News Archives: September, 2020

Investment Company Institute President and CEO Paul Schott Stevens commented on money market mutual funds and this spring's coronavirus crisis during ICI's 2020 Tax And Accounting Conference." In his keynote, "Delivering on the Promises We Have Made to Investors," Stevens explains, "Policymakers must have a clear and accurate picture of what happened during the crisis, including the experience of funds and their investors. To this end, ICI is conducting a comprehensive examination of developments in fixed income and money markets in March and early April. We hope to release that examination later this fall. It will, among many other things, demonstrate that the US Treasury market -- the deepest and most liquid market in the world -- was the very first to seize up, and showed enormous strain several days before money market or bond funds came under redemption pressure. The data also show that bond fund redemptions were a small share of those funds' assets -- about 5 percent -- and did not drive or exacerbate market volatility." (Note: ICI's Stevens will also keynote our next virtual event, Crane's Money Fund Symposium Online, which will be Tuesday, October 27 from 1-4pm ET. To register, click here.)

Stevens explains, "In 2008, after more than a dozen major banks had failed, the Reserve Primary Fund became the second money market fund in history to 'break the buck.' In response, ICI's Executive Committee called for the Institute to investigate, to face up to any structural or regulatory factors that might have made money market funds vulnerable, and to offer constructive policy recommendations to regulators, even at some cost to fund sponsors and their products. The result was the Money Market Working Group, a group of top executives and staff from ICI member firms. Chaired by Vanguard's Jack Brennan, that group produced a significant report in March 2009. In that report, the Institute suggested substantial reforms to SEC Rule 2a-7 designed to make money market funds stronger and more resilient for investors -- new liquidity requirements, new limits on the maturity of securities these funds hold, stronger credit analysis and know-your-customer standards, and more options for fund boards to deal with heavy redemptions."

He comments, "Less than a year after the Money Market Working Group Report came out, the SEC had adopted package of money market reforms rooted in the Report's recommendations -- the first major regulatory reforms after the global financial crisis. These changes to Rule 2a-7 were completed six months before Congress enacted its response to the crisis, the Dodd-Frank Act."

Stevens continues, "The Money Market Working Group report, and the SEC reforms that followed, greatly advanced the debate over post-crisis reforms but did not end it. In view of the damage caused by the crisis, policymakers focused on how to avoid a recurrence, emphasizing the need to address risks that could threaten the stability of the broader financial system. Initial reforms focused on the source of the global financial crisis: the banking system. But they did not stop there. Policymakers also focused on non-bank institutions, including asset managers and regulated funds."

He adds, "The bodies that have led this effort since 2009, dominated by central bankers, understandably take a banking-centered view of the world. They called mutual funds and other capital-market participants 'shadow banks,' a characterization that was intentionally pejorative and wholly inaccurate. Well, as I have said so many times, regulated funds aren't banks, and they aren't in the shadows. Indeed, ICI has spent the last decade engaged in a policy debate that illustrates another of our industry's qualities: We stand on principle -- even when that's difficult, unpopular, or risky." (See also, The Wall Street Journal's "Money-Market Fund Rules Likely Fall Short, Policy Makers Say," Reuters' "Money market turmoil in March shows past reforms may be insufficient - U.S. Treasury official," and U.S. Treasury Deputy Secretary Justin Muzinich's comments on money market funds at the 2020 U.S. Treasury Market Conference.)

The ICI also released its monthly "Trends in Mutual Fund Investing" and its "Month-End Portfolio Holdings of Taxable Money Funds" for August 2020 yesterday. The former report shows that money fund assets decreased by $56.7 billion to $4.523 trillion in August, after decreasing $55.4 billion in July, $133.5 billion in June and increasing $31.8 billion in May and $399.4 billion in April. For the 12 months through July 31, 2020, money fund assets have increased by a breathtaking $1.230 trillion, or 39.6%.

ICI's monthly "Trends" release states, "The combined assets of the nation's mutual funds increased by $649.54 billion, or 2.9 percent, to $22.70 trillion in August, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $71.32 billion in August, compared with an inflow of $69.27 billion in July.... Money market funds had an outflow of $56.80 billion in August, compared with an outflow of $55.36 billion in July. In August funds offered primarily to institutions had an outflow of $49.16 billion and funds offered primarily to individuals had an outflow of $7.63 billion."

ICI's latest statistics show that both Taxable MMFs and Tax Exempt MMFs lost assets last month. Taxable MMFs decreased by $55.2 billion in August to $4.402 trillion. Tax-Exempt MMFs decreased $1.5 billion to $120.3 billion. Taxable MMF assets increased year-over-year by $1.171 trillion (36.2%), while Tax-Exempt funds fell by $14.5 billion over the past year (-10.8%). Bond fund assets increased by $66.4 billion in August (1.4%) to $4.936 trillion; they've risen by $366.4 billion (8.0%) over the past year.

Money funds represent 19.9% of all mutual fund assets (down 0.9% from the previous month), while bond funds account for 22.7%, according to ICI. The total number of money market funds was 352, down four from the month prior and down from 367 a year ago. Taxable money funds numbered 272 funds, and tax-exempt money funds numbered 80 funds.

ICI's "Month-End Portfolio Holdings" confirms a jump in Repo a modest increase in Treasuries and another drop in Agencies last month. Treasury holdings in Taxable money funds remain in first place among composition segments since surpassing Repo in April. Treasury holdings increased by $2.7 billion, or 0.1%, to $2.281 trillion, or 51.8% of holdings. Treasury securities have increased by $1.450 trillion, or 174.4%, over the past 12 months. (See our September 11 News, "Sept. MF Portfolio Holdings: Repo Jumps; Agencies, CP, CDs Decline.")

Repurchase Agreements were in second place among composition segments; they increased by $38.8 billion, or 4.1%, to $993.5 billion, or 22.6% of holdings. Repo holdings have dropped $243.9 billion, or -19.7%, over the past year. U.S. Government Agency securities were the third largest segment; they decreased $41.0 billion, or -5.2%, to $745.4 trillion, or 16.9% of holdings. Agency holdings have risen by $83.5 billion, or 12.6%, over the past 12 months.

Certificates of Deposit (CDs) stood in fourth place; they decreased by $5.1 billion, or -2.3%, to $212.9 billion (4.8% of assets). CDs held by money funds shrunk by $58.2 billion, or -21.5%, over 12 months. Commercial Paper remained in fifth place, down $11.5 million, or -5.8%, to $187.6 billion (4.3% of assets). CP has decreased by $43.8 billion, or -18.9%, over one year. Other holdings decreased to $34.1 billion (0.8% of assets), while Notes (including Corporate and Bank) were down to $6.1 billion (0.1% of assets).

The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 371.3 million to 39.685 million, while the Number of Funds was down four at 272. Over the past 12 months, the number of accounts rose by 3.4.008 million and the number of funds decreased by 14. The Average Maturity of Portfolios was 43 days, unchanged from July. Over the past 12 months, WAMs of Taxable money have increased by 12.

This month, Bond Fund Intelligence interviews Ruta Ziverte, the Head of U.S. Fixed Income for William Blair Investment Management. Ziverte discusses the Chicago-based manager's history, her team's emphasis on preserving capital and focus on agency mortgage-backed securities, and alternatives to cash management. Our discussion follows. (Note: The following is reprinted from the September issue of our Bond Fund Intelligence, which was published on Sept. 15. Contact us at info@cranedata.com to request the full issue or to subscribe. Also, the replay is now available for Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash, which we hosted last Thursday.)

BFI: Give us some history. Ziverte: William Blair's fixed-income team has focused on active management in developed fixed-income markets since 1990, when the team launched their first mutual fund, the William Blair Income Fund. This fund is benchmarked to the intermediate government credit index.

As markets evolved and client needs shifted, we expanded our lineup. In 1998 we added a core bond strategy, and 10 years later we launched the corresponding mutual fund -- the William Blair Bond Fund. Our low duration strategy was launched in 1999 and the corresponding mutual fund in 2009. More recently, our platform has grown into sustainable fixed income due to the integration of ESG analysis into our investment process, and we run a sustainable fixed income strategy for separately managed accounts.

Our team members have an average of 20 years of experience, with the majority having worked together at William Blair for more than 10 years. I would like to point out that our team is diverse, with about 40% women and 40% minorities. In addition, all have experience across funding markets, securitized and corporate credit, and emerging markets. I believe this is what differentiates us from our peers, and it adds value to our overall process because it provides diversity of thought.

I joined William Blair in October 2019 as Head of U.S. Fixed Income. In this role, I'm responsible for the team's leadership. I'm also involved in portfolio management and developing and executing our fixed income growth strategy, in conjunction with other team members. Before joining William Blair, I was a vice president and senior PM at Oppenheimer Funds.

BFI: Talk about the fund lineup. Ziverte: We manage three mutual funds. The William Blair Income Fund, which falls in the short-term bond fund category, is our oldest fund. It seeks to provide relatively stable capital and income. The William Blair Bond Fund is a high-quality, core fixed-income strategy with an objective of income and capital appreciation. Lastly, the William Blair Low Duration Fund, which falls in the ultra-short category, seeks capital preservation and income. This strategy aims to outperform the risk-free rate through differentiated exposures within fixed-income sectors while maintaining a liquid portfolio of fixed income-securities rated A- or higher.

BFI: Talk more about Low Duration. Ziverte: While we launched the William Blair Low Duration Fund in 2009 as an alternative to prime money market funds that paid a basis point, we've been managing a low duration strategy for institutional clients for more than 20 years.

Our low duration strategy was created for investors that seek capital preservation, liquidity, and some income. These investors, corporations or nonprofit organizations, have common goals -- optimizing how they manage their capital, earning a competitive return over the risk-free rate while not taking on oversized risk, and staying liquid.

I think our low duration strategy is unique in its high-quality orientation. Investments have to be rated at least single-A-. The strategy and corresponding mutual fund are also diversified, comprised of four types of securities: agency mortgage-backed securities (MBS), asset-backed securities (ABS), corporate credit, and Treasuries. The duration profile of the fund is around one year.

I think it's important to point out that our pursuit of income occurs after our objectives of high-quality, liquidity, and preservation of capital are satisfied. The most important element of our approach is that we employ continuous active management to ensure we have the appropriate high-quality and diversified exposures, including a timely and appropriate allocation between fixed and floating-rate instruments. Plus, security selection is key. We are committed to a disciplined security selection process that looks at fundamentals versus relative value. That, combined with a distinctive approach that favors investing in above-market-coupon agency MBS give us the potential to achieve higher yields than cash instruments while providing the benefit of capital preservation.

Our ability to identify differentiated, higher-quality exposures has helped deliver the fund's objective of capital preservation and above-market income during even periods of extreme market volatility, such as Q1 2020. Overall, then, I would say that our approach to managing this fund is time-tested and our strategy has held up through market cycles.

BFI: Where can you find any yield? Ziverte: It's a great question these days. Rates are zero-bound, and everyone is looking for yield. We're obviously looking for yield too, but the priority for us in any market is to really understand and solve for the clients' needs. The focus today tends to be on finding high-quality sources of income while maintaining that capital preservation. As prime money market funds are closing and government money funds produce limited yield, investors are forced to seek alternatives to cash management. At such times, investors might be inclined to take on more credit risk or duration risk to generate that extra income. However, we don't believe it has to be that way.

We believe we are able to achieve this capital preservation and higher income by investing in agency mortgage-backed securities. We favor seasoned, high coupon U.S. agency MBS with low loan balances. Borrowers within these pools typically have little economic incentive to refinance their smaller mortgage balances. Therefore, investors experience lower pre-payments than the market, thus receiving above market coupons for longer periods of time. We believe disciplined risk management is really critical and remains a priority for our strategies, including our low duration strategy.

BFI: Talk about what you can't do. Ziverte: We try to make sure the William Blair Low Duration Fund is diversified, generally consisting of 80 to 130 issuers. In terms of duration, it's inside one year. For bullet securities, we focus on three years as a maximum maturity. When we look at the issuer size guidance for credit instruments, we generally don't go over 2.0%. And anything to be included in the fund has to be high-quality, so A-rated or higher. Those are some of the guidelines.

In terms of asset classes, we don't invest in commercial mortgage-backed securities (CMBS).... But as I mentioned, we do invest in MBS. When evaluating MBS, we solely focus on agency versus non-agency. The benefit of agency MBS is the timely payment and principal and interest which is guaranteed by Government Sponsored Enterprises such as Fannie Mae and Freddie Mac. It's generally less risky, but has also provided nice income for our investors. And the fund definitely does not utilize leverage.

BFI: What is your biggest challenge? Ziverte: Things are better now than they were in March. But we're still living in uncertain times, and capital preservation is even more critical. As such, we continue to challenge our base-case expectations to ensure that we understand the true downside risks of all our positions.... Especially in a low-yield environment, it can be challenging to identify securities that could add incremental yield without adding a lot more risk. We seek to do that by staying very disciplined, and sticking to our process.

We really showcased that in the first quarter of this year. There were not many funds that provided the positive returns like we did. So we provided capital preservation and income. And our unique way of investing in MBS is a big part of why we were able to achieve that.

BFI: Tell us about your overall outlook. Ziverte: We're very constructive on the future of ultra-short bond funds, especially the ones with a high-quality tilt, the ones focused on capital preservation. We've seen that in times of stress, central banks become very accommodative to help boost the economy. This leads to front-end rates moving toward zero and drives investors to start looking for alternatives to managing their cash.

We believe the short end of the strategy curve will remain anchored near zero, and we do not believe that under the current regime the Fed is at all interested in entertaining the idea of negative rates. Therefore, these types of funds should be more in demand.

We learned from Dechert's Stephen Cohen that the U.S. Securities & Exchange Commission's Director of the Division of Investment Management, Dalia Blass, briefly discussed money market funds at the ICI's 2020 Virtual Securities Law Developments Conference Thursday. During her theme of "Regulating with our Eyes on the Future," she comments, "Last month, the Investment Company Act turned 80 years old. At the time of the Act's adoption, the registered fund industry consisted of only 105 funds with $1 billion in assets. Now over 14,000 SEC-registered funds hold nearly $25 trillion in assets, including through two important fund structures that did not exist in 1940 -- money market funds and exchange-traded funds (ETFs). In terms of assets, that is an annualized growth rate of 13%."

Blass says, "Let's start with money market funds. The Commission granted orders that permitted the first money market funds starting in 1978. As additional funds requested and received similar relief, the Commission codified the money market fund structure in 1983 by adopting rule 2a-7. Over the next 30 years, the Commission amended the rule many times. The latest amendments in 2010 and 2014 sought to primarily address issues that arose during the 2008 financial crisis."

She continues, "A perennial area of concern has been whether the structure of money market funds is able to withstand periods of market stress without some form of external support and without runs. The 2010 and 2014 amendments were designed to address this issue by reducing the risks of money market fund portfolios, addressing their susceptibility to heavy redemptions in times of stress, improving their ability to manage potential contagion from redemptions, and increasing the transparency of their risks. For example, the rule now permits non-government funds to impose a liquidity fee or gate to address certain liquidity conditions. The rule also now requires institutional prime and tax-exempt funds, whose investors historically have made the heaviest redemptions in times of stress, to transact at a 'floating' NAV rather than a 'stable' NAV, which all money market funds were permitted to use prior to 2016."

Blass explains, "The COVID-19 market disruption tested these reforms. As the markets reacted to the impact of the pandemic, prime and tax-exempt money market funds experienced significantly heightened redemptions. In fact, the percentage of redemptions from certain funds during the height of the market turmoil was higher than what we saw in a similar time period in September 2008. Despite the significant reforms to rule 2a-7, once again, financial regulators stepped in with emergency measures to assist these funds."

She tells us, "I believe that it is critical for us to analyze the events in March and how the framework of rule 2a-7 may have either alleviated or contributed to any of the events that unfolded. For example, did the possibility of gates when a fund's liquidity approached or passed certain limits drive market behavior? On the other hand, did the risk limitations imposed by the rule provide funds with the necessary liquidity to meet the heightened redemptions?"

Blass adds, "However, analyzing past dislocations should not be the only drivers of regulatory review and changes. Instead we also need to be forward-looking with a fresh eye, focusing on how to create a flexible framework that will interact smoothly with future market innovations, different market conditions, and investor reactions that we may not have already experienced. Most importantly, we should seek to construct a framework that provides structural resiliency and appropriate incentives during market stress while preserving the important role of money market funds in the short-term funding markets. I think this speech highlights that the push for additional reforms is occurring and we'll continue to monitor statements and actions from regulators."

