News Archives: August, 2021
ICI released its latest monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds" for July 2021. The monthly "Trends" report shows that money fund assets decreased $24.4 billion in July to $4.510 trillion. This follows a decrease of $73.4 billion in June, which followed increases of $78.6 billion in May, $31.9 billion in April, $129.4 billion in March, and $39.4 billion in February. MMFs decreased $5.2 billion in January, $10.0 billion in December and $12.0 billion in November. Assets also fell $47.6 billion in October, $118.4 billion in September and $56.7 billion in August. For the 12 months through July 31, 2021, money fund assets have decreased by $24.4 billion, or -0.5%. (Month-to-date in July through 8/27, MMF assets have decreased by $11.5 billion according to Crane's MFI Daily.)
Their monthly release states, "The combined assets of the nation’s mutual funds increased by $166.39 billion, or 0.6 percent, to $26.16 trillion in July, 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 $15.93 billion in July, compared with an inflow of $38.65 billion in June.... Money market funds had an outflow of $24.39 billion in July, compared with an outflow of $73.37 billion in June. In July funds offered primarily to institutions had an outflow of $10.94 billion and funds offered primarily to individuals had an outflow of $13.45 billion."
The Institute's latest statistics show that both Taxable and Tax Exempt MMFs saw asset declines last month. Taxable MMFs decreased by $22.2 billion in July to $4.419 trillion. Tax-Exempt MMFs decreased $2.3 billion to $91.2 billion. Taxable MMF assets decreased year-over-year by $39.0 billion (-0.9%), while Tax-Exempt funds fell by $30.6 billion over the past year (-25.1%). Bond fund assets increased by $60.8 billion in July to a record $5.574 trillion; they've risen by $703.7 billion (14.4%) over the past year.
Money funds represent 17.2% of all mutual fund assets (up 0.2% from the previous month), while bond funds account for 21.3%, according to ICI. The total number of money market funds was 314, down 2 from the prior month and down from 356 a year ago. Taxable money funds numbered 250 funds, and tax-exempt money funds numbered 64 funds.
ICI's "Month-End Portfolio Holdings" confirms yet another massive drop in Treasuries and jump in Repo last month. Treasury holdings in Taxable money funds still remain the largest composition segment (since surpassing Repo last April). Treasury holdings plunged $185.9 billion, or -8.8%, to $1.919 trillion, or 43.4% of holdings. Treasury securities have decreased by $359.3 trillion, or -15.8%, over the past 12 months. (See our August MF Portfolio Holdings: Treasuries Plunge Again; Repo, TDs Jump.")
Repurchase Agreements were the second largest composition segment; repos increased by $49.5 billion, or 3.1%, to $1.638 trillion, or 37.1% of holdings. Repo holdings have increased $683.0 billion, or 71.5%, over the past year. U.S. Government Agency securities were the third largest segment; they decreased $8.5 billion, or -1.7%, to $489.9 billion, or 11.1% of holdings. Agency holdings have fallen by $296.5 billion, or -37.7%, over the past 12 months.
Certificates of Deposit (CDs) remained in fourth place; they increased by $37.8 billion, or 25.5%, to $186.2 billion (4.2% of assets). CDs held by money funds shrank by $31.8 billion, or -14.6%, over 12 months. Commercial Paper took fifth place, up $8.6 billion, or 6.0%, to $150.7 billion (3.4% of assets). CP has decreased by $48.4 billion, or -24.3%, over one year. Other holdings increased to $24.0 billion (0.5% of assets), while Notes (including Corporate and Bank) were down to $3.5 billion (0.1% of assets).
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased to 44.453 million, while the Number of Funds was down 1 to 250. Over the past 12 months, the number of accounts rose by 5.139 million and the number of funds decreased by 26. The Average Maturity of Portfolios was 38 days, the same number as in June. Over the past 12 months, WAMs of Taxable money have decreased by 5.
The Wall Street Journal discusses pending money fund reforms in its article, "Firms Wary as Money-Market Rule Changes Studied After Covid-19 Run." They tell us, "Investment managers are fighting for the future of money-market funds. Just over a year ago, jittery investors withdrew from the markets over concern the pandemic would devastate the economy. Money funds emerged as a flashpoint in March 2020, when companies and pension managers raced to stockpile cash, and the firms that managed those funds struggled to sell enough bonds to meet those redemptions. Now financial regulators are weighing rule changes designed to ensure that these funds fare better in the next crisis."
The piece explains, "Asset managers have supported some of the regulators' ideas, including one that might ensure higher-yielding prime money funds will weather future runs without the need for government support. Other proposals, they argue, would render many funds too costly to manage. They have made those opinions known in comment letters and meetings with Securities and Exchange Commission officials." Federated Hermes' Debbie Cunningham comments, "I don't think the SEC is in a seat where they want this industry to die a quick death or a slow and painful death."
The Journal discusses previous rounds of reforms, saying, "[P]rior changes and low rates have reshaped the money-market-fund industry, shifting more than $1 trillion into funds that hold government securities and out of prime funds. These funds typically offer investors higher returns, with more credit risk. Institutional prime money funds now hold $647 billion in assets, according to Crane Data. By comparison, government funds total nearly $3 trillion."
They write, "In recent letters and meetings, industry players are pointing the finger at one of the previous rule changes as the cause of some of last year's problems. The SEC's decision to allow a fund's board to impose gates or fees on investors looking to pull their cash when the fund's share of liquid assets dropped below 30% accelerated the run on funds as investors sought to get ahead of those limitations."
The article continues, "In March 2020, many investors didn't stick around to find out what would happen once their prime funds' liquid assets hit the 30% level. Instead, those investors raced to redeem their money before funds could impose any limits on those withdrawals. Some institutional prime funds struggled to keep up with these outflows."
It states, "Investment firms expect that demand for prime funds will come back once rates rise, and want to ensure the new rules don't impede their businesses' growth when that day arrives. If prime funds disappear, corporate borrowing costs might increase, they argue."
The WSJ comments, "The Financial Stability Board, led by Federal Reserve Vice Chairman Randal Quarles, plans to unveil its final recommendations in October. The SEC is expected to publish its proposed rule changes in early 2022. Many of the ideas focus on prime funds held by companies and other institutional investors."
Finally, they add, "Many of the other ideas included in the reports have drawn far less enthusiasm from the industry, including rules that would force managers to set aside capital to absorb potential losses or to fund a new 'liquidity exchange bank' that would step in to buy assets from money funds during a crisis. 'Regulators are interested in throwing every possible option except the one that would fix the problem: the Fed stepping in to provide liquidity,' said Peter Crane, president of Crane Data."
In other news, J.P. Morgan's latest "Short-Term Market Outlook and Strategy," includes a section entitled, "Beyond money markets: an update on low duration bond funds." Authors Teresa Ho and Alex Roever tell us, "At the start of the year, we posited that flows into ultrashort and short-term bond funds and ETFs should continue, driven by a confluence of inside-out (short money extending for yield) and outside-in (longer money to shorten duration) behaviors. This is not to say we expect money to flood into the sector; rather, on margin, we expect a boost in demand coming from both directions."
They write, "A look at the most recent Morningstar data shows this has unfolded largely as expected, with AUMs increasing by $91bn or 10% YTD.... To be sure, liquidity investors remain underwhelmed with yields in deposits and money market funds as rates have hovered at or near zero for months. Perhaps more notably, capacity issues are a rising concern as certain banks have been unwilling to accept as many deposits on their balance sheets."
JPM explains, "Interestingly, a closer look at the AUM composition reveals that most of the growth took place in the short-term sector (i.e., those with a portfolio duration between 1.5 and 3.5 years) as opposed to the ultrashort sector (duration between 0.5 and 1.5 years). 92% of the growth YTD can be attributed to a rise in short-term bond fund balances.... To the degree that flows were yield driven, this makes sense given the current rate and curve structure. At a minimum, an investor would need to go out beyond one year to pick up any significant yield advantage relative to deposits or money market funds.... Furthermore, despite the slightly longer duration, total returns of short-term bond funds remain superior to those of MMFs."
Lastly, they state, "It is perhaps worth noting that despite the demand for ultrashort and short-term bond funds (collectively their AUMs now register ~$1tn), MMF AUMs remain elevated. This is not to say that the yield-seeking-extension behavior is not taking place. Rather, we think it underscores the amount of cash in the system that is looking for a place to go. Even as the 1-3y sector grows, MMFs are seeing increased demand as banks look to shed deposits. Cash is everywhere. A QE tide lifts all AUMs." (Note: JP Morgan's Ho is scheduled to give an "Ultra-Short, ETFs & Stablecoin Update at our upcoming Money Fund Symposium, Sept. 21-23 in Philadelphia.)
ICI's latest "Money Market Fund Assets" report shows assets inching higher over the latest week, their third tiny increase in a row and fifth over the past six weeks. The release says, "Total money market fund assets increased by $4.25 billion to $4.53 trillion for the week ended Wednesday, August 25, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $2.16 billion and prime funds increased by $2.29 billion. Tax-exempt money market funds decreased by $208 million." Money fund assets are up by $229 billion, or 5.3%, year-to-date in 2021. Inst MMFs are up $329 billion (11.9%), while Retail MMFs are down $100 billion (-6.6%). (Month-to-date in August through 8/25, money fund assets have declined by $6.1 billion to $4.940 billion, according to Crane Data's MFI Daily collection.)
ICI's stats show Institutional MMFs increasing $6.3 billion and Retail MMFs decreasing $2.1 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.961 trillion (87.5% of all money funds), while Total Prime MMFs were $475.0 billion (10.5%). Tax Exempt MMFs totaled $91.0 billion (2.0%). Over the past 52 weeks, money fund assets have decreased by $13 billion, or -0.3%, with Retail MMFs falling by $107 billion (-7.0%) and Inst MMFs rising by $94 billion (3.1%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than our asset series.)
They explain, "Assets of retail money market funds decreased by $2.06 billion to $1.43 trillion. Among retail funds, government money market fund assets decreased by $349 million to $1.13 trillion, prime money market fund assets decreased by $1.37 billion to $219.15 billion, and tax-exempt fund assets decreased by $338 million to $79.44 billion." Retail assets account for just under a third of total assets, or 31.5%, and Government Retail assets make up 79.1% of all Retail MMFs.
ICI adds, "Assets of institutional money market funds increased by $6.31 billion to $3.10 trillion. Among institutional funds, government money market fund assets increased by $2.51 billion to $2.83 trillion, prime money market fund assets increased by $3.67 billion to $255.84 billion, and tax-exempt fund assets increased by $130 million to $11.55 billion." Institutional assets accounted for 68.5% of all MMF assets, with Government Institutional assets making up 91.4% of all Institutional MMF totals.
In other news, BNY Mellon also submitted a comment letter to the Financial Stability Board in response to the FSB's "Policy proposals to enhance money market fund resilience: Consultation Report". They write, "BNY Mellon Investment Management welcomes the opportunity to respond to this Consultation Report on policy proposals to enhance money market fund resilience. BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies."
They explain, "Our input reflects perspectives from an asset management lens, in particular BNY Mellon Investment Adviser, Inc., which is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940. As of July 31, 2021, BNYM Investment Adviser managed 119 domestic investment company portfolios with approximately $324 billion in assets, for approximately 211 thousand investor accounts nationwide. As of the same date, BNYM Investment Adviser managed approximately $234.4 billion invested in 17 domestic money market mutual funds structured within the confines of Rule 2a-7 under the Investment Company Act of 1940."
CEO Hanneke Smits comments, "BNY Mellon supports the following overarching goals for money market fund reform: Effectively address the structural vulnerabilities in money market funds that have been impacted by stress in short-term funding markets, Improve the resilience and functioning of short-term funding markets, and Reduce the likelihood that interventions and taxpayer support would be needed to prevent future money market fund runs or address stresses in short-term funding markets."
He tells us, "Due to the breadth of suggestions offered in the FSB Consultation, we are focusing on the recommendations that we believe would have the greatest potential to support the continued smooth functioning of the money market fund industry in various jurisdictions and market environments: 1. Decouple link between regulatory liquidity thresholds and imposition of fees and gates. 2. Enhance liquidity requirements, such as limits on eligible assets. These reforms should be aimed at prime MMFs rather than public debt MMFs, which did not suffer the same liquidity outflows that were witnessed in other parts of the market."
BNY Mellon says, "Other recommendations, such as the move from constant net asset value ('NAV') to floating NAV, swing pricing, minimum balance at risk, and capital buffer would fundamentally change the nature and attractiveness of the underlying MMF relative to other types of investment funds (e.g., short-term bond funds) or cash and cash substitutes (e.g., bank deposits, government funds where available in the US and UK).... We would note that swing pricing would have a particularly detrimental impact.... We expect reforms that materially change the attractiveness of prime money market funds will push assets into stable NAV government only funds and less regulated products such as separately managed accounts and private liquidity pools."
Finally, they add, "We appreciate the FSB's efforts in proposing different mechanisms for enhancing the resilience of the money market fund industry. While each proposal presents an opportunity to enhance the resilience of the market and reduce the likelihood of government interventions and taxpayer support, we believe that decoupling regulatory liquidity minimum from the imposition of fees and gates presents the greatest opportunity to enhance the resilience of MMFs, reduce the likelihood of government interventions and taxpayer support, and preserve the attractiveness of non-public debt MMFs. In addition, enhanced liquidity requirements, such as limits on eligible assets, would reduce liquidity transformation depending on the MMF jurisdiction and market."
BlackRock, the second largest manager of money market mutual funds in the world (according to Crane Data), submitted an extensive comment letter to the Financial Stability Board in response to the FSB's "Policy proposals to enhance money market fund resilience: Consultation Report". Managing Director, Global Head of Cash Management Business Thomas Callahan, and MDs from the Global Public Policy Group Carey Evans and Elizabeth Kent, write, "BlackRock, Inc. respectfully submits its comments to the Financial Stability Board in response to its Consultation report on Policy Proposals to Enhance Money Market Fund Resilience. Our views in this letter reflect our ViewPoints on Lessons from COVID-19: The Experience of European MMFs in Short-Term Markets and Lessons from COVID-19: U.S. Short-Term Money Markets. The views in this letter are also generally consistent with those expressed in our recent responses to the President's Working Group on Financial Markets: Overview of Recent Events and Potential Reform Options for Money Market Funds and the ESMA Consultation on EU Money Market Fund Regulation, both of which are attached as appendices." (Note: BlackRock's Callahan will co-keynote our upcoming Money Fund Symposium conference, which will still take place live on Sept. 21-23 in Philadelphia. We hope to see you in Philly next month!)
Their comment letter tells us, "The market dislocation in March of 2020 stemmed from a global public health crisis, which created unprecedented shocks to the real economy, supply chain disruption, and worldwide uncertainty. During this period, investors moved quickly to increase liquidity by raising cash. As investors and issuers worldwide chased liquidity simultaneously, short-term funding markets largely froze with many holders of even high-quality commercial paper struggling at times to find a bid from dealers in the secondary market. Money market funds were left to balance the competing pressures of rapidly changing end-investor need for cash and liquidity with a breakdown in the STFMs. That said, the reforms implemented after the 2008 Global Financial Crisis made MMFs more resilient, allowing them to weather the dash for cash during the COVID-19 Crisis much more smoothly than they otherwise would have."
It explains, "The lack of a secondary market that does not rely on bank dealer intermediation, particularly for CP, was the root cause of the turmoil in the STFMs, including with respect to MMFs, during March 2020. The COVID-19 Crisis underscores the need to consider improving the liquidity of the STFMs by making changes in the market structure for CP and other short-term instruments to develop a more robust market for secondary trading. While MMFs were not without issue, any reforms to MMFs in isolation will not be effective in enhancing market stability and preventing the need for extraordinary official sector interventions in the future if the underlying issues in the STFMs are not initially or concurrently resolved."
The post says, "As such, BlackRock recommends the following: The liquidity strains in the STFMs need to be addressed at the root cause, as those strains would exist with or without MMFs. We recommend regulators consider implementing standardization in the CP market, increasing transparency, and encouraging the structure to move from an OTC market to greater use of all-to-all platforms for both primary and secondary trading of CP to deepen the pool of liquidity providers. Without addressing these market dynamics, we respectfully disagree that enhancing MMF resilience will minimize the need for future extraordinary central bank interventions. While it may not be necessary to provide relief to the MMF sector, it could still be necessary to support the STFMs in a future liquidity event."
BlackRock tells the FSB, "Additionally, to further enhance the stability of the secondary market for high-quality CP, policymakers could consider encouraging the use of banks' balance sheets as a countercyclical buffer. We recommend the FSB consider guidance on how such buffers may be utilized in a future STFM liquidity crisis to provide additional stability to the STFMs. We believe that banks are better holders of high-quality CP relative to other investors such as corporates, particularly during periods of stress, as they have more options available to them for financing."
They state, "With respect to MMF reform, there are important jurisdictional differences in MMF structure, experience, and regulation, particularly given the divergent reforms post-GFC. In March 2020, US and European MMFs exhibited different market dynamics, and, within Europe, the dynamics further varied across different fund types and currencies. The distinctive features and idiosyncratic nature of MMFs make 'one size fits all' reforms an inappropriate solution. We cover some broader themes in this letter and have attached letters to the U.S. Securities and Exchange Commission and the European Securities and Markets Authority that dive deeper into reform suggestions for the US and European MMF structures, respectively, as appendices."
