News Archives: August, 2023
ICI released its latest monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds" for July 2023 on Wednesday. The monthly Trends shows money fund totals rising $31.4 billion in June to a record $5.481 trillion (after increases in June, May and April). Prior to this, the March jump (a $371.0 billion increase) was the third largest monthly increase ever and the largest in history if you exclude 2 coronavirus lockdown panic months in March and April 2020. Bond fund assets also increased, rising $26.0 billion to $4.662 trillion.
MMFs have increased by $906.8 billion, or 19.8%, over the past 12 months. Money funds' July asset increase follows gains of $30.6 billion in June, $172.7 billion in May, $8.4 billion in April, $371.0 billion in March, $60.0 billion in February, $31.5 billion in January, $105.3 billion in December, $63.4 billion in November, $36.8 billion in October and $4.2 billion in Sept. Money fund assets surpassed bond fund assets in September 2022 for the first time since 2010 and they continued to hold a sizeable lead last month. (The bond fund totals don't include bond ETFs, which total $1.392 trillion as of 7/31, according to ICI.)
ICI's monthly release states, "The combined assets of the nation’s mutual funds increased by $477.90 billion, or 2.0 percent, to $24.78 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 $11.12 billion in July, compared with an inflow of $12.82 billion in June <b:>`_.... Money market funds had an inflow of $17.82 billion in July, compared with an inflow of $16.20 billion in June. In July funds offered primarily to institutions had an outflow of $13.04 billion and funds offered primarily to individuals had an inflow of $30.86 billion."
The Institute's latest statistics show that Taxable MMFs were higher while Tax Exempt MMFs were lower last month. Taxable MMFs increased by $34.8 billion in July to $5.369 trillion. Tax-Exempt MMFs decreased $3.4 billion to $112.1 billion. Taxable MMF assets increased year-over-year by $891.3 billion (19.9%), and Tax-Exempt funds rose by $15.5 billion over the past year (16.0%). Bond fund assets increased by $26.0 billion (after increasing $20.5 billion in June) to $4.662 trillion; they've decreased by $217.3 billion (-4.5%) over the past year.
Money funds represent 22.1% of all mutual fund assets (down 0.3% from the previous month), while bond funds account for 18.8%, according to ICI. The total number of money market funds was 279, down 1 from the prior month and down from 297 a year ago. Taxable money funds numbered 231 funds, and tax-exempt money funds numbered 48 funds.
ICI's "Month-End Portfolio Holdings" confirm a drop in Repo and a jump in Treasuries last month. Repurchase Agreements remained the largest composition segment in July but decreased $58.5 billion, or -1.9%, to $2.950 trillion, or 54.9% of holdings. Repo holdings have increased $535.7 billion, or 22.2%, over the past year. (See our Aug. 10 News, "August Portfolio Holdings: Treasuries Skyrocket; Repo, Agencies Plunge.")
Treasury holdings in Taxable money funds increased last month; they remain the second largest composition segment. Treasury holdings increased $152.6 billion, or 12.9%, to $1.337 trillion, or 24.9% of holdings. Treasury securities have decreased by $16.6 billion, or -1.2%, over the past 12 months. U.S. Government Agency securities were the third largest segment; they decreased $59.6 billion, or -8.9%, to $612.9 billion, or 11.4% of holdings. Agency holdings have increased by $231.4 billion, or 60.6%, over the past 12 months.
Certificates of Deposit (CDs) remained in fourth place; they increased by $20.6 billion, or 8.8%, to $255.9 billion (4.8% of assets). CDs held by money funds rose by $77.5 billion, or 43.4%, over 12 months. Commercial Paper remained in fifth place, up $17.5 billion, or 9.6%, to $199.4 billion (3.7% of assets). CP increased $72.1 billion, or 56.6%, over one year. Other holdings increased to $38.9 billion (0.7% of assets), while Notes (including Corporate and Bank) decreased to $9.0 billion (0.2% of assets).
The Number of Accounts Outstanding in ICI's series for taxable money funds increased to 59.894 million, while the Number of Funds was down 1 at 231. Over the past 12 months, the number of accounts rose by 1.792 million and the number of funds decreased by 7. The Average Maturity of Portfolios was 23 days, down 1 from June. Over the past 12 months, WAMs of Taxable money have decreased by 1.
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 August 25) includes Holdings information from 78 money funds (up 23 from a week ago), which totals $3.102 trillion (up from $2.436 trillion) of the $5.955 trillion in total money fund assets (or 52.1%) tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here.) (Reminder: Register ASAP for our European Money Fund Symposium, which takes place Sept. 25-26, 2024 in Edinburgh!)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.628 billion (up from $1.298 trillion a week ago), or 52.5%; Treasuries totaling $909.8 billion (up from $705.6 billion a week ago), or 29.3%, and Government Agency securities totaling $254.1 billion (up from $223.0 billion), or 8.2%. Commercial Paper (CP) totaled $104.8 billion (up from a week ago at $76.2 billion), or 3.4%. Certificates of Deposit (CDs) totaled $84.5 billion (up from $63.5 billion a week ago), or 2.7%. The Other category accounted for $83.8 billion or 2.7%, while VRDNs accounted for $37.0 billion, or 1.2%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $909.8 billion (29.3% of total holdings), the Federal Reserve Bank of New York with $839.3 billion (27.1%), Fixed Income Clearing Corp with $219.1B (7.1%), Federal Home Loan Bank with $184.2B (5.9%), Federal Farm Credit Bank with $60.4B (1.9%), Citi with $50.0B (1.6%), BNP Paribas with $49.9B (1.6%), RBC with $46.9B (1.5%), Goldman Sachs with $40.4B (1.3%) and Bank of America with $38.5B (1.2%).
The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($265.0B), JPMorgan US Govt MM ($255.8B), Fidelity Inv MM: Govt Port ($180.9B), JPMorgan 100% US Treas MMkt ($150.7B), Federated Hermes Govt ObI ($147.4B), BlackRock Lq FedFund ($141.4B), Allspring Govt MM ($119.4B), State Street Inst US Govt ($114.1B), Fidelity Inv MM: MM Port ($110.4B) and BlackRock Lq Treas Tr ($104.6B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
In other news, law firm Vedder Price writes on website JD Supra, "SEC Adopts Significant Money Market Fund Reforms and Amended Form PF Reporting Requirements for Private Liquidity Fund Advisers." The summary says, "On July 12, 2023, in a 3-2 vote, the SEC adopted amendments to Rule 2a-7 under the Investment Company Act of 1940, representing the SEC's latest reforms of the rules governing money market funds in its effort to improve their resiliency and ability to manage significant investor redemptions during market stress events."
They tell us, "Key elements of the final rule include: Increased Minimum Daily and Weekly Liquidity Requirements; Board Reporting of Liquidity Threshold Events. The amendments increase the minimum daily and weekly liquid asset requirements to 25% (up from 10%) and 50% (up from 30%), respectively, of total assets. The amendments also require a fund to notify its board of directors when the fund's liquidity falls to less than half of the required levels -- i.e., when the fund has invested less than 12.5% of its total assets in daily liquid assets or less than 15% of its total assets in weekly liquid assets -- a circumstance referred to as a 'liquidity threshold event.'"
Key elements also include, "Removal of Redemption Gates from Rule 2a-7. The amendments remove money market funds' ability to temporarily suspend investor redemptions (i.e., impose a 'gate') under Rule 2a-7. Money market funds will continue to be able to impose permanent gates to facilitate an orderly liquidation of a fund pursuant to Rule 22e-3. Mandatory Liquidity Fees for Institutional Prime and Institutional Tax-Exempt Money Market Funds. The SEC adopted a mandatory liquidity fee framework for institutional prime and institutional tax-exempt money market funds -- a notable change from the SEC's proposed swing pricing requirement.... Specifically, institutional prime and institutional tax-exempt money market funds will be subject to a mandatory liquidity fee when net redemptions exceed 5% of net assets."
Additional key elements are: "Discretionary Liquidity Fees for Non-Government Money Market Funds. The amendments allow any non-government money market fund to impose a discretionary liquidity fee if the fund’s board determines a fee is in the fund’s best interest. Removal of Linkage between Weekly Liquid Assets and Liquidity Fees; Reporting Amendments. Under the SEC's new liquidity fee framework, the amendments remove the tie between a money market fund's weekly liquid asset levels and liquidity fees, for both mandatory and discretionary liquidity fees. This change seeks 'to avoid predictable triggers that may incentivize investors to preemptively redeem to avoid incurring fees.'"