In other news, a Prospectus Supplement for the $1.8 billion Vanguard Pennsylvania Municipal Money Market Fund and the $1.2 billion Vanguard New Jersey Municipal Money Market Fund tells us, "On September 24, 2020, the board of trustees for each of the Vanguard Pennsylvania Municipal Money Market Fund and the Vanguard New Jersey Municipal Money Market Fund (the Funds) approved a proposal to liquidate and dissolve the Funds on or about November 24, 2020 (the liquidation date). In anticipation of the liquidation and dissolution, the Funds will be closed to new investors at the start of business on September 25, 2020, and will be closed to new investments at the start of business on November 5, 2020."

Vanguard writes, "On the liquidation date, each Fund will redeem all of its outstanding shares at the net asset value of such shares. On this same date, all outstanding shares of each Fund will be canceled and each Fund will cease operations as a mutual fund. In order to provide for an orderly liquidation and satisfy redemptions in anticipation of the liquidation, each Fund may deviate from its investment objective and strategies as the liquidation date approaches. Prior to the liquidation date, the Fund will declare and pay its shareholders of record one or more dividends, other distributions of its investment company taxable income, if any, and/or net realized capital gains."

Finally, the filing states, "The liquidation and dissolution is not expected to result in income tax liability for either Fund. Each Fund may pay more than one liquidating distribution in more than one installment. Distribution of liquidation proceeds, if any, to Fund shareholders may result in a taxable event for shareholders, depending on their individual circumstances. Shareholders should consult their own tax advisors about any tax liability resulting from the receipt of liquidation proceeds."

Vanguard CIO Greg Davis comments in a posting, "We are focused on providing a viable and thoughtful lineup of money market products, and we are confident that our streamlined suite of tax-exempt money market funds is well suited to meet investors' cash management and tax-free income preferences. Due to the short supply of certain types of municipal securities available in Pennsylvania and New Jersey, we believe these specific municipal money markets no longer offer the market depth needed to prudently provide these state-specific products in all market conditions."

We learned about the news from Independent Advisor for Vanguard Investors Editor Dan Wiener, who writes in a note, "As yields have hit the near-lower bound of 0.01%, Vanguard has taken the unprecedented step of closing more of its money funds with plans to liquidate them as supplies of securities in the New Jersey and Pennsylvania markets are squeezed. The closures are happening even as assets have declined with more investors taking money from the funds than putting money in." Fidelity will be the sole provider offering NJ and PA Muni MMFs after Vanguard and Federated exit the space. (See Crane Data's Links of the Day, "Federated to Liquidate State Muni MFs" (9/4/20) and "Dreyfus Liquidating General NJ MMF" (8/3/20).)

The Investment Company Institute's latest "Worldwide Regulated Open-Fund Assets and Flows, Second Quarter 2020" release shows that money fund assets globally rose by $472.5 billion, or 6.1%, in Q2'20 to a record $8.160 trillion. The increase was driven by big gains in U.S. and European money funds. MMF assets worldwide have increased by $1.968 trillion, or 31.8%, the past 12 months, and money funds in the U.S. now represent 63.0% of worldwide assets. We review the latest Worldwide MMF totals, below. (Note: Let us know if you'd like to see our latest Money Fund Intelligence International product, which tracks "offshore" money market funds domiciled in Europe and outside the U.S. Note too: The recording of yesterday's Bond Fund Webinar: Ultra-Short & Alt-Cash is available here. Thanks to our excellent speakers and thanks for attending!)

ICI's release says, "Worldwide regulated open-end fund assets increased 12.4 percent to $53.87 trillion at the end of the second quarter of 2020, excluding funds of funds. Worldwide net sales to all funds was $899 billion in the second quarter, compared with $691 billion of net inflows in the first quarter of 2020. The Investment Company Institute compiles worldwide regulated open-end fund statistics on behalf of the International Investment Funds Association (IIFA), the international organization of national fund associations. The collection for the first quarter of 2020 contains statistics from 46 jurisdictions."

It explains, "Assets in regulated open-end funds reported in US dollars increased in the second quarter of 2020 in part because of US dollar depreciation. For example, on a US dollar–denominated basis, fund assets in Europe increased 11.7 percent in the second quarter, compared with a increase of 9.3 percent on a euro-denominated basis."

ICI's quarterly continues, "On a US dollar–denominated basis, equity fund assets increased by 19.1 percent to $22.86 trillion at the end of the second quarter of 2020. Bond fund assets rose by 7.5 percent to $11.63 trillion in the second quarter. Balanced/mixed fund assets increased by 10.7 percent to $6.48 trillion in the second quarter.... Money market fund assets rose by 6.1 percent globally to $8.16 trillion."

The release also tells us, "At the end of the second quarter of 2020, 42 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 22 percent and the asset share of balanced/mixed funds was 12 percent. Money market fund assets represented 15 percent of the worldwide total."

ICI adds, "Net sales of regulated open-end funds worldwide were $899 billion in the second quarter of 2020. Flows out of equity funds worldwide were $2 billion in the second quarter, after experiencing $19 billion of net outflows in the first quarter of 2020. Globally, bond funds posted an inflow of $306 billion in the second quarter of 2020, after recording an outflow of $229 billion in the first quarter.... Money market funds worldwide experienced an inflow of $486 billion in the second quarter of 2020 after registering an inflow of $915 billion in the first quarter of 2020."

According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. strengthened its position as the largest money fund market in Q2'20 with $4.635 trillion, or 60.3% of all global MMF assets. U.S. MMF assets increased by $297.1 billion (6.9%) in Q2'20 and increased by $1.433 trillion (44.8%) in the 12 months through June 30, 2020. China remained in second place among countries overall. China saw assets decrease $87.7 billion (-7.6%) in Q2, to $1.072 trillion (13.9% of worldwide assets). Over the 12 months through June 30, 2020, Chinese MMF assets have risen by $11.5 billion, or 1.1%.

Ireland remained third among country rankings, ending Q2 with $673.7 billion (8.8% of worldwide assets). Dublin-based MMFs were up $58.2B for the quarter, or 9.5%, and up $115.0B, or 20.6%, over the last 12 months. Luxembourg remained in fourth place with $481.2 billion (6.3% of worldwide assets). Assets there increased $73.2 billion, or 17.9%, in Q2, and were up $96.3 billion, or 25.0%, over one year. France was in fifth place with $359.6B, or 4.7% of the total, up $30.1 billion in Q2 (9.1%) and down $11.6B (-3.1%) over 12 months.

Australia was listed in sixth place with $274.3 billion, or 3.6% of worldwide assets. Its MMFs increased by $36.3 billion, or 15.3%, in Q2. Note that ICI's data includes this footnote for Australia: "Due to a reclassification, a portion of the assets from the 'other' category have been moved into the money market and real estate categories." Australia's MMF assets were mysteriously shifted into the "Other" category several years ago but reappeared several quarters ago. Japan was in seventh place with $114.0 billion (1.5%); assets there rose $3.7 billion (3.3%) in Q2 and increased by $11.3 billion (11.0%) over 12 months.

Korea, the 8th ranked country, saw MMF assets increase $13.7 billion, or 13.8%, in Q2'20 to $112.9 billion (1.5% of the world's total MMF assets); they've risen $22.4 billion (24.8%) for the year. Brazil was in 9th place, assets increased $4.9 billion, or 6.4%, to $81.0 billion (1.1% of total assets) in Q2. They've decreased $3.0 billion (-3.5%) over the previous 12 months. ICI's statistics show India in 10th place with $65.3B, or 0.8% of total assets, up $13.5B (26.0%) in Q2 and down $962 million (-1.5%) for the year. Mexico was in 11th place, increasing $3.9 billion, or 7.1%, to $58.5 billion (0.8% of total assets) in Q2 and decreasing $7.6 billion (-11.4%) over the previous 12 months.

Canada ($31.9, up $2.1B and up $8.8B over the quarter and year, respectively) ranked 12th ahead of the Chinese Taipei ($30.3B, up $4.6B and up $6.7B). The U.K. ($27.0B, down $1.6B and up $985B) and South Africa ($24.4B up $3.5B and down $459M), rank 13th through 15th, respectively. Chili, Switzerland, Belgium, Norway and Argentina round out the 20 largest countries with money market mutual funds.

ICI's quarterly series shows money fund assets in the Americas total $4.843 trillion, up $311.9 billion in Q2. Asian MMFs decreased by $14.9 billion to $1.678 trillion, while Europe saw its money funds increase by $172.0 billion in Q2'20 to $1.614 trillion. Africa saw its money funds increase $3.5B to $24.4 billion.

Note that Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have mainly domestic money fund offerings. Contact us if you'd like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data.

The Securities and Exchange Commission's latest monthly "Money Market Fund Statistics" summary shows that total money fund assets dropped by $57.0 billion in August to $4.981 trillion, the third decrease in a row but just the fourth over the past 25 months. (Month-to-date in September through 8/22, assets have decreased by $117.2 billion according to our MFI Daily.) The SEC shows that Prime MMFs decreased by $7.1 billion in August to $1.138 trillion, but Govt & Treasury funds fell by $49.3 billion to $3.714 trillion. Tax Exempt funds decreased $0.6 billion to $128.6 billion. Yields were down again across the board in August. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review their latest numbers below. (Note: As a final reminder, we'll be hosting Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash later today, Thursday, Sept. 24 from 1-2pmET. To register, click here. Crane Data's Peter Crane will give a brief update on the ultra-short bond fund and "enhanced cash" market, and will host a panel including J.P. Morgan Asset Management's Cecilia Junker, UBS Asset Management's David Walczak and J.P. Morgan Securities' Alex Roever.)

August's overall asset decrease follows a decline of $66.4 billion in July, $127.3 billion in June, and increases of $31.0 billion May, $461.6 billion in April and $704.8 billion in March. This followed an increase of $17.3 billion in February, a decrease of $4.3 billion in January, and increases of $37.2 billion in December and $45.6 billion in November. Over the 12 months through 8/31/20, total MMF assets have increased by an incredible $1.214 trillion, or 32.2%, according to the SEC's series. (Note that the SEC's series includes a number of internal money funds not tracked by ICI, though Crane Data includes most of these in its collections.)

The SEC's stats show that of the $4.981 trillion in assets, $1.138 trillion was in Prime funds, down $7.1 billion in August. This follows increases of $16.4 billion in July, $21.3 billion in June, $50.6 billion in May and $105.2 billion in April, decreases of $124.5 billion in March and $13.9 billion in February, an increase of $28.1 billion in January, a decrease of $26.5 billion in December and an increase of $20.2 billion in November. Prime funds represented 22.9% of total assets at the end of August. They've increased by $87.0 billion, or 8.3%, over the past 12 months.

Government & Treasury funds totaled $3.714 trillion, or 74.6% of assets. They fell $49.3 billion in August after falling $42.6 billion in July, plummeting $145.1 billion in June, falling $18.6 billion in May, skyrocketing $347.3 billion in April and $838.3 billion in March, and increasing $32.0 billion in February. They fell $31.4 billion in January, but rose $64.7 billion in December and $24.2 billion in November. Govt & Treas MMFs are up a staggering $1.139 trillion over 12 months, or 44.2%. Tax Exempt Funds decreased $0.6 billion to $128.6 billion, or 2.6% of all assets. The number of money funds was 357 in August, down two from the previous month, and down 13 funds from a year earlier.

Yields for Taxable MMFs were down across the board in August. Steady declines over the past 17 months follow 25 months of straight increases. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on August 31 was 0.22%, down 5 basis points from the previous month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 0.25%, down 6 basis points. Gross yields were 0.19% for Government Funds, down 4 bps from last month. Gross yields for Treasury Funds were down 4 bps at 0.20%. Gross Yields for Muni Institutional MMFs were down 11 bps to 0.12% in August. Gross Yields for Muni Retail funds were down 11 bps at 0.22% in August.

The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 0.15%, down 4 bps from the previous month and down 2.03% since 8/31/19. The Average Net Yield for Prime Retail Funds was 0.06%, down 3 bps from the previous month and down 1.99% since 8/31/19. Net yields were 0.03% for Government Funds, down 3 bp from last month. Net yields for Treasury Funds decreased 3 basis point to 0.03%. Net Yields for Muni Institutional MMFs were down from 0.11% in July to 0.04%. Net Yields for Muni Retail funds were down 7 bps at 0.03% in August. (Note: These averages are asset-weighted.)

WALs and WAMs were mixed but predominantly down in August. The average Weighted Average Life, or WAL, was 59.2 days (down 3.6 days from last month) for Prime Institutional funds, and 66.5 days for Prime Retail funds (down 1.3 days). Government fund WALs averaged 99.7 days (down 2.0 days) while Treasury fund WALs averaged 97.1 days (up 0.2 days). Muni Institutional fund WALs were 15.5 days (down 1.3 days), and Muni Retail MMF WALs averaged 35.6 days (up 2.2 days).

The Weighted Average Maturity, or WAM, was 40.0 days (down 2.6 days from the previous month) for Prime Institutional funds, 47.7 days (down 0.6 days from the previous month) for Prime Retail funds, 39.9 days (down 1.3 days) for Government funds, and 46.7 days (up 0.7 days) for Treasury funds. Muni Inst WAMs were down 1.0 days to 14.9 days, while Muni Retail WAMs increased 2.6 days to 33.8 days.

Total Daily Liquid Assets for Prime Institutional funds were 51.2% in August (up 1.6% from the previous month), and DLA for Prime Retail funds was 46.3% (up 4.6% from previous month) as a percent of total assets. The average DLA was 63.4% for Govt MMFs and 96.4% for Treasury MMFs. Total Weekly Liquid Assets was 62.8% (up 1.8% from the previous month) for Prime Institutional MMFs, and 58.6% (up 7.2% from the previous month) for Prime Retail funds. Average WLA was 78.6% for Govt MMFs and 99.4% for Treasury MMFs.

In the SEC's "Prime MMF Holdings of Bank-Related Securities by Country table for August 2020," the largest entries included: Canada with $119.0 billion, Japan with $94.9 billion, France with $86.0 billion, the U.S. with $72.0B, Germany with $45.4B, the U.K. with $42.4B, the Netherlands with $31.0B, Aust/NZ with $21.7B and Switzerland with $18.3B. The only gainer among the "Prime MMF Holdings by Country" was Switzerland (up $1.0 billion). The biggest decreases were: Japan (down $3.8B), the Netherlands (down $2.9B), Canada (down $2.8B), France (down $1.4B) and Aust/NZ (down $0.9B), the U.K. (down $0.9B) and the U.S. (down $0.9B). Germany was flat for the month.

The SEC's "Prime MMF Holdings of Bank-Related Securities by Major Region" table shows Europe had $105.1B (up $5.1B from last month), the Eurozone subset had $171.0B (down $4.1B). The Americas had $191.7 billion (down $3.7B), while Asia Pacific had $130.7B (down $8.2B).

The "Prime MMF Aggregate Product Exposures" chart shows that of the $1.150 trillion in Prime MMF Portfolios as of August 31, $542.5B (47.2%) was in Government & Treasury securities (direct and repo) (up from $513.4B), $249.0B (21.7%) was in CDs and Time Deposits (down from $257.3B), $157.8B (13.7%) was in Financial Company CP (down from $163.8B), $144.1B (12.5%) was held in Non-Financial CP and Other securities (down from $156.3B), and $56.2B (4.9%) was in ABCP (down from $59.4B).

The SEC's "Government and Treasury MMFs Bank Repo Counterparties by Country" table shows the U.S. with $179.8 billion, Canada with $134.4 billion, France with $197.2 billion, the U.K. with $78.4 billion, Germany with $21.0 billion, Japan with $132.0 billion and Other with $44.8 billion. All MMF Repo with the Federal Reserve fell by $0.2 billion in August to $0.0 billion.

Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs 7.3%, Prime Retail MMFs with 6.3%, Muni Inst MMFs with 2.6%, Muni Retail MMFs 7.2%, Govt MMFs with 15.9% and Treasury MMFs with 13.8%.

The Federal Reserve Bank of New York posted a new "Liberty Street Economics" blog entitled, "Expanding the Toolkit: Facilities Established to Respond to the COVID-19 Pandemic," which gives a spirited defense of the Fed's actions during the March coronavirus crisis. Written by Anna Kovner and Antoine Martin, the piece explains, "The Federal Reserve's response to the coronavirus pandemic has been unprecedented in its size and scope. In a matter of months, the Fed has, among other things, cut the federal funds rate to the zero lower bound, purchased a large amount of Treasury securities and agency mortgage backed securities (MBS) and, together with the U.S. Treasury, introduced several lending facilities. Some of these facilities are very similar to ones introduced during the 2007-09 financial crisis while others are completely new. In this post, we argue that the new facilities, while unprecedented, are a natural extension of the Fed's toolkit, as they operate through similar economic mechanisms to prevent self-reinforcing bad outcomes. We also explain why these new facilities are particularly useful as part of the response to the pandemic, which is an economic shock very different from a financial crisis."