BlackRock continues, "We agree that mitigating the impact of large redemptions, while simultaneously helping to reduce the likelihood of destabilizing redemptions, should be the primary focus of MMF specific reforms. To achieve this, we believe that the policy focus should be on ensuring that liquidity thresholds and fees are adequately calibrated, useable, and do not create 'bright lines' which enhance client redemption risks. To achieve this result, we recommend (1) decoupling the potential imposition of gates and fees from regulatory liquidity thresholds; (2) retaining the regulatory liquidity threshold requirements as a portfolio construction feature to provide MMFs a substantial liquidity buffer; (3) implementing changes to currency-denomination specific daily liquidity levels; and (4) decoupling not just fees and gates from liquidity thresholds but also decoupling fees from gates to more appropriately effectuate the primary purpose of fees."
They comment, "We strongly disagree that swing pricing, capital buffers, or minimum balance at risk options are appropriate reform measures for MMFs. Such measures are not operationally feasible for the vast majority of MMFs and are unnecessary when the above enhancements to the liquidity thresholds and fee requirements are implemented. With regards to swing pricing specifically, while we find that to be a valuable tool for other types of open-ended funds ('OEFs'), we believe liquidity fees are the more appropriate mechanism for assigning potential costs in MMFs."
BlackRock adds, "We also believe that changing the redemption terms of MMF shares would undermine their fundamental utility to investors, and could prompt a shift into alternative products, which may have unknown market functioning or financial stability implications.... [W]e believe that some MMF reform options (a liquidity exchange facility and concentration limits) could have the unintended consequence of enhancing the transmission of risk across MMFs; we are not therefore supportive of pursuing these proposals."
They state, "We have outlined below a combination of recommendations that we believe will enhance the resiliency of MMFs while also preserving the product features that provide the greatest utility to investors.... BlackRock supports not only retaining the regulatory liquidity thresholds as a portfolio construction feature but also increasing the MMF's minimum level of overnight liquidity to at least 15%, with minimums depending on the MMF's currency denomination.... BlackRock believes that it is appropriate for USD-denominated prime or credit MMFs to hold a minimum of 20% of their assets in overnight liquidity."
Finally, the comment concludes, "BlackRock thanks the FSB for the opportunity to comment on the Consultation Report. We appreciate and support policymakers' efforts to further strengthen the STFMs and MMFs. In addition to our own response, we have contributed to the responses of several wider industry associations and would like to express our support for these submissions; in particular, we support the submissions of the Investment Company Institute ('ICI'), the European Fund and Asset Management Association (“EFAMA”), the International Capital Markets Association ("ICMA”), and the Institutional Money Market Fund Association ('IMMFA')."
Fitch Ratings published a brief entitled, "MMF Reform Flows Could Reduce Effectiveness of Fed's Tools," which tells us that, "Proposed U.S. money market fund (MMF) reforms, if enacted, could result in large inflows into government MMFs, and force the Federal Reserve (Fed) to adjust the tools it uses to manage interest rates. Already, in March 2021, the Fed raised capacity on its reverse repo program (RRP) to $80 billion from $30 billion per counterparty, to account for the large amount of cash that government MMFs hold, at $4 trillion as of July 31, 2021 according to Crane Data."
The piece continues, "Similarly, in June 2021, the Fed increased the overnight RRP rate to 0.05% from 0.00% in an effort to keep interest rates above 0%. The increased capacity of the RRP has provided MMFs a venue to park excess cash, which otherwise may have gone into Treasury, Agency, and repo markets, and pushed interest rates lower. If MMF reforms cause significant flows into government MMFs, the Fed may be compelled to consider further actions."
Fitch tells us, "The Fed's recent changes have led to a material increase in demand for the RRP, with total balances topping $1.09 trillion as of August 12, 2021, from effectively no utilization a few months prior. As of July 30, 2021, MMFs held $861 billion in the RRP, which was 83% of the program's total utilization as of the same date. MMFs' demand for the RRP is driven by the low interest rate environment and the recent rate increase for the program, a decrease in Treasury Bill (T-Bill) supply, and pandemic-driven inflows into government MMFs."
They explain, "Outstanding T-Bill supply peaked in June 2020, reaching over $5 trillion outstanding, and declined by $938 billion since then to July 31, 2021, according to SIFMA. Between February 28, 2020 and July 31, 2021, government MMFs have gained $1.2 trillion in assets, according to CraneData. This mismatch between supply and demand has caused MMFs to push yields on Treasuries and other instruments to the lower end of the Fed's target range, but the Fed's recent changes have corrected this imbalance to a large degree. Fitch views MMF exposure to the RRP as commensurate with U.S. government risk, and therefore, there is no impact to 'AAAmmf' ratings."
The brief adds, "U.S. MMF reforms currently under consideration could lead to large flows out of prime and into government MMFs, similar to 2016, when government MMFs gained $884 billion between February and October at the expense of prime funds. Numerous reform proposals are being discussed, and the magnitude of MMF flows will depend on the outcome. If mild reforms are implemented, such as de-linking funds' weekly liquidity levels from their ability to impose redemption fees or gates, this is unlikely to cause material prime fund outflows. However, if the outcome is to ban prime funds or introduce material structural changes, large prime fund outflows would be expected, with the money largely moving to the same fund managers' government funds, based on historical experience. Under such a scenario, certain large government MMFs may be constrained in their ability invest such inflows in the Fed's RRP."
Fitch's piece includes a table of the "Top 10 Fund Exposures to RRP," which includes a listing of "Fund, Fund Type, RRP Exposure, Fund AUM and Remaining RRP Capacity" as of (7/31/21). The table includes: Fidelity Government Cash Reserves (Retail Govt, $56B, $204B, $24B), Fidelity Government Money Market (Retail Govt, $54B, $224B, $26B), Morgan Stanley Inst Liq Government Port (Inst Govt, $50B, $143B, $30B), Fidelity IMM: Govt Port (Inst Govt, $49B, $128B, $31B), JPMorgan US Govt MM (Inst Govt, $46B, $232B, $34B), Federated Hermes Government Obligs (Inst Govt, $44B, $128B, $36B), Dreyfus Government Cash Mgmt (Inst Govt, $36B, $117B, $44B), Wells Fargo Govt MM (Inst Govt, $33B, $152B, $47B), BlackRock Liquidity FedFund (Inst Govt, $26B, $178B, $54B) and Northern Institutional Treasury MM (Inst Treas, $20B, $76B, $56B).
In other news, 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 Aug. 20, 2021) includes Holdings information from 78 money funds (up 12 from 3 weeks ago), which represent $2.495 trillion (up from $2.455 trillion) of the $4.860 trillion (51.3%) in total money fund assets tracked by Crane Data. (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 $1.057 trillion (down from $1.197 trillion 3 weeks ago), or 42.3%, Repurchase Agreements (Repo) totaling $1.001 trillion (up from $890.5 billion 3 weeks ago), or 40.1% and Government Agency securities totaling $186.8 billion (down from $191.6 billion), or 7.5%. Commercial Paper (CP) totaled $86.2 billion (up from $64.3 billion), or 3.5%. Certificates of Deposit (CDs) totaled $53.7 billion (up from $42.1 billion), or 2.2%. The Other category accounted for $80.6 billion or 3.2%, while VRDNs accounted for $29.9 billion, or 1.2%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.060 trillion (42.5% of total holdings), Federal Reserve Bank of New York with $477.7B (19.1%), Federal Home Loan Bank with $82.6B (3.3%), BNP Paribas with $61.1B (2.4%), Fixed Income Clearing Corp with $60.4B (2.4%), RBC with $49.8B (2.0%), Federal Farm Credit Bank with $42.2B (1.9%), Federal National Mortgage Association with $38.3B (1.5%), JP Morgan with $37.4B (1.5%) and Credit Agricole with $31.4B (1.3%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($246.1B), BlackRock Lq FedFund ($174.1B), Wells Fargo Govt MM ($148.1B), Morgan Stanley Inst Liq Govt ($146.3B), Fidelity Inv MM: Govt Port ($130.4B), Federated Hermes Govt Obl ($123.5B), BlackRock Lq T-Fund ($118.0B), Dreyfus Govt Cash Mgmt ($116.7B), BlackRock Lq Treas Tr ($110.4B) and JPMorgan 100% US Treas MM ($99.3B). (See our August 11 News, "August MF Portfolio Holdings: Treasuries Plunge Again; Repo, TDs Jump" for more, and 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.)
Thirty eight letters have now been posted in response to the Financial Stability Board's "Policy proposals to enhance money market fund resilience: Consultation Report", and we've quoted from several of them over the past week and a half. Today, we excerpt extensively from J.P. Morgan Asset Management's letter, written by CEO Americas John Donohue. He tells us, "JPMAM is pleased to provide comments on the Financial Stability Board's (FSB) Consultation Report on Policy Proposals to Enhance Money Market Fund Resilience. JPMAM is one of the largest managers of money market funds (MMFs) globally, with over $710B in assets under management. In the US, we manage over $460B in MMFs, across government and treasury MMFs (~$360B), institutional prime MMFs (~ $79B), retail prime MMFs (~$8B), and tax-exempt MMFs (~$12B). In Europe, we manage approximately $210B across the Low-Volatility Net Asset Value (LVNAV), Public Debt Constant NAV (PDCNAV) and Variable NAV (VNAV) MMF categories."
Donohue explains, "As was the case for many other MMF providers, JPMAM's non-public debt funds saw substantive redemptions in March 2020, as a result of global financial markets' reaction to COVID-19 and the actions taken by various governments to combat it. As such, we are supportive of policymakers' efforts to consider reform measures to improve the resilience of MMFs, as well as short-term funding markets (STFMs), while preserving the important functions they perform. We applaud the FSB for undertaking a thorough assessment of the potential impacts and consequences, to investors and markets more broadly, of the various policy options being considered."
He continues, "In order for reforms to be effective and to fulfil the objectives of policymakers, it is important they are appropriately calibrated and contextualized. At the peak of the pandemic-related market stress, there was an unprecedented demand for liquidity, which created significant strain across global financial markets, including STFMs. The significant tightening of market liquidity and the resulting dislocation permeated many areas of the market, including longer-dated government bonds, longer-term agency securities, corporate bonds, FX markets and global equities. In all of these markets, access to, and the preservation of, liquidity became paramount. As investors faced extraordinary uncertainty, the desire to hold cash prompted many companies -- even those on strong financial footing -- to draw down credit lines, issue debt, sell marketable securities, and redeem from MMFs. The market volatility only abated following public sector intervention, although the extent to which MMFs were able to avail themselves directly of such support differed across jurisdictions."
JPMAM comments, "Below we provide our views on the Consultation, including: The challenges faced by MMFs, on both the asset- and liability-side, and an assessment of potential MMF substitutes, where we have reservations on their effectiveness and availability; The various policy options presented, where we: outline our support for removing the tie between liquidity thresholds and the potential imposition of fees and gates, which we believe would be the most effective reform option; offer recommendations regarding potential modifications to the use of liquidity fees, incorporating certain elements of swing pricing; and discuss the drawbacks of the other options presented, some of which would undermine the viability of MMFs. We conclude by offering observations on risk monitoring and STFMs more broadly."
On "Potential substitutes," they state, "JPMAM welcomes the analysis of potential substitutes. While in theory the identified alternatives may perform a similar function to that of MMFs, in practice, they are not as readily available or interchangeable as suggested. Notwithstanding the key point that these substitutes also exhibit vulnerabilities, as noted by the FSB, there are material differences when compared to MMFs and/or significant practical challenges, which mean they are unlikely to be meaningfully utilized by investors or issuers. From an investor perspective, the two alternatives most frequently referenced are bank deposits and direct investments into the underlying instruments.... [T]he aversion of banks for such assets has been a key contributory element to the growth of the MMF sector.... With regards to direct investment, we broadly agree with the drawbacks referenced by the FSB. Only certain large investors will have the internal capacity, resources and necessary expertise to be able to invest directly."
The letter says, "The FSB also highlights the use of public debt MMFs as an alternative to non-public debt funds. While the comparatively lower yield offered by public debt MMFs may deter certain investors, a more material issue is capacity and supply-side constraints. For example, in Europe, the PDCNAV segment consists almost entirely of USD-denominated funds, with Sterling- and Euro-denominated funds collectively representing approximately 3 percent of total assets under management. Consideration should be given to the impact of further demand for Government MMFs on the US Treasury market, which, despite being the deepest and most liquid market in the world, also experienced market liquidity dislocations during March 2020 and are part of the ongoing review by policymakers."
It continues, "Another identified alternative is short-term fixed income funds. We note that in addition to having a different accounting treatment, which is a key consideration for MMF investors, these funds are likely to invest in longer-term assets, be subject to a greater degree of credit risk and maintain lower levels of liquidity relative to MMFs. In light of the current interest rate environment, one would expect those investors that could tolerate such risk in search of higher yield to have already done so. As such, we do not anticipate there being significant demand for such vehicles from current MMF investors."
Donohue also writes, "Following successive rounds of reforms, MMFs represent a highly regulated and highly transparent investment vehicle, which effectively matches investors with those in need of short-term funding. While new substitutes may arise, we note that none have yet done so which offer the same utility to MMF investors. Similarly, should these operate in a relatively less regulated environment, investors may need to accept higher risk and policymakers may have less visibility of market developments.... Issuers of short-term debt will need to find alternative means of funding. Given balance sheet constraints, the availability of bank loans will likely be limited."
He tells the FSB, "Based on these observations, we believe the most impactful policy options would be to 1) reduce threshold effects by removing the tie between the 30 percent WLA threshold and the imposition of fees and/or gates; and 2) modify redemption fees to facilitate their use, when appropriate, to impose on redeeming investors the cost of their redemptions (an alternative to swing pricing). Each of these is discussed in more detail below, after which we address the other policy options discussed in the Consultation, i.e., those designed to absorb losses and reduce liquidity transformation. We believe that the removal of the tie between consideration of fees and gates and the 30 percent WLA threshold is the single most impactful change regulators could make. As the Consultation observes, 'this option would reduce the likelihood of preemptive runs by investors in MMFs,' and make MMF 'managers more willing to use their WLA buffers to meet redemptions, thus reducing the need to sell less liquid assets.' While the impact of this change on the liability side of MMFs (investors being incentivized to redeem) is obvious, we believe the Consultation may underestimate the impact of such an action on the asset side. Both US prime and EU LVNAV funds hold nearly one third of their assets in highly liquid assets that could not be used to meet redemptions. If those assets had been usable, there would have been substantially fewer assets being liquidated, which would have reduced liquidity stress and decreased the downward pressure on prices."
JPMAM's comment states, "We believe the same beneficial result, namely that MMFs are able to use existing liquidity within a fund to meet redemptions during times of stress, will be more easily achieved if gates and fees are not linked to the 30 percent threshold, i.e., if MMFs do not risk accelerated redemptions as they approach 30 percent due to investor fear of gates or fees."
They quote, "[T]he swing pricing mechanism presents additional challenges, not identified in the Consultation, which would substantially limit the appeal and utility of MMFs. A more workable alternative would take certain elements of swing pricing and adapt them to the existing redemption fee mechanism.... MMFs ... routinely hold substantial amounts of short-term and maturing assets, and regularly see predictable, high levels of inflows and outflows (e.g., at month and quarter end); indeed, JPMAM maintains a 'cash flow calendar' that tracks expected subscriptions and redemptions, with input from client-facing representatives, to assist in cash flow management. Moreover, given the short duration of MMF assets generally, portfolio managers can plan for these redemptions by allowing assets to mature, rather than transacting in the secondary market. Thus, tying the execution of a NAV adjustment to net flows, as with swing pricing, does not make sense."
The letter opines, "We believe redemption fees, with some modifications, could be an effective mechanism to impose on redeeming investors the cost of their redemptions. Under current rules, fees are treated as essentially interchangeable from gates in the first instance, i.e., as an option for boards to consider when a MMF breaches regulatory thresholds.... We believe a more nuanced approach to fees could be beneficial, drawing on certain elements of swing pricing. As a preliminary matter, for investors, we observe that fees are a more tolerable intervention than gates.... While investors are comfortable with the concept that liquidity may come at a cost, in contrast, gates deny investors access to their cash entirely, which is highly problematic when a client has cash flow demands. Thus, it is worth considering an approach to fees as a remediation tool separate from, and to be used earlier than, gates. Importantly, we believe the existence of such a tool could be useful in educating clients away from viewing the 30 percent WLA as a bright line."
It continues, "Moreover, while current rules regarding fees are not prescriptive, we believe there is an opportunity to incorporate a framework similar to that used for swing pricing, to make fees more dynamic and reflective of the true cost of liquidity to those demanding it. Such an approach is likely to be more palatable to investors than a static 1-2 percent fee, imposed at the board's discretion. And, while swing pricing as currently used by mutual funds is operationally infeasible and conceptually problematic for MMFs, MMFs have already built an operational framework for the implementation of fees."
JPMAM adds, "Under our proposed approach, funds could be required to maintain detailed policies and procedures (i.e., a 'playbook'), reviewable by their supervising authorities to ensure they were sufficiently robust, that provide the board with clear direction on when to impose redemption fees and how to calculate them. We believe MMF sponsors are better positioned than boards to assess both when a fee should be imposed, and the right level of the fee; and further, that it is preferable to conduct this analysis ahead of time and have a decision tree prepared for the board, rather than expecting the board to make difficult determinations during periods of market stress."
Finally, they tells the FSB, "While we envision that the playbook would provide clear direction to the board on when to act, we expect the board would retain the discretion to decline imposing a fee if was not deemed in the best interest of shareholders. In developing the playbook, funds could consider a range of factors including net redemptions (single day, rolling average, cumulative, or other); WLA and other portfolio-specific characteristics (investor concentration, diversification of holdings, etc.); and market-based liquidity metrics (i.e., indications that non-WLA might not be readily sold).... Similar to the current practice for swing pricing, any fee recouped would be returned to the fund, which would protect remaining investors from the dilutive effects of the redemption activity."