Vedder Price continues, "Board Delegation of Liquidity Fee Administration. Importantly, the amendments allow a money market fund's board to delegate responsibility for administering a liquidity fee to the fund's investment adviser or officers, subject to written guidelines established and reviewed by the board and ongoing board oversight. The current rule does not permit a board to delegate its responsibility for liquidity fee determinations. The SEC's adopting release states that the written guidelines generally should specify the manner in which the delegate is to act with respect to any discretionary aspect of the liquidity fee mechanism (e.g., whether the fund will apply a fee to a shareholder based on the shareholder’s gross or net redemption activity for the relevant day). The board will also need to periodically review the delegate's liquidity fee determinations."
They also list, "Option to Use RDM in Negative Interest Rate Environment. If negative interest rates result in a negative gross yield, a retail or government money market fund that seeks to maintain a stable net asset value may convert to a floating share price, as the current rule already permits. The amendments will also permit a stable NAV fund to reduce the number of its shares outstanding to maintain a stable NAV per share in the event of negative interest rates, subject to certain board determinations and disclosures to investors. This new option is referred to as 'share cancellation,' 'reverse distribution mechanism,' or 'RDM.'"
Lastly, they mention, "Amendments to Form PF. The SEC is also amending Section 3 of Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, to require additional information regarding the liquidity funds they advise. These private funds seek to maintain a stable NAV (or minimize fluctuations in their NAVs) and thus are similar in certain respects to money market funds. The amendments will require certain information regarding asset turnover, liquidity management and secondary market activities, subscriptions and redemptions, and ownership type and concentration."
The update writes on the "Compliance Dates," "The rule amendments will be effective October 2, 2023, and compliance with the reformed requirements is staggered over a 12-month period, as indicated below. October 2, 2023: removal of redemption gate provisions. April 2, 2024: increased minimum liquidity requirements, discretionary liquidity fee. June 11, 2024: amendments to Forms N-MFP, N-CR, and PF. October 2, 2024: mandatory liquidity fee. The SEC's adopting release is available here, and the SEC's corresponding fact sheet is available here."
J.P. Morgan Securities' most recent "Short-Term Market Outlook and Strategy" features, "An update on short-term bond funds and money market spreads. The "Short-duration bond fund update" comments, "YTD, short-duration bond fund AUMs have declined by an estimated $32bn (or 4%), led by short-term credit and short-term multi-asset bond funds.... This isn't surprising, as these funds tend to maintain a longer average effective duration than ultra-short funds and MMFs. Indeed, 6-month short-term fund returns averaged between 0.47% and 0.99%, while 6-month ultra-short fund returns ranged from 2.33-2.39% and `money funds from 2.25-2.34% as of July-end." (Note: Please join us next month for our European Money Fund Symposium, which takes place Sept. 25-26, 2024 in Edinburgh!)
They explain, "In fact, average government MMF yields have surpassed short-duration bond fund yields since early this year, with the spread between these funds registering 66bp as of July-end. Needless to say, since the Fed began raising interest rates, flows seem to have gravitated towards MMF AUMs at the expense of short-duration AUMs. Since February-end 2022, taxable MMF balances have increased by $940bn, while short-duration fund AUMs have declined by an estimated $162bn."
JPM also writes, "In light of the annual Jackson Hole Economic Symposium, we thought it might be worth revisiting how money market spreads have performed so far this year. While monetary policy often plays a key role in setting rates, so too do technicals. To be sure, total money market supply (excluding Fed RRP) has grown substantially this year (+$1.5tn), thanks to a surge in net T-bill issuance (+$1.3tn). At present, we estimate total money market supply (excluding Fed RRP) stands at ~$15tn, surpassing the peak we saw in mid-2020 when Treasury issued about $2.5tn of T-bills to fund the CARES package.... Meanwhile, the demand for money market supply (as proxied by AUMs of taxable MMFs and GSE liquidity portfolios) has continued to grow, albeit to a smaller extent (+$800bn)."
The piece continues, "Still, even with the growth in supply relative to demand, it's been notable that this has had minimal impact on money market spreads, underscoring the notion that there is still an abundance of cash in the front end, most of which is sitting at the ON RRP. Indeed, in the overnight space, the SOFR/EFFR spread has remained relatively steady, trading mostly in a narrow range between -2bp and -3bp. The same is true of the TGCR/RRP spread."
It states, "Farther out the money markets rates curve, T-bill valuations remain rich, thanks to a mix of RRP and non-RRP investors actively deploying liquidity into this asset class. Combining that with investors' desire to extend duration, longer-dated T-bills (i.e., 3m and 6m) are now trading below their 3m averages on a spread-to-OIS basis, while shorter-dated T-bills have remained rangebound.... Meanwhile, Agency discos continue to trade rich to T-bills as diversification remains a focus among liquidity investors."
JPM adds, "In money market credit, bank CP/CD yields have also not been impacted by the increased T-bill supply so far this year. In fact, since early June, 3m and 6m fixed-rate bank CP/CD spreads to OIS have tightened by 12bp and 10bp, respectively, and 6m SOFR FRNs have also narrowed by 5-10bp.... The same is true of Tier 1 and Tier 2 non-financial CP, though we have seen some recent widening in Tier 1 non-financial CP given additional supply in recent weeks."
Finally, they tell us, "We are not at the end of the rise in total money market supply balances. In particular, our Treasury strategists forecast an additional ~$540bn of net T-bill issuance between now and the end of the year. All else equal, this would bring the year-over-year change in total money market supply balances to +$2.1tn, the second-highest year-over-year increase we've seen in the past decade and only slightly behind the year-over-year increase of $2.2tn in 2020. And yet, given what we have seen so far this year, we suspect the additional supply will continue to be easily digested, limiting its impact on money market spreads."
In other news, money fund yields inched higher over the past week to 5.16% on average, their highest levels since 1999. They broke the 5.0% level for the first time since August 2007 five weeks ago <b:>`_. The Crane 100 Money Fund Index (7-Day Yield) rose by 1 basis point to 5.16% in the week ended Friday, 8/25, after increasing by 1 bp the previous week. We expect yields to inch higher in coming days as they finish digesting the Fed's July 26th 25 basis point hike.
Yields are up from 4.94% on June 30, 4.61% on March 31 and 4.05% on 12/31/22. Three-quarters of money market fund assets now yield 5.0% or higher. (They should get more company in coming days.) Assets of money market funds rose by $24.5 billion last week to $5.955 trillion according to Crane Data's Money Fund Intelligence Daily, and they have risen by $73.9 billion in the month of August (after rising $34.7 billion in July). Weighted average maturities were unchanged last week, and were mostly unchanged in July (at 24 days), after increasing by 3 days during June.
The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 681), shows a 7-day yield of 5.04%, unchanged in the week through Friday. Prime Inst MFs were up 1 bp at 5.26% in the latest week. Government Inst MFs were up 1 bp at 5.11%. Treasury Inst MFs up 1 bps for the week at 5.09%. Treasury Retail MFs currently yield 4.87%, Government Retail MFs yield 4.81%, and Prime Retail MFs yield 5.07%, Tax-exempt MF 7-day yields were up 68 bps to 3.52%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (8/25), 10 money funds (out of 810 total) yield under 3.0% with $2.9 billion in assets, or 0.0%; 115 funds yield between 3.00% and 3.99% ($107.5 billion, or 1.8%), 244 funds yield between 4.0% and 4.99% ($1.284 trillion, or 21.6%) and 441 funds now yield 5.0% or more ($4.560 trillion, or 76.6%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.62% after rising 1 bp two weeks prior. The latest Brokerage Sweep Intelligence, with data as of Aug 25, shows that there was no changes over the past week. Three of the 11 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
Bloomberg published an article entitled, "T-Bill Deluge Risks Draining Bank Reserves, St. Louis Fed Warns." They tell us, "As the US Treasury borrows heavily in the bills market, the Federal Reserve may find it has to pause its efforts to shrink its balance sheet to ensure the banking system remains stable, according to the St. Louis Fed. The US Treasury has sold about $1 trillion of bills since June after the government suspended the debt ceiling. The cash to buy this government debt can come from at least two places instead: bank accounts, or money market funds. Recently money market funds have been holding back on buying the bills, because they can often earn more by just parking their money at the Fed, using ... ON RRP."