It continues, "The distinction between new and old facilities loosely maps to a commonly used description of facilities as 'liquidity' or 'credit' facilities. Liquidity facilities include the Primary Dealer Credit Facility (PDCF), the Commercial Paper Funding Facility (CPFF), and the Money Market Mutual Fund Liquidity Facility (MMLF). These facilities support financial intermediaries, such as primary dealers and money market funds, or money markets, such as the commercial paper market. In addition, they provide short-term support, generally less than one year. "Credit" facilities include the Municipal Liquidity Facility, the Main Street Lending Program, the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF), the Term Asset‐Backed Securities Loan Facility (TALF) (introduced during the 2007-09 crisis) and the Paycheck Protection Program Liquidity Facility (PPPLF). They support corporations, states, and municipalities more directly and the terms of the loans are longer. All these facilities were established under Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary."

Kovner and Martin write, "Liquidity provision by the central bank can break the vicious cycle that makes panics self-fulfilling. For example, in a bank run, if a bank can borrow from the central bank to repay its depositors, it will not have to sell its assets at a loss. This means that the bank will have enough resources to repay the depositors that are not withdrawing immediately, which reduces or eliminates the incentive to do so. This is an example of multiple equilibria -- a situation with multiple outcomes. By acting according to Walter Bagehot's advice to the Bank of England to lend freely and vigorously against good collateral, the Fed can prevent or mitigate run dynamics."

They explain, "In the 2007-09 financial crisis, the liquidity facilities were established to help prevent run dynamics in financial markets, just as the Fed has done through the discount window for banks since its founding, thus avoiding the bad equilibrium that could follow from inefficient fire sales of assets. Many of these facilities have been reinstated to respond to the severe market dislocations and run risks that emerged in response to the coronavirus pandemic."

The blog also says, "It is important to recognize that the coronavirus pandemic is of a different nature than the 2007-09 financial crisis. That crisis was primarily a financial shock that amplified what may have otherwise been a reasonably small macroeconomic shock. By contrast, the pandemic is primarily a large macroeconomic shock arising from measures taken to contain it. The shock to the economy created by the pandemic has created unusually high uncertainty about the possible macroeconomic outcomes.... [T]he Fed had to adapt its tools to address this new problem. The multiple equilibria argument does not mean that these facilities are a free lunch -- costlessly leading the U.S. economy to the better outcomes. Interventions could raise concerns, particularly about moral hazard, as we discuss in a later post (publishing Thursday)."

The article adds, "A central bank's toolkit must adapt to the circumstances it faces. The Fed has established a number of facilities, in partnership with the Treasury and at the direction of the Congress. These facilities play a similar role to that played by the facilities introduced during the 2007-09 financial crisis, helping to prevent self-reinforcing bad outcomes. The "credit" facilities are particularly helpful to respond to the macroeconomic shock created by the uncertainty associated with the coronavirus pandemic. Of course, the facilities are only one aspect of the official sector's response to the pandemic."

In other news, Fitch Ratings published, "Local Government Investment Pools: 2Q20." The dashboard explains, "Cumulative assets for the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index reached another new high of $349 billion at the end of 2Q20, an increase of $27 billion QoQ and $56 billion YoY. Similar to 1Q20, asset flows for both indices during the second quarter were again on par with their observed historical cyclical patterns (+10% QoQ for the Fitch Liquidity LGIP Index and +4% QoQ for the Fitch Short-Term LGIP Index). Thus far, the economic downturn caused by the coronavirus has not had a visible impact on asset levels for most LGIPs, particularly as assets typically grow during the second quarter due to tax payment deadlines. However, lower sales, income, and other taxes, along with reduced state support for local municipalities, will lead to smaller future inflows into LGIPs relative to prior expectations."

It continues, "The Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index ended the quarter with average net yields of 0.34% (a drop of roughly 70bps from March) and 1.15% (down 53bps from March), respectively. These downward trends for LGIP yields should continue as the Fed's interest rate policy is expected to remain in the zero-bound territory for a prolonged period. LGIP managers extended their interest rate exposures out slightly during the quarter, with the weighted average maturity of the Fitch Liquidity LGIP Index increasing to 44 days (+2 days) and the duration of the Fitch Short-Term LGIP Index ticking up slightly higher to 1.28 years (up from 1.27 at the end of 1Q20)."

Fitch adds, "Given the elevated uncertainty surrounding the economy and future revenues and expenditures of local governments, LGIP managers have actively shifted more of their portfolios to higher quality asset classes this year. The shift in allocation becomes more apparent when comparing positioning to the prior year. In the Fitch Liquidity LGIP Index specifically, exposure to U.S. Treasury debt increased to approximately 20%of the index as of June 2020 from 11% as of June 2019. On the other hand, combined exposure to corporates (commercial paper and corporate bonds) dropped to 24% of the index from 33% last June." (See also, Fitch Assigns First-Time 'AAAf'/'S1' Ratings to the Sarasota County Investment Pool.")

Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of September 18) includes Holdings information from 70 money funds (down 8 from a week ago), which represent $1.987 trillion (down from $2.322 trillion) of the $4.867 trillion (40.8%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website. For our latest monthly Holdings, see our September 11 News, "Sept. MF Portfolio Holdings: Repo Jumps; Agencies, CP, CDs Decline.")

Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.038 trillion (down from $1.255 trillion a week ago), or 52.2%, Repurchase Agreements (Repo) totaling $460.1 billion (down from $526.8 billion a week ago), or 23.2% and Government Agency securities totaling $290.7 billion (down from $329.3 billion), or 14.6%. Certificates of Deposit (CDs) totaled $71.0 billion (down from $73.5 billion), or 3.6%, and Commercial Paper (CP) totaled $64.3 billion (down from $69.4 billion), or 3.2%. The Other category accounted for $33.7 billion or 1.7%, while VRDNs accounted for $29.1 billion, or 1.5%.

The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.038 trillion (52.3% of total holdings), Federal Home Loan Bank with $160.6B (8.1%), Fixed Income Clearing Corp with $57.9B (2.9%), BNP Paribas with $57.8B (2.9%), Federal Farm Credit Bank with $53.2B (2.7%), Federal National Mortgage Association with $47.1B (2.4%), RBC with $34.0B (1.7%), JP Morgan with $32.0B (1.6%), Credit Agricole with $29.8B (1.5%) and Mitsubishi UFJ Financial Group Inc with $28.2B (1.4%).

The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt MM ($176.6B), Fidelity Inv MM: Govt Port ($156.8B), Wells Fargo Govt MM ($154.3B), BlackRock Lq FedFund ($143.0B), JP Morgan 100% US Treas MMkt ($105.3B), BlackRock Lq T-Fund ($94.3B), Morgan Stanley Inst Liq Govt ($92.5B), Dreyfus Govt Cash Mgmt ($89.1B), JP Morgan Prime MM ($83.6B) and First American Govt Oblg ($73.5B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") Monday. Among the 4 tables it includes on money market mutual funds, the Second Quarter 2020 edition shows that Total MMF Assets increased by $298 billion to $4.636 trillion in Q2'20. The Household Sector, by far the largest investor segment with $2.615 trillion, saw assets jump in Q2, while the next largest segments, Other Financial Businesses and Nonfinancial Corporate Businesses, also saw assets surge from the massive coronavirus cash buildup.

The Fed's latest Z.1 numbers, which contain one of the few looks at money fund investor segments available, also show a big asset increase in MMF holdings for the Rest of the World category in Q2 2020. Private Pension Funds, Nonfinancial Noncorporate Business, Life Insurance Companies and State & Local Government Retirement, State & Local Govts and Property-Casualty Insurance also all saw assets increase in Q2; no segments saw decreases. Over the past 12 months, the Household Sector, Nonfinancial Corporate Businesses and Other Financial Business showed the biggest asset increases. Every category saw increases over the past year.

The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows that total assets increased by $298 billion, or 6.9%, in the second quarter to $4.636 trillion. Over the year assets were up $1.430 trillion, or 44.6%. The largest segment, the Household sector, totals $2.615 trillion, or 56.4% of assets. The Household Sector jumped by $197 billion, or 8.2%, in the quarter, after increasing $214 billion in Q1'20. Over the past 12 months through Q2'20, Household assets were up $703 billion, or 36.8%.

Nonfinancial Corporate Businesses, the second-largest segment according to the Fed's data series, held $962 billion, or 20.8% of the total. Assets here rose by $46 billion in the quarter, or 5.0%, and they've increased by $470 billion, or 95.5%, over the past year. Other Financial Business was the third-largest investor segment with $417 billion, or 9.0% of money fund shares. They rose by $29 billion, or 7.4%, in the latest quarter. Other Financial Business has increased by $122 billion, or 41.5%, over the previous 12 months.

The fourth-largest segment, The Rest of the World, category held $165 billion (3.6%). Private Pension Funds was in 5th place, it held 3.5% of money fund assets ($164 billion), up by $1 billion (0.3%) for the quarter, and up $4 billion, or 2.6%. The Nonfinancial Noncorporate Business remained sixth place in market share among investor segments with 2.7%, or $125 billion, while Life Insurance Companies held $94 billion (2.0%), State and Local Governments held $34 billion (0.7%), State and Local Government Retirement Funds held $31 billion (0.7%) and Property-Casualty Insurance held $28 billion (0.6%) according to the Fed's Z.1 breakout.

The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $3.544 trillion, or 76.5% of the total. Debt securities includes: Open market paper ($219 billion, or 4.7%; we assume this is CP), Treasury securities ($2.350 trillion, or 50.7%), Agency and GSE-backed securities ($826 billion, or 17.8%), Municipal securities ($137 billion, or 2.9%) and Corporate and foreign bonds ($13 billion, or 0.3%).

Other large holdings positions in the Fed's series include Security repurchase agreements ($906 billion, or 19.5% of total assets) and Time and savings deposits ($215 billion, or 4.6%). Money funds also hold minor positions in Miscellaneous assets ($13 billion, or 0.3%), Foreign deposits ($2 billion, 0.0%) and Checkable deposits and currency (-$45 billion, -1.0%). Note: The Fed also lists "Variable Annuity Money Funds," which currently total $45 billion.

During Q2, Debt Securities were up $976 billion. This subtotal included: Open Market Paper (down $6 billion), Treasury Securities (up $1.082 trillion), Agency- and GSE-backed Securities (down $105 billion), Corporate and Foreign Bonds (down $1 billion) and Municipal Securities (up $6 billion). In the second quarter of 2020, Security Repurchase Agreements were down a massive $562 billion, Foreign Deposits were down $2 billon, Checkable Deposits and Currency were down $19 billion, Time and Savings Deposits were down by $24 billion, and Miscellaneous Assets were down $70 billion.

Over the 12 months through 6/30/20, Debt Securities were up $1.745 trillion, which included Open Market Paper down $13B, Treasury Securities up $1.606T, Agencies up $150B, Municipal Securities (up $1), and Corporate and Foreign Bonds (up $1B). Foreign Deposits were flat, Checkable Deposits and Currency were down $48B, Time and Savings Deposits were down $44B, Securities repurchase agreements were down $227B and Miscellaneous Assets were up $4B.

Note that the Federal Reserve changed its numbers related to money market funds substantially in the second quarter of 2018. Its "Release Highlights Second Quarter 2018" tells us, "New source data for money market funds from the U.S. Securities and Exchange Commission's (SEC) form N-MFP have been incorporated into the sector's asset holdings (tables F.121 and L.121). Money market funds not available to the public, which are included in the SEC data, are excluded from Financial Accounts' estimates. Data revisions begin 2013:Q1. Holdings of money market fund shares by households and nonprofit organizations, state and local governments, and funding corporations (tables F.206 and L.206) have been revised due to a change in methodology based on detail from the Investment Company Institute. Data revisions begin 1976:Q1."

On Thursday, TMANY, the Treasury Management Association of New York, hosted a virtual segment entitled, "Cash Investment Themes in Uncertain Times" featuring speakers from Morgan Stanley Investment Management. The description says, "Cash levels are near all-time highs with overnight rates near all-time lows. What to do now? We will discuss everything from COVID-19's impact on the market, Federal Reserve stimulus, and the zero/negative interest rate environment." We review comments from the webinar below. (Note: Please join us for our next online event, Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash, which will take place Thursday, Sept. 24 from 1-2pmET. Register here: https://register.gotowebinar.com/register/1404567139793203980 for the free event.)

Morgan Stanley's Brian Buck comments, "We wanted to spend the remainder of our time on investment best practices and just talking to you about how to implement these things, or how to think about the general concepts of your investment options. [M]any of you we know are going to be invested in bank deposits and government funds, and that's sort of the foundation for most high-quality cash investors. But for those of you that are interested in looking for yield, for those of you with more stable cash balances, we'll sort of walk you through what to think about, or how you need to think about it."

He continues, "As we mentioned, now that rates are as low as they are and people have as much cash as they do, we think it's all the more important to be efficient with your cash and at least review and 'kick the tires' on the options. The three tracks we've seen during Covid.... You hunker down and get more conservative. You stay with what you've been doing. Or, we've actually had a growing amount of clients come to us and say, well, OK, now that I have so much more cash, I need to look at some new options or be a bit more flexible than in the past."

Buck tells us, "Everything really, comes down to the three options … bank deposits that you all know; commingled funds, that includes money market funds, bond funds, private funds; and direct securities, that's just going out and buying individual securities, whether it's treasuries or commercial paper, on your own. That could be done through a brokerage account. It can be done through a separate account with an asset manager, things like that. That's really the general approach that a lot of investors are taking."

He states, "When you look at the pluses and minuses of each, that's where you have to figure out what fits best with your needs. Clearly with bank deposits, it's really hard to argue with their liquidity and ease of use. It's just the other products can give you a little bit more flexibility when it comes to yield if you have a slightly longer time horizon. When you get into buying direct securities on your own you can customize and take whatever risks that you are comfortable with."

Buck says, "On A2/P2 [commercial paper], it's sort of the unloved sector, and that's why yields are attractive for usually pretty high-quality names. That's because it's just not easy for you to go to the powers that be and say, 'OK, let's go buy some A2/P2 commercial paper.' Because again, you all have day jobs. Your day job isn't to do the credit work on potentially A2/P2 issuers you might want to buy.... So, there's a lot of dynamics that go into it. And then there's a lot of people that have a little bit of perhaps past history with going into credit products that may color their views on all this."

Morgan Stanley's Jim Crowley adds, "I think looking back in the February, March, April timeframe, all the calls that we were receiving were basically investors looking for capacity in Government and Treasury funds. Yield was certainly not something that anyone was really thinking about or looking to optimize in any meaningful way at that time. There were just way too many unknowns in the market. That was like the initial flood, it was all into these risk off trades."

He tells the TMANY webinar, "Fast forward six months, which is not a long time, but a lot has happened between now and then. The observation I've had recently is that a lot of our institutional investors are at minimum 'kicking tires' on yield opportunity.... Government funds are down to a single basis point, prime funds are hovering around 15 or 20 basis points, ultra short, short duration strategies, may be somewhere around 40 to 50 basis points. So, investors are starting to come to us and say, hey, 'What are our opportunities in a somewhat risk adjusted framework that we can potentially look to get a little bit of incremental investment income?' Particularly for the more strategic type cash that they're sitting on today.... If you're willing to take a step out, maybe 30 days or so ... there is some incremental yield to be had."

Buck also comments, "If you're like many of our clients that at least want to kick the tires on this, the way to think about it is concentrating on a couple things. As Jim referenced, cash segmentation is something we always talk about and different people do it different ways. Some people have one cash bucket because they need everything liquid. Other people have four or five cash buckets because they have a very sophisticated cash flow forecasting model and a huge amount of cash.... Most people are somewhere in between, where maybe you have two or maybe sometimes three cash buckets."

He explains, "It really comes down to thinking about what you need at the ready to be spent or put to work, so really anything you're going to use cash-wise in the next month or so…. We usually put the first daily liquid bucket as cash you need in a couple of weeks to a month's time…. That's money that you're going to want concentrated in, again, the bank deposits and the government money market funds, the daily liquid stable value products.... Those investors that have longer term cash have the ability to cash flow forecast and the ability to identify a bit of a longer time horizon. That's where the opportunities arise for other products. A little bit more flexibility in terms of what else is out there."

Buck states, "[This second option] introduces high quality credit for the first time. That tends to come with a floating price. So, whether that's a Prime money market fund with a floating NAV, whether it's an ultra short bond fund or an ultra short duration strategy, that typically comes with a floating NAV, this introduces some products that can get you a blended yield on your portfolio well in excess of the first option. This could get you to a blended yield somewhere in that 25 basis point range if you limit your stable value products to maybe half or a third of your overall portfolio and you look at the higher yielding, high quality credit options for the other. This tends to be a good blend of the goals and objectives we looked at earlier."