The SEC recently released its quarterly "Private Funds Statistics" report, which summarizes Form PF reporting and includes some data on "Liquidity Funds," or pools which are similar to but not money market funds. The publication shows overall Liquidity fund assets were slightly lower in the latest reported quarter (Q4'20) to $624 billion (down from $627 billion in Q3'20 but up from $568 billion in Q4'19). The SEC's "Introduction" tells us, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from First Calendar Quarter 2019 through Fourth Calendar Quarter 2020 as reported by Form PF filers." (Note: Crane Data believes the largest portion of these liquidity fund assets are securities lending reinvestment pools.)
The tables in the SEC's "Private Funds Statistics: Fourth Calendar Quarter 2020," with the most recent data available, show 123 Liquidity Funds (including "Section 3 Liquidity Funds," which are Liquidity Funds from advisers with over $1 billion total in cash), up 9 from last quarter and up 17 from a year ago. (There are 71 Liquidity Funds and 52 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 36 Liquidity Fund advisers and 23 Section 3 Liquidity Fund advisers, or 59 advisers in total, the same number as last quarter (up 3 from a year ago).
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $624 billion, down $3 billion from Q3'20 but up $56 billion from a year ago (Q4'19). Of this total, $313 billion is in normal Liquidity Funds while $311 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $633 billion, down $8 billion from Q3'20 but up $60 billion from a year ago (Q4'19). Of this total, $318 billion is in normal Liquidity Funds while $315 billion is in Section 3 (large manager) Liquidity Funds.
A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $59 billion is held by Private Funds (18.8%), $79 billion is held by Unknown Non-U.S. Investors (25.5%), $87 billion is held by Other (28.0%), $20 billion is held by SEC-Registered Investment Companies (6.5%), $9 billion in held by Pension Plans (2.7%), $8 billion is held by Insurance Companies (2.6%), $2 billion is held by Non-Profits (0.7%) and $1 billion is held by State/Muni Govt. Pension Plans (0.3%).
The tables also show that 72.1% of Section 3 Liquidity Funds have a liquidation period of one day, $294 billion of these funds may suspend redemptions, and $270 billion of these funds may have gates. WAMs average a short 31 days (43 days when weighted by assets), WALs are 48 days (55 days when asset-weighted), and 7-Day Gross Yields average 0.12% (0.25% asset-weighted). Daily Liquid Assets average about 46% (44% asset-weighted) while Weekly Liquid Assets average about 60% (60% asset-weighted). Overall, these portfolios appear shorter with a heavier Treasury exposure than money market funds in general; almost half of them (44.2%) are fully compliant with Rule 2a-7. When calculating NAVs, 73.1% are "Stable" and 26.9% are "Floating."
In other news, Federal Reserve Bank of New York Executive Vice President Lorie Logan spoke recently on "Liquidity Shocks: Lessons Learned from the Global Financial Crisis and the Pandemic." She comments, "Thank you to the Yale Program on Financial Stability and to the Bank for International Settlements for the invitation to speak at today's forum. Financial crises can have deep and lasting effects on the economy. They disrupt the vital flow of credit, damage business and household balance sheets, and result in lost jobs and income for the American public. Given these costs, it is critical that we learn the lessons of past crises and continue to build knowledge about the tools and interventions that will help us respond effectively in the future. Discussions like the one we’ll have today are valuable opportunities to evolve our thinking on policy implementation and crisis management."
Logan tells us, "Today, I'll share some lessons I’ve taken from two crises that occurred during my time implementing monetary policy: the Global Financial Crisis (GFC) and the coronavirus pandemic shock. I'll discuss liquidity shocks and how central bank actions address them. In particular, I'll focus on a recent decision by the Federal Open Market Committee (FOMC) to establish two standing repo facilities to support the effective implementation of monetary policy and smooth market functioning: the Standing Repo Facility and the FIMA Repo Facility."
She continues, "The GFC and the pandemic crisis resulted from very different events. The GFC was precipitated by a housing market shock that was amplified by weak underwriting standards and highly leveraged financial intermediaries—in particular, in subprime mortgage finance. The crisis unfolded over an extended timeline, punctuated by events that revealed significant vulnerabilities among financial institutions, including in the banking sector. In contrast, the pandemic crisis was caused by an extraordinary exogenous shock to the economic outlook as measures taken to control the coronavirus pandemic threatened to disrupt activity worldwide and raised concern about the ability of financial markets to operate smoothly. The sudden and unprecedented uncertainty resulted in a 'dash for cash' that began in the markets for the most liquid and safe investments and unfolded with astonishing speed. Although banks were a source of strength during the pandemic, the event still revealed vulnerabilities in market structure and among some financial firms."
Logan explains, "Even with these very divergent origins, the GFC and pandemic crisis impacted financial markets in some similar ways. First, both resulted in an extraordinary increase in the demand for dollar liquidity. The demand arose out of both immediate funding needs and the desire to raise precautionary liquidity. The supply of liquidity was also curtailed as firms that normally lend instead stockpiled liquidity to meet potential future payment needs. During both crises, this surge in demand for U.S. dollars was global in nature and had significant spillovers to domestic funding conditions. Second, each crisis revealed vulnerabilities in short-term funding markets -- notably among prime money market funds -- in which maturity transformation created an unstable source of liquidity during periods of stress, propagating funding strains."
She adds, "As I've discussed in previous remarks, the Federal Reserve responded to dislocations from the pandemic crisis with swift and decisive actions -- many in coordination with the U.S. Treasury -- to support smooth market functioning and the flow of credit to the U.S. economy. Bearing in mind lessons from the GFC, policymakers announced actions to address conditions quickly in order to restore confidence. Fortunately, many tools used during the GFC -- including expanded U.S. dollar liquidity swap lines, enhanced terms of Discount Window lending, and 13(3) facilities -- were able to be revived, with good results. Indeed, the Commercial Paper Funding Facility (CPFF), Money Market Mutual Fund Liquidity Facility (MMLF), Primary Dealer Credit Facility (PDCF), and Term Asset-Backed Securities Loan Facility (TALF) were all substantively similar to facilities employed during the GFC. And, during the pandemic, the CPFF and MMLF in particular were highly effective at stabilizing money funds and short-term funding markets."
Finally, Logan states, "At its July meeting, the FOMC established two standing repo facilities as tools in the Fed's policy implementation framework: a domestic standing repo facility (SRF) and a repo facility for foreign and international monetary authorities (FIMA Repo Facility). These facilities will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.... While I hope we can avoid future shocks to the financial system and the disruptions to the economy that they cause, history teaches us that unpredictable events will challenge financial markets from time to time. Central banks will need to respond to new environments and new shocks. Nonetheless, there are some recurring elements of liquidity shocks from which we can learn. The SRF and FIMA Repo Facility will provide backstops in overnight money markets that help address immediate demand for dollar liquidity, both domestically and internationally, when shocks occur. I hope that the continued study of crisis events will yield further lessons for central bankers looking to shield economies from the effects of shocks to the financial system."
ICI's latest "Money Market Fund Assets" report shows assets higher again over the latest week, their fourth increase in the past five weeks. The release says, "Total money market fund assets increased by $12.46 billion to $4.52 trillion for the week ended Wednesday, August 18, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $14.81 billion and prime funds decreased by $2.30 billion. Tax-exempt money market funds decreased by $54 million." Money fund assets are up by $225 billion, or 5.2%, year-to-date in 2021. Inst MMFs are up $323 billion (11.7%), while Retail MMFs are down $98 billion (-6.4%). (Month-to-date in August through 8/18, money fund assets have declined by $14.7 billion to $4.931 billion, according to Crane Data's MFI Daily collection.)
ICI's stats show Institutional MMFs increasing $11.0 billion and Retail MMFs increasing $1.5 billion in the latest week. Total Government MMF assets, including Treasury funds, were $3.959 trillion (87.5% of all money funds), while Total Prime MMFs were $472.7 billion (10.5%). Tax Exempt MMFs totaled $91.2 billion (2.0%). Over the past 52 weeks, money fund assets have decreased by $22 billion, or -0.5%, with Retail MMFs falling by $109 billion (-7.1%) and Inst MMFs rising by $87 billion (2.9%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than our asset series.)
They explain, "Assets of retail money market funds increased by $1.47 billion to $1.43 trillion. Among retail funds, government money market fund assets increased by $2.35 billion to $1.13 trillion, prime money market fund assets decreased by $840 million to $220.52 billion, and tax-exempt fund assets decreased by $41 million to $79.77 billion." Retail assets account for just under a third of total assets, or 31.6%, and Government Retail assets make up 79.0% of all Retail MMFs.
ICI adds, "Assets of institutional money market funds increased by $10.99 billion to $3.09 trillion. Among institutional funds, government money market fund assets increased by $12.46 billion to $2.83 trillion, prime money market fund assets decreased by $1.46 billion to $252.18 billion, and tax-exempt fund assets decreased by $13 million to $11.42 billion." Institutional assets accounted for 68.4% of all MMF assets, with Government Institutional assets making up 91.5% of all Institutional MMF totals.
In other news, Wells Fargo Securities' Vanessa Hubbard McMichael writes about "Fed RRP: MMFs in focus." She tells us, "[T]he minutes talked about the increase in participation of the Fed's reverse repo facility as it had reached 'its highest level since the facility was put in place', averaging about $800 billion over the most recent inter-meeting period compared to $340 billion over the prior inter-meeting period. The facility is open to a variety of investors, including primary dealers, money market funds, GSEs, and banks, but it was noted in the meeting minutes that the facility saw particularly larger investments from money market funds over the inter-meeting period due to a drop in net T-bill issuance. Month-to-date, the Fed RRP has averaged about $998 billion in August, with the low point at $909 billion and the maximum usage, which happened yesterday, at $1.11 trillion."
The Federal Reserve's recently released "Minutes of the Federal Open Market Committee, July 27–28, 2021," explain, "The manager turned next to a discussion of developments in operations and money markets over the period. Following the June meeting, overnight rates rose in line with the technical adjustment in administered rates and were relatively stable for the remainder of the period. Overnight reverse repurchase agreement (ON RRP) take-up jumped by over $200 billion after the technical adjustment took effect, as government-sponsored enterprises moved balances held in unremunerated Federal Reserve deposit accounts into the higher-yielding ON RRP investments. Government money market funds also increased their participation in the facility amid a continued decline in Treasury bills outstanding and downward pressure on overnight rates. Overall, market participants reported that the technical adjustment went smoothly and that, with overnight rates having moved further away from zero, concerns about the functioning of short-term funding markets had diminished."
They continue, "Looking ahead, market participants were beginning to focus on the potential effects of changes in the Treasury General Account at the Federal Reserve and Treasury bill issuance over coming months in connection with the debt ceiling. The manager noted that, if a number of counterparties reached the per-counterparty limit on their ON RRP investments and downward pressure on overnight rates emerged, it may become appropriate to lift the limit."
On the "Establishment of Standing Repurchase Agreement Facilities," the Fed says, "Finally, the manager summarized the proposed terms for the standing repurchase agreement (repo) facility (SRF) and the Foreign and International Monetary Authorities (FIMA) Repo Facility. In questions and comments following the manager’s briefing, participants expressed broad support for the establishment of the SRF and FIMA Repo Facility. The vast majority of participants supported the proposed terms, although a few participants raised questions.... In general, participants viewed the SRF and FIMA Repo Facility as important new tools, serving in backstop roles, that would support effective policy implementation and smooth market functioning. Participants anticipated that the Committee would learn more about how these facilities operate over time and noted that it could adjust some parameters of the facilities on the basis of that experience."
Finally, they add, "The Federal Open Market Committee authorizes and directs the Open Market Desk at the Federal Reserve Bank of New York, for the System Open Market Account, to conduct operations in which it offers to purchase securities, subject to an agreement to resell. The repurchase agreement transactions hereby authorized and directed shall (i) include only U.S. Treasury securities, agency debt securities, and agency mortgage-backed securities; (ii) be conducted as open market operations with primary dealers and depository institutions as participants; (iii) be conducted with a minimum bid rate of 0.25 percent; (iv) be offered on an overnight basis (except that the Open Market Desk at the Selected Bank may extend the term for longer than an overnight term to accommodate weekend, holiday, and similar trading conventions); and (v) be subject to an aggregate operation limit of $500 billion. The aggregate operation limit can be temporarily increased at the discretion of the Chair. These operations shall be conducted by the Open Market Desk at the Selected Bank until otherwise directed by the Committee."
BlackRock, one of the largest managers of money funds and one of the first to enter the ESG money fund space, has filed to launch a several more D&I dealer affiliated share classes for a number of its funds. The new Form N-1A Registration Statement filings include: Bancroft Capital Shares for BlackRock's Liquid Federal Trust Fund, Cabrera Capital Markets Shares for TempFund and BlackRock Liquid Federal Trust Fund, Mischler Financial Group Shares for BlackRock Liquid Federal Trust Fund and Bancroft Capital Shares for the BlackRock Liquid Environmentally Aware Fund (LEAF). BlackRock already offers ESG MMFs BlackRock LEAF Direct (LEDXX) and LEAF Inst (LEFXX); BlackRock Wealth LEAF Inv (PINXX) and Inst (PNIXX); and BlackRock Liquidity FedFund Mischler (HUAXX) shares. (We learned about the filing from mutual fund reporter Fund Intelligence.)
The first filing explains, "Cabrera Capital Markets Shares are only available for purchase by clients of Cabrera Capital Markets LLC and its affiliates. To open an account with the Fund, contact Cabrera Capital Markets LLC by telephone (312-236-8888) or by e-mail at mminfo@cabreracapital.com." The shares list a $3 million minimum and add the disclaimer, "If you purchase shares of TempFund through a broker-dealer or other Financial Intermediary, such as Cabrera Capital Markets LLC, the Fund and BlackRock Investments, LLC, the Fund’s distributor, or its affiliates may pay the Financial Intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other Financial Intermediary and your individual financial professional to recommend the Fund over another investment."
It adds, "Bancroft Capital Shares are only available for purchase by clients of Bancroft Capital, LLC and its affiliates. To open an account with the Fund, contact Bancroft Capital, LLC by telephone (484-546-8000) or by e-mail at ops@bancroft4vets.com."
The filing for TempFund says about "Environmental, Social and Governance ('ESG') Integration," "Although TempCash and TempFund do not seek to implement a specific ESG, impact or sustainability strategy unless disclosed in the Funds' prospectuses, BlackRock will consider ESG characteristics in the credit research and investment process for TempCash and TempFund. All securities purchases by TempCash and TempFund are selected from approved lists maintained by BlackRock. All instruments on an approved list used by TempCash and TempFund have met the minimal credit risk requirement of Rule 2a-7. In reviewing instruments, BlackRock will consider the capacity of the issuer or guarantor to meet its obligations. BlackRock considers ESG data within the total data available during its review. This may include third party research as well as considerations of proprietary BlackRock research across environmental, social and governance risk and opportunities regarding an issuer."
It continues, "ESG characteristics are not the sole consideration when making investment decisions for TempCash or TempFund. TempCash and TempFund may invest in issuers that do not reflect the beliefs or values with respect to ESG of any particular investor. BlackRock will consider those ESG characteristics it deems relevant or additive when making investment decisions for TempCash or TempFund. The ESG characteristics utilized in TempCash and TempFund's investment processes may evolve over time and one or more characteristics may not be relevant with respect to all issuers that are eligible for investment. While BlackRock views ESG considerations as having the potential to contribute to TempCash and TempFund's long-term performance, there is no guarantee that such results will be achieved. TempCash and TempFund may incorporate certain specific ESG considerations into their investment objectives, strategies and/or processes, as described in the prospectuses."
The filings also comment on the "Conversion of Bancroft Capital Shares to Institutional Shares," explaining, "Bancroft Capital Shares are only available for purchase by clients of Bancroft Capital, LLC and its affiliates. If you are no longer a client of Bancroft Capital, LLC, you are not eligible to hold Bancroft Capital Shares and any Bancroft Capital Shares you hold will be converted to Institutional Shares of the same Fund.... The Bancroft Conversion will occur on the basis of the relative NAV of the shares of the two applicable classes on the date of conversion, without the imposition of any sales load, fee or other charge. The Bancroft Conversion will not be deemed a purchase or sale of the shares for U.S. federal income tax purposes. Shares acquired through reinvestment of dividends on Bancroft Capital Shares will also convert to Institutional Shares."
On the "Conversion of Cabrera Capital Markets Shares to Institutional Shares," the filing comments, "Cabrera Capital Markets Shares are only available for purchase by clients of Cabrera Capital Markets LLC and its affiliates. If you are no longer a client of Cabrera Capital Markets LLC, you are not eligible to hold Cabrera Capital Markets Shares and any Cabrera Capital Markets Shares you hold will be converted to Institutional Shares of the same Fund.... The Cabrera Conversion will occur on the basis of the relative NAV of the shares of the two applicable classes on the date of conversion, without the imposition of any sales load, fee or other charge. The Cabrera Conversion will not be deemed a purchase or sale of the shares for U.S. federal income tax purposes. Shares acquired through reinvestment of dividends on Cabrera Capital Markets Shares will also convert to Institutional Shares."