The piece explains, "If too much money instead comes from the banking system, lenders could find themselves with too few reserves to meet regulatory requirements, Federal Reserve Bank of St. Louis ... wrote in a research note.... That could force the central bank to halt its quantitative tightening program, known as QT. 'There is a risk that ON RRP balances remain sizable and bank reserves represent the majority of the contraction of Fed liabilities as QT continues,' economists Amalia Estenssoro and Kevin Kliesen <b:>`_wrote. 'In this case, regulatory banking constraints could start binding sooner than expected.'"
It continues, "That risk isn't just academic: the decline in the Fed's ON RRP facilities seems to have stalled. And bank reserve scarcity has caused problems in the past, most notably in September 2019, when the Treasury increased borrowing and the Fed stopped buying as many Treasuries for its balance sheet. Overnight financing rates for Treasury securities -- widely relied upon by Wall Street banks -- spiked then, and the Fed ultimately intervened by re-starting purchases of the securities to add more reserves to the system."
It adds, "Wall Street strategists estimate the Treasury has another $600 billion of T-bills to issue between now and the end of the year. That probably won't fully deplete the ON RRP in the second half of the year, according to the economists. The St. Louis Fed economists said that in the last bout of quantitative tightening, about five years ago, bank reserves needed to be equal to about 7% of nominal gross domestic product to prevent money market rates from spiking. Given current GDP, that would amount to about $1.9 trillion of reserves."
The Federal Reserve Bank of St. Louis' publication, "The Mechanics of Fed Balance Sheet Normalization <i:https://research.stlouisfed.org/publications/economic-synopses/2023/08/23/the-mechanics-of-fed-balance-sheet-normalization>," states, "The Federal Open Market Committee (FOMC) began reducing the size of the Federal Reserve's balance sheet in June 2022. This policy, termed balance sheet 'normalization' or 'quantitative tightening' (QT), is designed to drain excess liquidity from the banking system. QT is the opposite of quantitative easing (QE). This essay looks at where the Fed stands in terms of QT and what should be considered going forward."
It states, "Today, there are three distinct domestic Fed counterparties that affect the level of reserve balances: banks, non-banks, and the US Treasury. Because each entity faces different market, regulatory, and policy constraints, each independently helps distribute system liquidity given the Fed's chosen aggregate liquidity level. Banks demand reserves to meet internal and regulatory liquidity constraints. These demands change over time as the financial system expands and regulations change. Understanding banks' needs is important to ensure the Fed does not drain too many reserves as it continues QT."
The paper comments, "Non-banks interact with the Fed through their overnight reverse repurchase (or repo; ON RRP) balances. Many large non-bank institutions (e.g., government-sponsored enterprises and money market funds) have access to the Fed's ON RRP facility where they can deposit funds to earn the RRP offering rate. Including non-banks as Fed counterparties was necessary because they are now a larger part of the financial system than banks. This meant a shift in Fed liabilities from bank reserve balances to the ON RRP facility. Take-up at the facility drains reserve balances.... The Fed's ON RRP facility increased from roughly zero in the spring of 2021 to $2.55 trillion at the end of December 2022 due to year-end effects, and 2.37 trillion by the end of March 2023. The Fed has to watch how take-up at the facility will evolve, as a quick shift into (out of) the facility could drain (boost) reserve balances."
It adds, "The Treasury can have a large impact on the Fed's balance sheet, as history shows. During the 2023 debt ceiling impasses, the Treasury General Account (TGA) sharply declined, from $296 billion in late April to $48 billion by the end of May. When the TGA declines, reserve balances tend to increase. During the 2023 debt ceiling impasse, reserve balances increased by $173 billion and ON RRP take-up declined by $70 billion. With the resolution of the debt ceiling impasse in June, the Treasury began issuing debt again and the TGA balance was rebuilt to $432 billion by August 14, 2023. Meanwhile, reserve balances as well as the ON RRP facility take-up fell by $86 and $455 billion, respectively. As money market mutual funds buy US Treasury bills that are now yielding more than the ON RRP offer rate, non-banks' funds are migrating from the facility to Treasuries."
In other news, CNBC recently published, "Coinbase takes stake in stablecoin firm Circle, shuts down joint venture as it sees 'regulatory clarity'." It tells us, "Cryptocurrency exchange Coinbase is taking a stake in Circle, the issuer of the USDC stablecoin, signifying a closer relationship between the two crypto heavyweights. The two companies also said they will close down the Centre Consortium, a private governance organization for USDC, as they now see 'regulatory clarity' on stablecoins. 'Reflecting Coinbase's belief in the fundamental importance of stablecoins to the broader crypto economy, Coinbase is taking an equity stake in Circle,' Coinbase said in a blogpost.... 'This means that Coinbase and Circle will now have even greater strategic and economic alignment on the future of the financial system. Coinbase is committed to the long term success of the stablecoin ecosystem and USDC, specifically.'"
The piece comments, "In March, USDC fell significantly below its peg after the collapse of Silicon Valley Bank, a major lender to the tech industry. Circle was a customer of SVB and held $3.3 billion of its cash reserves with the bank. The coin subsequently regained its $1 peg after U.S. regulators closed SVB down, took control of its deposits and worked to restore customers' access to their money."
It states, "Circle launched its own U.S. dollar version of what's known as a 'stablecoin' in 2018. The fintech company, which shelved plans to go public via a combination with a special purpose acquisition company in December, is a core player in the $124.1 billion stablecoin market. USDC currently accounts for about 21% of the entire stablecoin market, with more than $26 billion worth of tokens in circulation. Tether is the largest stablecoin by far with a market value of $82.8 billion and an almost 67% share of the entire market."
They say, "Circle set up the Centre Consortium in 2018 to help guide policy thinking around stablecoins.... Stablecoins have come under greater scrutiny from regulators over the past year following the collapse of terraUSD, a major stablecoin which relies on a complex algorithm to hold its $1 value. Officials have likened the assets to unregulated money market funds and have proposed bringing them under similar rules that govern banks and payment companies."
The piece concludes, "Circle said that, as well as bringing in Coinbase as an investor and shutting down the Centre Consortium, the company plans to launch USDC on six new blockchains between September and October. Blockchains are like the underlying, decentralized ledgers on which digital currencies are issued and traded. Circle didn't name the blockchains it was looking to launch USDC on, but said the move would bring the total blockchains USDC is available on to 15 in total, as the firm looks to 'continue accelerating USC's momentum with developers around the world.'"
For more, see these Crane Data News stories: "CNBC on PayPal, Paxos' Stablecoin" (8/10/23), "NY Fed on "Runs on Stablecoins" (7/19/23), "USDC Stablecoin Breaks the Buck on SVB; MarketWatch on Debt Ceiling" (3/13/23), "Morningstar on Ultra-Short Bond Funds; Regulators on Stablecoin Risks" (2/27/23), "New Paper on Stablecoin Pegs, Runs; WSJ on Pensions' Thin Cash Levels" (12/29/22), "BlackRock Debuts Circle Reserve Fund, Treasury MF for USDC Stablecoin" (12/1/22).
This month, Crane Data's Bond Fund Intelligence publication interviewed Joe Auth, Head of Developed Fixed Income at Boston-based, Jeremy Grantham-founded GMO. Auth is portfolio manager of both GMO High Yield Fund and GMO Opportunistic Income Fund. He started in September 2014, coming over from the Harvard Endowment (HMC) to run the structured products business at GMO. He tells us "The most extensive part of my background in fixed income is in structured products, so mortgages, CLOs, ABS, those types of investments." We discuss the overall bond market, the High Yield fund and the risks of not owning credit and bonds. Our Q&A follows. (Note: The following is reprinted from the August issue of BFI, which was published on August 14. Contact us at info@cranedata.com to request the full issue or to subscribe. BFI is $500 a year, $1,000 including our Bond Fund Intelligence XLS spreadsheet or $2,000 including our Bond Fund Portfolio Holdings dataset.)
BFI: Give us some history. Auth: I was one of the three people that started the GMO High Yield Fund. The strategy got going in 2017 and then became a mutual fund in the spring of 2018. Of the two main products that I manage at GMO (High Yield and Opportunistic Income), they're very different.... One (Opportunistic Income -- the structured products fund) uses a fundamental approach more, and then the other one (High Yield) uses more of a systematic, factor-based approach.... Fixed income isn't something GMO is known for, but we've been investing in bonds for quite a long time.