He adds, "Option three is really close to what we put on here, separately managed accounts. But it doesn't have to be that. It could be you just going out and, Joe, as you referenced, maybe you spying a little bit of A2/P2 here or there, or maybe it's buying some Treasuries in combination with some high-quality commercial paper."

Finally, Buck comments, "When you look specifically at products, Prime money market funds are a really popular option.... The downside of prime money market funds is the fees and gates that were put in place by the S.E.C. back in 2016. So that's something you're going to need to get your accounting department, or your investment committee, or your CFO comfortable with. I think finally, if the fees and gates are a hindrance for people, or if perhaps if yield is something you're looking for, there are other options, like ultra short bond funds, or coming up with a package of securities on your own."

Aviva Investors, hosted a webinar in association with the U.K.-based ACT, or Association of Corporate Treasurers earlier this week, which discussed the "Current rate environment and the implications of monetary policy on money market fund yields." The outlook is not good, and the possibility of negative rates in Sterling and perhaps even USD, is very real, according to Aviva's Anthony Callcott and Caroline Hedges. Aviva manages one of the largest European Sterling MMFs, but it also offers "offshore" Euro and USD funds. (Note that these aren't available to U.S. investors.) We excerpt from their comments below.

Callcott explains, "We'll be drilling down the types of options that are available to treasurers to help with the management of their cash flows. The question is often asked ... are money market funds still a viable alternative to bank deposits? We feel that they certainly are, and as a product, they've shown, especially through times of crisis, to be resilient and a valid vehicle in order for investors to gain the diversification, access to liquidity and security of capital that they require."

He continues, "The niche of money market funds has been one that's been needed by all types of clients, be it corporates, financial institutions, pension schemes, local authorities, county councils, charities, housing associations. All have the same common goal, namely security of capital, diversification of investments and access to cash on a same day settlement basis."

Discussing last year's European Money Fund Reforms, Callcot comments, "The impact of these changes meant the money market fund providers created money market funds to be even more fit for [this] purpose than ever before. Navigating through times of crisis and stress markets has been so much easier for us all to manage as a result of these regulatory changes. So, it is with confidence that we can say that money market funds are still a viable alternative to bank deposits; resilient in times of stress market conditions and will continue to be so looking forward."

The moderator, ACT's James Winterton, posed a poll question on corporate cash holdings. He says, "We have bank deposits at nearly 48%, money market funds are nearly 41%, and then trailing really quite a long way behind, we have segregated holdings of T-bills or short-dated bonds at 5%, 'other' nearly 4%, and tri-party repo at 2.5%. Is that the sort of spread you were expecting to see?"

Callcott responds, "Yeah, I think so.... I think ultimately, it still is the security of capital, the diversification and access to liquidity that people crave.... They need that security to know that their money is safe. So, we certainly saw a rise in assets from our point of view. There was a stockpiling of cash, I'd say. There were fewer wants to be out there for mergers and acquisitions. It was very much, 'Let's ring-fence our cash; let's see how things settle.' So as a consequence, certainly more money coming through to the cash markets. In the short to medium term, it's our opinion that ... the need for daily access to liquidity, is going to continue to be of the highest importance."

He adds, "The challenge that we now face, aside from ensuring that we can embrace the new way of working, is adapting to the potential changes in the rate landscape, both here and potentially in the U.S. Interest rates have been low for many, many years in some geographies and in some cases negative. The question to ask is whether we'll see this pattern repeated in the U.K. and in the US. And if we were to, how do we manage through that and how do we ensure that our business remains fit for purpose?"

Callcot tells us, "As a provider of cash solutions, we all need to be quick to react to change. We need to be innovative, nimble, confident and assured in our investment decisions. Not just in times of crisis, by the way, but always, at all times. But it's paramount that we are able to facilitate change in fund structure should market dynamics and scenarios dictate to maintain business as usual, and to ensure that the clients, our clients, all clients, have the confidence to invest in our products going forward."

Hedges says, "Now, some of the new programs from the central banks included facilities to support the short-term markets -- the commercial paper markets, the repo markets and from the Fed, we even had a facility to support money market funds. As this liquidity increased in the system and as corporates built up cash buffers, yields plummeted very quickly and they made new lows in euros and dollars. So, what is the prospect of rates going even farther south and turning negative? ... The Fed has been quite vocal with their reluctance to take this path."

She continues, "In the U.K. however, we've seen the rhetoric [turn] increasingly dovish. The new governor himself has changed his language and view on negative interest rates, stating earlier in the year that he doesn't believe negative interest rates are an effective tool ... to a couple of weeks ago stating that it is one of the tools that they may use in their toolbox. And this hasn't only been from the governor himself, Andrew Bailey, but also other members.... It seems have also changed their stance. The market has [now] priced in negative yields.... Some issuers in the sterling money market space have even been pricing in negative yields over the last month, which is something we've never seen before."

Hedges states, "There are a few unknowns, unfortunately. What we do know, however, is that rates will be at the most near to zero or lower for the U.S. and the U.K. for many years to come. The recovery from the pandemic will take a long time and the threat of inflation is such a long way off. The government is actually trying to fight off deflation. What does this mean for money market funds? Money market funds should prepare for negative rates whether they expect them to materialize or not, both operationally and from an investment management perspective as well."

She explains, "LVNAV funds should have plans in place to move to accumulating share classes or VNAV structure. In terms of management of the portfolios, perhaps a long duration strategy would be most beneficial. What we've seen actually in the sterling space is that funds have been increasing their duration over the last few weeks in particular, but also over the last three months or so. Those that made this play early on have benefitted quite well because rates have been drifting lower for a few months. But because liquidity requirements are also required to remain high, you tend to see more of a barbell strategy."

Hedges also says, "All of the Sterling money market funds over the past few months, even during the crisis when yields were elevated and yields have gone lower now, they've continued to price at 1.00. As we know for LVNAV structures, they have a collar of 20 basis points. No triple-A money market fund breached that quota, even during the current crisis. Investors still continue to have their capital preservation, and for every unit that they invested in a money market fund they received a unit back. Yields in the interest that they receive or accrue on those funds have been drifting lower, for prime money market funds, that's still a positive net return."

When asked about what information clients are looking for, Callcott responds, "[They've been focused] around transparency; the ability to get a proper look through and the ability to get really quick information on the underlying assets.... But not only with the individual fund they might be dealing with, but as a cross-reference across a number of funds in an aggregated look.... So, that's the type of questions that we're getting at the moment from treasurers." (Note: Let us know if you'd like to see Crane Data's latest Money Fund Intelligence International, which tracks these "offshore" or European MMFs, or our latest MFI International MF Portfolio Holdings data set.)

The Financial Times weighed in on recent money fund news in its piece, "Asset managers overhaul money market funds after March rout." They write, "Some of the world's largest asset managers are shutting down US investment vehicles that have suffered rapid outflows in times of stress, threatening an important source of short-term funding for companies across America. Vanguard followed peers Fidelity and Northern Trust last month when it announced the closure of its 'prime' money market fund.... The manager's move to convert its prime fund to one buying government bonds by the end of September will pull $125bn from the remaining $750bn invested in the prime segment.... Some analysts are now braced for a regulatory clampdown on the sector."

The FT explains, "In 2016 regulators introduced stringent new rules for prime funds, including the ability for fund managers to temporarily prevent investors from withdrawing their money. But Fed economists argued in July that those rules may have actually exacerbated outflows from prime funds in this year's sell-off, by pushing investors to try to get hold of their cash at a faster pace. 'Given the notable role of [money market funds] in the short-term funding markets and in the shadow banking system, more research and collaborative regulatory efforts are warranted to enhance the stability of the industry,' they concluded."

They comment, "There could be more immediate effects, too, if fund closures curtail a vital source of short-dated financing for companies. The commercial paper market -- where companies borrow for up to 12 months, and where prime money market funds are among the largest players -- was rescued in March when the Fed set up a special purchasing program to stave off a funding crunch. The US central bank also launched a facility that made loans to banks secured by assets from money market mutual funds, in order to ensure that they could meet demands for redemptions.... The total amount of commercial paper outstanding in the US has sunk from $1.13tn at the beginning of the year to less than $1tn in September -- the lowest in three years."

The FT article adds, "Some analysts say that investors will continue to be drawn to the higher returns that prime funds offer, despite the risks. Pete Crane, who runs the money market fund data service Crane Data, said reports of the death of such funds are 'greatly exaggerated', adding: 'Yield always wins over safety, eventually.' But others are not so sure. If interest rates remain on hold, spreads -- the additional yield available on credit over Treasuries -- shrink further, and another round of regulation makes running these funds more onerous, 'it is possible you could see another round of  ... closures', said Mark Cabana, a strategist at Bank of America.

In other news, ICI released its latest monthly "Money Market Fund Holdings" summary yesterday, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (For more, see our September 11 News, "Sept. MF Portfolio Holdings: Repo Jumps; Agencies, CP, CDs Decline.")

The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in August, prime money market funds held 40.8 percent of their portfolios in daily liquid assets and 53.0 percent in weekly liquid assets, while government money market funds held 74.3 percent of their portfolios in daily liquid assets and 84.0 percent in weekly liquid assets." Prime DLA increased from 40.2% in July, and Prime WLA increased from 50.4%. Govt MMFs' DLA increased from 74.2% in July and Govt WLA was unchanged at 84.0% from the previous month.

ICI explains, "At the end of August, prime funds had a weighted average maturity (WAM) of 46 days and a weighted average life (WAL) of 66 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 42 days and a WAL of 99 days." Prime WAMs were down one day from the previous month and WALs were down two days from the previous month. Govt WAMs were down one day in August and WALs were down two days in the previous month.

Regarding Holdings By Region of Issuer, the release tells us, "Prime money market funds' holdings attributable to the Americas rose from $414.44 billion in July to $418.42 billion in August. Government money market funds' holdings attributable to the Americas declined from $3,273.06 billion in July to $3,239.43 billion in August." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $418.4 billion, or 5.2%; Asia and Pacific at $103.1 billion, or 13.6%; Europe at $227.9 billion, or 30.1%; and, Other (including Supranational) at $8.4 billion, or 1.1%. The Government Money Market Funds by Region of Issuer table shows Americas at $3.239 trillion, or 87.5%; Asia and Pacific at $125.4 billion, or 3.4%; Europe at $325.1 billion, 8.8%, and Other (Including Supranational) at $13.4 billion, or 0.4%."

Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Wednesday (a day late due to our monthly Offshore MF Portfolio Holdings shipping Tuesday), which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of September 11) includes Holdings information from 78 money funds (up 1 from two weeks ago), which represent $2.322 trillion (down from $2.360 trillion) of the $4.867 trillion (47.7%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website.)

Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.255 trillion (down from $1.282 trillion two weeks ago), or 54.1%, Repurchase Agreements (Repo) totaling $526.8 billion (down from $527.5 billion two weeks ago), or 22.7% and Government Agency securities totaling $329.3 billion (down from $337.4 billion), or 14.2%. Certificates of Deposit (CDs) totaled $73.5 billion (down from $75.2 billion), or 3.2%, and Commercial Paper (CP) totaled $69.4 billion (up from $65.0 billion), or 3.0%. The Other category accounted for $36.1 billion or 1.6%, while VRDNs accounted for $31.7 billion, or 1.4%.

The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.256 trillion (54.1% of total holdings), Federal Home Loan Bank with $177.7B (7.7%), BNP Paribas with $71.7B (3.1%), Fixed Income Clearing Corp with $61.3B (2.6%), Federal Farm Credit Bank with $60.3B (2.6%), Federal National Mortgage Association with $53.2B (2.3%), RBC with $43.6B (1.9%), Federal Home Loan Mortgage Corp with $35.2B (1.5%), JP Morgan with $35.0B (1.5%) and Mitsubishi UFJ Financial Group Inc with $30.8B (1.3%).

The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt MM ($177.6B), Goldman Sachs FS Govt ($174.7B), Fidelity Inv MM: Govt Port ($163.3B), Wells Fargo Govt MM ($158.7B), BlackRock Lq FedFund ($139.4B), JP Morgan 100% US Treas MMkt ($110.7B), BlackRock Lq T-Fund ($93.4B), Morgan Stanley Inst Liq Govt ($90.3B), Dreyfus Govt Cash Mgmt ($88.7B) and JP Morgan Prime MM ($85.5B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

Crane Data's latest MFI International shows that assets in European or "offshore" money market mutual funds were flat to lower over the past month after hitting a record $1.056 trillion in August. They broke above the $1.0 trillion for the first time ever three months ago. These U.S.-style funds, domiciled in Ireland or Luxemburg and denominated in US Dollars, Pound Sterling and Euros, increased by $149 million over the last 30 days (when translated into dollars); they're up by $172.2 billion (19.6%) year-to-date. Offshore US Dollar money funds, which broke over $500 billion in January, are down $3.0 billion over the last 30 days but up $64.1 billion YTD to $558.5 billion. Euro funds are up E1.2 billion over the past month, and YTD they're up E34.2 billion to E132.8 billion. GBP money funds have fallen by L7.2 billion over 30 days, but are up by L28.3 billion YTD to L253.3B. U.S. Dollar (USD) money funds (192) account for over half (53.3%) of the "European" money fund total, while Euro (EUR) money funds (94) make up 14.0% and Pound Sterling (GBP) funds (122) total 29.3%. We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers Tuesday), below.

Offshore USD MMFs yield 0.08% (7-Day) on average (as of 9/14/20), down from 1.59% on 12/31/19 and 2.29% at the end of 2018. EUR MMFs yield -0.59% on average, compared to -0.59% at year-end 2019 and -0.49% on 12/31/18. Meanwhile, GBP MMFs yielded 0.03%, down from 0.64% as of 12/31/19 and 0.64% at the end of 2018. (See our latest MFI International for more on the "offshore" money fund marketplace. Note that these funds are only available to qualified, non-U.S. investors.)

Crane's September MFII Portfolio Holdings, with data as of 8/31/20, show that European-domiciled US Dollar MMFs, on average, consist of 22.8% in Commercial Paper (CP), 14.7% in Certificates of Deposit (CDs), 17.8% in Repo, 31.9% in Treasury securities, 11.3% in Other securities (primarily Time Deposits) and 1.5% in Government Agency securities. USD funds have on average 34.8% of their portfolios maturing Overnight, 4.5% maturing in 2-7 Days, 15.5% maturing in 8-30 Days, 14.8% maturing in 31-60 Days, 10.4% maturing in 61-90 Days, 16.0% maturing in 91-180 Days and 3.9% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (43.3%), France (12.6%), Japan (8.3%), Canada (6.9%), Germany (4.9%), the U.K. (4.7%), Sweden (4.2%), the Netherlands (4.0%), Switzerland (2.0%), Australia (1.7%), Belgium (1.6%), Norway (1.5%), Singapore (0.9%) and China (0.7%).

The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $196.2 billion (31.9% of total assets), Fixed Income Clearing Co with $22.3B (3.6%), BNP Paribas with $19.2B (3.1%), Credit Agricole with $16.9B (2.8%), Barclays PLC with $16.5B (2.7%), Mizuho Corporate Bank Ltd with $14.3B (2.3%), Sumitomo Mitsui Banking Corp with $13.1B (2.1%), Mitsubishi UFJ Financial Group Inc with $12.6B (2.0%), RBC with $11.8B (1.9%) and JP Morgan with $11.1B (1.8%).

Euro MMFs tracked by Crane Data contain, on average 41.8% in CP, 18.0% in CDs, 20.6% in Other (primarily Time Deposits), 15.3% in Repo, 3.0% in Treasuries and 1.3% in Agency securities. EUR funds have on average 32.9% of their portfolios maturing Overnight, 6.4% maturing in 2-7 Days, 15.4% maturing in 8-30 Days, 13.0% maturing in 31-60 Days, 9.6% maturing in 61-90 Days, 18.9% maturing in 91-180 Days and 3.9% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (33.0%), Japan (11.4%), the U.S. (10.1%), Germany (9.0%), Sweden (6.0%), the U.K. (4.6%), Switzerland (4.4%), Belgium (4.0%), Canada (3.6%), the Netherlands (3.5%), Austria (2.8%), Qatar (1.4%) and China (1.3%).

The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E7.7B (6.5%), BNP Paribas with E7.2B (6.1%), Citi with E5.0B (4.2%), Republic of France with E4.8B (4.1%), BPCE SA with E4.2B (3.5%), Societe Generale with E4.1B (3.4%), Agence Central de Organismes de Securite Sociale with E3.9B (3.3%), Mizuho Corporate Bank Ltd with E3.9B (3.3%), DZ Bank AG with E3.9B (3.3%) and Sumitomo Mitsui Banking Corp with E3.6B (3.1%).