It also describes the "Conversion of Mischler Financial Group Shares to Institutional Shares," telling us, "Mischler Financial Group Shares are only available for purchase by clients of Mischler Financial Group, Inc. and its affiliates. If you are no longer a client of Mischler Financial Group, Inc., you are not eligible to hold Mischler Financial Group Shares and any Mischler Financial Group Shares you hold will be converted to Institutional Shares of the same Fund."
Crane Data currently tracks 28 Social, ESG, Minority or Veteran-affiliated MMFs with $64.5 billion (as of 7/31/21), representing 1.3% of the total $4.8 trillion in taxable MMFs. Social or "Impact" MMFs (all Govt MMFs) total $21.6 billion and include: Dreyfus Govt Sec Cash Instit (DIPXX, $4.2B), Federated Hermes Govt Ob Tax-M IS (GOTXX, $6.8B), Goldman Sachs FS Fed Instr Inst (FIRXX, $2.7B) and Morgan Stanley Inst Liq Govt Sec Inst (MUIXX, $12.1B). ESG MMFs (All Prime) total $9.0B and include: BlackRock LEAF Direct (LEDXX, $1.2B), BlackRock Wealth LEAF Inv (PINXX, $1.8B), DWS ESG Liquidity Inst (ESGXX, $570M), Morgan Stanley Inst Liq ESG MMP I (MPUXX, $3.4B), State Street ESG Liq Res Prem (ELRXX, $1.3B) and UBS Select ESG Prime Inst Fund (SGIXX, $688M).
Social and Veteran-Affiliated MMF Share Classes (Prime and Govt) total $34.0B and include: BlackRock Lq FedFund Mischler (HUAXX, $689M), Goldman Sachs FS Govt Drexel Hamilton (VETXX, $6.0B), Goldman Sachs FS Prm Ob Drexel Hamilton (VTNXX, $31M), Invesco Govt & Agency Cavu (CVGXX, $1.4B), Invesco Liquid Assets Cavu (CVPXX, $1M), Invesco Treasury Cavu (CVTXX, $509M), JPMorgan 100% US Trs MM Academy (JACXX, $110M), JPMorgan Prime MM Academy (JPAXX, $1.1B), JPMorgan Prime MM Empower (EJPXX, $1M), JPMorgan US Govt MM Academy (JGAXX, $9.5B), JPMorgan US Govt MM Empower (EJGXX, $2.8B), JPMorgan US Trs Plus MM Academy (JPCXX, $1M), Morgan Stanley Inst Liq ESG MMP CastleOak (OAKXX, $255M), Morgan Stanley Inst Liq Govt CastleOak (COSXX, $572M) and Northern Instit Govt Select SWS (WCGXX, $10.9B). (Some other funds are pending, including: HSBC ESG Prime.)
For more on ESG and "Social" MMFs, see these Crane Data News pieces: "Northern Renames Diversity Shares Siebert Williams; Safened Platform (4/20/21); "Morgan Stanley Files for CastleOak Shares; Bond Fund Symposium Today" (3/25/21); "JP Morgan Launches "Empower" Share Class to Support Minority Banks" (2/24/21); "Invesco Files for Cavu Secs Class" (12/18/20); "ESG and Social MMF Update: Mischler News, Green Deposits, Reg Debate" (12/4/20); "Goldman Launches Social Class; Tiedemann Adds FICA; CS Green ABCP" (1/24/20); "Mischler Financial Joins "Impact" or Social Money Market Investing Wave" (12/5/19); and "Dreyfus Launches "Impact" or Diversity Government Money Market Fund" (11/21/19).
Finally, click here to see the Federal Home Loan Bank Office of Finance's list of D&I or diversity and inclusion, dealers. The page explains, "The Office of Finance is committed to diversity and inclusion in our authorized dealer group, and actively seeks opportunities to work with dealers that are owned by minorities, women, disabled persons, veterans, and members of the lesbian, gay, bisexual, and transgender (LGBT) community. The Office of Finance promotes diverse dealer opportunities through increased access to debt programs, focused training for dealer sales and trading staff, and co-marketing programs with fixed-income investors. To become a member of the OF's Diversity and Inclusion (D&I) Dealer Group, you are invited to apply to be an authorized dealer for FHLBank debt securities, and your firm should be certified by a nationally-recognized certifying organization, by a national, state, or local government agency, or be self-certified as meeting one of the diversity criteria for inclusion. To learn more about becoming a member of the Office of Finance's D&I Dealer Group, contact us."
The current "D&I Dealer Group" includes: Academy Securities, Inc., Alamo Capital, ASL Capital Markets Inc., Bancroft Capital, LLC, Blaylock Van, LLC, Cabrera Capital Markets, LLC, CastleOak Securities, L.P., Drexel Hamilton, LLC, Great Pacific Securities, Loop Capital Markets LLC, MFR Securities, Inc., Mischler Financial Group, Inc., Multi-Bank Securities, Inc., Penserra Securities LLC, R. Seelaus & Co., LLC, Rice Securities, LLC, Samuel A. Ramirez & Company, Inc., Siebert Williams Shank & Co., LLC (SWS), Stern Brothers & Co. and Tribal Capital Markets, LLC.
The Investment Company Institute and ICI Global shared their comment letter to the Financial Stability Board with us yesterday, which was the deadline for feedback in response to the FSB's "Policy proposals to enhance money market fund resilience: Consultation Report". They write, "The Investment Company Institute, including ICI Global, appreciates the opportunity to provide its views on the Financial Stability Board (FSB) Consultation Report on Policy Proposals to Enhance Money Market Fund Resilience (Report). Money market funds (which the International Investment Funds Association estimates to be about $4.7 trillion in the Americas, $1.7 trillion in Europe, and $2.0 trillion in the Asia-Pacific) are an important source of direct financing for governments, businesses, and financial institutions and of indirect financing for households. Money market funds are highly regulated, transparent, diversified, and low cost. Limiting the availability of money market funds will not reduce the demand for the type of financing currently provided by money market funds. Instead, governments, businesses, and financial institutions would likely seek more expensive, less transparent, less diversified, and less efficient forms of financing, which may have negative implications for the global financial system." (See the response letters to the FSB here.)
The letter says, "ICI and its members are committed to working with international policymakers, especially through the FSB and the International Organization of Securities Commissions (IOSCO), to strengthen money market funds, the financial markets, and the economy more generally against liquidity events like the one caused by the COVID-19 crisis. Because the United States is the largest money market fund market with $4.5 trillion in assets under management and represents 53 percent of the global money market fund industry, our responses, and the detailed economic analysis that supports our responses, focus mainly on the experiences of these US funds during March 2020. We ask, however, that the reasoning presented in this letter also be considered with respect to the FSB's evaluation of money market funds in other markets around the world."
Its "Executive Summary" tells us, "Given the important role of money market funds in the financial system, policymakers should evaluate any reform options by comparing their impact on the ability of money market funds to fulfill this role (i.e., preservation of their key characteristics) against the likely practical impact any money market fund reforms will have on making the overall financial system more resilient. Any new reforms for money market funds must be measured and appropriately calibrated taking into account the costs and benefits these funds provide to investors, the economy, and the short-term funding markets. To this end, ICI and its members have previously analyzed and offered detailed and concrete feedback on many of the policy options set forth in the Report and appreciate the opportunity to do so again in this consultation."
It continues, "Money market funds were neither the first nor the largest targets of the government and central bank intervention programs that helped a broad range of financial market participants during the COVID-19 crisis, and the relevant program should not be described as a 'bail-out' of money market funds. In an effort to contain the spread of COVID-19 in February-March 2020, governments around the world contemporaneously shut down their economies. As a result, liquidity dried up, short-and long-term credit markets ceased to function, and the flow of credit to the economy evaporated.... To prevent economic and financial collapse, governments and central banks around the world introduced a broad array of monetary policy measures and market liquidity programs to help virtually every sector of the economy. Money market funds were just one of many market participants that benefited from the broad, calming effect of the Federal Reserve's actions. Contrary to the popular conception of a 'bail out,' the amount of assets attributable to the Federal Reserve's action toward money market funds was limited compared to other actions taken by the Federal Reserve for the benefit of other sectors of the global financial system. The action also did not result in any losses to the Federal Reserve."
President & CEO Eric Pan explains, "As supported by ICI's analysis of data, the evidence clearly shows that money market funds did not cause the stresses in the short-term funding markets in March 2020. The March 2020 'dash for cash' impacted all investors -- not just US prime and European non-public debt money market funds. Money market funds are just one participant in global short-term funding markets. Therefore, policymakers should give high priority to examining the performance of all players in the market and their impact on market liquidity before finalizing policy options. Without understanding the role of other players, merely imposing new restrictions on money market funds would not address policymakers' concerns."
Discussing "Consideration of FSB Policy Proposals," the letter states, "The Report discusses a range of policy proposals for further reform of money market funds. ICI and its members have previously analyzed and offered feedback on many of the possible reforms outlined in the Report. After careful review, removing the tie between money market fund liquidity and fee and gate thresholds is the best approach to addressing the challenges money market funds experienced in March 2020. As such, we will discuss this policy proposal first. The other policy proposals will be discussed in the same order as set forth in the Report."
Finally, the comment concludes, "ICI appreciates the opportunity to comment on the FSB Report. We are committed to working with policymakers to further strengthen money market funds' resilience to severe market stress. We would welcome the opportunity to present our views in more detail to FSB members."
In related news, ICI also released its latest monthly "Money Market Fund Holdings" summary, 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 August 11 News, "August MF Portfolio Holdings: Treasuries Plunge Again; Repo, TDs Jump")
Their MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in July, prime money market funds held 33.7 percent of their portfolios in daily liquid assets and 49.4 percent in weekly liquid assets, while government money market funds held 81.9 percent of their portfolios in daily liquid assets and 90.2 percent in weekly liquid assets." Prime DLA was up from 36.2% in June, and Prime WLA increased from 49.7%. Govt MMFs' DLA increased from 81.6% in June and Govt WLA increased from 90.0% from the previous month.
ICI explains, "At the end of July, prime funds had a weighted average maturity (WAM) of 45 days and a weighted average life (WAL) of 61 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 37 days and a WAL of 85 days." Prime WAMs were one day higher than June, while WALs were unchanged from the previous month. Govt WAMs and WALs were unchanged from June.
Regarding Holdings By Region of Issuer, the release tells us, "Prime money market funds' holdings attributable to the Americas decline from $235.89 billion in June to $187.85 billion in July. Government money market funds' holdings attributable to the Americas decline from $3,649.79 billion in June to $3,509.32 billion in July."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $187.9 billion, or 39.3%; Asia and Pacific at $92.0 billion, or 19.2%; Europe at $192.7 billion, or 40.3%; and, Other (including Supranational) at $5.8 billion, or 1.3%. The Government Money Market Funds by Region of Issuer table shows Americas at $3.509 trillion, or 89.2%; Asia and Pacific at $131.0 billion, or 3.3%; Europe at $284.4 billion, 7.2%, and Other (Including Supranational) at $10.2 billion, or 0.3%."
The Securities and Exchange Commission's latest monthly "Money Market Fund Statistics" summary shows that total money fund assets fell by $39.9 billion in July to $4.986 trillion. (Month-to-date in August assets are down $27.8 billion through 8/13, according to our MFI Daily.) The SEC shows that Prime MMFs fell by $19.4 billion in July to $875.3 billion, Govt & Treasury funds decreased $18.7 billion to $4.010 trillion and Tax Exempt funds decreased $1.8 billion to $100.5 billion. Yields were mixed in July, after their first increase in 24 months the prior month. 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.
July's asset declines follow a decrease of $86.9 billion in June, and increases of $72.4 billion in May, $46.3 billion in April, $146.1 billion in March, $30.5 billion in February and $35.4 billion in January. Over the 12 months through 7/31/21, total MMF assets have decreased by $52.0 billion, or -1.0%, 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 assets in its collections.) The SEC's stats show that of the $4.986 trillion in assets, $875.3 billion was in Prime funds, down $19.4 billion in July. This follows a decline of $19.9 billion in June and $14.6 billion in May, and increases of $1.3 billion in April and $7.2 billion in March. Prime funds represented 17.6% of total assets at the end of July. They've decreased by $270.2 billion, or -23.6%, over the past 12 months.
Government & Treasury funds totaled $4.010 trillion, or 80.4% of assets. They decreased by $18.7 billion in July, after decreasing $67.8 billion in June and increasing $90.3 billion in May, $48.4 billion in April and $140.9 billion in March. Govt & Treasury MMFs are up $246.9 billion over 12 months, or 6.6%. Tax Exempt Funds decreased $1.8 billion to $100.5 billion, or 2.0% of all assets. The number of money funds was 318 in July, down one from the previous month and down 41 funds from a year earlier.
Yields for Taxable MMFs were mixed in July after rebounding in June. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on July 31 was 0.10%, up a basis point from the prior month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 0.14%, down one bp. Gross yields were 0.07% for Government Funds, down two basis points from last month. Gross yields for Treasury Funds were unchanged at 0.06%. Gross Yields for Tax Exempt Institutional MMFs were down a basis point to 0.05% in July. Gross Yields for Tax Exempt Retail funds were down one bp to 0.08%.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 0.05%, unchanged from the previous month but down 6 basis points from 12/31/20. The Average Net Yield for Prime Retail Funds was 0.02%, unchanged from the previous month, and down a basis point since 12/31/20. Net yields were 0.02% for Government Funds, unchanged from last month. Net yields for Treasury Funds were also unchanged from the previous month at 0.01%. Net Yields for Tax Exempt Institutional MMFs were unchanged from June at 0.02%. Net Yields for Tax Exempt Retail funds were unchanged at 0.01% in July. (Note: These averages are asset-weighted.)
WALs and WAMs were also mixed in July. The average Weighted Average Life, or WAL, was 54.2 days (up 0.2 days) for Prime Institutional funds, and 48.9 days for Prime Retail funds (up 0.7 days). Government fund WALs averaged 82.3 days (down 0.1 days) while Treasury fund WALs averaged 90.7 days (up 1.6 days). Tax Exempt Institutional fund WALs were 17.2 days (up 1.5 days from the previous month), and Tax Exempt Retail MMF WALs averaged 25.5 days (down 0.1 days).
The Weighted Average Maturity, or WAM, was 37.3 days (up 0.5 days from the previous month) for Prime Institutional funds, 40.1 days (up 2.3 days from the previous month) for Prime Retail funds, 35.3 days (unchanged) for Government funds, and 41.5 days (up 0.6 days) for Treasury funds. Tax Exempt Inst WAMs were up 1.6 days to 17.0 days, while Tax Exempt Retail WAMs increased 0.6 days to 24.9 days.
Total Daily Liquid Assets for Prime Institutional funds were 51.4% in July (down 2.3% from the previous month), and DLA for Prime Retail funds was 36.5% (down 4.9% from previous month) as a percent of total assets. The average DLA was 72.8% for Govt MMFs and 95.3% for Treasury MMFs. Total Weekly Liquid Assets was 63.8% (down 0.7% from the previous month) for Prime Institutional MMFs, and 50.8% (down 3.2% from the previous month) for Prime Retail funds. Average WLA was 84.2% for Govt MMFs and 97.6% for Treasury MMFs.
In the SEC's "Prime Holdings of Bank-Related Securities by Country table for July 2021," the largest entries included: Canada with $91.7 billion, France with $72.1 billion, Japan with $71.2 billion, the U.S. with $51.1B, Germany with $38.0B, the Netherlands with $30.3B, the U.K. with $29.8B, Aust/NZ with $24.3B and Switzerland with $10.8B. The only gainers among the "Prime MMF Holdings by Country" were: Germany (up $9.6B), France (up $6.1 billion), Japan (up $5.7B) and the Netherlands (up $0.8B). The biggest decreases were shown by: Canada (down $6.0B), the U.S. (down $4.0B), Switzerland (down $0.4B), Aust/NZ (down $0.3B) and the U.K. (down $0.1).
The SEC's "Prime Holdings of Bank-Related Securities by Region" table shows Europe had $88.6B (up $12.5B from last month), the Eurozone subset had $158.3B (up $27.9B). The Americas had $142.9 billion (down $10.0B), while Asia Pacific had $109.2B (up $5.2B).
The "Prime MMF Aggregate Product Exposures" chart shows that of the $870.7B billion in Prime MMF Portfolios as of July 31, $328.1B (37.7%) was in Government & Treasury securities (direct and repo) (down from $396.9B), $217.8B (25.0%) was in CDs and Time Deposits (up from $176.3B), $167.0B (19.2%) was in Financial Company CP (up from $161.6B), $123.3B (14.2%) was held in Non-Financial CP and Other securities (up from $119.3B), and $34.5B (4.0%) was in ABCP (down from $36.6B).
The SEC's "Government and Treasury Funds Bank Repo Counterparties by Country" table shows the U.S. with $160.2 billion, Canada with $124.1 billion, France with $165.7 billion, the U.K. with $72.3 billion, Germany with $30.0 billion, Japan with $138.7 billion and Other with $32.7 billion. All MMF Repo with the Federal Reserve was up $41.9 billion in July to $885.6B billion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs 7.9%, Prime Retail MMFs with 5.7%, Tax Exempt Inst MMFs with 2.0%, Tax Exempt Retail MMFs with 4.3%, Govt MMFs with 13.9% and Treasury MMFs with 14.8%.