Our flagship strategy is really our Emerging Country Debt strategy, and that's been open since 1994. We've also been doing broad-based, core plus fixed income investing since the 1990's.... Since then, we've kind of established other "pointier" or "niche-ier" strategies, including the structured products strategy, which started in 2011. There is a local currency EM debt option as well. We have a fixed income hedge fund, the high yield strategy that I mentioned, and we're also doing systematic investment grade credit investing. So that's kind of an overview of GMO fixed income. We're known more for the niche, alpha-driven -- 'pointy' is the term that people use -- strategies in fixed income than the generic broad-based kind of benchmark strategies.
BFI: Tell us about Boston and bonds. Auth: I think of Boston as being more of a long-only, credit-focused town. We're a little different.... On the corporate credit side, overall, we employ more usage of derivatives. Much of our focus is on the macro side, top-down. We also approach things in a factor-based way, as opposed to traditional bottom-up credit underwriting, and we do plenty of investing on the short side in addition to what we do on the long-side. (But our high yield effort happens to be a long-only product.)
BFI: What are you buying now? Auth: The goal of this fund is to try to generate high yield, beta returns. We think this fund is pretty benchmark aware. We're not looking to time the market with this fund [and] we try not to hold cash. We also don't lever the fund up. We're generally shooting for 100%-invested at all times.... We're not doing traditional credit work in this fund, not trying to pick the company or industry.
We are trying to exploit what we think are the market inefficiencies in the high yield market, and we do that on a systematic factor-based way.... We think that we're running a more liquid strategy than the average high yield mutual fund. This is [attractive] if investors want a greater ability to trade in and out of a high yield product. We think our fund allows them to do that.
As I said, we're not picking individual credits. But our models and our sense of the market right now tells us that higher quality high-yield is better than lower quality, given the inverted yield curve, given where interest rates have gone and given [remaining] recession risks. It feels like the odds of the recession certainly in the near term have come down, but they're not gone. We look at the gap between, for instance, double-B spreads and triple-C spreads, or even single-B's and triple-C's, and we think those gaps are too tight. So, we think generally you want to be in a higher quality part of the high yield market.
BFI: Talk about yields in general. Auth: We are spread-based investors; we're total return investors. When you look at the yield, the yield consists of the risk-free component and then the risky component. And if much of your yield is made up of the risk-free component, well then, 'Is the yield of a risky corporate bond really attractive, or are you just harvesting a higher risk-free component with a relatively unattractive spread component?' You really do want to look at spread versus yield. That being said, there are a lot of investors out there that do look at yield, and yields drive their decision-making process. So, we are respectful of that. When yields get more exciting, there is more demand for fixed income products, including credit products. We see it in investment grade cash; we see it in high yield cash.
BFI: What are your main challenges? Auth: When we think about challenges today versus historically, one of the challenges is the fact that financial repression has made it very difficult to find attractive investments.... That challenge is lower now than it has been in most periods since the end of the GFC. We don't think spreads everywhere are that interesting, but they are in some parts of the market. Even if you don't think spreads are interesting, rates are about as high as they've been at any point during the post GFC era.
When base interest rates were at zero and spreads were very tight, it was difficult to find investments that generated returns that were adequate for the risk. That challenge is much less now, which is a good thing. On a nominal basis, on a relative basis, there's a lot more to do. I would go back to the challenge that's always present for managing a mutual fund with credit instruments -- you have to balance the search for alpha with the need for diversification and liquidity.
We need to think about when markets get really stressed. We need to make sure that everything can look liquid when the market is trading in a balanced way and everything feels fine. But on those days, weeks and months when liquidity really goes out, you want to make sure that you've got enough investments that hold their liquidity in your fund.
BFI: What about risks and rates? Auth: Four of the main risks that we take in fixed income are: rate/duration risk, spread risk, volatility risk and liquidity risk. Rates and spreads are the two most obvious ones, so clients are always thinking about them. You can be bearish on rates; you can be bearish on credit. I think there's reasonably good arguments for either of those.... But you can't really argue that there's no risk or very little risk of not owning those risks anymore.
When rates were at 50 basis points or zero at the front end of the curve, there was very little risk in being under-exposed or not having exposure to duration. Now when the 10-year Treasury is at 4% and 2 year yields are at 4.90%, there is a real opportunity cost to not holding any duration if rates rally. Rates can rally and there could be a lot of P&L from owning duration in certain parts of the credit markets.... Customers are still worried that rates could go higher and spreads can go wider. But they also recognize that it's a much better time to be looking now. Yields are a lot higher..... The cost of not being invested at all is much higher in fixed income than in credit than it was a year and a half ago.
BFI: Tell us about your customer base. Auth: In the high yield fund, it's institutional. In the structured products fund that I manage, it is a mix. There is definitely a private wealth advisor component in that fund as well. For GMO as a whole there is a mix of traditional institutional, high net worth, sub-advisory, and intermediary clients.
BFI: What's your outlook going forward? Auth: If I think about the outlook for the high yield market, `obviously economic growth is by far the most important factor.... If we go into a recession or a deep recession, that's usually very poor for high yield fundamentals and spread performance.
But I do think the rates market is going to drive fundamentals to some extent as well, in many parts of credit. The longer that interest rates stay at these higher levels and the curve remains inverted, the tougher it is for big parts of the market to obtain capital.... So to the extent that rates rally from here [and] the curve normalizes, I think that's going to be positive for fundamentals. But the longer we stay at levels we are now, or even go higher on rates, that's going to be problematic for parts of this economy and parts of the financial markets.
The Securities and Exchange Commission's latest monthly "Money Market Fund Statistics" summary shows that total money fund assets increased by $28.8 billion in July to a record high of $5.959 trillion. The SEC shows Prime MMFs jumping $28.9 billion in July to $1.240 trillion, Govt & Treasury funds increased $3.1 billion to $4.600 trillion and Tax Exempt funds decreased $3.2 billion to $119.1 billion. Taxable yields jumped again in July after moving higher in June. 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. (Month-to-date in August through 8/22, total money fund assets have increased by $84.5 billion to $5.965 trillion, according to our separate, and slightly smaller, MFI Daily series.) (Note: Register soon for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh, Scotland.)
July's overall asset increase follows an increase of $19.6 billion in June, $156.6 billion in May, $49.9 billion in April, $364.4 billion in March, $52.1 billion in February, $53.2 billion in January, $54.8 billion in December, $48.5 billion in November and $35.6 billion in October. Assets decreased $9.4 billion in September, but they increased $3.5 billion in August. Over the 12 months through 7/31/23, total MMF assets have increased by $857.5 billion, or 16.8%, according to the SEC's series.
The SEC's stats show that of the $5.959 trillion in assets, $1.240 trillion was in Prime funds, up $28.9 billion in July. Prime assets were up $11.0 billion in June, $13.7 billion in May, $36.0 billion in April, down $22.2 billion in March, up $35.4 billion in February, $86.2 billion in January, $10.5 billion in December, $28.0 billion in November, $36.6 billion in October, $15.8 billion in September and $43.5 billion in August. Prime funds represented 20.8% of total assets at the end of July. They've increased by $323.3 billion, or 35.3%, over the past 12 months. (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.)
Government & Treasury funds totaled $4.600 trillion, or 77.2% of assets. They increased $3.1 billion in July, $4.9 billion in June, $137.4 billion in May, $19.3 billion in April, $387.9 billion in March, $16.1 billion in February, decreased $33.2 billion in January and increased $41.3 billion in December and $23.1 billion in November. Govt MMFs decreased $12.8 billion in October, $20.8 billion in September and $47.1 billion in August. Govt & Treasury MMFs are up $519.2 billion over 12 months, or 12.7%. Tax Exempt Funds decreased $3.2 billion to $119.1 billion, or 2.0% of all assets. The number of money funds was 293 in July, unchanged from the previous month and down 13 funds from a year earlier.