The GBP funds tracked by MFI International contain, on average (as of 8/31/20): 32.5% in CDs, 18.9% in CP, 24.7% in Other (Time Deposits), 18.8% in Repo, 4.6% in Treasury and 0.5% in Agency. Sterling funds have on average 37.6% of their portfolios maturing Overnight, 8.1% maturing in 2-7 Days, 10.5% maturing in 8-30 Days, 12.3% maturing in 31-60 Days, 11.0% maturing in 61-90 Days, 16.8% maturing in 91-180 Days and 3.7% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: the U.K. (20.0%), France (19.1%), Japan (16.3%), Canada (9.5%), the Netherlands (5.6%), the U.S. (5.4%), Germany (4.3%), Sweden (3.9%), Australia (2.9%), Abu Dhabi (2.4%) and Singapore (2.0%).

The 10 Largest Issuers to "offshore" GBP money funds include: the UK Treasury with L23.4B (10.8%), Mizuho Corporate Bank Ltd with L12.3B (5.7%), BNP Paribas with L10.6B (4.9%), Sumitomo Mitsui Banking Corp with L8.6B (4.0%), Agence Central de Organismes de Securite Sociale with L7.6B (3.5%), RBC with L7.4B (3.4%), Credit Agricole with L7.3B (3.4%), Barclays PLC with L7.2B (3.3%), Mitsubishi UFJ Financial Group Inc with L7.0B (3.2%) and BPCE SA with L6.8B (3.1%).

In related news, BNP Paribas Asset Management discusses "offshore" MMFs in their, "Weekly Market Podcast," saying there is, "Still room for positive yields in USD, GBP money markets." An article on the podcast states, "Central banks provided economies with ample cash as the economic effects of the COVID-19 health crisis bit, driving down interest rates – and absolute returns – in the process, but as Philippe Renaudin, head of global money markets, tells senior investment strategist Daniel Morris in this interview, careful selection and diversification mean potential for competitive returns remains in money markets."

Morris asks, "Can you share with us the current conditions for the US dollar money markets, what about the level of rates, what about spreads, particularly following the turmoil we had from March?" Renaudin explains, "In general, major central banks including the Fed have done a good job calming the markets and providing liquidity after markets reeled this spring. The Fed actively entered the market and injected liquidity, resulting in low US yields and spreads. CDs (certificates of deposits), for example, now trade at 15bp – that is a fraction of the 80-100bp at the height at the crisis in March. So for three-month paper issued by US banks and corporates, the cost is only 0.15%, down from 1% half a year ago."

Renaudin explains, "The key for us is to buy paper that is liquid. This accounts for 30-40% of our portfolios. This portion is invested in bank deposits with yields close to the fed funds fixing. The remainder is invested in paper with different maturities, particularly from banks, which are very active, especially in three to six-month maturities. We actually favour these securities. With this allocation, we have been able to provide a positive daily yield and we are confident that we can maintain this positive level for a couple of months."

Morris comments, "In the eurozone, we do not expect much change, especially after the recent ECB decision to keep its monetary policy stance unchanged. In the UK, however, we believe that the monetary stance will need to remain loose for the foreseeable future, not least because the fiscal pendulum will soon swing back in the direction of budget consolidation ... given the backdrop of rising unemployment and greater uncertainty over the future relationship between the UK and the EU. We expect the Bank of England (BoE) to do more QE rather than cut interest rates significantly to below zero. Depending on economic developments in the interim, there is scope for a small cut to 0%, but no earlier than November and more likely in 2021."

Renaudin adds, "Similar to the Fed, the BoE provided liquidity on a large scale in the crisis, leaving market rates at close to zero and pushing spreads to very low levels. In terms of volatility, the UK market is quieter now than the US market, with rates at zero to 20bp on all types of instruments. Rates have remained under pressure: recently, we saw the UK three-month T-bill rate at -1bp. In these circumstances, it is hard to have positive yields for money market flows. The UK is a small market in terms of outstanding amounts and the numbers of issuers, so constructing a well-diversified portfolio is a challenge. Nevertheless, in the market, we are seeing rates of close to 5bp on deposits."

The September issue of our Bond Fund Intelligence, which was sent to subscribers Tuesday morning, features the lead story, "Ultra-Shorts Brace for Flood as Second Zero Yield Era Dawns," which examines the growth of ultra-shorts as zero yields add to their already explosive growth, and "William Blair's Ruta Ziverte Talks Bonds, Low Duration," which interviews the Chicago firm's head of fixed income. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund yields and returns were mixed in August. We excerpt from the new issue below. (Contact us if you'd like to see our Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data, and register to attend next week's Crane's Bond Fund Webinar: Ultra-Shorts and Alt-Cash, which is Sept. 24 from 1-2pmET.)

Our Ultra-Shorts piece reads, “Ultra-Short Bond Funds, which have seen even more explosive growth over the past decade than bond funds overall, are poised for more. Zero yields on money market funds and record low yields across the yield curve have set the stage for yet another burst of interest in the space just beyond money market funds. Below, we look at where ultra-shorts have been, and where they’re going.”

It continues, "AssetTV recently posted, Straight From PIMCO: Time to Be Conscious of Your Cash.' It quotes PIMCO's Jerome Schneider, 'Today's economic environment is one fraught with uncertainty, where being selective in risk taking will likely prove to be beneficial. Focusing on the defense is important, in fact, we've had over $800 billion year-to-date and over $2 trillion the past three years into money market funds as investors have grown more defensive.'"

Our Profile says, "This month, Bond Fund Intelligence interviews Ruta Ziverte, the Head of U.S. Fixed Income for William Blair Investment Management. Ziverte discusses the Chicago-based manager's history, her team's emphasis on preserving capital and focus on agency mortgage-backed securities, and alternatives to cash management. Our discussion follows."

BFI says, "Give us some history." Ziverte tells us, "William Blair's fixed-income team has focused on active management in developed fixed-income markets since 1990, when the team launched William Blair's first Income Fund, which was benchmarked to the intermediate government credit index."

She continues, "As markets evolved and client needs shifted, we expanded our lineup. In 1998 we added a core bond strategy, and 10 years later we launched the corresponding mutual fund—the William Blair Bond Fund. Our low duration strategy was launched in 1999 and the corresponding mutual fund in 2009. More recently, our platform has grown into sustainable fixed income due to the integration of ESG analysis into our investment process, and we run a sustainable fixed income strategy for separately managed accounts."

Our Bond Fund News includes the brief, "Yields & Returns Mixed in August," which explains, "Bond fund yields and returns inched higher last month. Our BFI Total Index returned 0.11% over 1-month and 3.72% over 12 months. The BFI 100 gained 0.03% in August and rose 4.69% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.12% over 1-mo and 1.88% over 1-yr; Ultra-Shorts averaged 0.28% in August and 1.86% over 12 mos. Short-Term returned 0.39% and 3.39%, and Intm-Term fell 0.09% last month and 5.80% over 1-year. BFI's Long-Term Index returned –0.78% in August and 7.35% for 1-year. Our High Yield Index rose 1.05% last month and is up just 2.28% over 1-year."

In another News brief, we quote Morningstar's piece, "Not All Core Bond Funds Are Created Equal." They write, "For investors seeking a diversified and relatively conservative fixed-income portfolio anchor, the intermediate core bond Morningstar Category is a good place to look. This category is home to strategies that invest primarily in high-quality U.S. fixed-income issues.... Strategies in this category tend to have durations ... that run from four to seven years."

A third News update covers the WSJ article, "Emerging-Market Bond Funds Face Reckoning." It comments, "Emerging-markets bond funds are facing a reckoning as Covid-19 stresses economies across the globe, reminding investors that assets aimed at producing higher returns in good times can post outsize losses when things go wrong."

BFI also features a sidebar entitled "Braun & Bartolini on Bonds. The piece explains, "AssetTV recently featured the video segment, 'The ETF Show – Fixed Income in Focus,' which tells us, 'PIMCO's David Braun and Matthew Bartolini of State Street Global Advisors discuss strong inflows into fixed income, the Fed's ETF purchases, and the search for yield in this low interest rate environment.'"

Finally, a brief entitled, "Bond Fund Inflows Still Going," tells us, "Bond funds continue to see strong inflows and asset gains. ICI's 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' says, 'Bond funds had estimated inflows of $24.54 billion for the week, compared to estimated inflows of $20.04 billion during the previous week [and inflows of $17.8 billion the week before that]. Taxable bond funds saw estimated inflows of $23.20 billion, and municipal bond funds had estimated inflows of $1.34 billion.' Over the past 5 weeks, bond funds and bond ETFs have seen inflows of $109.8 billion."

The mainstream press has again taken note of events in the money market space, this time writing about fears over exits in the Prime MMF sector. The Wall Street Journal writes, "Shrinking Money-Market Funds Threaten Global Dollar Supply and Bloomberg writes, "Money-Market Fund Woe Becomes a Headache for Borrowers." The Journal's piece explains, "After the money-market panic in March, assets in the prime funds, which invest in short-term corporate debt, rocketed back up in April and May. They are now sliding once again, posing a threat to non-U.S. banks that rely on them. According to data from the Investment Company Institute, the assets of prime money-market funds ran to $741.62 billion on Wednesday, down $24 billion from its rebound level in late June and down sharply from its 2020 peak of about $810 billion in mid-February."

It continues, "Without the stable dollar deposit bases of American lenders, yield-hungry foreign banks have relied on these funds as a source of dollar borrowing in recent years. In times of stress, U.S. banks can count on deposits, but prime fund investors are far more flighty. The plunge in assets this year contributed to decisions by Fidelity and Vanguard to wind down major money-market funds."

The Journal piece tells us, "Under the hood, the picture is actually even more acute. The proportion of prime-fund assets made up of commercial paper and certificates of deposit has declined, while the share of government and agency bonds surged to 25.5% by the end of July from 7.3% at the start of 2020. The ultimate result depends on the Federal Reserve. If the U.S. central bank remains as accommodative as it has been so far, foreign banks likely have little to worry about. Currency swaps between central banks did the trick in calming strained funding markets in March."

Finally, they write, "But the situation may change if financial distress is concentrated among international lenders. Despite its largess this year, the Fed has no specific mandate to provide support to overseas banks. In that context, the thinning demand for a major funding source is worth keeping an eye on."

The Bloomberg article" comments, "For decades, money-market mutual funds offered better returns than bank deposits, were just as accessible and seemed just as safe -- until they needed a federal bailout at the height of the 2008 financial crisis. That led to reforms meant to make the industry safer, while still allowing users to pursue higher yields, and investors started to drift back. But now the Federal Reserve has driven rates so low that the extra risk hardly seems worth it. That's creating problems not just for fund managers but for corporations that have long relied on money markets to fund their day-to-day operations."

It states, "As social distancing and quarantine measures to curb the pandemic shut down economies and wracked global markets in March, investors again herded out of prime funds, and into the relative safety of 'govvies.' Over six weeks, prime funds shed around $150 billion of assets. Perversely, the 2016 overhaul may have exacerbated the flight, as investors were motivated to move early to avoid possible penalties, or getting stuck if a fund's assets dropped too far. Some managers with parent banks were able get liquidity injections from them -- Goldman Sachs bought a total of $1.84 billion from two of its asset management arm's money-market funds in March."

Bloomberg writes, "What did that do to markets? Made a bad situation worse. While prime redemptions were largely absorbed by government funds, they had big ripple effects: Commercial-paper issuance froze in March through April, which in turn contributed to a surge in Libor, a benchmark rate for lending between banks that underpins trillions of dollars of corporate and consumer loans. Once again the Fed stepped in with emergency support, rolling out its Money Market Mutual Fund Liquidity Facility to help them meet demand for redemptions. That solved one problem for funds, even while the Fed was creating another."

They continue, "Prime money-market funds exist because they offer better returns than holding cash or Treasuries. But that's hard to offer when the Fed is pushing rates down to zero, as it did in March. The Fed's assurances that the target policy rate will stay put for years to support a full economic recovery signify another stretch in the wilderness for money-market funds. Rock-bottom rates will mean that short-term funds will be able to offer little if any return. But the situation is particularly tough for prime funds, where the main appeal is the dollop of yield they offer investors prepared to take a little credit risk."

The article adds, "Vanguard Group -- the world's second-largest asset manager -- voluntarily agreed to limit expenses on the investor class of a $125 billion fund that it's converting to a government-only vehicle after more than 40 years. Northern Trust Corp. and Fidelity Investments recently axed prime funds altogether.... Barclays rates strategist Joseph Abate assumes the prime-fund industry will be 'permanently smaller, because of voluntary exits or regulation changes.' And even if the incumbents stay, regulators armed with this fresh evidence of how commercial-paper markets can evaporate in moments of stress may want to impose limits on how much of it these funds can buy."

In other news, Wells Fargo Asset Management's latest "Money market overview," tells us, "The outflows the industry experienced in June were confirmed as a trend during the ensuing two months, though the pace declined sharply. After shedding $111 billion in assets in June, money market fund assets declined another $102 billion over the two-month period that ended August 31. Government and Treasury funds lost another $86 billion on the heels of June’s loss of $131 billion, bringing total assets under management to $3.7 trillion after peaking on May 13 at $3.915 trillion. Prime funds also experienced an erosion in their asset base, losing $8.6 billion after gathering $22.9 billion the previous month—this in spite of reaching a new high in assets under management on July 10 of $1.135 trillion. Even municipal funds were not immune, shrinking a further $7.4 billion and finishing August with assets of $128 billion."

The update continues, "Given the sources of asset flows into the funds, it's not surprising to see this decline in assets occurring. As money from federal coronavirus-related financial assistance programs gets spent down and corporations and small businesses get back to work, it's likely that the cash reserves to fund a resumption in activity will be depleted and money market balances will continue to trend down over the very near future. Additionally, corporate tax day is right around the corner, likely leading to a spike in redemptions around September 15. Normal seasonal flows for funds typically show an increase going into year-end. With this year being rather atypical, to say the least, it's unclear whether we will see this type of behavior in funds as the year winds down."

On the U.S. government sector, Wells adds, "The biggest news over the summer is what didn't happen, as the widely expected next stimulus bill not only didn't get over the finish line but also didn't really even show up to the track. The kinds of things that usually inject urgency into the process were largely absent, as economic data was generally better than feared and equities were buoyant. A stimulus bill would have meant more government spending, quickly, and would've required more Treasury bills (T-bills) to fund it. In its absence, T-bill supply has leveled off and market yields have declined and flattened.... If another stimulus bill does eventually pass, the additional supply, though significant, will likely be but a fraction of what the market digested in the spring, with perhaps a correspondingly smaller increase in yields."

Crane Data released its September Money Fund Portfolio Holdings Thursday, and our most recent collection, with data as of August 31, 2020, shows an increase in Repo and Treasuries and drops in CP and Government Agency Debt last month. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) decreased by $12.7 billion to $4.867 trillion last month, after decreasing $83.1 billion in July and $159.1 billion in June, and increasing $31.6 billion in May, and a staggering $529.4 billion in April and $725.6 billion in March. Treasury securities remained the largest portfolio segment, followed by Repo, 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, Treasury securities increased by $3.1 billion (0.1%) to $2.468 trillion, or 50.7% of holdings, after decreasing $79.9 billion in July and increasing $60.8 billion in June and $355.9 billion in May. Repurchase Agreements (repo) increased by $60.8 billion (6.2%) to $1.048 trillion, or 21.5% of holdings, after increasing $40.0 billion in July, and decreasing $124.3 billion in June and $216.7 billion in May. Government Agency Debt decreased by $37.6 billion (-4.5%) to $796.5 billion, or 16.4% of holdings, after decreasing $45.1 billion in July, $65.2 billion in June and $99.8 billion in May. Repo, Treasuries and Agencies totaled $4.312 trillion, representing a massive 88.6% of all taxable holdings.

Money funds' holdings of CP, CDs and VDRNs fell in August, while Other (mainly Time Deposits) saw assets increase. Commercial Paper (CP) decreased $32.5 billion (-11.8%) to $243.5 billion, or 5.0% of holdings, after decreasing $10.7 billion in July, $6.5 billion in June and increasing $5.2 billion in May. Certificates of Deposit (CDs) fell by $19.0 billion (-9.8%) to $176.9 billion, or 3.6% of taxable assets, after decreasing $12.3 billion in July, $9.1 billion in June and $7.4 billion in May. Other holdings, primarily Time Deposits, increased $15.3 billion (15.2%) to $115.6 billion, or 2.4% of holdings, after increasing $22.3 billion in July and decreasing by $13.7 billion in June and $5.7 billion in May. VRDNs decreased to $19.1 billion, or 0.4% of assets, from $22.0 billion the previous month. (Note: This total is VRDNs for taxable funds only. We will publish Tax Exempt MMF holdings separately late Friday.)