Crane Data's latest MFI International shows that assets in European or "offshore" money market mutual funds inched lower over the past 30 days to $1.040 trillion, following a small gain the prior month. These U.S.-style funds, domiciled in Ireland or Luxembourg but denominated in US Dollars, Pound Sterling and Euros, decreased by $4.4 billion over the last 30 days (through 8/12); they're down $18.9 billion (-1.8%) year-to-date. Offshore US Dollar money funds are down $16.4 billion over the last 30 days and are down $15.4 billion YTD to $535.7 billion. Euro funds are up E3.9 billion over the past month, but YTD they're down E14.2 billion to E143.1 billion. GBP money funds have risen by L5.0 billion over 30 days, but are down by L11.7 billion YTD to L244.8B. U.S. Dollar (USD) money funds (193) account for half (50.0%) of the "European" money fund total, while Euro (EUR) money funds (94) make up 16.8% and Pound Sterling (GBP) funds (116) total 33.2%. We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers yesterday), below.
Offshore USD MMFs yield 0.02% (7-Day) on average (as of 8/12/21), down from 0.05% on 12/31/20, 1.59% on 12/31/19 and 2.29% on 12/31/18. EUR MMFs yield -0.66% on average, compared to -0.71% at year-end 2020, -0.59% at year-end 2019 and -0.49% at year-end 2018. Meanwhile, GBP MMFs yielded 0.01%, up from 0.00% on 12/31/20, down from 0.64% on 12/31/19 and 0.64% on 12/31/18. (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 August MFII Portfolio Holdings, with data as of 7/31/21, show that European-domiciled US Dollar MMFs, on average, consist of 23% in Commercial Paper (CP), 16% in Certificates of Deposit (CDs), 13% in Repo, 30% in Treasury securities, 17% in Other securities (primarily Time Deposits) and 1% in Government Agency securities. USD funds have on average 33.7% of their portfolios maturing Overnight, 9.0% maturing in 2-7 Days, 14.3% maturing in 8-30 Days, 13.0% maturing in 31-60 Days, 10.7% maturing in 61-90 Days, 13.2% maturing in 91-180 Days and 6.0% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (39.1%), France (13.4%), Canada (8.6%), Japan (7.8%), Sweden (7.4%), the Netherlands (4.2%), the U.K. (2.9%), Germany (2.5%), Belgium (2.3%) and Australia (2.0%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $165.5 billion (30.4% of total assets), Credit Agricole with $17.4B (3.2%), BNP Paribas with $16.8B (3.1%), Mizuho Corporate Bank with $13.2B (2.4%), Skandinaviska Enskilda Banken AB with $12.9B (2.4%), RBC with $12.1B (2.2%), KBC Group with $11.4B (2.1%), Nordea Bank with $11.0B (2.0%), Societe Generale with $9.5B (1.7%) and Toronto-Dominion Bank with $9.4B (1.7%).
Euro MMFs tracked by Crane Data contain, on average 36% in CP, 21% in CDs, 25% in Other (primarily Time Deposits), 13% in Repo, 4% in Treasuries and 1% in Agency securities. EUR funds have on average 34.7% of their portfolios maturing Overnight, 6.5% maturing in 2-7 Days, 13.2% maturing in 8-30 Days, 12.4% maturing in 31-60 Days, 14.0% maturing in 61-90 Days, 15.6% maturing in 91-180 Days and 3.7% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (35.4%), Japan (14.0%), the U.S. (12.3%), Sweden (7.6%), Switzerland (5.6%), Germany (5.5%), Canada (3.7%), Belgium (3.0%), Supranational (3.0%) and the U.K (2.5%).
The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E8.9B (7.5%), BPCE SA with E6.4B (5.4%), Societe Generale with E6.0B (5.1%), BNP Paribas with E5.4B (4.6%), Mizuho Corporate Bank Ltd with E4.5B (3.8%), Sumitomo Mitsui Banking Corp with E4.5B (3.8%), Zürcher Kantonalbank with E4.2B (3.5%), Republic of France with E4.0B (3.4%), JP Morgan with E3.8B (3.3%) and Citi with E3.7B (3.1%).
The GBP funds tracked by MFI International contain, on average (as of 7/31/21): 33% in CDs, 21% in CP, 21% in Other (Time Deposits), 20% in Repo, 5% in Treasury and 0% in Agency. Sterling funds have on average 36.9% of their portfolios maturing Overnight, 9.0% maturing in 2-7 Days, 9.9% maturing in 8-30 Days, 10.6% maturing in 31-60 Days, 15.1% maturing in 61-90 Days, 13.3% maturing in 91-180 Days and 5.3% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (24.5%), Japan (17.9%), the U.K. (13.4%), Canada (11.2%), the Netherlands (4.4%), the U.S. (4.4%), Sweden (4.2%), Australia (4.1%), Switzerland (3.1%) and Germany (2.8%).
The 10 Largest Issuers to "offshore" GBP money funds include: BNP Paribas with L17.0B (9.4%), the UK Treasury with L10.1B (5.6%), Mizuho Corporate Bank Ltd with L8.8B (4.9%), Mitsubishi UFJ Financial Group Inc with L7.6B (4.2%), BPCE SA with L7.1B (3.9%), Sumitomo Mitsui Banking Corp with L6.9B (3.8%), Sumitomo Mitsui Trust Bank with L5.8B (3.2%), RBC with 5.8B (3.2%), Toronto Dominion with L5.6B (3.1%) and Credit Agricole with L5.5B (3.0%).
In other news, The Wall Street Journal writes about Tether and its unconvincing reserves in "Tether Sheds Light, but Not Enough, on Its $63 Billion Reserves." Columnist James Mackintosh comments, "One of the things most cryptocurrency enthusiasts really don't want is more exposure to the U.S. government. It turns out -- via the biggest so-called stablecoin, tether -- that is exactly what they got. Holdings of Treasury bills backing tether surged, according to the first accountant-verified breakdown of its issuer's $63 billion of assets."
He explains, "The good news is that with more detailed disclosure and the stamp of approval from an accountant, it is less likely that Tether, the company that issues the coin, and linked crypto brokerage Bitfinex are repeating the illegal practices that led to an $18.5 million settlement with the New York Attorney General earlier this year. The bad news is that the disclosure is still far less than is provided by regulated money-market funds. The accountant's assurance is limited to one day, and it is based in the Cayman Islands -- albeit part of Moore Global, a second-tier international firm. And the portfolio still includes plenty of assets that would be hard to sell to support the value of the coin in an emergency."
The Journal adds, "Almost half the assets are in commercial paper, a form of short-term loan used by banks and large companies. The bulk of that is rated investment grade. But its holdings have an average rating of A-2, lower than the norm for a prime money-market fund. They have an average maturity of 150 days, much longer than is usual among such funds.... The danger of taking more risk is that a sudden fall in the markets Tether invests in could wipe out the slim cushion of 0.25% of extra assets Tether holds above its liabilities. If that happened, its assets would be worth less than $1 per tether, which could destroy confidence and prompt a rush to withdraw, as happened to money-market funds that 'broke the buck' during the 2008 financial crisis."
The August issue of our Bond Fund Intelligence, which was sent to subscribers Friday morning, features the lead story, "Bond Fund Inflows Slow; Long-Term, TIPs See Gains," which reviews the latest on asset flows into funds; and "Paper Asks: Are Bond Funds Riskier Than They Seem?," which quotes from a recent Journal of Finance work. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns jumped again in July while yields fell. We excerpt from the new issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data. Also, mark your calendars for next year's Bond Fund Symposium, which is scheduled for March 28-29, 2022, in Newport Beach, Calif.)
BFI's "Inflows" piece reads, "Bond funds and bond ETFs continue to see inflows, though they've clearly begun slowing. ICI's 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' says, 'Bond funds had estimated inflows of $7.85 billion for the week, compared to estimated inflows of $12.88 billion during the previous week. Taxable bond funds saw estimated inflows of $5.62 billion, and municipal bond funds had estimated inflows of $2.23 billion.' Over the past 5 weeks, bond funds and bond ETFs have seen inflows of $42.1 billion."
It continues, "The latest 'Trends in Mutual Fund Investing - June 2021' shows bond fund assets up $72.1 billion, 1.3%, to $5.513 trillion in June, after rising $41.7 billion in May and $96.2 billion in April. Over the 12 months through 6/30/21, bond fund assets have risen by $795.4, or 16.9%. The number of funds rose by 2 in June to 2,118, but is down 13 over a year."
The Misclassification article explains, "The Journal of Finance published the study, '`Don't Take Their Word for It: The Misclassification of Bond Mutual Funds,' which explains, 'We provide evidence that bond fund managers misclassify their holdings, and that these misclassifications have a real and significant impact on investor capital flows. The problem is widespread, resulting in up to 31.4% of funds being misclassified with safer profiles, compared to their true, publicly reported holdings. 'Misclassified funds' -- those that hold risky bonds but claim to hold safer bonds -- appear to on-average outperform lower risk funds in their peer groups. Within category groups, misclassified funds receive more Morningstar stars and higher flows. However, when we correctly classify them based on actual risk, these funds are mediocre performers."
It states, 'In this paper, we show that for one of the largest markets in the world, namely, U.S. fixed-income debt securities, this has led to large information gaps that have been filled by strategic-response information provision by funds. In particular, we show that the reliance on (and by) the information intermediary has resulted in systematic misreporting by funds. This misreporting has been persistent, widespread, and appears strategic, casting misreporting funds in a significantly more positive position than is actually the case. Moreover, the misreporting has a real impact on investor behavior and mutual fund success."
A News brief, "Returns Up Again, Yields Lower in July," explains, "Bond fund returns rose and yields were down again last month. Our BFI Total Index rose 0.58% in 1-month and 3.35% for 12 months. The BFI 100 rose 0.76% in July and 3.13% over 1 year. Our BFI Conservative Ultra-Short Index was up 0.02% for 1-mo and 0.45% for 1-yr; Ultra-Shorts averaged 0.02% in July and 1.33% over 12 mos. Short-Term increased 0.22% and rose 2.52%, and Intm-Term rose 0.94% in July and 2.11% over 1-year. BFI's Long-Term Index rose 1.31% in July and 1.48% over 1-year. Our High Yield Index rose 0.22% in July and 9.53% over 1-year.
Another News brief quotes Barron's article, "How a $75B Core Bond Fund Is Gearing Up for Inflation." They write, "To satisfy some clients' income needs, bond-fund managers may reach for yield.... Pramod Atluri, however, isn't forgetting the reasons people still want bonds in their portfolios. The portfolio manager of the $75 billion American Funds Bond Fund of America (ABNDX) and his team maintain a philosophy that fixed income has four roles: income, capital preservation, inflation protection, and diversification. As an intermediate-term core bond-fund manager, Atluri, 45, aims to meet all four goals."
A third News update covers The Wall St. Journal's "Chinese Bond Swings Threaten Global Debt Investors." They tell us, "Policy moves in Beijing are hitting Chinese corporate bonds and rippling across global markets through the U.S. and European money managers who loaded up on the securities in recent years. Emerging-markets investors have long been subject to such shocks, but Chinese bonds are now so widely held that swings in their prices are affecting even bond funds that don't specialize in developing countries, including funds managed by firms such as Pacific Investment Management Co. and BlackRock Inc. Global bond funds with the most Chinese corporate debt lagged behind their benchmark indexes over the month that ended last Thursday."
Finally, a sidebar entitled, "Vanguard to Launch Core-Plus, Multi-Sector Bond Fund," explains, "Vanguard filed to launch Core-Plus Bond Fund and Vanguard Multi-Sector Income Bond Fund according to a press release. It says, 'Vanguard ... filed initial registration statements with the U.S. Securities and Exchange Commission to introduce two new active fixed income funds: Vanguard Core-Plus Bond Fund and Vanguard Multi-Sector Income Bond Fund. The funds are designed to meet the needs of clients seeking actively managed 'core' and 'satellite' bond portfolios and will augment the lineup of higher-alpha, diversified fixed income strategies managed by Vanguard Fixed Income Group."
A recent press release explains that, "BNY Mellon Investment Management ... announced the expansion of its Exchange-Traded Funds (ETFs) range with the introduction of the BNY Mellon Ultra Short Income ETF, sub-advised by Dreyfus Cash Investment Strategies (CIS). This active ETF solution, which seeks to address the growing demand for increased yield with less volatility than a short-term bond fund and potentially additional return over money market funds, is expected to commence trading on the New York Stock Exchange (NYSE) on Wednesday, August 11, 2021."
It tells us, "The introduction of the BNY Mellon Ultra Short Income ETF marks the first of several upcoming active ETF solutions from BNY Mellon Investment Management. In the coming months the firm expects to launch three active ETF sustainable solutions sub-advised by Newton Investment Management Limited [including] the BNY Mellon Responsible Horizons Corporate Bond ETF, sub-advised by Insight North America LLC."
John Tobin, CIO of Dreyfus Cash Investment Strategies comments, "Given the current low rate environment, an ultra short bond ETF seeks to address the growing demand for increased yield with less volatility than a short-term bond fund and potentially additional return over money market funds.... The BNY Mellon Ultra Short Income ETF is a natural extension of our existing suite of liquidity solutions, and we're especially excited to bring our ultra short income capabilities to the ETF market."
The release also says, "BNY Mellon introduced in April 2020 its initial suite of eight Index ETFs, including the industry's first true zero-fee ETFs in the largest equity and fixed income ETF categories without fee waivers or other restrictions -- the `BNY Mellon US Large Cap Core Equity ETF and the BNY Mellon Core Bond ETF -- as well as a BNY Mellon High Yield Beta ETF. Since its debut, the initial BNY Mellon-sponsored ETF suite has grown to over $845M in AUM as of June 30, 2021, with spreads and quoted depth proving competitive across each strategy."
Andy Provencher, BNY Mellon Investment Management Head of North American Distribution, adds, "Our mission in entering the ETF marketplace last year was to make our leading investment capabilities accessible to a broader range of clients through the ETF structure.... We have an ambitious product pipeline of active ETFs that we're excited to bring to market over the next several months. Continuing to launch active ETFs strengthens the suite of solutions we're able to offer clients and deepens our relationships by meeting their evolving needs for more low-cost, tax-efficient investment strategies."
In other news, Larry Locke, a Professor & Associate Dean at the University of Mary Hardin-Baylor, gave a presentation at the International Academy of Business & Public Administration Disciplines in Dallas entitled, "Paper Tiger: The Toothless Ban on Money Market Mutual Fund Bailouts. He states, "To claw the financial system back from the brink of disaster in 2008, the US Treasury used the Exchange Stabilization Fund to backstop money market mutual funds and stabilize the short term credit market. Anticipating the bailout's unpopularity, Congress built into the original 2008 legislation a ban on the Treasury doing so ever again. In reality, the ban had no teeth. In the midst of the COVID-19 downturn in the economy, Congress lifted the ban and the Treasury once again used the ESF to backstop MMMFs. The 2008 legislation was a paper tiger and the Treasury's continued support for MMMFs in times of economic crises has exposed the underlying dichotomy of an investment product now essential to the US economy."
Locke and co-presenter Taelyn Shelton explain, "Money market mutual funds are a unique form of mutual fund. While most open-ended registered investment companies sell or redeem shares at the next determined net asset value, MMMFs sell and redeem shares at the fixed price of $1. This, along with high liquidity and credit quality, allows MMMFs to function like bank accounts for individuals and corporate treasurers alike. Unlike most bank accounts, MMMFs are not insured by the FDIC and are subject to the default risk of their underlying investments. Investors nonetheless choose MMMFs for the risk diversification they provide and sometimes for yield advantages."
They continue, "In the middle of the financial crisis of 2008, Congress passed the Emergency Economic Stabilization Act to immediately provide facilities the Treasury could use to stabilize the U.S. financial system. A key pillar of the act was the Troubled Asset Relief Program (TARP), which enabled the Treasury to quickly provide capital to the banking system. A less-publicized element of TARP was the Treasury Money Market Funds Guaranty Program. This program used the Exchange Stability Fund to guarantee the assets of money market mutual funds in order to promote investor confidence and bring money back into a market critical to the economy."
The talk tells us, "Ultimately, none of the money market funds secured by the ESF defaulted and the ESF suffered no losses from the program. In fact, the program earned about $20 billion from interest charged to the institutions who borrowed from the TARP facilities. In spite of this, the TARP was politically unpopular.... Congress attempted to shield itself from TARP's unpopularity by creating a legislative barrier to future bailouts. Section 131 of TARP stated that, after the conclusion of the program, the Secretary of the Treasury was prohibited from using the ESF for the establishment of any future guaranty programs for MMMFs. Today, we see that limit as a paper tiger, no more meaningful than the national debt ceiling."
Locke says, "The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in March 2020. The CARES Act temporarily removed the ban on the Treasury's use of the ESF to guarantee MMMFs until the end of 2020, once again allowing the Treasury to transfer potential losses incurred by MMMF investors to taxpayers. Congress is allowing the Treasury to do exactly what it banned it from doing 12 years ago, in a relatively similar situation. Why?"
He responds, "A decline in investor confidence in MMMF's is dangerous for the economy. In 2008, Lehman Brothers' bankruptcy caused one money market fund, the Reserve Fund, to close and begin liquidation. The collapse of the Reserve Fund unnerved investors and triggered a run on MMMFs. Investors attempted to withdraw billions of dollars from MMMFs all at the same time. This run on MMMF's crippled the market for commercial paper and other short term investments. In his book, On The Brink, former Treasury Secretary, Henry Paulson, described a call he received from the CEO of General Electric, warning that without cash from MMMF's the company would be unable to make payroll that week."
Locke and Shelton add, "The same risk exists today. Major U.S. companies that employ many thousands of workers continue to rely on MMMF's for their short term cash needs. The government's handling of MMMFs in the midst of the COVID-19 pandemic proves that the former ban was an empty threat. Congress will always backstop MMMFs if the alternative is potential widespread panic. The only question is how the backstop will be funded."