Yields for Taxable MMFs moved higher yet again in July while Tax Exempt MMFs moved lower. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on July 31 was 5.35%, up 13 bps from the prior month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 5.43%, up 15 bps from the previous month. Gross yields were 5.32% for Government Funds, up 16 basis points from last month. Gross yields for Treasury Funds were up 14 bps at 5.31%. Gross Yields for Tax Exempt Institutional MMFs were down 7 basis points to 3.99% in July. Gross Yields for Tax Exempt Retail funds were down 19 bps to 3.72%.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 5.29%, up 13 bps from the previous month and up 351 basis points from 7/31/22. The Average Net Yield for Prime Retail Funds was 5.17%, up 16 bps from the previous month, and up 345 bps since 7/31/22. Net yields were 5.08% for Government Funds, up 15 bps from last month. Net yields for Treasury Funds were up 14 bps from the previous month at 5.09%. Net Yields for Tax Exempt Institutional MMFs were down 6 bps from June to 3.88%. Net Yields for Tax Exempt Retail funds were down 20 bps at 3.47% in July. (Note: These averages are asset-weighted.)
WALs and WAMs were mostly down in July. The average Weighted Average Life, or WAL, was 44.2 days (down 2.7 days) for Prime Institutional funds, and 38.9 days for Prime Retail funds (down 0.8 days). Government fund WALs averaged 67.6 days (up 0.1 days) while Treasury fund WALs averaged 55.2 days (down 1.4 days). Tax Exempt Institutional fund WALs were 9.5 days (down 0.9 days), and Tax Exempt Retail MMF WALs averaged 20.8 days (down 0.4 days).
The Weighted Average Maturity, or WAM, was 20.9 days (down 2.1 days from the previous month) for Prime Institutional funds, 21.1 days (down 0.5 days from the previous month) for Prime Retail funds, 25.0 days (up 0.6 days from previous month) for Government funds, and 21.9 days (down 1.2 days from previous month) for Treasury funds. Tax Exempt Inst WAMs were down 0.9 days to 9.0 days, while Tax Exempt Retail WAMs were down 0.7 days from previous month at 19.6 days.
Total Daily Liquid Assets for Prime Institutional funds were 52.4% in July (up 1.0% from the previous month), and DLA for Prime Retail funds was 42.8% (down 2.4% from previous month) as a percent of total assets. The average DLA was 71.4% for Govt MMFs and 97.2% for Treasury MMFs. Total Weekly Liquid Assets was 67.2% (down 0.3% from the previous month) for Prime Institutional MMFs, and 62.2% (up 0.8% from the previous month) for Prime Retail funds. Average WLA was 83.8% for Govt MMFs and 99.0% for Treasury MMFs.
In the SEC's "Prime Holdings of Bank-Related Securities by Country table for July 2023," the largest entries included: Canada with $124.0 billion, the U.S. with $123.2B, Japan with $105.4 billion, France with $95.2 billion, the Netherlands with $47.1B, the U.K. with $42.4B, Germany with $36.6B, Aust/NZ with $25.8B and Switzerland with $8.1B. The gainers among the "Prime MMF Holdings by Country" included: France (up $13.1B), Germany (up $10.8B), Japan (up $9.8B), the U.S. (up $6.3B), Netherlands (up $5.5B), the U.K. (up $1.0B), Switzerland (up $1.0B) and Aust/NZ (up $0.2B). Decreases were shown by: Canada (down $6.4B).
The SEC's "Prime Holdings of Bank-Related Securities by Region" table shows The Americas had $247.2 billion (down $0.2B), while Eurozone had $201.8B (up $38.9B). Asia Pacific subset had $154.1B (up $14.1B), while Europe (non-Eurozone) had $106.6B (up $8.0B from last month).
The "Prime MMF Aggregate Product Exposures" chart shows that of the $1.229 trillion in Prime MMF Portfolios as of July 31, $545.1B (44.3%) was in Government & Treasury securities (direct and repo) (down from $579.8B), $306.5B (24.9%) was in CDs and Time Deposits (up from $269.7B), $179.6B (14.6%) was in Financial Company CP (up from $164.2B), $138.0B (11.2%) was held in Non-Financial CP and Other securities (up from $132.8B), and $60.1B (4.9%) was in ABCP (up from $54.0B).
The SEC's "Government and Treasury Funds Bank Repo Counterparties by Country" table shows the U.S. with $287.7 billion, Canada with $152.4 billion, France with $147.0 billion, the U.K. with $101.9 billion, Germany with $23.4 billion, Japan with $110.2 billion and Other with $40.3 billion. All MMF Repo with the Federal Reserve was down $152.8 billion in July to $1.753 trillion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs 6.3%, Prime Retail MMFs with 4.7%, Tax Exempt Inst MMFs with 0.8%, Tax Exempt Retail MMFs with 3.4%, Govt MMFs with 13.7% and Treasury MMFs with 8.4%.
The Federal Reserve Bank of New York published an update under its "The Teller Window" paper series entitled, "Liquidity Fees, Swing Pricing, and the 2023 Money Market Fund Reforms." Authors Marco Cipriani, Antoine Martin, Patrick McCabe, and Will Riordan write, "In July 2023, the SEC issued a new set of reforms for the U.S. money market fund (MMF) industry. The reforms increase the amount of daily and weekly liquid assets a fund must hold, eliminate the link between weekly liquid assets (WLA) and the option to impose liquidity fees and redemption gates, and introduce a dynamic liquidity fee. This article describes some of the most important provisions of the reforms."
After discussing some background, they tell us, "The 2023 reforms change the MMF industry along several dimensions. One is abolishing the system of WLA-linked fees and gates introduced by the 2014 reforms. Under that system, if a prime or tax-exempt fund's WLA fell below 30 percent, its board had the option to impose a fee of up to 2 percent or suspend redemptions for up to 10 days. Fees and gates linked to funds' WLA have been criticized in the academic literature as potentially causing preemptive runs."
The paper states, "An important feature of the new reforms is the introduction of mandatory 'dynamic' liquidity fees for institutional prime and tax-exempt MMFs (institutional funds are those held by institutional investors, such as corporate treasurers and insurance companies, rather than retail investors). The fees will be imposed if, on a given day, a fund experiences net redemptions in excess of 5 percent of its assets. The fees are dynamic, in that they are set based on current market conditions. Specifically, the fee will be based on the cost of liquidating a slice of a fund's entire portfolio (not just the most liquid assets in the portfolio). The fee should incorporate all costs of redemptions (including transactions costs, bid-ask spread costs, costs of portfolio rebalancing to replenish liquidity, and market impact)."
It continues, "Since estimating liquidity costs can be difficult, a fund that cannot accurately quantify those costs also has the option to impose a default liquidity fee of 1 percent. Moreover, to prevent a fee being imposed when a fund experiences heavy redemptions but is not otherwise under stress, a fund will be allowed to waive fees that are less than 1/100 of a cent (1 basis point) per share."
The piece comments, "The SEC's dynamic liquidity fees are economically identical to partial swing pricing, where a fund reduces, or 'swings' down, the price it pays redeeming investors on days when the costs of managing redemptions are high. Like swing pricing, dynamic liquidity fees impose liquidity costs on redeeming investors when same-day redemptions exceed a specified threshold. This reduces investors' incentive to run when liquidity conditions in the markets deteriorate. Moreover, the fees protect remaining shareholders from dilution and allocate redemption costs more fairly across redeeming and non-redeeming investors."
It states, "The 2023 reforms include a number of other helpful provisions. For example, reporting requirements for MMFs have been enhanced, making it easier to monitor the industry. The reforms also increase the minimum amounts of liquid assets that all MMFs must hold to make them more resilient to large redemptions."
The authors add, "The SEC's dynamic liquidity fees are an important and promising innovation in MMF regulation, in part because they can be a disincentive for investors to run in a crisis. Nonetheless, the degree of protection provided by dynamic liquidity fees is uncertain. Such fees are untested for MMFs, and their efficacy will depend on effective calibration and may need to be adjusted over time. Moreover, the fees are only required for institutional prime and tax-exempt funds, in part because institutional investors have proven to be especially run-prone. Although retail prime and tax-exempt MMFs also experienced large redemptions in March 2020, they are not covered by the new liquidity fee requirement."
Finally, they conclude, "The SEC's 2023 MMF reforms -- particularly the removal of WLA-linked fees and gates and the adoption of dynamic liquidity fees -- represent significant progress in making prime and tax-exempt MMFs more resilient. Even so, given the longstanding fragility of MMFs, these funds may remain vulnerable to runs in periods of significant stress."
In other news, Axios published an article entitled, "How I accidentally made one of the most popular trades of the year." It says, "Through dumb luck -- emphasis on dumb -- I've gotten myself into the most popular trade of the year. Why it matters: High short-term interest rates -- and no sign the Fed will cut them anytime soon -- are attracting massive amounts of capital to money market funds."