Prime money fund assets tracked by Crane Data increased $2.0 billion to $1.136 trillion, or 23.3% of taxable money funds' $4.867 trillion total. Among Prime money funds, CDs represent 15.6% (down from 17.3% a month ago), while Commercial Paper accounted for 21.4% (down from 24.3%). The CP totals are comprised of: Financial Company CP, which makes up 12.6% of total holdings, Asset-Backed CP, which accounts for 4.9%, and Non-Financial Company CP, which makes up 3.9%. Prime funds also hold 9.0% in US Govt Agency Debt, 28.4% in US Treasury Debt, 4.9% in US Treasury Repo, 0.5% in Other Instruments, 6.3% in Non-Negotiable Time Deposits, 5.4% in Other Repo, 4.7% in US Government Agency Repo and 0.9% in VRDNs.

Government money fund portfolios totaled $2.505 trillion (51.5% of all MMF assets), up $2.0 billion from $2.503 trillion in July, while Treasury money fund assets totaled another $1.226 trillion (25.2%), down from $1.243 trillion the prior month. Government money fund portfolios were made up of 27.7% US Govt Agency Debt, 13.5% US Government Agency Repo, 44.8% US Treasury debt, 13.4% in US Treasury Repo, 0.2% in VRDNs , 0.1% in Investment Company and 0.2% in Other Instrument. Treasury money funds were comprised of 83.5% US Treasury Debt and 16.4% in US Treasury Repo. Government and Treasury funds combined now total $3.731 trillion, or 76.7% of all taxable money fund assets.

European-affiliated holdings (including repo) rose by $35.4 billion in August to $659.9 billion; their share of holdings rose to 13.6% from last month's 12.8%. Eurozone-affiliated holdings rose to $456.7 billion from last month's $424.3 billion; they account for 9.4% of overall taxable money fund holdings. Asia & Pacific related holdings decreased $21.3 billion to $248.1 billion (5.1% of the total). Americas related holdings fell $26.0 billion to $3.952 trillion and now represent 81.2% of holdings.

The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (up $22.9 billion, or 4.0%, to $593.5 billion, or 12.2% of assets); US Government Agency Repurchase Agreements (up $24.2 billion, or 6.6%, to $392.3 billion, or 8.1% of total holdings), and Other Repurchase Agreements (up $13.7 billion, or 28.7%, from last month to $61.6 billion, or 1.3% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $10.7 billion to $143.5 billion, or 2.9% of assets), Asset Backed Commercial Paper (down $10.7 billion to $55.4 billion, or 1.1%), and Non-Financial Company Commercial Paper (down $11.1 billion to $44.6 billion, or 0.9%).

The 20 largest Issuers to taxable money market funds as of August 31, 2020, include: the US Treasury ($2,467.5 billion, or 50.7%), Federal Home Loan Bank ($491.3B, 10.1%), BNP Paribas ($129.2B, 2.7%), Federal National Mortgage Association ($116.2B, 2.4%), Fixed Income Clearing Co ($113.2B, 2.3%), RBC ($102.5B, 2.1%), Federal Farm Credit Bank ($99.7B, 2.0%), JP Morgan ($91.2B, 1.9%), Federal Home Loan Mortgage Co ($84.3B, 1.7%), Credit Agricole ($73.0B, 1.5%), Mitsubishi UFJ Financial Group Inc ($67.8B, 1.4%), Barclays ($59.7B, 1.2%), Citi ($53.8B, 1.1%), Sumitomo Mitsui Banking Co ($49.4B, 1.0%), Societe Generale ($42.7B, 0.9%), Toronto-Dominion Bank ($41.2B, 0.8%), Bank of Montreal ($40.2B, 0.8%), Bank of America ($37.0B, 0.8%), Mizuho Corporate Bank Ltd ($34.8B, 0.7%) and Canadian Imperial Bank of Commerce ($32.7B, 0.7%).

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 ($115.1B, 11.0%), Fixed Income Clearing Co ($113.0B, 10.8%), JP Morgan ($80.9B, 7.7%), RBC ($78.1B, 7.5%), Credit Agricole ($53.8B, 5.1%), Citi ($45.9B, 4.4%), Mitsubishi UFJ Financial Group ($45.2B, 4.3%), Barclays ($42.4B, 4.1%), Bank of America ($34.5B, 3.3%) and Societe Generale ($33.7B, 3.2%).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($24.4B, 5.3%), Toronto-Dominion Bank ($24.1B, 5.2%), Mitsubishi UFJ Financial Group ($22.6B, 4.9%), Mizuho Corporate Bank Ltd ($19.7B, 4.3%), Credit Agricole ($19.2B, 4.2%), Sumitomo Mitsui Trust Bank ($17.3B, 3.7%), Barclays ($17.3B, 3.7%), Sumitomo Mitsui Banking Co ($17.0B, 3.7%), Canadian Imperial Bank of Commerce ($16.1B, 3.5%) and BNP Paribas ($14.1B, 3.1%).

The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc ($15.1B, 8.5%), Sumitomo Mitsui Banking Co ($13.7B, 7.7%), Bank of Montreal ($13.0B, 7.4%), Sumitomo Mitsui Trust Bank ($11.2B, 6.3%), Mizuho Corporate Bank Ltd ($10.9B, 6.2%), Toronto-Dominion Bank ($9.2B, 5.2%), Canadian Imperial Bank of Commerce ($7.2B, 4.1%), Bank of Nova Scotia ($6.9B, 3.9%), Credit Suisse ($6.6B, 3.7%) and Svenska Handelsbanken ($6.3B, 3.6%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: RBC ($13.8B, 6.6%), Toronto-Dominion Bank ($13.3B, 6.4%), JP Morgan ($10.3B, 5.0%), Societe Generale ($8.3B, 4.0%), Canadian Imperial Bank of Commerce ($7.6B, 3.7%), BNP Paribas ($6.7B, 3.2%), Barclays ($6.4B, 3.1%), Citi ($6.3B, 3.0%), NRW.Bank ($6.2B, 3.0%) and Caisse des Depots et Consignations ($6.2B, 3.0%).

The largest increases among Issuers include: BNP Paribas (up $11.0B to $129.2B), Fixed Income Clearing Corp (up $7.5B to $113.2B), Mitsubishi UFJ Financial Group Inc (up $4.0B to $67.8B), Bank of America (up $3.5B to $37.0B), DNB ASA (up $3.5B to $15.9B), JP Morgan (up $3.3B to $91.2B), the US Treasury (up $3.0B to $2,467.5B), Mizuho Corporate Bank Ltd (up $2.4B to $2.4B to $34.8B), Goldman Sachs (up $2.4B to $22.4B) and Sumitomo Mitsui Banking Corp (up $2.4B to $49.4B).

The largest decreases among Issuers of money market securities (including Repo) in August were shown by: the Federal Home Loan Bank (down $19.0B to $491.3B), Federal Home Loan Mortgage Corp (down $11.0B to $84.3B), Federal National Mortgage Association (down $5.3B to $116.2B), Credit Suisse (down $3.9B to $21.1B), Wells Fargo (down $3.8B to $23.2B), Federal Farm Credit Bank (down $1.6B to $99.7B), Deutsche Bank AG (down $1.3B to $17.3B), Landesbank Baden-Wurttemberg (down $1.2B to $9.4B), Bank of Nova Scotia (down $1.1B to $26.6B) and National Australia Bank Ltd (down $1.)B to $7.4B).

The United States remained the largest segment of country-affiliations; it represents 76.0% of holdings, or $3.696 trillion. France (6.1%, $294.8B) was number two, and Canada (5.3%, $256.1B) was third. Japan (4.8%, $235.6B) occupied fourth place. The United Kingdom (2.5%, $121.2B) remained in fifth place. Germany (1.4%, $66.6B) was in sixth place, followed by The Netherlands (1.1%, $54.9B), Sweden (0.7%, $31.9B), Switzerland (0.6%, $31.3B) and Australia (0.6%, $28.6B). (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 August 31, 2020, Taxable money funds held 36.0% (up from 29.3%) of their assets in securities maturing Overnight, and another 6.9% maturing in 2-7 days (down from 11.0% last month). Thus, 42.9% in total matures in 1-7 days. Another 16.6% matures in 8-30 days, while 13.9% matures in 31-60 days. Note that close to three-quarters, or 73.4% of securities, mature in 60 days or less (up slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 10.6% of taxable securities, while 13.5% matures in 91-180 days, and just 2.4% matures beyond 181 days.

Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be sent out Thursday, and we'll be writing our normal monthly update on the August 31 data for Friday's News. But we also published a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Wednesday. (We continue to merge the two series, and the N-MFP version is now available via Holding file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of August 31, 2020, includes holdings information from 1,071 money funds (down 5 from last month), representing assets of $5.043 trillion (down $17 billion). We review the new N-MFP data below.

Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Treasury holdings totaled $2.486 trillion (up from $2.483 trillion and just below their record level of 2 months ago), or a massive 49.3% of all holdings. Repurchase Agreement (Repo) holdings in money market funds totaled $1.042 trillion (up from $992.1 billion), or 20.7% of all assets, and Government Agency securities totaled $812.4 billion (down from $850.0 billion), or 16.1%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $4.340 trillion, or a stunning 86.1% of all holdings.

Commercial paper (CP) totals $265.8 billion (down from $285.7 billion), or 5.3% of all holdings, and Certificates of Deposit (CDs) total $177.6 billion (down from $196.4 billion), 3.5%. The Other category (primarily Time Deposits) totals $161.0 billion (up from $149.7 billion), or 3.2%, and VRDNs account for $98.8 billion (down from $103.1 billion last month), or 2.0% of money fund securities.

Broken out into the SEC's more detailed categories, the CP totals were comprised of: $157.8 billion, or 3.1%, in Financial Company Commercial Paper; $55.6 billion or 1.1%, in Asset Backed Commercial Paper; and, $52.5 billion, or 1.0%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($606.1B, or 12.0%), U.S. Govt Agency Repo ($387.6B, or 7.7%) and Other Repo ($48.1B, or 1.0%).

The N-MFP Holdings summary for the 210 Prime Money Market Funds shows: Treasury holdings of $329.0 billion (up from $326.2 billion), or 28.6%; CP holdings of $260.0 billion (down from $280.0 billion), or 22.6%; CD holdings of $177.6 billion (down from $196.4 billion), or 15.5%; Repo holdings of $158.7 billion (up from $142.5 billion), or 13.8%; Other (primarily Time Deposits) holdings of $109.9 billion (up from $98.3 billion), or 9.6%; Government Agency holdings of $102.9 billion (up from $92.4 billion), or 9.0% and VRDN holdings of $11.3 billion (down from $14.3 billion), or 1.0%.

The SEC's more detailed categories show CP in Prime MMFs made up of: $157.8 billion (down from $163.8 billion), or 13.7%, in Financial Company Commercial Paper; $55.6 billion (down from $58.6 billion), or 4.8%, in Asset Backed Commercial Paper; and $46.6 billion (down from $57.5 billion), or 4.1%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($56.9 billion, or 5.0%), U.S. Govt Agency Repo ($53.6 billion, or 4.7%), and Other Repo ($48.1 billion, or 4.2%).

In other news, a press release entitled, "OFR Begins Publishing Repo Data, Unveils Short-term Funding Monitor," tells us, "The U.S. Office of Financial Research (OFR) released its new U.S. Repo Markets Data Release, a prototype publication of daily data on repo markets, and unveiled the Short-term Funding Monitor, an interactive tool that provides a more complete view into short-term funding markets."

It continues, "Trillions of dollars in repo agreements trade hands daily in short-term funding markets. Pressure in short-term funding markets can serve as an early warning signal of financial stress. To help the Financial Stability Oversight Council monitor risk in these markets, the OFR collects data on centrally cleared repurchase agreements, which amount to more than one trillion dollars in daily repo transactions. Through its new data release, the OFR is making aggregates of this data, and data covering tri-party repo, available to the public. The monitor is available on the OFR's website at: https://www.financialresearch.gov/short-term-funding-monitor/."

OFR Director Dina Falaschetti comments, "Fulfilling the OFR's Dodd Frank mandate, the cleared repo data provides the FSOC with a more complete view of the complex and critical repurchase agreement market.... We're making aggregates of these data available to the public to increase transparency and facilitate research on the financial system."

The release explains, "The Short-term Funding Monitor integrates the OFR's U.S. Repo Markets Data Release with other existing data sets previously scattered across many sources. The monitor combines data on the balance sheets and funding needs of short-term funding market participants, and the volumes and rates across market segments. Users can download all of the monitor data via a public API."

It adds, "The OFR's cleared repo data also supports the calculation of the Secured Overnight Financing Rate (SOFR), the Alternative Reference Rates Committee's preferred alternative to the U.S. dollar LIBOR reference rate. Due to concerns about LIBOR, different markets across the world are transitioning to other reference rates." Falaschetti says, "The OFR's repo collection is expected to provide a permanent and expanded source of data to support the SOFR and reference rate transition."

Crane Data's latest Money Fund Market Share rankings show assets were down for most of the largest U.S. money fund complexes in August. Money market fund assets decreased $39.2 billion, or -0.8%, last month to $4.924 trillion. Assets have fallen by $227.7 billion, or -4.4%, over the past 3 months, but they've increased by $1.138 trillion, or 30.0%, over the past 12 months through August 31, 2020. The largest increases among the 25 largest managers last month were seen by First American, Wells Fargo, Fidelity, BlackRock and HSBC, which grew assets by $9.4 billion, $9.3B, $9.0B, $6.1B and $4.8B, respectively. The largest declines in assets in August were seen by Goldman Sachs, SSGA, Schwab, Dreyfus/BNY Mellon and JP Morgan, which decreased by $50.1 billion, $15.6B, $5.6B, $4.4B and $2.4B, respectively. Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. The combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers. We review the latest market share totals below, and we also look at money fund yields in August.

Over the past year through Aug. 31, 2020, Fidelity (up $161.7B, or 21.5%), Goldman Sachs (up $152.8B, or 71.9%), JP Morgan (up $120.1B, or 36.3%), BlackRock (up $95.0B, or 29.4%), Vanguard (up $93.8B, or 23.8%), Wells Fargo (up $88.7B, or 69.0%) and Federated Hermes (up $85.4B, or 29.3%) were the largest gainers. These complexes were followed by Morgan Stanley (up $79.9B, or 67.7%), Northern (up $66.8B, or 53.7%), Dreyfus/BNY Mellon (up $34.2B, or 20.5%) and American Funds (up $32.4B, or 25.1%). Wells Fargo, Northern, First American, Vanguard and DWS had the largest money fund asset increases over the past 3 months, rising by $22.0B, $10.1B, $9.1B, $6.8B and $6.8B, respectively. The largest decliners over 3 months included: Goldman Sachs (down $49.2B, or -11.9%), Fidelity (down $48.4B, or -5.0%), JP Morgan (down $44.3B, or -8.9%), SSGA (down $31.3B, or -18.0%) and Morgan Stanley (down $26.5B, or -11.8%).

Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $914.8 billion, or 18.6% of all assets. Fidelity was up $9.0 billion in August, down $48.4 billion over 3 mos., but up $161.7B over 12 months. Vanguard ranked second with $487.3 billion, or 9.9% market share (down $1.5B, up $6.8B and up $93.8B for the past 1-month, 3-mos. and 12-mos., respectively). JP Morgan was third with $451.0 billion, or 9.2% market share (down $2.4B, down $44.3B and up $120.1B). BlackRock ranked fourth with $418.4 billion, or 8.5% of assets (up $6.1B, down $14.9B and up $95.0B for the past 1-month, 3-mos. and 12-mos.), while Federated Hermes took fifth place with $377.4 billion, or 7.7% of assets (up $934M, down $20.9B and up $85.4B).

Goldman Sachs was in sixth place with $365.3 billion, or 7.4% of assets (down $50.1 billion, down $49.2B and up $152.8B), while Wells Fargo was in seventh place with $217.3 billion, or 4.4% (up $9.3B, up $22.0B and up $88.7B). Dreyfus ($201.1B, or 4.1%) was in eighth place (down $4.4B, down $232M and up $34.2B), followed by Morgan Stanley ($198.0B, or 4.0%, down $2.0B, down $26.5B and up $67.7B). Schwab was in 10th place ($194.3B, or 3.9%; down $5.6B, down $20.5B and up $9.3B).

The 11th through 20th-largest U.S. money fund managers (in order) include: Northern ($191.2B, or 3.9%), American Funds ($161.7B, or 3.3%), SSGA ($142.5B, or 2.9%), First American ($102.0B, or 2.1%), Invesco ($76.4B, or 1.6%), UBS ($76.0B, or 1.5%), HSBC ($42.3B, or 0.9%), T Rowe Price ($40.1B, or 0.8%), Western ($35.0B, or 0.7%) and DWS ($30.9B, or 0.6%). Crane Data currently tracks 67 U.S. MMF managers, the same as last month.

