued during the first quarter of this year has caused chronic indigestion in money markets. The scarcity premium of bills is completely gone: instead of trading well below OIS, bills now trade at or above OIS three months and in! The last time the Treasury printed this many bills, the market digested them with gusto: overnight rates did respond but stayed within the Fed's target band.... Not this time around."
He explains, "Bill supply reduced the usage of the Fed's o/n RRP facility to zero and Treasury bill yields became the effective floor for o/n rates. Bill yields pushed o/n tri-party repo rates from trading just above the o/n RRP rate to just under the IOR rate. With o/n tri-party repo being the marginal source of funding for interdealer GCF trades, the o/n GCF repo rate got pushed higher too and now prints outside the Fed's target range for the fed funds rate."
Posnar tells us, "The fed funds rate is also feeling the heat. Now that o/n repo rates are trading above the funds rate, FHLBs are lending more in o/n repo markets and less in the funds market. Reduced fed funds volumes have been the main driver of the updrift of the o/n funds rate as borrowing is increasingly less about some lazy o/n fed funds-IOR arbitrage and more about settlement constrains and LCR. The Fed's control of its o/n target rate is slipping... What has changed since last time? What caused the indigestion this time around? The answers are complex and have to do with changes in both demand and supply."
He speculates, "On the demand side, we've just lost a stalwart member of the community of cash pools -- corporate treasurers. Corporate tax reform ended the decades-old practice of corporations accumulating offshore investment portfolios.... These investment portfolios are now being unwound, and, as a result, the corporate bid for front-end Treasuries and bank debt has disappeared. Microsoft for example used to be a quasi bidder-of-last-resort for front-end Treasuries. Its bid is now gone and has turned into an offer."
The Credit Suisse think piece continues, "As Microsoft and other corporates shrink their offshore portfolios -- whether through sales or the echo-taper -- the supply of front-end Treasuries will increase for everyone else. The Treasury is currently adding to that supply by issuing hundreds of billons of bills, which overwhelmed the market. Clearly TBAC and the Debt Management Office of the Treasury ought to dynamically adjust bill issuance strategy to a changing demand-side landscape. Fewer hungry mouths argue for less feed, not more. Corporate tax reform reduced the corporate bid for front-end Treasuries by roughly $350 billion, which is roughly equivalent to the $400 billion of bills that the Treasury issued during the first quarter of the year."
It adds, "On the supply side, the changes have been even larger! Change came from four sources: increased issuance from the Federal Home Loan banks (FHLBs) as they became U.S. G-SIBs' preferred source of funding for HQLA portfolios and arbitrage books; QE and liberalizing access to central bank liabilities for non-bank institutional investors; more balance sheet for repo through new entrants and new sources of collateral supply; and last but not least, an increased supply of 'synthetic U.S. Treasury bills” via FX swaps.'"
Finally, Pozsar comments, "Money funds don't need more bills. The FHLBs have become large and structural issuers of safe assets. Yankee banks are growing matched repo books everywhere. And the Fed's o/n RRP facility provides safe assets on demand. Government money funds don't need more bills and that after $800 billion in new assets since money fund reform."
In other news, Federated Investors posted its latest "Month in Cash monthly, entitled, "Same ol', same ol' and that's OK." It indicates that no news was good news during the month of May. According to Federated, "New developments in the cash market were hard to come by in May. The month seemed a continuation of the main topics of April. That's not a bad thing; cash managers have had plenty to consider in recent quarters."
Money Market CIO Deborah Cunningham tell us, "The Federal Reserve's policy meeting in early May, and the minutes released later in the month, showed a central bank bent on keeping monetary policy in low gear, grinding on regardless of geopolitical events, market movement, trade-war talk or elections. The core personal consumption expenditures index (PCE) climbed ahead of the meeting, nearly hitting the Fed's established goal of 2% inflation."
She says, "The Fed took no rate action in May, but the content of the meeting statement suggested the next 25-basis-point hike likely will happen at the June meeting. The markets think it is a done deal, but are split between expecting one or two additional hikes the remainder of the year. We still expect a total of three in 2018, but will re-evaluate after parsing the June Federal Open Market Committee statement."
Federated continues, "While the spread between the 3-month London interbank offered rate (Libor) and the overnight index swap (OIS) slightly narrowed compared to April, it remained elevated in May relative to normal. The reason for the elevated spread remains the same: it's not driven by poor bank credit, the economic and political predicament transpiring in Italy or the potential summit with North Korea. Rather it is again due to the atypical large quantities of Treasuries the U.S. has had to issue to fund itself amid lower tax revenue and higher spending."
Finally, Federated writes, "While nothing compared to the volatility of the stock market in May, the relative fluctuation in the short end of the Treasury curve led us to shorten the weighted average maturity (WAM) of our government funds by five days to a range of 25-35 days. The range for our prime and muni funds remained 30-40 days. We continued to purchase Treasuries because of their still attractive yields on elevated supply. The short end of the Libor curve ended May in a holding pattern ahead of a likely June hike: 1-month Libor increased from 1.91% to 1.98%; 3-month decreased from 2.36% to 2.31%; and 6-month slipped from 2.52% to 2.47%."