The piece tells us, "The average annualized yield on money funds is now above 5%, according to Crane Data, an authority in the world of money markets. What they're saying: 'It's likely the highest yields since 1999,' said Peter Crane, president and publisher of Crane Data, in an email exchange. Crane's data only goes back to 2006. The latest: Money market fund assets just notched another record last week, the fifth straight week of new highs. There's now $5.5 trillion sitting in these accounts."
Lastly, Fox Business published, "Money market funds hit record as investors jump at 5% returns." They write, "Money market mutual funds are earning the highest interest rates in decades, making them an increasingly attractive option for investors seeking higher yields with relatively low risk. Savers are reaping the rewards of high returns on money market mutual funds.... Money markets are often treated similarly to savings accounts as they afford investors a relatively safe and liquid means of stashing their cash."
They say, "Money market funds are paying an average interest rate of 5.15% according to Crane Data, which is the highest level since 1999 and comes after money market yields were typically much lower over the last two decades."
The European Central Bank published, "Euro area investment fund statistics: second quarter of 2023," which shows that total European money market mutual fund assets hit a record 1.5 trillion EUR in Q2'23. The statistical release says, "For shares/units issued by money market funds the outstanding amount was 18 billion EUR higher than in the first quarter. This increase was accounted for by 11 billion EUR in net issuance of shares/units and 8 billion EUR in other changes (including price changes). The annual growth rate of shares/units issued by money market funds, calculated on the basis of transactions, was 11.9% in the second quarter of 2023." (Note: Crane Data's separate Money Fund Intelligence International tracks $1.072 trillion of the MMFs in Europe. We don't cover a number of the French "Standard" MMFs, which invest in sectors prohibited by US MMFs. Note too: Register soon for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh.)
The ECB writes, "Within the assets of money market funds, the annual growth rate of debt securities holdings was 8.9% in the second quarter of 2023, with overall net purchases amounting to 66 billion EUR, which reflected net purchases of 57 billion EUR in debt securities issued by non-euro area residents and net purchases of 9 billion EUR in debt securities issued by euro area residents. For deposits and loan claims, the annual growth rate was 20.6% and transactions during the second quarter of 2023 amounted to -47 billion EUR."
Bloomberg also commented on money market funds in Europe recently with the commentary, "`European Banks Aren't Helping Your Savings." They state, "European banks are rightly being criticized for failing to pass on interest-rate increases to customers. But is it any wonder they're so unafraid of losing business? Compared to their US counterparts, European financial institutions often face less competition from alternative cash-like investments."
The piece explains, "Years of negative interest rates in the wake of the 2008 financial crisis resigned Europeans to not enjoying a return on their savings, and they're only slowly waking up to better opportunities for their more than 9 trillion EUR($9.8 trillion) of consumer deposits. The average interest rate on easily accessible household money is just 0.23%. In the US, investors have ploughed $1 trillion into money-market funds over the past year, lifting total assets to more than $5.5 trillion. More than one-third of that money is from retail customers who view these funds as safe and attractive substitutes for bank deposits."
Bloomberg adds, "European money-market funds have seen more modest inflows: Total assets amounted to just 1.5 trillion EUR ($1.6 trillion) at the end of March, and this is almost entirely corporate and institutional money. Less than half is denominated in euros, with the remainder split between sterling and US dollars.... Many Europeans don't have a brokerage account usually required to purchase a money-market fund, and they hold a higher share of their wealth in bank accounts than Americans."
They quote ING Groep NV Chief Executive Officer Steven van Rijswijk, "Money-market funds are a US phenomenon.... We don't have that here in Europe." The article adds, "'While money-market funds are available in Germany, they have never been successful in the retail market and are probably not widely known,' Deutsche Bank AG analysts wrote in an April note regarding the country's 'highly sticky' deposits."
Finally, the editorial says, "For the first time in a generation, Europeans can now earn a return on their savings, but they won't if customers do nothing. If more cash moved into some alternatives, Europe's banks might be inclined to pass interest-rate increases on to savers sooner."
In other news, money fund yields inched higher over the past week to 5.15% on average, their highest levels since 1999. They broke the 5.0% level for the first time since August 2007 four weeks ago <b:>`_. The Crane 100 Money Fund Index (7-Day Yield) rose by 1 basis point to 5.15% in the week ended Friday, 8/18, after increasing by 1 bp the previous week. We expect yields to inch higher in coming days as they finish digesting the Fed's July 26th 25 basis point hike.
Yields are up from 4.94% on June 30, 4.61% on March 31 and 4.05% on 12/31/22. Three-quarters of money market fund assets now yield 5.0% or higher. (They should get more company in coming days.) Assets of money market funds fell by $3.8 billion last week to $5.930 trillion according to Crane Data's Money Fund Intelligence Daily, and they have risen by $49.3 billion in the month of August (after rising $34.7 billion in July). Weighted average maturities were unchanged last week, and were mostly unchanged in July (at 24 days), after increasing by 3 days during June.
The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 681), shows a 7-day yield of 5.04%, up 1 bp in the week through Friday. Prime Inst MFs were up 1 bp at 5.25% in the latest week. Government Inst MFs were unchanged at 5.10%. Treasury Inst MFs up 1 bps for the week at 5.08%. Treasury Retail MFs currently yield 4.86%, Government Retail MFs yield 4.81%, and Prime Retail MFs yield 5.06%, Tax-exempt MF 7-day yields were up 13 bps to 2.84%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (8/18), 83 money funds (out of 810 total) yield under 3.0% with $41.7 billion in assets, or 0.7%; 51 funds yield between 3.00% and 3.99% ($79.9 billion, or 1.3%), 237 funds yield between 4.0% and 4.99% ($1.293 trillion, or 21.8%) and 439 funds now yield 5.0% or more ($4.516 trillion, or 76.1%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.62% after rising 1 bp the week prior. The latest Brokerage Sweep Intelligence, with data as of Aug 18, shows that there was no changes over the past week. Three of the 11 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
It's been over a month now since the SEC passed its 424-page "Money Market Fund Reforms," and money market participants continue to discuss, interpret and publish updates on the new rules. Over the past week and a half, several law firms -- Dechert, Stradley Ronon and K&L Gates -- have held webinars or posted papers on the subject. We quote from the latter two below, and we'll quote highlights from the Dechert webinar in our next Money Fund Intelligence newsletter. Stradley Ronon's "Client Alert," "A Swing and a Miss! Swing Pricing Strikes Out in SEC's Money Market Fund Reforms," explains, "At a meeting on July 12, 2023, the U.S. Securities and Exchange Commission (SEC), in a 3-2 vote, adopted amendments to Rule 2a-7 under the Investment Company Act of 1940 (1940 Act) that impact the operation and management of money market funds. Here is what you need to know." (Note: Crane's Money Fund University, which is scheduled for Dec. 18-19, in Jersey City, NJ, will feature two sessions on Money Fund Regulations and Reforms.)
They list, "Key Items Included in Rulemaking Package," "Removal of redemption gates from Rule 2a-7; Modified liquidity fee framework: Removal of the tie between weekly liquid assets (WLA) and liquidity fee requirements. Mandatory liquidity fees for institutional prime and institutional tax-exempt money market funds. Discretionary liquidity fees for nongovernment money market funds; Changes to portfolio liquidity requirements: Increase daily liquid asset (DLA) and WLA requirements to 25% and 50%, respectively. Board notification and public SEC filing if a money market fund has less than 25% or 12.5% of total assets invested in WLA or DLA, respectively. Changes to stress testing requirements to require testing of the ability to maintain a sufficient liquidity level under specified hypothetical events; Permit stable net asset value (NAV) money market funds to use share cancellation in a negative interest rate event, subject to board determinations and disclosure requirements; Amendments to SEC reporting requirements on Forms N-MFP, N-1A, N-CR and PF that will require additional items to be reported to the SEC; [and] Clarifications on dollar-weighted average portfolio maturity (WAM) and dollar-weighted average life maturity (WAL) calculations."
Among the "Key Items Not Included in the Rulemaking Package," they cite: "Mandatory swing pricing; Prohibition on share cancellation; Requirement for stable NAV money market funds to determine that financial intermediaries have the capacity to transact at prices other than a stable NAV [and] Certain Form N-MFP amendments: Disclosure of the name of each shareholder who owns 5% or more of the money market fund. Lot-level reporting of portfolio holdings and disaggregated information for certain repurchase agreement reporting on Form N-MFP."