When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg and the Cayman Islands -- are included, the top 10 managers appear as Fidelity, JP Morgan, BlackRock, Goldman Sachs, Vanguard, Federated Hermes, Morgan Stanley, Dreyfus/BNY Mellon, Northern and Wells Fargo. JP Morgan moves ahead of Vanguard, BlackRock moves ahead of Goldman Sachs and Vanguard, Morgan Stanley moves ahead of Dreyfus, 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 ($925.1 billion), J.P. Morgan ($675.4B), BlackRock ($609.0B), Goldman Sachs ($506.5B) and Vanguard ($487.3B). Federated Hermes ($388.7B) was sixth, Morgan Stanley ($248.0B) was in seventh, followed by Dreyfus/BNY Mellon ($221.3B), Northern ($218.4B) and Wells Fargo ($218.3B) which round out the top 10. These totals include "offshore" U.S. Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into U.S. dollar totals.

The September issue of our Money Fund Intelligence and MFI XLS, with data as of 8/31/20, shows that yields dropped in August for almost all of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 738), fell a basis point to 0.03% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield decreased by 2 bps to 0.04%. The MFA's Gross 7-Day Yield was down 1 bps to 0.24%, while the Gross 30-Day Yield also fell 1 bps 0.25%.

Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.04% (down 3 bps) and an average 30-Day Yield that decreased by 3 bps to 0.06%. The Crane 100 shows a Gross 7-Day Yield of 0.23% (down 3 bps), and a Gross 30-Day Yield of 0.24% (down 3 bps). Our Prime Institutional MF Index (7-day) yielded 0.08% (down by 3 bps) as of August 31, while the Crane Govt Inst Index was 0.03% (down 2 bps) and the Treasury Inst Index was 0.02% (down 1 bps). Thus, the spread between Prime funds and Treasury funds is 6 basis points, while the spread between Prime funds and Govt funds is 5 basis point. The Crane Prime Retail Index yielded 0.04% (down 1 bps), while the Govt Retail Index was 0.01% (unchanged) and the Treasury Retail Index was 0.01% (unchanged from the month prior). The Crane Tax Exempt MF Index yield dropped in August to 0.02% (down 2 bps).

Gross 7-Day Yields for these indexes in August were: Prime Inst 0.31% (down 2 bps), Govt Inst 0.21% (down 2 basis points), Treasury Inst 0.22% (down 1 bps), Prime Retail 0.33% (down 1 bps), Govt Retail 0.20% (flat) and Treasury Retail 0.23% (unch. from the previous month). The Crane Tax Exempt Index was down 2 basis points at 0.27%. The Crane 100 MF Index returned on average 0.00% over 1-month, 0.02% over 3-months, 0.37% YTD, 0.94% over the past 1-year, 1.46% over 3-years (annualized), 1.01 % over 5-years, and 0.52% over 10-years.

The total number of funds, including taxable and tax-exempt, was down 9 at 921. There are currently 738 taxable funds, down 9 from the previous month, and 183 tax-exempt money funds (unchanged from last month). (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.

The September issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Tuesday morning, features the articles: "Vanguard Retreats from Prime; Going Govie Again," which reviews the most recent exit from the Prime space; "Major Issues Highlight of Crane's Mini Fund Symposium," which quotes from our latest webinar; and, "Federated Joins Social MMF Movement; Update on ESG," which discusses recent developments in the "Impact" MMF space. We've also updated our Money Fund Wisdom database with August 31 statistics, and sent our MFI XLS spreadsheet Tuesday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our September Money Fund Portfolio Holdings are scheduled to ship on Thursday, September 10, and our September Bond Fund Intelligence is scheduled to go out Tuesday, September 15.

MFI's "Retreat from Prime" article says, "The news that Vanguard is converting its $125.3 billion Vanguard Prime Money Market Fund into a Government MMF continues to send shock waves through the money markets. Following Northern and Fidelity's retreats from the Prime Institutional space, this marks the third major exit from Prime since the coronavirus chaos hit in March and the first Prime Retail conversion since Money Fund Reforms went into effect in 2016."

It continues, "The press release, 'Vanguard Announces Changes to Money Market Fund Lineup,' tells us, 'Vanguard today announced the following changes to its taxable money market fund lineup: Vanguard Prime Money Market Fund will be reorganized into a government money market fund and renamed Vanguard Cash Reserves Federal Money Market Fund Vanguard.... Treasury Money Market Fund has reopened to new investors."

Our latest "Profile" reads, "We recently hosted our fourth webinar and first true virtual event, 'Crane's Money Fund Webinar: Mini Fund Symposium,' a 3-hour series of sessions including segments on 'The State of the Money Fund Industry,' 'Strategists Speak: Treasury, Fed & Repo;' 'Regulatory & ESG Money Funds Update;' and, 'Major Money Fund Issues 2020.' We quote from this last session, which featured BNY Mellon/Dreyfus' Tracy Hopkins, Goldman Sachs Asset Management's Andrew Lontai and J.P. Morgan Asset Management's John Tobin. Thanks again to our Mini Fund Symposium attendees, speakers and sponsors! (The full recording is available here and materials are available via our 'Webinar Download Center.')"

When asked about ESG vs. Social MMFs, Hopkins comments, "What we did, we call it an 'Impact' fund. It's really a subset of the ESG sector as a whole. When we took a look at ESG [in] the money fund space, I think it's a different kind of way of looking at things. Obviously, in the short duration product the vast majority of what we do is really heavily concentrated in the financial sector and the government sector. Instead of converting a Prime fund to an ESG specific mandate, we converted one of our Government funds, Dreyfus Government Securities Cash Management Fund."

She continues, "Where we changed the strategy a little bit is to direct the aggregate value of our buys themselves to minority owned brokerage firms. Being part of Bank of New York Mellon and Dreyfus, our firm does put a lot of emphasis on diversity and inclusion, and it's always been an important part of our organization. So, we felt that this was a good way to go.... Given the fact that so many assets from our large customers ... are really in that Government and Treasury space, we thought there was some value add there."

The "Update on ESG" article tells readers, "The Board of Federated Hermes Government Obligations Tax-Managed Fund recently voted to convert it into a 'Social' or 'Impact' money market fund, we learned from ignites.com and from a Prospectus Supplement filing.' The ignites article, '$7.5B Federated Hermes Fund Adds Diversity Target for Trading,' explains, 'The $7.5 billion Federated Hermes Government Obligations Tax-Managed Fund will 'generally seek' to direct trades to women-, minority- and veteran-owned broker-dealers starting on Oct. 1.... The change applies to all three of the fund's share classes."

The piece continues, "This fund becomes the third 'social' money fund, joining Goldman Sachs and Dreyfus in offering funds that attempt to drive trading business through minority brokerages; it also joins a number of ESG money market funds focused on environmental investment screens."

The latest MFI also includes the News brief, "The Wall Street Journal Writes, 'Money Funds Waive Charges to Keep Yields From Falling Below Zero." It tells us, "Fidelity Investments, Federated Hermes Inc. and J.P. Morgan Asset Management are ... ceding some fees to stave off negative yields. The moves are the latest sign of how a roughly $5 trillion piece of the financial system is bracing for new pressure."

A second News piece titled, "MMF Yields Near Record Lows," says, "Money market fund yields continue to bottom out just above zero; our flagship Crane 100 was down 4 basis points in August to a near-record low of 0.​04%. (The record low was set in 2014 at 0.02%.)"

Our September MFI XLS, with August 31 data, shows total assets decreased by $42.3 billion in August to $4.924 trillion, after decreasing $44.2 billion in July and $113.0 billion in June, but increasing $31.6 billion in May, $417.9 billion in April and $688.1 billion in March. Our broad Crane Money Fund Average 7-Day Yield fell 2 bps to 0.03% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was down 4 bps to 0.04%.

On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA was down one bp to 0.24% while the Crane 100 fell 3 bps to 0.23%. Charged Expenses averaged 0.21% (unchanged from last month) and 0.19% (down 2 bps and 1 basis point from the previous month), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 39 (down 1 day) and 42 days (down a day) respectively. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

Money market fund assets fell for the fourth week in a row, their 12th decrease over the past 15 weeks, breaking below the $4.5 trillion level for the first time since April 15. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $45.22 billion to $4.49 trillion for the week ended Wednesday, September 2, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $38.87 billion and prime funds decreased by $4.24 billion. Tax-exempt money market funds decreased by $2.11 billion." ICI's stats show Institutional MMFs decreasing $39.1 billion and Retail MMFs decreasing $6.1 billion. Total Government MMF assets, including Treasury funds, were $3.628 trillion (80.7% of all money funds), while Total Prime MMFs were $747.4 billion (16.6%). Tax Exempt MMFs totaled $118.9 billion (2.6%).

ICI shows Money fund assets up a still massive $863 billion, or 23.8%, year-to-date in 2020, with Inst MMFs up $706 billion (31.2%) and Retail MMFs up $157 billion (11.4%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.114 trillion, or 33.0%, with Retail MMFs rising by $238 billion (18.4%) and Inst MMFs rising by $876 billion (41.9%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets were down $47.6 billion in August to $4.881 trillion.)

They explain, "Assets of retail money market funds decreased by $6.14 billion to $1.53 trillion. Among retail funds, government money market fund assets decreased by $2.04 billion to $983.26 billion, prime money market fund assets decreased by $2.59 billion to $436.54 billion, and tax-exempt fund assets decreased by $1.51 billion to $106.89 billion." Retail assets account for just over a third of total assets, or 33.4%, and Government Retail assets make up 64.4% of all Retail MMFs.

ICI adds, "Assets of institutional money market funds decreased by $39.08 billion to $2.97 trillion. Among institutional funds, government money market fund assets decreased by $36.83 billion to $2.65 trillion, prime money market fund assets decreased by $1.65 billion to $310.83 billion, and tax-exempt fund assets decreased by $603 million to $12.02 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22, accounted for 66.0% of all MMF assets, with Government Institutional assets making up 89.1% of all Institutional MMF totals.

In other news, J.P. Morgan Securities writes in a "Mid-Week US Short Duration Update" about the recent Vanguard retreat from Prime. (See our August 28 Crane Data News, "Vanguard Prime Money Market Fund Going Government," and yesterday's "Moody's on Vanguard Prime Conversion.") They say, "We noted last week that Vanguard's planned conversion of its $125bn prime retail MMF to a government fund should not result in any significant negative funding pressures in the CP/CD markets, as over 75% of the funds' holdings are already in rates products and very little in credit."

JPM explains, "With market participants wondering if other managers might follow suit, this raises the question of how other funds compare.... Among large complexes, Vanguard’s funds currently have by far the lowest exposure to 'credit' (assets other than Treasuries, Agencies or Tsy/Agency repo), at 22%. Still, a number of fund complexes have significant allocations to repo and/or Treasuries and Agencies, and in aggregate only 55% of prime fund assets are invested in credit. The bulk of this exposure is to Yankee banks (42% of all prime fund assets), though some complexes have lower Yankee exposures."

The update continues, "Although Vanguard has always managed its prime funds relatively conservatively, looking at the data over time shows that their current low exposure to credit is the result of a steady decrease in recent months, from a peak of 68% credit at the end of February.... Vanguard was not alone: the data show something of a bifurcation in strategy, with the very largest fund families reducing their credit exposure this year while many others kept them relatively unchanged. Overall, the aggregate credit exposure across all funds fell from 72% at the end of February to 54% in June before ticking up slightly in July."

It adds, "Given the sizeable non-credit allocations of many large prime funds, it seems likely that short-term credit markets could weather the loss of some more prime funds without too much disruption. If the trickle of prime fund conversions turns into a flood, though, the impact on markets could be more severe. While this is not our base case, consolidation among the prime MMF sponsors creates headwinds. For credit issuers, fewer large buyers means less funding diversity."

Finally, Federated Hermes posted, "Encouraging elements of new Fed framework" as its latest monthly commentary. Deborah Cunningham writes, "Like so many derailed plans in 2020, the Federal Reserve intended its major revision of its 'Statement on Longer-Run Goals and Monetary Policy Strategy' to be its momentous policy announcement of the year. Unlike the calibrations that happen in Federal Open Market Committee (FOMC) meetings, this document frames everything U.S. policymakers do. The only thing more fundamental is the Federal Reserve Act that established the central bank in 1913. And it isn't updated often -- the last overhaul happened in 2012."

She asks, "So, what in the document pertains to cash management? On the surface it seems dire, but it really isn't. The unfortunate news is the Fed essentially adopted a lower-for-longer stance. It won't raise rates when the economy is getting better -- like it did under Janet Yellen (and Powell) -- only when conditions are robust. But this approach simultaneously is the good side of the new framework for the liquidity space.... My position is this, combined with the other Fed moves this year, might spur inflation sooner than many think after the pandemic ends, meaning the FOMC could raise rates sooner and yields in the liquidity space should rise."

Cunningham also says, "The race to replace the London interbank offered rate (Libor) heated up in August. Lately, the Fed's Secured Overnight Financing Rate (SOFR) isn't looking like a perfect replacement. SOFR certainly will be the new benchmark, but it has yet to establish a term yield curve and doesn't have a credit component. Other indexes are being considered as viable alternatives to some lending transactions. The other issue is that Libor is a benchmark across different currencies, while SOFR is based only on U.S. securities. This is all a little troubling with only a year and a half to go. We continue to provide feedback to the Fed's Alternative Reference Rates Committee and various street firms to address these concerns."

She adds, "Industry flows in the cash space were sideways in August, ending the month not much different than from where they started. We kept the weighted average maturities of our funds in target ranges of 35-45 days for government and 40-50 days for prime and municipals."

Moody's Investors Service published a brief entitled, "Vanguard will convert its prime fund, the industry's largest, to a government fund, a credit positive." They comment, "On 27 August, Vanguard Group announced that it will convert its $125.3 billion Prime Money Market Fund into a government fund, a credit positive for the asset management sector because one of its bellwether funds will no longer bear the credit and liquidity risks inherent in the prime money market fund product. The fund, the industry's largest prime fund, holds 3% of US money market fund (MMF) industry assets under management (AUM).... Designated a retail fund, it manages 29% of all prime retail AUM. The changeover should be completed in late September, at which time the fund will be renamed the Cash Reserves Federal Money Market Fund." (See also our August 28 Crane Data News, "Vanguard Prime Money Market Fund Going Government.")

Moody's writes, "In its announcement, Vanguard essentially implied that the yield advantage of prime MMFs does not adequately compensate investors for the risks they assume. Therefore, the fund sponsor said, it would be better to enhance yield by reducing fees, while transitioning the Prime Fund to a safe government format. The reclassified fund will invest almost exclusively in US government securities, cash, and repurchase agreements collateralized solely by US government securities or cash."

They continue, "Already this year, Fidelity and Northern Trust closed prime funds with approximately $15 billion of assets in response to declining yields, market volatility, and a background of rising concern about the future direction of MMF industry regulation. We would not be surprised if other sponsors followed Vanguard and these firms, and we anticipate additional prime fund closures or fund consolidations."

The piece adds, "Historically, the Prime Fund took a conservative approach, with approximately one-third of its assets in US Treasury bills and other government obligations. In advance of its conversion, Vanguard is reinvesting maturing proceeds from 'risk' assets, predominantly Yankee (dollar-denominated) foreign liabilities, certificates of deposit, and US commercial paper, into US Treasuries and government paper, which already comprise three-quarters of the Prime Fund's assets."

Moody's says, "In the past, fund sponsors have repeatedly acted to avoid realizing losses on the part of MMF shareholders, exposing themselves (and investors in their debt and equity securities) to risk. Regulators have intervened to stabilize MMFs and liquidity markets. In March, at the onset of the coronavirus crisis, prime fund assets declined $138 billion and the Fed quickly launched seven funding facilities to address the severe market dislocation, including the Money Market Mutual Fund Liquidity Facility (MMLF) and the Commercial Paper Funding Facility. Shortly after it opened, the MMLF's loans to mutual fund sponsors (collateralized by assets acquired from MMFs) exceeded $50 billion. Two fund sponsors intervened to stabilize prime funds."

Finally, they tell us, "In 2010, Moody's identified over 200 MMFs in the US and Europe, as far back as 1980, that were beneficiaries of sponsor support. In 2012, researchers at the Federal Reserve Bank of Boston identified at least 31 instances between 2007 and 2011 in which, absent sponsor intervention, prime MMFs would have 'broken the buck' -- or traded below a net asset value of $1." (For more, see Moody's "Sponsor Support Key to Money Market Funds" and the Boston Fed's "The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011.")

In other ratings agency news, Fitch Ratings published "U.S. Money Market Funds: August 2020" dashboard recently. They tell us, "Total taxable money market fund (MMF) assets decreased by $50 billion from July 21, 2020 to Aug. 21, 2020, with government and prime funds losing $14 billion and $36 billion, respectively. This follows outflows of $87 billion from June 22, 2020 to July 21, 2020."