Federated Investors' President & CEO J. Christopher Donahue presented at the Deutsche Bank's Global Financial Services Conference on Tuesday, where he answered questions on a number of topics involving money market funds, including the expected shift of assets from bank deposits, pending legislation to reverse the floating NAV, and 2% yields. We quote from Donahue's comments below, and we also review the latest on money market fund assets. (Note: Federated's Donahue will also keynote next month's Crane's Money Fund Symposium, which will be held June 25-27 at the Westin Convention Center Pittsburgh. Registrations are still being taken, and we hope to see you in Pittsburgh later this month!)
When asked about money funds and Federated's asset mix, Donahue answered, "As an owner operator, we love all revenues, just like we love all of our children. So we don't [look at it] exactly like that [that they want to add equity assets]. `On the other hand, we would expect that percentage of money funds and liquidity revenue to come down, because we expect to grow the lion's share [from their new acquisition] Hermes.... We are working on other things as well to grow the non-money market fund, fixed income, and equity assets.... `So we are not [pushing too hard on] that, because we would accept any numbers that are available on the money market fund side."
He was also asked about pricing pressure and fee waivers, and responded, "There has been no time in the many, many decades that I have been involved in the mutual fund business, since filing our first money market fund back in the mid-1970s, when there wasn't price competition. Whether it is intensifying or not is hard to say. What really happened was when the Fed and the SEC got together and closed down a trillion dollars of prime funds and plopped them all into government funds, that caused a different dynamic in the marketplace."
Donahue continued, "However, you've seen deposits reach over $10 trillion [while] money funds [are] just under $3 trillion, [but you've seen] recently the trends where the growth in those deposits are less than the growth in money funds. [Growth in MMFs is] off of a smaller base, but still, it is consistent with trends that have occurred beforehand when the banks don't pay all the interest [out] when interest rates go up. [Like we've seen with the latest Fed hike] they don't [send] all that down to their customers."
He explained, "They now call that 'deposit beta' -- we have a fancy term for that. Well, okay, fine. What that means is that the clients that are in a position to demand the full market rate -- you can get 2% on your money fund right now -- [are asking] 'Where is my 2%?' [They're asking] 'Am I getting 20 bps or am I getting 2% Am I in a deposit sweep account where someone else is getting the 2% and I am getting 20bps?' Sooner or later these things start to change around."
Donahue added, "So, we do not find any reason we could not have $4 trillion back in money funds, which is the number it had back after the crash. That is not an impossible thing. So at base, the money fund is a great provider of service to the industry. I often gave speeches where I call it the 'Eighth Wonder of the World' because it has such perfect pricing with such vigorous competition, [and is] right at the spearhead of the capital markets.... Then important people with power decided they did not like them, and they were dented, not ruined, but dented."
He was also asked, "Do you see a big shift coming back to money markets very soon?" Donahue commented, "No. A big shift, I would not phrase it like that nor would I phrase it as catalytic because it has to come from the bottom. When the customers see that, it becomes important to keep the customers happy with where their cash is. A lot of intermediaries can make the speech 'Hey, it [rates] really does not matter and it has not mattered for a long time. It was 1 bps, so what is the deal?' So this will take time. We see the green chutes of it, but it will take time."
Finally, Donahue was asked about regulatory and legislative issues. He said, "We are working on a bill going through Congress, H.R. 2319, on the Senate side it's S.1117, which has been marked up in the House and has had a hearing in the Senate. We now have some 75 or so Congress people and Senators who are cosponsors of that bill. All that simply does is restore the money fund to the 2010 amendment which is designed to enhance the resiliency of money funds. So this gets rid of the four-digit net asset value, gets rid of the natural person requirement and gets rid of fees and gates, and this would be terrific. Other than that, I do not think the SEC is going to change anything on the regulatory side on the money funds."
In other news, ICI released its latest "Money Market Fund Assets" report yesterday, which showed money fund assets rising in the latest week, after being flat or down the previous 4 weeks in a row. Money fund assets turned positive for the year-to-date for the first time in 2018. `They've increased by $2 billion, or 0.1%, and they've increased by $192 billion, or 7.2%, over 52 weeks.
ICI writes, "Total money market fund assets increased by $14.98 billion to $2.84 trillion for the week ended Wednesday, May 30, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $14.82 billion and prime funds increased by $690 million. Tax-exempt money market funds decreased by $538 million." Total Government MMF assets, which include Treasury funds too, stand at $2.238 trillion (78.8% of all money funds), while Total Prime MMFs stand at $463.2 billion (16.3%). Tax Exempt MMFs total $139.5 billion, or 4.9%.
They explain, "Assets of retail money market funds increased by $22 million to $1.03 trillion. Among retail funds, government money market fund assets decreased by $987 million to $629.94 billion, prime money market fund assets increased by $1.16 billion to $263.74 billion, and tax-exempt fund assets decreased by $155 million to $131.79 billion." Retail assets account for over a third of total assets, or 36.1%, and Government Retail assets make up 61.4% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $14.95 billion to $1.81 trillion. Among institutional funds, government money market fund assets increased by $15.81 billion to $1.61 trillion, prime money market fund assets decreased by $473 million to $199.43 billion, and tax-exempt fund assets decreased by $383 million to $7.71 billion." Institutional assets account for 63.9% of all MMF assets, with Government Inst assets making up 88.6% of all Institutional MMFs.