Stradley's Jamie Gershkow, Alison Fuller and Geena Marzouca tell us, "This client alert will review the various requirements of the SEC's rulemaking package and related compliance dates and provide practical tips for managers and boards of directors of money market funds to implement and comply with the new money market fund reforms. For information on amendments to SEC forms and related disclosure considerations, please see our separate client alert. Stradley Ronon is pleased to host a webinar on Sept. 6, 2023, at 12:00 pm (Eastern time) on money market fund reform."
Discussing the "Modified Liquidity Fee Framework," they comment, "Following significant opposition to the SEC's swing pricing proposal for money market funds, the SEC adopted a modified liquidity fee framework in place of the SEC's proposal to require money market funds to implement swing pricing. Unlike the current liquidity fee framework, a money market fund's ability to impose a liquidity fee will no longer be tied to the fund's level of WLA. Instead, the modified liquidity fee contains two liquidity fee components: (i) a mandatory liquidity fee based on net redemptions and (ii) a discretionary liquidity fee based on a best interest finding by the board of directors (or its delegate)."
On the "Calculation of Mandatory Liquidity Fees," Stradley states, "The mandatory liquidity fee framework requires that the fee be based on a good faith estimate, supported by data, of the costs the institutional fund would incur if it sold a pro rata amount of each security in its portfolio (a vertical slice) to satisfy the amount of net redemptions, including (i) spread costs, such that the fund is valuing each security at its bid price, and any other charges, fees and taxes associated with portfolio security sales and (ii) market impacts for each security."
The paper continues, "The final rule does not require an institutional fund to impose the mandatory liquidity fee if its estimated liquidity costs are de minimis, which is defined as less than 0.01% of the value of the shares redeemed. The final rule does not impose a cap on the maximum amount that can be charged under the mandatory liquidity fee framework. With respect to determining market impacts, an institutional fund would first establish a market impact factor for each security, which is a good faith estimate of the percentage change in the value of the security if it were sold ... if the fund sold a pro rata amount of each security in its portfolio to satisfy the amount of net redemptions, under current market conditions.... In response to comments on the proposal, if the costs of selling a vertical slice of the portfolio cannot be estimated in good faith and supported by data, then the fund must apply a default liquidity fee of 1% of the value of shares redeemed."
The K&L Gates update, "A Deep Dive into Money Market Fund Liquidity Fees," was published in the National Law Review and written by Jon-Luc Dupuy, Michael Davalla and Maxwell Black. Their summary says, "On 12 July 2023, the Securities and Exchange Commission (the SEC) adopted amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended (the 1940 Act) (the Final Rule), which governs the structure and operation of money market funds (MMFs). The amendments, which were first proposed by the SEC in a December 2021 release (the Proposed Rule), reflect the SEC's concern over market stresses experienced in response to the COVID-19 pandemic in March 2020 and are intended to improve the resiliency and transparency of MMFs."
It explains, "In a surprising change from the Proposed Rule, the SEC did not adopt the much criticized swing pricing proposals for institutional prime and institutional tax-exempt MMFs (Institutional MMFs) and instead adopted a revamped liquidity fee regime that will require mandatory liquidity fees for Institutional MMFs and allow all MMFs, including Institutional MMFs, to impose discretionary liquidity fees when determined to be in the best interest of the fund."
The paper tells us, "This alert provides a detailed discussion of the requirements for implementing and calculating the new mandatory liquidity fees, the application of discretionary liquidity fees, board obligations and responsibilities, and changes in regulatory reporting requirements related to this new liquidity fee structure. We also briefly touch on the potential implications of the SEC's determination to drop the swing pricing proposal for MMFs on the SEC's separate, and still outstanding, rule proposal that would require swing pricing for non-MMF mutual funds. For a summary of the Final Rule, please see our earlier client alert here. The Final Rule was published in the Federal Register on 3 August 2023 and is slated to go effective on 2 October 2023."
K&L Gates continues, "As proposed, swing pricing would have required the imposition of market impact factors when net redemptions exceeded 4% of the fund's net assets, which commenters asserted could have occurred on a fairly regular basis. As a small concession, the SEC has increased this threshold to 5% of the fund's net assets in the Final Rule as the trigger for when a mandatory liquidity fee must be imposed. Similar to swing pricing under the Proposed Rule, in calculating the market impact for a liquidity fee, a fund must estimate the impact of selling a vertical slice of its portfolio to satisfy the amount of net redemptions. The Final Rule allows funds to estimate transaction costs and market impacts for each type of security with the same or substantially similar characteristics and apply those estimates to all securities of that type in the fund's portfolio, rather than analyze each security separately -- an approach that is consistent with the use of estimates for swing pricing in the Proposed Rule."
They add, "The SEC continues to believe it would be reasonable to assume a market impact of zero for the fund's daily and weekly liquid assets, since a fund could reasonably expect such assets to convert to cash without a market impact to fulfill redemptions, because these assets are close to maturity. As the Final Rule requires MMFs to hold an even greater percentage of both daily and weekly liquid assets, MMFs will be required to hold a larger portion of their portfolios in securities that can be expected to have a market impact of zero."
The Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets hitting record levels for the fifth week in a row after a brief pause in mid-June and early July. ICI's asset series hit a record $5.570 trillion, after breaking the $5.5 trillion level two weeks ago, and shows MMFs up over $1.0 trillion, or 22.1%, over the past year. Assets are up by $835 billion, or 17.6%, year-to-date in 2023 (and up $749.5 billion, or 15.5%, since 2/22/23), with Institutional MMFs up $437 billion, or 14.3% and Retail MMFs up $398 billion, or 23.7%. Over the past 52 weeks, money fund assets have risen $1.008 trillion, or 22.1%, with Retail MMFs rising by $592 billion (39.9%) and Inst MMFs rising by $416 billion (13.5%). (Note: Please join us next month for our European Money Fund Symposium, Sept. 25-26, 2024 in Edinburgh. Make your hotel reservations ASAP -- our discount expires this week!)
Their weekly release says, "Total money market fund assets increased by $39.70 billion to $5.57 trillion for the week ended Wednesday, August 16, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $37.30 billion and prime funds increased by $5.08 billion. Tax-exempt money market funds decreased by $2.69 billion." ICI's stats show Institutional MMFs jumping $24.1 billion and Retail MMFs rising $15.6 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.586 trillion (82.3% of all money funds), while Total Prime MMFs were $869.9 billion (15.6%). Tax Exempt MMFs totaled $113.6 billion (2.0%).
ICI explains, "Assets of retail money market funds increased by $15.61 billion to $2.08 trillion. Among retail funds, government money market fund assets increased by $11.00 billion to $1.38 trillion, prime money market fund assets increased by $6.83 billion to $596.59 billion, and tax-exempt fund assets decreased by $2.23 billion to $102.79 billion." Retail assets account for over a third of total assets, or 37.3%, and Government Retail assets make up 66.3% of all Retail MMFs.
They add, "Assets of institutional money market funds increased by $24.09 billion to $3.49 trillion. Among institutional funds, government money market fund assets increased by $26.30 billion to $3.21 trillion, prime money market fund assets decreased by $1.75 billion to $273.27 billion, and tax-exempt fund assets decreased by $468 million to $10.79 billion." `Institutional assets accounted for 62.7% of all MMF assets, with Government Institutional assets making up 91.9% of all Institutional MMF totals.
According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets broke the $5.9 trillion level on August 1 and hit a record $5.967 trillion on Tuesday, 8/15, before easing back to $5.955 trillion Wednesday. Assets have risen by $74.0 billion in August through 8/16 after rising by $34.7 billion in July. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.
In other news, State Street Global Advisors published a "Monthly Cash Review - July 2023," entitled, "Summer-End Blues Like Central Bank Woes." They write, "Since the debt ceiling resolution two months ago, T-Bill issuance has increased. T-Bill yields have also increased and become even more attractive for money market funds, leading to a decline in the usage of the Fed's reverse repurchase agreement (RRP) in favor of purchasing those T-Bills. This trend should continue as the US Treasury continues to grow its general account balance and, overall, increase T-Bill issuance as a percent of its overall indebtedness. The Fed should be pleased with the reduced reliance on the RRP as it would prefer not to be the 'lender of last resort.' The RRP is a critical tool in the Fed's management of monetary policy and without that facility it would be very difficult to control short-term rates."