Finally, they comment, "Until MMMF's find a way to spread their own risk through premiums, or other calls on their own assets or the assets of their investment advisors, the government will always be forced to step in to bail them out when events threaten the short term credit market. The global pandemic has exposed the 2008 ban to be a paper tiger, meant to pander to a constituency that does not understand the true role MMMF's play in the U.S. economy. Congress would be better served to face this reality. When the choice comes down to cratering the economy or backstopping MMMFs, Congress is going to backstop MMMFs. The question Congress must resolve is whether they will be supported by their own investors or by the U.S. taxpayer."
Crane Data's July Money Fund Portfolio Holdings, with data as of July 31, 2021, show another increase in Repo holdings, a jump in Other (Time Deposits) and another plunge in Treasuries. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) declined by $89.1 billion to $4.860 trillion in July, after rising $1.5 billion in June, $30.2 billion in May, $29.1 billion in April and $187.5 billion in March. Treasury securities remained the largest portfolio segment, though Repo is closing in on the No. 1 spot. `Agencies were the third largest segment, CP remained fourth, ahead of Other/Time Deposits, CDs , and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among taxable money funds, Treasury securities plummeted $200.6 billion (-8.8%) to $2.071 trillion, or 42.6% of holdings, after falling $134.5 billion in June, $135.0 billion in May and $29.6 billion in April. Repurchase Agreements (repo) rose by $62.9 billion (3.7%) to $1.753 billion, or 36.1% of holdings, after jumping $251.0 billion in June, $200.9 billion in May, and $54.1 billion in April. Government Agency Debt was flat (up $3.8 billion, or 0.7%) to $540.5 billion, or 11.1% of holdings, after decreasing $26.7 billion in June, $22.7 billion in May and $15.8 billion in April. Repo, Treasuries and Agency holdings totaled $4.364 trillion, representing a massive 89.8% of all taxable holdings.
Money funds' holdings of CP and Other (mainly Time Deposits) were higher in July as Prime MMFs shifted away from Repo and towards TDs, but CDs and VRDNs declined. Commercial Paper (CP) increased $8.2 billion (3.6%) to $235.2 billion, or 4.8% of holdings, after decreasing $36.1 billion in June and $5.0 billion in May, but increasing $2.4 billion in April. Other holdings, primarily Time Deposits, jumped by $39.9 billion (47.0%) to $124.7 billion, or 2.6% of holdings (surpassing CDs), after dropping $35.9 billion in June and $5.4 billion in May, but increasing $11.5 billion in April. Certificates of Deposit (CDs) fell by $1.5 billion (-1.2%) to $122.2 billion, or 2.5% of taxable assets, after dropping $14.9 billion in June and $3.7 billion in May, but increasing $6.5 billion in April. VRDNs decreased to $1.8 billion, or 0.3% of assets. (Note: This total is VRDNs for taxable funds only. We will post our Tax Exempt MMF holdings separately late Wednesday.)
Prime money fund assets tracked by Crane Data fell to $858 billion, or 17.7% of taxable money funds' $4.860 trillion total. Among Prime money funds, CDs represent 14.2% (up from 14.1% a month ago), while Commercial Paper accounted for 27.4% (up from 25.8% in June). The CP totals are comprised of: Financial Company CP, which makes up 19.3% of total holdings, Asset-Backed CP, which accounts for 3.9%, and Non-Financial Company CP, which makes up 4.2%. Prime funds also hold 2.4% in US Govt Agency Debt, 13.1% in US Treasury Debt, 18.2% in US Treasury Repo, 2.4% in Other Instruments, 11.1% in Non-Negotiable Time Deposits, 6.2% in Other Repo, 2.4% in US Government Agency Repo and 0.7% in VRDNs.
Government money fund portfolios totaled $2.742 trillion (56.4% of all MMF assets), down from $2.808 trillion in June, while Treasury money fund assets totaled another $1.259 trillion (25.9%), down from $1.263 trillion the prior month. Government money fund portfolios were made up of 18.6% US Govt Agency Debt, 13.1% US Government Agency Repo, 36.9% US Treasury Debt, 31.1% in US Treasury Repo, 0.3% in Other Instruments. Treasury money funds were comprised of 75.3% US Treasury Debt and 24.6% in US Treasury Repo. Government and Treasury funds combined now total $4.001 trillion, or 82.3% of all taxable money fund assets.
European-affiliated holdings (including repo) increased by $82.3 billion in July to $583.4 billion; their share of holdings rose to 12.0% from last month's 10.1%. Eurozone-affiliated holdings increased to $409.6 billion from last month's $364.5 billion; they account for 8.4% of overall taxable money fund holdings. Asia & Pacific related holdings increased to $226.3 billion (4.7% of the total) from last month's $223.3 billion. Americas related holdings decreased to $4.045 trillion from last month’s $4.220 trillion, and now represent 83.2% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (up $54.2 billion, or 4.3%, to $1.319 trillion, or 27.1% of assets); US Government Agency Repurchase Agreements (up $8.5 billion, or 2.3%, to $380.6 billion, or 7.8% of total holdings), and Other Repurchase Agreements (up $0.2 billion, or 0.4%, from last month to $53.5 billion, or 1.1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $5.6 billion to $165.3 billion, or 3.4% of assets), Asset Backed Commercial Paper (down $2.1 billion to $33.4 billion, or 0.7%), and Non-Financial Company Commercial Paper (up $4.8 billion to $36.4 billion, or 0.7%).
The 20 largest Issuers to taxable money market funds as of July 31, 2021, include: the US Treasury ($2,071 billion, or 42.6%), Federal Reserve Bank of New York ($889.5.8B, 18.3%), Federal Home Loan Bank ($286.3B, 5.9%), BNP Paribas ($115.1B, 2.4%), RBC ($95.9B, 2.0%), Federal Farm Credit Bank ($90.3B, 1.9%), Federal National Mortgage Association ($79.6B, 1.6%), Fixed Income Clearing Corp ($77.0B, 1.6%), JP Morgan ($72.6B, 1.5%), Credit Agricole ($55.9B, 1.2%), Sumitomo Mitsui Banking Co ($55.8B, 1.1%), Barclays PLC ($55.6B, 1.1%), Federal Home Loan Mortgage Corp ($52.0B, 1.1%), Bank of America ($48.9B, 1.0%), Citi ($48.0B, 1.0%), Mitsubishi UFJ Financial Group Inc ($44.7B, 0.9%), Societe Generale ($36.4B, 0.7%), Canadian Imperial Bank of Commerce ($33.7B, 0.7%), Toronto-Dominion Bank ($33.2B, 0.7%) and Nomura ($32.6B, 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: Federal Reserve Bank of New York ($861.1B, 49.1%), BNP Paribas ($100.8B, or 5.7%), Fixed Income Clearing Corp ($77.0B, or 4.4%), RBC ($72.5B, or 4.1%), JP Morgan ($67.1B, or 3.8%), Bank of America ($46.2B, or 2.6%), Citi ($42.5B, or 2.4%), Barclays ($41.7B, or 2.4%), Sumitomo Mitsui Banking Corp ($41.3B, or 2.4%) and Credit Agricole ($40.1B, or 2.3%). The largest users of the $861B in Fed RRP included: Fidelity Govt Cash Reserves ($55.7B), Fidelity Govt Money Market ($54.2B), JPMorgan US Govt MM ($46.3B), Fidelity Inv MM: Govt Port ($49.5B), Wells Fargo Govt MM ($32.9b), Federated Hermes Govt ObI ($44.0B), Fidelity Cash Central Fund ($57.9B), Morgan Stanley Inst Liq Govt ($50.0B), Dreyfus Govt Cash Mgmt ($36.3B) and Fidelity Sec Lending Cash Central Fund ($27.1B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($23.4B or 5.7%), Mizuho Corporate Bank Ltd ($19.5B or 4.7%), Toronto-Dominion Bank ($16.6B or 4.0%), Credit Agricole ($15.8B or 3.8%), Sumitomo Mitsui Banking Corp ($14.5B or 3.5%), BNP Paribas ($14.4B or 3.5%), Bank of Montreal ($14.1B or 3.4%), Barclays PLC ($13.9B or 3.4%), Canadian Imperial Bank of Commerce ($13.7B or 3.3%) and Sumitomo Mitsui Trust Bank ($13.0B or 3.2%).
The 10 largest CD issuers include: Bank of Montreal ($12.5B or 10.2%), Sumitomo Mitsui Banking Corp ($11.3B or 9.2%), Canadian Imperial Bank of Commerce ($9.0B or 7.4%), Sumitomo Mitsui Trust Bank ($6.6B or 5.4%), Toronto-Dominion Bank ($5.9B or 4.8%), Landesbank Baden-Wurttemberg ($5.4B or 4.5%), Credit Agricole ($5.3B or 4.4%), Mizuho Corporate Bank Ltd ($5.2B or 4.2%), Mitsubishi UFJ Financial Group Inc ($5.0B or 4.1%) and Rabobank ($4.8B or 3.9%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($11.8B or 5.9%), RBC ($11.0B or 5.5%), Toronto-Dominion Bank ($10.4B or 5.2%), DNB ASA ($7.3B or 3.7%), Barclays PLC ($6.8B or 3.4%), Societe Generale ($6.5B or 3.3%), Mizuho Corporate Bank Ltd ($6.1B or 3.1%), Sumitomo Mitsui Trust Bank ($6.0B or 3.0%), UBS AG ($5.9B or 3.0%) and JP Morgan ($5.4B or 2.7%).
The largest increases among Issuers include: Federal Reserve Bank of New York (up $35.7B to $889.5B), Credit Agricole (up $26.5B to $55.9B), Barclays PLC (up $9.4B to $55.6B), Deutsche Bank AG (up $9.2B to $24.8B), BNP Paribas (up $7.3B to $115.1B), Mizuho Corporate Bank Ltd (up $6.8B to $27.4B), Landesbank Hessen-Thueringen Girozentrale (up $6.3B to $7.5B), Nordea Bank (up $6.2B to $11.4B), KBC Group NV (up $6.1B to $8.5B) and RBC (up $5.6B to $95.9B).
The largest decreases among Issuers of money market securities (including Repo) in July were shown by: the US Treasury (down $200.6B to $2,071.0B), Federal Home Loan Bank (down $7.2B to $286.3B), JP Morgan (down $7.1B to $72.6B), Fixed Income Clearing Corp (down $5.3B to $77.0B), Sumitomo Mitsui Banking Corp (down $4.7B to $55.8B), Bank of Nova Scotia (down $2.7B to $13.7B), Lloyds Banking Group (down $2.6B to $9.1B), Canadian Imperial Bank of Commerce (down $2.6B to $33.7B), Federal National Mortgage Association (down $2.2B to $79.6B) and ABN Amro Bank (down $1.6B to $18.2B).
The United States remained the largest segment of country-affiliations; it represents 78.7% of holdings, or $3.826 trillion. France (5.1%, $248.9B) was number two, and Canada (4.5%, $219.3B) was third. Japan (4.4%, $213.1B) occupied fourth place. The United Kingdom (2.1%, $103.5B) remained in fifth place. Germany (1.3%, $62.2B) was in sixth place, followed by The Netherlands (1.1%, $53.8B), Sweden (0.8%, $37.2B), Australia (0.6%, $27.4B) and Switzerland (0.4%, $18.1B). (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 July 31, 2021, Taxable money funds held 44.5% (up from 43.9%) of their assets in securities maturing Overnight, and another 10.9% maturing in 2-7 days (up from 8.9%). Thus, 55.4% in total matures in 1-7 days. Another 10.5% matures in 8-30 days, while 11.2% matures in 31-60 days. Note that over three-quarters, or 77.1% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 8.2% of taxable securities, while 11.9% matures in 91-180 days, and just 2.7% matures beyond 181 days. (Visit our Content center to download, or contact us to request our latest Portfolio Holdings reports.)
Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be sent out Tuesday, and we'll be writing our normal monthly update on the July 31 data for Wednesday's News. But we also published a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Monday. (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 July 31, 2021 includes holdings information from 1,027 money funds (the same number as last month), representing assets of $4.977 trillion (down from $5.100 trillion). Prime MMFs now total $870.7 billion, or 17.5% of the total. We review the new N-MFP data below, and we also look at our revised MMF expense data.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Treasury holdings totaled $2.072 trillion (down from $2.291 trillion), or a massive 41.6% of all holdings. Repurchase Agreement (Repo) holdings in money market funds rose again to $1.782 trillion (up from $1.715 trillion), or 35.8% of all assets, and Government Agency securities totaled $524.2 billion (down from $536.3 billion), or 10.5%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $4.378 trillion, or a stunning 88.0% of all holdings.
Commercial paper (CP) totals $243.0 billion (up from $235.1 billion), or 4.9% of all holdings, and the Other category (primarily Time Deposits) totals $163.6 billion (up from $123.7 billion), or 3.3%. Certificates of Deposit (CDs) total $122.3 billion (down from $124.1 billion), 2.4%, and VRDNs account for $70.6 billion (down from $74.9 billion last month), or 1.4% of money fund securities.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $167.0 billion, or 3.4%, in Financial Company Commercial Paper; $33.5 billion or 0.7%, in Asset Backed Commercial Paper; and, $42.5 billion, or 0.9%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($1.359 trillion, or 27.5%), U.S. Govt Agency Repo ($369.7B, or 7.4%) and Other Repo ($53.7B, or 1.1%).
The N-MFP Holdings summary for the Prime Money Market Funds shows: CP holdings of $238.3 billion (up from $230.3 billion), or 27.4%; Repo holdings of $231.4 billion (down from $272.3 billion), or 26.6%; Treasury holdings of $119.0 billion (down from $144.4 billion), or 13.7%; CD holdings of $122.3 billion (down from $124.1 billion), or 14.0%; Other (primarily Time Deposits) holdings of $121.7 billion (up from $78.4 billion), or 14.0%; Government Agency holdings of $31.3 billion (down from $33.6 billion), or 3.6% and VRDN holdings of $6.7 billion (up from $7.5 billion), or 0.8%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $167.0 billion (up from $161.6 billion), or 19.2%, in Financial Company Commercial Paper; $33.5 billion (down from $35.6 billion), or 3.8%, in Asset Backed Commercial Paper; and $37.9 billion (up from $33.2 billion), or 4.4%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($157.7 billion, or 18.1%), U.S. Govt Agency Repo ($20.1 billion, or 2.3%), and Other Repo ($53.6 billion, or 6.2%).
In other news, money fund charged expense ratios were flat in July after hitting a record low of 0.06% in May and inching higher in June. Our Crane 100 Money Fund Index and Crane Money Fund Average both were 0.07% as of July 31, 2021. Crane Data revises its monthly expense data and gross yield information after the SEC updates its latest Form N-MFP data the morning of the 6th business day of the new month. (They posted this info Monday morning, so we revised our monthly MFI XLS spreadsheet and historical craneindexes.xlsx averages file to reflect the latest expenses, gross yields, portfolio composition and maturity breakout Frida yesterday.) Visit our "Content" page for the latest files, and see below for the review of the latest N-MFP Portfolio Holdings data.
Our Crane 100 Money Fund Index, a simple average of the 100 largest taxable money funds, shows an average charged expense ratio (Exp%) of 0.07%, the same as last month's level (and one bps higher than May's record low 0.06%). The average is down from 0.27% on Dec. 31, 2019, so we estimate that funds are waiving 20 bps, or 74% of normally charged expenses. The Crane Money Fund Average, a simple average of all taxable MMFs, also showed a charged expense ratio of 0.07% as of July 31, 2021, the same as the month prior but down from 0.40% at year-end 2019.
Prime Inst MFs expense ratios (annualized) now average 0.11% (down one basis point from last month), Government Inst MFs expenses average 0.05% (the same as the month prior), Treasury Inst MFs expenses average 0.06% (up one basis point from last month). Treasury Retail MFs expenses currently sit at 0.05%, (unchanged), Government Retail MFs expenses yield 0.05% (the same as in June). Prime Retail MF expenses are 0.13% (down one bps from the month prior). Tax-exempt expenses were down 2 basis points over the month to 0.05% on average.
Gross 7-day yields were unchanged on average for the month ended July 31, 2021. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 733), shows a 7-day gross yield of 0.09%, the same as the previous month. The Crane Money Fund Average is down 1.65% from 1.72% at the end of 2019. Our Crane 100's 7-day gross yield also was flat, ending the month at 0.09%, but down 1.66% from year-end 2019.
According to our revised MFI XLS and Crane Index numbers, we now estimate that annualized revenue for all money funds is approximately $3.616 billion (as of 7/31/21). Our estimated annualized revenue totals increased from $3.530 billion last month, but fell from $6.028 trillion at the start of 2020 and $10.642 trillion at the start of 2019. Charged expenses and gross yields are driven by a number of variables, and the Fed's 0.05% floor on its RRP repo appears to have helped stabilize rates above zero. Nonetheless, severe fee waivers and heavy fee pressure should continue as long as the Fed keeps yields pinned close to the zero floor.
Crane Data's latest Money Fund Market Share rankings show assets declined across a majority of the largest U.S. money fund complexes in July. Money market fund assets decreased $11.1 billion, or -0.2%, last month to $4.965 trillion. Assets have decreased by $28.4 billion, or -0.6%, over the past 3 months, and they've decreased by $56.2 billion, or -1.1%, over the past 12 months through July 31, 2021. The only increases among the 25 largest managers last month were seen by Dreyfus, Morgan Stanley, SSGA and SEI, which grew assets by $9.9 billion, $5.3B, $2.7B and $1.1 billion, respectively. The largest declines in July were seen by JPMorgan, First American, Federated, Fidelity and Schwab, which decreased by $11.1 billion, $7.4B, $4.6B, $3.0B and $2.3B, 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 July.