The brief continues, "MMF yields continue to decline as cash from maturing securities is re-invested in lower yielding instruments given the low interest-rate environment. From July 27, 2020 to Aug. 25, 2020, MMF net yields declined from 0.04% to 0.02% for institutional government funds, and from 0.11% to 0.07% for institutional prime funds, according to iMoneyNet."

Lastly, Fitch comments, "Taxable MMF allocations to the U.S. Treasury decreased by $80 billion in July 2020, following inflows of $1.5 trillion from Feb. 29, 2020 to June 30, 2020. In July, MMFs increased exposure to repos by $40 billion and reduced exposure to agencies by $45 billion."

In other news, Bloomberg writes, "Investors Dump 'Dead Weight' Cash-Like ETFs at Record Pace." They explain, "Investors are abandoning cash holdings at a record clip as momentum continues to build behind 2020's risk rally. Roughly $5.4 billion has exited from the $20 billion iShares Short Treasury Bond exchange-traded fund -- the biggest ultra-short duration ETF -- over 14 consecutive weeks of outflows. That was the longest streak on record for the product, whose ticker is SHV. Meanwhile, investors have pulled $2.4 billion from the $14 billion SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) over 10 weeks, according to Bloomberg Intelligence data."

The article continues, "Investors accumulated record amounts of cash earlier this year amid concern over the impacts of the coronavirus pandemic on the global economy, with assets in money-market mutual funds soaring to a record $4.8 trillion in late May. Now, that cash is coming off the sidelines as stocks surge and corporate bonds look increasingly appealing. Additionally, the Federal Reserve's commitment to keep interest rates at near-zero levels for the foreseeable future is further curbing appetite for short-duration Treasury ETFs."

They quote Charles Schwab's Kathy Jones, "It's recognition that 'ZIRP' will be around for a long time, combined with a rising risk appetite.... Short-term Treasury ETFs are looking less attractive than alternatives. Equities are benefiting. We also see interest in foreign equities and high-yield and emerging-market bonds."

Bloomberg adds, "The exodus from ultra-short duration ETFs is also likely due to investors trying to eliminate the 'cash drag' in their portfolios by reinvesting in higher-yielding assets, according to Dan Suzuki at Richard Bernstein Advisors." (For more on ultra-short bond ETFs, register for our upcoming Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash, which is Sept. 24, 2020 from 1-2pm ET, or ask us to see our Bond Fund Intelligence publication.)

We wrote on Monday about our recent "Crane's Money Fund Webinar: Mini Fund Symposium," a 3-hour series of sessions including segments on "`The State of the Money Fund Industry," "Strategists Speak: Treasury, Fed & Repo;" "Regulatory & ESG Money Funds Update;" and, "Major Money Fund Issues 2020." (See our News, "Hopkins, Lontai, Tobin Talk Major MF Issues: ESG MFs, Sticking w/​Prime.") Today, we quote from the Regulatory & ESG session, which featured Dechert LLP's Stephen Cohen. (The full recording is available here and materials are available via our "Webinar Download Center," and mark your calendars for our future online events: "Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash" on Sept. 24 from 1-2pmET, where Crane Data's Peter Crane and a panel of ultra-short bond fund managers will give a brief update on the space; "Crane's Money Fund Symposium Online" on Oct. 27 from 1-4:30pmET, which will feature another afternoon of money fund discussions; and, "European Money Fund Symposium Online" on Nov. 19 from 10am-12pmET.)

Cohen tells the Mini Fund Symposium, "I don't want to give anyone PTSD, but I thought we'd talk a little about the March 2020 market conditions and the government response to lay the groundwork for potential future reforms at the end. And then, to talk a little bit about potential negative interest rates, and in particular ... the reverse distribution mechanism. We'll talk a little bit about ESG money funds and the actions that regulators are taking relating to ESG. And then finally, we'll talk about the potential future reform."

He says regarding, "March 2020 market conditions and the government's response," "Institutional money market funds were forced to sell their most liquid securities to meet redemptions and that put pressure on weekly liquid assets. As most of you recall, the SEC adopted a number of reforms in 2014. Most notable, at least here, was the adoption of fees and gates -- liquidity fees and gates for non-government money market funds. Those are triggered when a fund's weekly liquid assets fall below 30 percent.... Redemptions were putting pressure on weekly liquid assets and funds. One case fell below 30 percent, but others were getting very, very close."

Cohen continues, "What really stopped these redemptions, and provided liquidity to the market, was the Federal Reserve Board stepping in and establishing ... the Money Market Mutual Fund Liquidity Facility, the MMLF. Under that, the Federal Reserve Bank of Boston began making loans to eligible financial institutions that would be secured by the high-quality assets that they purchased from money market funds.... The MMFL, out of all the actions that the government took, this was the one that really helped the industry the most. It restored liquidity in the market, reduced the fear of institutional prime funds falling below that 30 percent weekly liquid assets and causing a fee or gate, or the consideration of a fee or a gate. And shortly after that, the weekly liquid assets started going back up to normal levels."

He adds, "A couple of other things to note: That week in particular, the SEC staff issued some no action relief. The ICI, on behalf of its members, in particular members who were affiliated or are affiliated with banks, were limited in their ability to purchase securities from money market funds using Rule 17a-9, because the banking regulations conflicted with that rule. To address that, staff provided no action relief that allowed funds to use the price that's required under the banking regulation to purchase securities from money market funds under the Rule 17a-9. That was sort of emergency no action relief that week, the week of March 16th, to help sponsors be able to step in and shift their money market funds during that difficult, difficult time."

On "Form N-CR filings," Cohen comments, "Historically, those filings are made on routine items, like topping up a fund as part of a liquidation.... It's never been used for an emergency situation. No funds have had to file to notify the SEC of an emergency until that week. Several money market funds had to make Form N-CR filings in connection with purchases that were made by their affiliated sponsors. So, another regulatory development that occurred that week."

He also says, "Another area that the industry has been very focused on and is trying to be proactive about is potential negative interest rates. This occurred in Europe, and there's concern that it could happen here in the United States as well. All else equal, if a fund is purchasing negative yielding securities, over time the market-based NAV of a stable NAV money market fund will decline over time.... Government money market funds ... are likely to sort of experience the pressure first.... So, the industry has been prepared for this and thought about it to sort of mitigate the pressure of a negative interest rate environment."

Cohen explains, "There are a number of actions that funds can take. One, implementing fee waivers. We're seeing that.... I think most money market funds are waiving some fees. The Wall Street Journal reported on this just a couple days ago, too. Closures of the funds is another way to help address this. It's just a short-term fix, but some funds have closed to new investors or any new money. This is not usually done, but a sponsor could, in theory, contribute capital to stabilize the NAV in a negative yielding environment. And then, of course, there's the option of converting a stable NAV money market fund to a floating NAV. All of those are not great options, and won't deal with a negative yielding environment for any period of time."

He states, "Another potential solution that's getting traction in the industry is the idea of implementing a reverse distribution mechanism, or RDM. This is an approach that was used in Europe. Europe called it share cancellation or share destruction.... Again, this was used in Europe, and it's a method that operationally can be used here in the United States as well. The industry, the ICI, has been in discussions with the SEC on this and the IRS. There is, I think at this point, reluctance by the SEC staff to move forward or bless this, but there are sort of ongoing discussions around it. So, I think, more to come here, but the industry is trying to work on providing this as a potential option in a negative yielding environment."

Cohen then tells us, "ESG is obviously a very hot topic these days.... Institutional investors increasingly are focused on ESG, it is part of their investment mandate, especially outside of the United States. And regulators are becoming more and more focused on this, too. Everybody probably knows ESG refers to environmental, social and governance, and a number of funds in the money market fund industry have incorporated social and/or ESG into their investment mandates.... BlackRock, Dreyfus, DWS, Federated, Goldman, Morgan Stanley, State Street, UBS. Other money market fund advisors have integrated ESG into their investment processes.... It's become a very popular strategy and there actually have been assets going into these funds.... ESG funds are not just being launched, but they're actually doing well. At least some of them."

Regarding "regulatory developments, he comments, "The SEC established what's called an Investor Advisory Committee, and in May of this year, that committee actually recommended that the SEC, 'begin in earnest an effort to update the reporting requirements of issuers to include material decision useful ESG factors.' So, that was just in May this year that that committee recommended it. Shortly thereafter, in June, Chair Clayton ... stated that the SEC is in the process of developing a rule to help asset managers to compare sustainability metrics across portfolio holdings. There's no timing, no further sort of details that have come out from the SEC, but it was an important and notable announcement in June. To date Chair Clayton and the majority of the SEC have been very methodical and slow moving on ESG."

Cohen explains, "This may be the next Administration's, or the next Chair's issue, because it seems like they're not going to likely move too far before November. But behind the scenes, interestingly, the SEC has been very focused on it. The staff of OCIE, which is the Office of Compliance Inspections and Examinations, included its review of ESG strategies as part of its examination priorities. They said in particular that they're going to focus on the accuracy and adequacy of disclosures related to sustainable and responsible investment strategies. To make sure that funds, for example, that say they are including ESG in their strategies are actually doing what they say. The staff that's responsible for rulemaking, issued a request for comment relating to what's called the Names Rule for funds, rule 35d-1 ... and there's a debate as to whether ESG is a type of investment or a type of strategy.... ESG is a hot topic within disclosure as well."

He continues, "The Department of Labor is moving in a different direction.... [DOL] issued a proposed new rule that actually, if it gets adopted, would make planned fiduciaries make sure that they do not invest in ESG vehicles when another strategy is better. In that release, the Department of Labor notes that the goal of the plan fiduciary should be to maximize the financial objective of the plan, not to focus on social, or governance, or environmental issues. That's secondary if there's a strategy that provides a better financial return to the plan, that should be made available as opposed to the ESG strategy."

Finally, Cohen comments, "I don't have a crystal ball about what's going to happen in terms of future reforms.... But I do follow the statements here that some of these regulators are making. And the first to note is the Center for Economic Policy Research. It published 'Runs on Prime Money Market Funds During the Covid-19 Crisis.' The economists on this all work for the Fed [and] they say, given the notable role of money market funds in short term funding markets in the shadow banking system, more research and collaborative regulatory efforts are warranted to enhance the stability of the industry. They’re clearly stating in that paper that regulatory efforts are necessary. The person responsible for regulatory reforms at the Federal Reserve is Vice Chairman Randall Quarles. He noted that, we have already announced that our next evaluation exam in the post-crisis reforms to money market funds, which were once again front and center in the Covid event. Another statement sort of pointing that the Fed is very interested in money market fund reforms."

He adds, "In Europe, it's the same. The Central Bank published the Financial Stability Review in May 2020 -- lessons from the recent stress in the money market fund sector should be drawn, including more regulation. And then I think the big item that'll come out later this year ... similar to the President's Working Group and the other reports that were published after the 2008 market crisis ... The Financial Stability Board, which is a collection of global regulators, is expected to review the March turbulence by November. It will no doubt discuss money market fund reform. I do think there will be a push, a strong push for reforms. I don't know how successful the industry will be pushing those back, and what the next administration will focus on. But I do think there will be a push."

The Federal Deposit Insurance Corporation published its latest "Quarterly Banking Profile" last week (see the release here), which reviews Q2 statistics on the banking industry in the U.S and shows a huge jump in deposits and drop in bank net interest margins. It states, "Net interest income was $131.5 billion in second quarter 2020, down $7.6 billion (5.4 percent) from a year ago. This marks the third consecutive quarter that net interest income declined on a year-over-year basis. Most of the decline was driven by the three largest institutions, as less than half (42.2 percent) of all banks reported lower net interest income from a year ago. The average net interest margin (NIM) for the banking industry declined below the 3 percent level, or down 58 basis point from a year ago to 2.81 percent."

They explain, "This is the lowest NIM ever reported in the Quarterly Banking Profile (QBP). The NIM compression was broad-based, as it declined for all five asset size groups featured in the QBP. The decline in NIM was caused by asset yields declining at a faster rate than funding costs, as low yielding assets grew substantially."

The FDIC update continues, "Total deposit balances increased by $1.2 trillion (7.5 percent) from the previous quarter. Noninterest-bearing account balances rose by $637 billion (17.7 percent) and interest-bearing account balances rose by $575.3 billion (5.4 percent). Nondeposit liabilities declined by $330.9 billion (14 percent) from the previous quarter. The decline in nondeposit liabilities was attributable to lower Federal Home Loan Bank advances, which fell by $234.1 billion (38.2 percent). Over the past 12 months, total deposits rose by $2.9 trillion (20.8 percent), led by the increase of $2.4 trillion in the last two quarters."

It adds, "The number of FDIC-insured commercial banks and savings institutions reporting declined from 5,116 to 5,066 during second quarter 2020. One new bank was added, 47 institutions were absorbed by mergers, and one bank failed. Additionally, three institutions, who did not report this quarter, sold a majority of their assets and are in process of ceasing operations. The number of institutions on the FDIC's 'Problem Bank List' declined from 54 in first quarter 2020 to 52, falling to near historic lows. Total assets of problem banks increased from $44.5 billion to $48.1 billion."

The Wall Street Journal comments, in "Coronavirus Has Left Banks With Lots of Cash and Little to Do With It," that, "The coronavirus threw the U.S. banking system into extreme gyrations. The normally unexciting quarterly industry report from the Federal Deposit Insurance Corp., released last week, showed in stark detail how the pandemic is ensnaring banks big and small. Profits tumbled as the banks put aside billions for loan losses. Margins hit an all-time low. Fee income hit a record high. Customers flooded banks with more deposits than they had ever seen, so much so that the nation's safety net for bank failures fell below a legal limit."

The article tells us, "Banks were whacked with the lowest lending margin in the history of the FDIC's data, which goes back to 1984. The average net interest margin, the difference between what the banks make on loans and pay out on deposits, shrank to 2.81% compared with 3.39% a year ago. The Federal Reserve slashed interest rates to near zero in March, and emergency cuts hit income faster than the banks could reduce their deposit costs."

It explains, "For the second quarter in a row, deposits increased by more than $1 trillion. There has been $2.4 trillion added in six months, five times any other six-month period, and roughly equal to the deposits of the entire industry in 1984. The big four banks have taken in $900 billion of the year's gains."

The Journal adds, "Corporate customers have loaded up with cash to backstop their businesses through a long slowdown. Consumers with nowhere to go have slowed spending and received stimulus checks and increased unemployment assistance. The surge was so quick that the FDIC insurance fund fell to just 1.3% of all deposits, breaching its legal requirement of holding enough to cover 1.35% of all deposits. The agency expects the deposits to normalize and said the fund would self-correct."

Crane Data's latest numbers show that money market fund yields continue to bottom out just above zero; our flagship Crane 100 was down a basis point in the last week to 0.05%. The Crane 100 Money Fund Index fell below the 1.0% level in mid-March and below the 0.5% level in late March. It is down from 1.46% at the start of the year and down from 2.23% at the beginning of 2019. Just over two-thirds all money funds and over a third of MMF assets have since landed on the zero yield floor.

According to our Money Fund Intelligence Daily (as of Friday, 8/28), 595 funds (out of 854 total, or 69.7%) currently yield 0.00% or 0.01%, with assets of $2.006 trillion, or 41.0% of the $4.895 trillion total. There are 178 funds yielding between 0.02% and 0.10%, totaling $2.135 trillion, or 43.6% of assets; 75 funds yielded between 0.11% and 0.25% with $665.4 billion, or 13.5% of assets; only 6 funds yielded between 0.26% and 0.50% with $89.0 billion in assets. No funds yield over funds yield over 0.50%.

The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 675), shows a 7-day yield of 0.03%, unchanged in the week through Friday, 8/28. The Crane Money Fund Average is down 44 bps from 0.47% at the beginning of April. Prime Inst MFs were down a basis point to 0.08% in the latest week and Government Inst MFs were flat at 0.03%. Treasury Inst MFs were unchanged at 0.02%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.01% (unchanged in the last week), and Prime Retail MFs yield 0.04% (unchanged), Tax-exempt MF 7-day yields were also flat at 0.02%. (Let us know if you'd like to see our latest MFI Daily.)

Our Crane Brokerage Sweep Index, which hit the zero floor four and a half months ago, remains at 0.01%. The latest Brokerage Sweep Intelligence, with data as of August 28, shows no changes in the last week. All of the major brokerages now offer rates of 0.01% for balances of $100K. No brokerage sweep rates or money fund yields have gone negative to date, but this could become a distinct possibility in coming weeks or months. Crane's Brokerage Sweep Index has been flat for the last 19 weeks at 0.01% (for balances of $100K). Ameriprise, E*Trade, Fidelity, Merrill Lynch, Morgan Stanley, Raymond James, RW Baird, Schwab, TD Ameritrade, UBS and Wells Fargo all currently have rates of 0.01% for balances at the $100K tier level (and almost every other tier too).