Over the past year through July 31, 2021, BlackRock (up $114.3B, or 27.7%), Morgan Stanley (up $61.6B, or 30.6%), First American (up $40.0B, or 43.2%), Dreyfus (up $20.0B, or 9.7%), T. Rowe Price (up $10.7B, or 27.0%), Invesco (up $8.9B, or 11.6%), DWS (up $7.5B, or 26.9%) and Columbia (up $5.2B, or 35.0%) were the largest gainers. Morgan Stanley, Northern, JPMorgan and SSGA had the largest asset increases over the past 3 months, rising by $26.6B, $12.2B, $9.7B and $9.4B, respectively. The largest decliners over 12 months were seen by: Schwab (down $59.9B), Goldman Sachs (down $53.3B), Federated Hermes (down $43.9B), UBS (down $30.9B) and Vanguard (down $23.7B). The largest decliners over 3 months included: BlackRock (down $18.5B), Federated (down $16.2B), Goldman Sachs (down $14.8B) and American Funds (down $14.7B).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $886.4 billion, or 17.9% of all assets. Fidelity was down $3.0B in July, down $3.2 billion over 3 mos., and down $16.4B over 12 months. BlackRock ranked second with $528.1 billion, or 10.6% market share (up $361M, down $18.5B and up $114.3B for the past 1-month, 3-mos. and 12-mos., respectively). Vanguard remained in third with $474.6 billion, or 9.6% market share (down $75M, down $10.8B and down $23.7B). JP Morgan ranked fourth with $459.1 billion, or 9.2% of assets (down $11.1B, up $9.7B and up $6.3B for the past 1-month, 3-mos. and 12-mos.), while Goldman Sachs took fifth place with $349.0 billion, or 7.0% of assets (down $407M, down $14.8B and down $53.3B).
Federated Hermes was in sixth place with $331.3 billion, or 6.7% of assets (down $4.6B, down $16.2B and down $43.9B), while Morgan Stanley was in seventh place with $275.3 billion, or 5.5% (up $5.3B, up $26.6B and up $61.3B). Dreyfus ($235.1B, or 4.7%) was in eighth place (up $9.9B, up $7.7B and up $20.0B), followed by Wells Fargo ($201.1B, or 4.0%, up $397M, up $7.0B and down $2.3B). Northern was in 10th place ($179.1B, or 3.6%; up $482M, up $12.2B and down $10.3B).
The 11th through 20th-largest U.S. money fund managers (in order) include: SSGA ($149.8B, or 3.0%), Schwab ($146.9B, or 3.0%), American Funds ($139.8B, or 2.8%), First American ($123.8B, or 2.5%), Invesco ($84.1B, or 1.7%), T. Rowe Price ($49.6B, or 1.0%), UBS ($48.4B, or 1.0%), HSBC ($36.8B, or 0.7%), DWS ($35.9B, or 0.7%) and Western ($34.0B, or 0.7%). Crane Data currently tracks 64 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg and the Cayman Islands -- are included, the top 10 managers are the same as the domestic list, except JPMorgan moves ahead of Vanguard to the No. 3 spot, and Northern moves ahead of Wells for the No. 9 spot. 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 ($899.2 billion), BlackRock ($725.6B), JP Morgan ($669.5B), Vanguard ($474.6B) and Goldman Sachs ($470.8B). Federated Hermes ($340.7B) was sixth, Morgan Stanley ($332.9B) was in seventh, followed by Dreyfus ($258.5B), Northern ($207.6B) and Wells Fargo ($201.7B), 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 July issue of our Money Fund Intelligence and MFI XLS, with data as of 7/31/21, shows that yields were flat to higher in July for our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 733), inched higher to 0.02% for the 7-Day Yield (annualized, net) Average, the 30-Day Yield inched up one bps to 0.02%. The MFA's Gross 7-Day Yield was flat at 0.09%, the Gross 30-Day Yield was also flat at 0.09%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.02% (unch) and an average 30-Day Yield also unchanged at 0.02%. The Crane 100 shows a Gross 7-Day Yield of 0.09% (unch), and a Gross 30-Day Yield of 0.09% (down one bps). Our Prime Institutional MF Index (7-day) yielded 0.03% (unch) as of July 31, while the Crane Govt Inst Index remained at 0.02% and the Treasury Inst Index was unchanged at 0.01%. Thus, the spread between Prime funds and Treasury funds is 2 basis points, and the spread between Prime funds and Govt funds is one basis point. The Crane Prime Retail Index yielded 0.01% (unch), while the Govt Retail Index was 0.01% (unch), the Treasury Retail Index was also 0.01% (unchanged from the month prior). The Crane Tax Exempt MF Index yielded 0.02% (up one bps) in July.
Gross 7-Day Yields for these indexes in July were: Prime Inst 0.16% (up 1 bps), Govt Inst 0.07% (unch), Treasury Inst 0.06% (unch), Prime Retail 0.15% (unch), Govt Retail 0.06% (unch) and Treasury Retail 0.06% (unch). The Crane Tax Exempt Index remained at 0.09%. The Crane 100 MF Index returned on average 0.00% over 1-month, 0.00% over 3-months, 0.01% YTD, 0.02% over the past 1-year, 1.08% over 3-years (annualized), 0.99% over 5-years, and 0.52% over 10-years.
The total number of funds, including taxable and tax-exempt, was down by 6 funds to 893. There are currently 733 taxable funds, down one from the previous month, and 160 tax-exempt money funds (down 5 from last month). (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.
The August issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Friday morning, features the articles: "MF Portfolio Holdings Review; Shift to Repo from Treasuries," which looks at the latest securities and composition held by MMFs; "Federated's Donahue Says Q2 High-Water Mark for Waivers," which quotes the latest on fee waivers from earnings calls; and, "Reviewing ESMA Comments: IMMFA, Irish Funds, EFAMA," which quotes from recent feedback to European regulators. We also sent out our MFI XLS spreadsheet Friday a.m., and have updated our Money Fund Wisdom database query system with 7/31/21 data. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our August Money Fund Portfolio Holdings are scheduled to ship on Tuesday, August 10, and our August Bond Fund Intelligence is scheduled to go out Friday, August 13.
MFI's lead article says, "Money fund portfolios continue their massive shift away from Treasuries and towards repo, especially Fed repo. So we thought it would be a good time to review Crane Data's Money Fund Portfolio Holdings data and information. Our last monthly cut, with data as of June 30, 2021, showed another huge increase in Repo holdings and a giant drop in Treasuries, and we expect our 7/31 data to show the trend continuing." (Our August holdings will ship on Tuesday, 8/10.)
It continues, "Money market securities held by Taxable U.S. money funds (tracked by Crane Data) inched higher by $1.5 billion to $4.949 trillion in June, after rising $30.2 billion in May. Treasury securities remained the largest portfolio segment, followed by Repo, then Agencies. CP remained fourth, ahead of CD, Other/Time Deposits and VRDNs."
Our "Federated's Donahue" piece reads, "On its latest quarterly earnings call, Federated Hermes spend a lot of time discussing fee waivers. CEO & President Chris Donahue comments, 'We believe that Q2 was the high-water mark for money market fund yield waiver impact. As we expected, the Fed raised the administered rates in mid-June, moving repo rates from zero to 5 basis points and interest on excess reserves from 10 to 15 bps.' We quote from the call below, and we also review other earnings calls that mentioned money fund fee waivers."
Donahue explains, "While the Fed movement was a step in the right direction, the money fund yield curve remains very flat, and we are experiencing more waivers for competitive purposes. Tom will update our yield waiver outlook for the third quarter. Taking a look now at recent asset totals, managed assets were approximately $638 billion, including $421 billion in money markets.... MMMF assets were at $293 billion."
CFO Tom Donahue tells us, "Total revenue for the quarter was down from the prior quarter due mainly to the impact of higher minimum yield and competitive waivers.... Now other revenue increases from Q1 included the impact of higher money market assets.... The decrease in distribution expense of $6.3 million, compared to the prior quarter was mainly due to the impact of minimum yield waivers, partially offset by higher distribution expense incurred for competitive purposes.' (See Federated's recent 'Domestic Fee Waiver Notice.')"
The "ESMA" article tells readers, "As we mentioned last month, over 30 comment letters have been posted in response to the European Securities and Markets Authority's (ESMA's) 'Consultation on EU Money Market Fund Regulation - Legislative Review.' We've reviewed several of these over the past few weeks, but below we excerpt highlights from the major fund industry association comment letters."
The piece continues, "The U.K.-based Institutional Money Market Fund Association writes, 'Although the overwhelming majority of IMMFA MMFs are LVNAV or PDC-NAV, IMMFA represents all fund types ... our members offer a range of funds.... We feel strongly that questions of how MMFs fared should be considered in the context of the broader ecosystem and that any proposed solutions should take this symbiosis into account, rather than isolating MMFs. The March crisis was the first test of the reforms introduced under EU MMFR. Those reforms proved instrumental in providing MMFs with the increased resilience which enabled them to pass this test. We note that MMFs continued to serve their purpose in preserving capital and providing liquidity, with no MMFs imposing gates or fees, and all IMMFA MMFs staying within ... collars."
MFI also includes the News brief, "MMF Assets Down Again," which says, "Money fund assets fell by $12.4 billion in July to $4.966 trillion, according to our MFI XLS. ICI's 'Money Market Fund Assets' report shows MMFs down $1.1 billion to $4.501 trillion in the latest week, but up $204 billion, or 4.7% YTD."
Another News brief, "TBAC Recommends MMF Reforms," tells readers, "The Treasury Borrowing Advisory Committee discussed MMF reforms. A 'presenting member argued that reforms should include removing the ties between MMFs liquidity mandates and redemption fees and gates, mandating that prime MMFs hold a higher degree of liquid assets, and using floating net asset values for all non-government MMFs to set clearer expectations of risks to MMF investors.'"
Our August MFI XLS, with July 31 data, shows total assets decreased $12.4 billion to $4.966 trillion, after decreasing $73.0 billion in June, increasing $74.0 billion in May and increasing $62.2 billion in April. Assets rose $151.0 billion in March, $30.8 billion in February and $5.6 billion in January. Assets decreased $6.7 billion in December, $11.7 billion in November, $46.8 billion in October, $121.2 billion in September, and $42.3 billion in August. Our broad Crane Money Fund Average 7-Day Yield inched higher to 0.02%, and our Crane 100 Money Fund Index (the 100 largest taxable funds) remained flat at 0.02%.
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA and the Crane 100 both remained at 0.09%. Charged Expenses averaged 0.07% for the Crane MFA and the Crane 100. (We'll revise expenses Monday once we upload the SEC's Form N-MFP data for 7/31.) The average WAM (weighted average maturity) for both the Crane MFA and Crane 100 was 37 days (down one day from the previous month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The U.S. Department of the Treasury's Treasury Borrowing Advisory Committee briefly discussed potential money market fund reforms, we learned from J.P. Morgan's "Mid-Week US Short Duration Update." The TBAC's Minutes explain, "The Committee reviewed a presentation on regulatory reform options for the money market mutual fund (MMF) industry, given the stress experienced by certain types of funds during March 2020. The presenting member began by noting the vulnerabilities that exist for prime MMFs, highlighting common themes in several recent episodes of heightened outflows. During these events, the outflows from prime MMFs have tended to result in similarly sized and simultaneous inflows into government MMFs."
They continue, "In the face of heightened investor redemptions, prime MMFs tend to show reluctance to sell liquid assets, such as Treasury securities, to guard against breaching regulatory liquidity thresholds that are tied to MMFs' ability to impose fees and gates on redemptions. These episodes increase demand for Treasury bills, as the bill share of government MMF portfolios is much larger than that of prime MMF portfolios. Relatedly, reforms that would result in a smaller prime MMF sector would likely result in higher structural demand for Treasury securities."
The TBAC statement tells us, "The presenting member concluded by arguing that optimal reforms to address the vulnerabilities among prime MMFs should balance allowing these funds to offer attractive yields under normal market conditions while ensuring stability during periods of market stress. In this vein, the presenting member argued that reforms should include removing the ties between MMFs liquidity mandates and redemption fees and gates, mandating that prime MMFs hold a higher degree of liquid assets, and using floating net asset values for all non-government MMFs to set clearer expectations of risks to MMF investors."
A slide deck accompanying the presentation states, "A recent President's Working Group on Financial Markets (PWG) report on money market fund (MMF) reform described 10 potential regulatory options to address existing vulnerabilities in the sector given the events of March 2020. 1. Please discuss the primary drivers of the stress experienced by MMFs in March 2020, as well as any other inherent vulnerabilities that currently exist in the MMF sector. 2. `How would the specific reform proposals presented in the PWG report be expected to impact the MMF industry and broader short-term funding markets, including the front-end of the Treasury market and Treasury repo, both under normal market conditions and during future episodes of market stress?"
It evaluates the PWG proposals, saying, "Listed proposals range from modest to those requiring aggressive changes. Changes to prime MMFs should effectively balance the tradeoffs between attractiveness of yields in normal times and resilience in times of stress. Proposals that strike the best balance, in our opinion, are: Weaken link between regulatory thresholds and gates/fees - Provide greater flexibility to tap liquid assets to meet redemptions; Reform conditions for imposing redemption gates - Reduce incentive for investors to pre-emptively redeem; Changes to liquidity management requirement - Increase liquidity profile through additional categories like biweekly liquid assets; and, Floating NAV for all Prime and Tax-exempt MMFs – Improve transparency and set clearer expectations of fund risks for investors."
The presentation adds, "Other proposals, in our opinion, might face greater challenges in their implementation: Minimum balance at risk and swing pricing requirement - Complex and hard to administer; Likewise, implementation of countercyclical WLA requirements would be challenging, while addressing the pre-emptive redemption incentive problem only partially; Capital buffers, liquidity exchange membership and new requirements for sponsor support are challenging from appropriate sizing and cost perspective and can reduce product viability."
J.P. Morgan's piece comments, "To the degree we see less of an AUM shift out of prime MMFs as a result of floating NAVs, there should be less follow-on impact on credit in the money markets. But that's not to say there will no impact. If the floating NAV reform were combined with the requirement to hold larger liquidity buffers for instance, this could also translate into greater demand for T-bills/discos/repo and lesser demand for CP and CDs, both of which could negatively impact fund yields. To that end, it's possible that reforms could further erode the appeal of prime and tax-exempt MMFs, and assets shift either to short duration credit funds (potentially higher yielding), government MMF (stable NAV, at the cost of little- or no-yield to shareholders) or perhaps evolving alternatives like stablecoin (no-yield). That said, given the current low yield environment, there appears to be still demand for these funds."
In other news, the Economic Times of India writes, "Mirae Asset Mutual Fund launches Money Market Fund NFO." They tell us, "Mirae Asset Investment Managers, India has announced the launch of 'Mirae Asset Money Market Fund', an open ended debt scheme investing in money market instruments. The New Fund Offer (NFO) will close for subscription on August 10. The scheme re-opens for continuous sale and repurchase from August 12. The fund will be benchmarked against Nifty Money Market Index and will be managed by Mahendra Jajoo."
The article says, "The minimum initial investment in the scheme will be Rs 5,000/- and in multiples of Rs 1/- thereafter. According to the fund house, the goal of investment is savings with low to moderate risk. The fund house said that the scheme is ideal for investors with an investment horizon of up to 1 year. Investments in the scheme will primarily be made in money market instruments with up to 1-year maturity. According to the press release, the duration of the portfolio will be between 6 months to 1 year."
They quote Mahendra Jajoo, CIO - Fixed Income, Mirae Asset Investment Managers (India), "At a time when fixed income markets are dealing with possibility of sustained higher inflation across the globe, Money Market Funds may be well suited with exposure in very liquid and high-quality money market instruments, providing attractive yield pick-up due to steep money market curve while still providing reasonable down side protection due to relatively shorter maturity of the portfolio."
India is the 11th largest money market fund marketplace in the world with $58.3 billion in assets, according to ICI's latest Worldwide asset totals. (See our June 18 News, "Worldwide MF Assets Jump in Q1'21 Led by US, China; Europe Sees Drop," and see our previous "Link of the Day briefs: "PGIM India Launches Money Fund" (3/3/20), "New Indian Money Fund Launch" (7/29/19), "Speed Bump for Indian Money Funds" (9/10/18), "New Sundaram Indian Money Fund" (5/9/18) and "Paytm may launch Indian money fund" (1/11/18).
A blog from the Brookings Institution asks, "What is swing pricing?" Authors Anil Kashyap, Donald Kohn, and David Wessel blog, "In March 2020, at the start of the COVID-19 pandemic in the U.S., investors pulled more than $100 billion out of corporate investment-grade and high-yield bond mutual funds, forcing funds to sell some of their holdings. The spread between corporate bond yields and U.S. Treasuries (a market that had its own dysfunction) widened, transaction costs rose, and issuance of new bonds came to a halt, disrupting the flow of credit to the nation's corporations. This led the Federal Reserve to intervene by offering, for the first time, to buy corporate bonds and exchange traded corporate bond funds in what proved a successful effort to keep credit to corporations flowing. It was an extraordinary move that underscores the risks these funds pose to financial stability. (For details, see this Federal Reserve note.)"
They explain, "The growth of open-end fixed income funds magnifies the systemic significance of the tension between shareholders' expectations of daily liquidity and the (often illiquid) holdings of the funds. The average corporate bond is traded about once a month. Shareholders in an open-end bond fund expect (and receive in many cases) to be able to sell their shares much more easily and quickly than if they held bonds directly. When he was governor of the Bank of England, Mark Carney said, 'These funds are built on a lie, which is that you can have daily liquidity, and that for assets that fundamentally aren't liquid.'"
The Brookings piece continues, "In normal times, redemptions are modest and can be met by an offsetting inflow of funds or by selling liquid securities in the portfolio like Treasuries. But big outflows can force a fund to sell holdings of less liquid securities that may require a price concession to attract a buyer. Especially in times of stress, big sales force down bond prices because of the absence of a truly liquid market for the underlying bonds. This, in turn, raises the rates that all corporate borrowers have to pay on newly issued bonds -- if they can sell them at all -- thus harming the overall economy."
It comments, "Swing pricing is widely used in Europe but not in the U.S., although its use was authorized by the SEC in 2018. Basically, it allows the manager of an open-end fund to adjust its net asset value up or down when inflows or outflows of securities exceed some threshold. In this way, a fund can pass along to first movers the cost associated with their trading activity, better protect existing shareholders from dilution, and reduce the threats to financial stability. This brief draws from the report of the Task Force on Financial Stability, which recommended more widespread use of swing pricing, and a roundtable the Task Force convened with industry, academic, and public sector officials to consider the pros, cons, challenges and costs to doing so."
The authors tell us, "Money market funds are a special kind of open-end fund that can hold only short-dated securities such as U.S. Treasury bills, commercial paper, and certificates of deposit. By limiting the securities to those deemed relatively safe and liquid, it is expected that the price of the fund will be stable as the securities have no price risk if held to maturity. Problems can -- and do -- still arise for money market funds if they sell the securities they hold before maturity; in that case, there is price risk. Prime money market mutual funds invest in short-term private-sector securities such as commercial paper and certificates of deposit. Default rates on these securities are low, but they trade infrequently so they are subject to the same kind of illiquidity problems as open-end bond and loan funds."
They add, "Prime money market mutual funds suffered a run in March 2020, leading commercial paper markets to freeze up and prompting the Federal Reserve to intervene to keep credit flowing to businesses. Investors in prime money market funds generally are using these funds as substitutes for bank accounts. They expect to withdraw, possibly large amounts in some circumstances, and at multiple times during the day. As a result, these funds often set an NAV multiple times throughout the day. Some in the industry say that feature of these funds means the information demands of setting a swing would be daunting and incompatible with how investors use them. Still, in a June 2021 consultation report, the Financial Stability Board included swing pricing among several possible policy responses to the problems posed by money market mutual funds."
In other news, 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 July 30, 2021) includes Holdings information from 63 money funds (the same number as a week ago), which represent $2.455 trillion (up from $1.900 trillion) of the $4.949 trillion (49.6%) in total money fund assets tracked by Crane Data. (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 $1.197 trillion (up from $944.4 billion a week ago), or 48.7%, Repurchase Agreements (Repo) totaling $890.5 billion (up from $686.5 billion a week ago), or 36.3% and Government Agency securities totaling $191.6 billion (up from $152.6 billion), or 7.8%. Commercial Paper (CP) totaled $64.3 billion (up from $44.2 billion), or 2.6%. Certificates of Deposit (CDs) totaled $42.1 billion (up from $20.5 billion), or 1.7%. The Other category accounted for $45.6 billion or 1.9%, while VRDNs accounted for $24.5 billion, or 1.0%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.197 trillion (48.7% of total holdings), Federal Reserve Bank of New York with $370.3B (15.1%), Federal Home Loan Bank with $81.7B (3.3%), BNP Paribas with $71.2B (2.9%), Fixed Income Clearing Corp with $56.0B (2.3%), RBC with $47.5B (1.9%), Federal Farm Credit Bank with $44.2B (1.8%), Federal National Mortgage Association with $42.0B (1.7%), JP Morgan with $37.8B (1.5%) and Barclays with $29.9B (1.2%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($232.8B), Goldman Sachs FS Govt ($200.4 billion), BlackRock Lq FedFund ($174.5B), Wells Fargo Govt MM ($152.7B), Morgan Stanley Inst Liq Govt ($137.4B), Fidelity Inv MM: Govt Port ($128.1B), BlackRock Lq T-Fund ($118.0B), Dreyfus Govt Cash Mgmt ($117.3B), Goldman Sachs FS Treas Instruments ($110.3B) and BlackRock Lq Treas Tr ($103.8B). (See our July 13 News, "July MF Portfolio Holdings: Repo Surge Again on RRP; T-Bills Plunge" for more, and 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.)
J.P. Morgan's latest "Short-Term Market Outlook And Strategy," discusses the Fed's new SRF, or Standing Repo Facility, Treasury bills vs. Fed RRP, and the fact that "Stablecoins are not money market funds." They write, "Price action in money market rates remained remarkably stable despite yet another $130bn decline in net T-bill issuance this month. Thanks to the Fed's ON RRP facility, which continues to absorb a substantial amount of liquidity from the markets ($1.039tn on month-end), rates have generally been floored at 5bp with the exception of some short-dated T-bills that are trading slightly below. Next week's Treasury's Quarterly Refunding Announcement should give some further insight into Treasury's use of extraordinary measures until the debt ceiling is either lifted or suspended again. Unfortunately, at this time, it's unlikely that debt ceiling legislation will be included in the bipartisan infrastructure package, which suggests that any movement on the debt ceiling front could be delayed until September. In the meantime, 3Q tends to be a low net T-bill issuance period, and in the absence of any resolution to the debt ceiling, T-bill supply will likely be muted for the time being."
In a section entitled, "Stablecoins are not MMFs," authors Alex Roever and Teresa Ho comment, "Public scrutiny of stablecoins and their reserve management practices have intensified sharply over the past few weeks. `Most recently, news surfaced that Tether and the Facebook-backed Diem were the focus of a recent meeting of the President's Working Group on Financial Markets. (See the Bloomberg article here.) Some official sector observers have likened stablecoins to unregulated money market funds because of the potential for disorderly liquidation in time of crisis. While the comparison nominally takes aim at stablecoins, it also throws shade on MMFs -- particularly prime MMFs -- which have long been a target for some regulators. It's a poor comparison for a number of reasons, not least of which are MMFs are highly regulated and very transparent. Furthermore, besides MMFs, there are other liquidity investors that buy money market instruments, such as banks, corporates, state and local governments, mutual funds, ETFs, etc., some of which have the potential to encounter similar run risks."
The JPM piece explains, "MMFs are regulated by the SEC under Rule 2a-7 and are subject to strict investment and disclosure guidelines. They are required to hold 10% and 30% in overnight and weekly liquidity respectively. They are only allowed to invest in instruments that have a legal final maturity of less than 397 days. They have 60-day and 120-day WAM and WAL limitations. There’s an overall issuer concentration limit of 5%. Securities need to be rated investment grade. On a daily basis, they have to disclose their shadow NAVs. On a monthly basis, they have to disclose their portfolio holdings on their websites as well as submit their holdings to the SEC. These are just some of the requirements for MMFs."
They add, "This is not to say that stablecoins do not pose financial stability concerns. Their reserve exposure into CP bears watching, considering the potential impact on the short-term markets. Recent commentary from regulatory officials suggests that it's a matter of time before they are subject to regulations, much like banks, MMFs, mutual funds, etc. As our derivative strategists note, regardless of where regulators ultimately fall in their treatment of this new asset class, presumably they will impose liquidity and asset quality requirements as well as a combination of regular, standardized and more extensive disclosure requirements. Though their decentralized nature does not necessarily allow for these to be imposed directly, in principle they can be implemented through the domestic commercial banking system, which is currently acting as either custodian or correspondent to these issuers."
In other news, Federated Hermes' Deborah Cunningham says the money markets are, "Looking like a trillion bucks." She tells us, "[I]t's no small thing that the usage of the Federal Reserve's Reverse Repo Program (RRP) has lately approached the $1 trillion mark. It was below $100 billion as recently as April. In March, the Fed increased the counterparty limit from $30 billion to $80 billion and then in June raised the rate to 5 basis points. Usage has steadily grown since then, and it's been a valuable outlet for the money markets, which still are facing heavy demand."
Cunningham continues, "A different Fed repo facility was in the news last week with the Federal Open Market Committee's (FOMC) announcement that the Fed has created a domestic standing repo facility (SRF) to replace the temporary open market operations it previously offered. (The Fed also announced the creation of a similar repo facility for foreign and international monetary authorities.) Although the Fed characterized these as being backstops for the money markets, the facilities are for borrowing rather than investing. While limited initially to primary dealers, the SRF will be expanded to other depository institutions."
She states, "Although money funds will not benefit directly from them, we view their creation as yet another sign the Fed is preparing for the tapering process, which Chair Powell mentioned in his comments after the meeting. Also, the September 2019 repo market volatility came amid a decline in reserves, and the Fed does not want a repeat of that experience. The new facilities are a sign of good advance planning and perhaps a Fed that utilizes numerous existing facilities to promote market liquidity rather than emergency ones."
Cunningham also says, "In the meantime, the biggest issue for cash managers remains the recent decline in Treasury bill issuance and the low supply of Treasury bills, a combination that continues to hold down yields. The decline in issuance is tied to the reinstatement of the federal debt limit on Aug. 1, and we expect constrained issuance until Congress takes action to raise the limit. The Treasury should have enough cash and other measures to meet the basic funding needs of the government into the fall. We fully anticipate lawmakers to eventually raise the limit or to suspend it again. Expect political theater, but not anything serious."
Finally, she writes, "The other trillion-dollar issue hanging around is the infrastructure deal. This week the Senate finally voted to take up the bill. But everyone -- in particular state and local governments and the municipal market -- is still playing the waiting game for the details. None of the above had led us to change the targeted weighted average maturities of our money market funds, which remain in ranges of 35-45 days for government and 40-50 days for prime and municipal."
Federated Hermes hosted its latest quarterly earnings call on Friday (see the Seeking Alpha transcript here), and fee waivers, near zero rates and pending regulatory reforms were again major topics of discussion. CEO & President Chris Donahue comments, "Moving to money markets, assets were up nearly $11 billion in the second quarter with just under half from funds and the rest from separate accounts. Our money market mutual fund of market share, which includes our sub-advised funds, was about 7.4% at the end of the second quarter, up slightly from the first quarter percentage.... [W]e believe that Q2 was the high-water mark for money market fund yield waiver impact. As we expected, the Fed raised the administered rates in mid-June, moving repo rates from zero to 5 basis points and interest on excess reserves from 10 to 15 basis points."
He explains, "While the Fed movement was a step in the right direction, the money fund yield curve remains very flat, and we are experiencing more waivers for competitive purposes. Tom will update our yield waiver outlook for the third quarter. Taking a look now at recent asset totals, managed assets were approximately $638 billion, including $421 billion in money markets, $99 billion in equities, $93 billion in fixed income, $21 billion in alternative, and $4 billion in multi-asset. Money market mutual fund assets were at $293 billion."
CFO Tom Donahue tells us, "Total revenue for the quarter was down from the prior quarter due mainly to the impact of higher minimum yield and competitive waivers.... Now other revenue increases from Q1 included the impact of higher money market assets, increasing revenue by $5 million an additional day, increasing revenue by about $5 million and higher equity and fixed income assets increasing revenue by $3.4 million.... The decrease in distribution expense of $6.3 million, compared to the prior quarter was mainly due to the impact of minimum yield waivers, partially offset by higher distribution expense incurred for competitive purposes."
He continues, "The negative impact on operating income from minimum yield waivers on money market mutual funds is currently estimated to be about $38 million for Q3, down from $46.8 million in Q2. The Q2 waivers were slightly higher than expected due mainly to related higher asset levels. The Q3 estimate is based on our investment team's expectations for portfolio yields and our recent asset levels and mix. The amount of minimum yield waivers and the impact on operating income will vary based on several factors, including, among others, interest rates, the capacity of distributors to absorb waivers, asset levels and asset mix."
During the Q&A session, Federated was asked, "Why the increase in competitive fee waivers?" Chris Donahue responds, "With competitive fee waivers ... it is forever a constant situation. [W]e cannot predict or figure out why certain competitors decide to do certain things over a certain period of time. There are a lot of variables in the equation. Some competitors want to increase their footprints. Others have creative uses of how things work inside their funds. We just try to do the best we can to stay competitive, and so it is not a predictable.... [I]t's not possible for us to [understand] why they're doing certain things on the pricing. So that's the way it is. I do not recall competitive waivers being altered that much in the post 2008 time frame."
MM CIO Debbie Cunningham adds, "The mix of assets so much more is in government funds at this point, compared to the 2008 time frame where more than half of our assets were in prime funds. And the prime funds obviously maintain a higher yield. So the waivers are less. Now that you've got 80% of the industry in government funds with a curve on the government side that is five to six basis points, that's, I think, where some of the positioning and changes have occurred."
When asked about their money fund mix, Cunningham responds, "Well, we have seen more from a 2a-7 money market fund standpoint. More of the inflows have come into the government funds, and that has a whole lot to do with where net yields are right now. Most net yields are to one to three basis point level and to many investors who are comfortable and have been in prime funds, it doesn't really make a whole lot of sense because they're not getting any extra incremental income from a net yield perspective.... So, we've seen our prime money fund, 2a-7 money fund assets decline."
She also says, "Where we've seen increases in the prime side, however, has come in the non-2a-7 business. So, offshore separate accounts, local government investment pools, they seem to be trending more toward the prime space. And the mix of assets on an overall liquidity business basis has remained fairly steady. But with a larger proportion of governments in the 2a-7 space and a larger proportion of prime in the non-2a-7 space."
Chris Donahue adds, "As things have changed over 4-plus decades in money funds, we don't lose clients. They may move from over this type of product to another type of product, or another solution, whether it's a private solution, whatever. Even when the massive amounts of prime were shut down because of the '14 amendments implemented in '16, the clients moved over to our govie funds. Part of the reason for that is our heritage and devotion to the business, our defense of the stakeholders here, but also because ... these clients are diversified.... They do not put all their money with one purveyor. They move it around and keep it diversified and that of course is helpful to us."
Asked about ESG, Donahue states, "When we did the reverse transformational deal with Hermes, we wanted to integrate all of our investment management with ESG, so that you get ESG baked in the cake. [The first] to get that accomplished was the money market funds." Cunningham adds, "Given the high-quality, short-term security types that we use in the money funds, what we basically did was add an additional layer of input into our credit process. So our team management approach for money market funds consists of team members that are investment analysts, portfolio managers and traders. So through our investment analyst positions, we added the ... ESG informational content that was provided, both by external as well as more importantly, internal sources and are using that actively in our assessment for the credit securities that we're using within our portfolio."
She continues, "Our prime funds were the first ones to be integrated just simply because their large use of international global banks and industrial types of firms and the coverage of those types of issuers by the ESG assessors and analysts. But most recently, we've made a lot of progress integrating our government funds, as well with the beginning of engagement strategies with all of various GSEs that we use within our portfolios for the government funds, FHLBs, Fannie Mae, Freddie Mac, the Farm Credit system.... In addition, because many of our municipal funds also rely on the banking system for their letters of credit and guarantors, those have also been fully integrated. So, our level is very high and our amount of input, given the high-quality short-term issuers that we use in these portfolios, has been very impactful and substantive."
Donahue adds, "So ... the answer you should detect from that without mentioning any particular competitor is that, when you're dealing with a Federated Hermes Money Market fund, the word Hermes basically embeds ESG in the process. And when you look at our money market funds, it's designed to go for minimal credit risk. Anytime you see risk somewhere, you want to evaluate it for your purposes. And that's what we're doing here. So, we view our products as fully integrated on ESG and able to stand up against anybody on that score."
Asked about MMF reforms, the Federated CEO says, "The list of things is, as you say, a rehash. I consider a whole lot of zombies coming back from the dead, because most of them are just different forms of killing money funds or killing prime money funds or killing muni money funds. And if that's what they want to do, then they've got to be straightforward about doing it. So, I'm not aware of anything [likely to pass] other than removing the mistake that was made by linking the 30% weekly liquidity with the threat of fees and gates, which did compromise the resiliency of funds."
He explains, "But part of the issue really here is that the Fed, from the mid-'70s, has wanted to eliminate these money funds, and uses any opportunity to do so. We make the argument that the money fund is simply a transparent collection device, a de facto operating entity of bank paper and commercial paper. Don't forget the Fed in 1913 was started in order to help and assist the commercial paper market. So when the Fed takes an action [they] lose no money, take no risk, and do their liquidity deals."
Donahue tells us, "So, we look at the whole thing as the only structural vulnerability that was created, was really the link of the 30%. We also think that the Fed could do a lot more and certainly ought to, before they go about shooting money funds. For example, doing [an] all [to] all-type market where people can really trade these short-term securities. And there are things they can do related to leaving the discount window open, reevaluating SLR in a crisis, and things like that to make the liquidity work smoother and still do everything totally consistent with Dodd-Frank, where all you do is help liquidity and don't help individual people."
Finally, Cunningham adds, "In addition to what Chris was saying about the Fed, we do think one of the things that they did at their meeting this week where they announced the standing repo facility, takes away some of the emergency actions they need to do. So, this replaces their temporary market open market operations.... This standing repo facility, it's the opposite of the standing reverse repo facility that they have. It's therefore borrowing not investing. So, people putting transactions back to them, putting collateral back to them, rather than them taking the cap and giving the collateral. But in fact we think maybe that is a sign of their willingness to look at facilities that are more permanent in nature and able to help in a crisis, rather than just coming up with emergency lending facilities, when they are on the brink of problems."