They also tell us, "Meanwhile, Money Market Fund Reform was announced two weeks ago, and, overall, the regulatory changes seem reasonable. The SEC stepped back on the proposed swing pricing rule and opted instead for a liquidity fee. Additionally, it increased the size that a redemption must be to activate that liquidity fee. Lastly, it increased the amount of liquidity that funds would need to hold and included a reverse distribution mechanism in the event yields on funds turned negative. We will be publishing a more detailed report on the reform soon."
SSGA adds, "This year's Jackson Hole symposium, titled 'Structural Shifts in the Global Economy,' is set to take place from August 24-26. I am sure there will be no shortage of headlines. As summer comes to a close, we all hope for a few more good days at the beach, pool or pond (pond would be good for you). Let us hope we all do not get carried away and try to squeeze too much from the remaining days. We can hope that central banks do the same." (Note: Crane Data's Peter Crane will be out in Jackson, Wy., late next week too trying to buy drinks for any Central Bankers he sees, so let us know if you're in the area!)
The Public Funds Investment Institute writes in a recent brief that, "CalTRUST, a California LGIP, has a new investment manager. State Street Global Advisors replaced BlackRock as of August 1. It's the first entry of Sate Street into the LGIP industry."
A recent speech entitled, "Remarks by Martin J. Gruenberg, Chairman, FDIC, on The Resolution of Large Regional Banks -- Lessons Learned," gives a recap of recent bank turmoil and the role of large, uninsured deposits. Gruenberg says, "Four years ago, I had the opportunity to speak at Brookings about an underappreciated risk -- the resolution of large regional banks in the United States.... [T]he speech contrasted the failures of Washington Mutual Bank and IndyMac Bank during the Global Financial Crisis of 2008. Washington Mutual, a $300 billion thrift institution, was the largest bank failure in U.S. history. Yet it was resolved at no cost to the Deposit Insurance Fund, and uninsured depositors suffered no losses. IndyMac, a $30 billion thrift, was one-tenth the size of Washington Mutual. Yet it was the costliest failure in FDIC history up to that point, at over $12 billion, and uninsured depositors suffered losses." (Note: Money fund assets jumped by $32.3 billion on Tuesday, Aug. 14, to a record $5.967 trillion, according to our latest Money Fund Intelligence Daily.)
He explains, "If we had any doubts about the challenges in resolving regional banks -- and the potential for significant adverse impact on the financial system -- they were dispelled by the failure this spring of three large regional banks -- Silicon Valley Bank (SVB), Signature Bank (Signature), and First Republic Bank (First Republic). While the FDIC resolved all three institutions in a manner that mitigated systemic risk, that outcome was by no means certain. In particular, the resolution of SVB and Signature required the use of extraordinary authority by the FDIC, the Federal Reserve, and the Secretary of the Treasury -- the systemic risk exception under the Federal Deposit Insurance Act (FDI Act) -- to protect uninsured depositors at those institutions, setting aside the least cost requirement to the Deposit Insurance Fund."
Gruenberg continues, "When Silicon Valley Bank failed overnight on Friday, March 10th, the FDIC initially established a Deposit Insurance National Bank (DINB), under FDIC control, so that depositors would have access to their insured funds on the Monday after failure. Uninsured depositors would have access to a substantial portion of their funds through the payment of an Advance Dividend. A portion of the uninsured deposits would be held back in the receivership and would experience losses depending on the losses to the Deposit Insurance Fund."
He tells us, "As it turned out, the prospect that uninsured depositors at Silicon Valley Bank would possibly experience losses alarmed uninsured depositors at other similarly situated banks, and they began to withdraw funds. Signature Bank and First Republic Bank also experienced heavy withdrawals. A contagion effect became apparent at these and other banks. There was clear evidence that the failure of a regional bank in which uninsured depositors faced losses could cause systemic disruption."
The FDIC Chair states, "In response, on Sunday the U.S. authorities invoked the systemic risk exception to the least-cost test. This allowed the FDIC to fully protect all depositors at Silicon Valley Bank and Signature Bank. They were placed into separate bridge banks under FDIC control. Signature Bank was sold a week later to Flagstar Bank, a subsidiary of New York Community Bank, and Silicon Valley Bank was sold two weeks later to First Citizens Bank of North Carolina."
He comments, "As you know, First Republic Bank also experienced large deposit outflows that weekend but managed to survive. The bank spent the next few weeks trying to raise capital, but was unsuccessful. On May 1st, the state of California closed the bank. The FDIC had time before the bank was closed to conduct a competitive bidding processs, which resulted in JPMorgan Chase submitting the least-cost bid and purchasing all of the assets and assuming all of the deposits of First Republic. The winning bid covered all uninsured depositors under the least-cost test and did not require a systemic risk exception."
Gruenberg later says, "[T]he bank failures earlier this year highlighted the vulnerabilities that can result when banks have a heavy reliance on uninsured deposits for funding. The significant proportion of uninsured deposit balances exacerbated deposit run vulnerabilities and made all three banks susceptible to contagion effects from the quickly evolving financial developments. Heavy reliance on uninsured deposits for funding carries a number of liquidity risks. First, large uninsured depositors, such as businesses, non-profit organizations, and wealthy depositors, are likely to be more sophisticated and more attuned to market developments than retail depositors, and thus may be more likely to withdraw funds quickly. Second, such deposit accounts are often concentrated in a relatively small number of depositors, also making them more susceptible to runs. Third, electronic banking services allow for the instantaneous withdrawal of large uninsured deposits. Finally, liquidity runs on uninsured deposits can be amplified and exacerbated through social media."
He explains, "For the banking industry as a whole, reliance on uninsured deposit funding has been increasing. The FDIC's report, Options for Deposit Insurance Reform, notes that in the aggregate, uninsured deposits rose from about 18 percent of domestic deposits in 1991 to nearly 47 percent at their peak in 2021, higher than at any time since 1949. The aggregate concentration of uninsured deposit funding has since come down slightly from 2021 but still remains high. Concentrations of uninsured deposit funding are more common among large banks. At year-end 2022, banks with more than $50 billion in assets were approximately one percent of banks but held nearly 80 percent of all uninsured deposits."
Gruenberg adds, "As noted previously, uninsured deposit funding tends to come from a relatively small number of depositors. At the end of 2022, less than one percent of all deposit accounts had balances above the deposit insurance limit of $250,000 but accounted for over 40 percent of banking industry deposits. At the time of its failure, Silicon Valley Bank's ten largest deposit accounts collectively held $13.3 billion in deposits.... [T]he FDIC is reviewing whether its supervisory instructions on funding concentrations should be bolstered to better capture risks related to high levels of uninsured deposits generally or types of deposits more specifically, such as business operating account deposits.... Regulators and other stakeholders may also benefit from more granular, and more frequent, reporting of deposits."
Finally, he says, "In addition, risk-based deposit insurance pricing can deter banks from relying too heavily on less stable forms of funding such as uninsured deposits and can maintain fairness by charging banks with unstable funding sources for the risk they pose to the Deposit Insurance Fund. For this reason, it is worth reexamining the ways in which deposit insurance pricing captures the risks of uninsured deposits. However, calibrating precisely the risk of uninsured deposits is a challenge."
Morgan Stanley is the second fund company in the past year to abandon its ESG Money Market Fund. (See our Sept. 19, 2022 News, "SSGA to Liquidate State Street ESG Liquid Reserves.") A Prospectus Supplement filing for the Morgan Stanley Institutional Liquidity Funds tells us "At a meeting held on April 19-20, 2023, the Board of Trustees of Morgan Stanley Institutional Liquidity Funds approved various changes to the Fund, including changing its name from 'ESG Money Market Portfolio' to 'Money Market Portfolio', modifying its principal investment strategies to remove references to an investment process which incorporates information about environmental, social and governance ('ESG') issues, and eliminating a policy to invest 100% of its net assets (excluding cash) in securities whose issuer or guarantor, in the Adviser's opinion at the time of purchase, meets the Fund's ESG criteria, each change effective June 20, 2023." (Note: We'll features a session on "ESG, Euro Money Fund and Distribution Issues" at our upcoming European Money Fund Symposium, Sept. 25-26, 2024 in Edinburgh.)
It continues, "In connection with these changes, there will not be any changes to the Fund's investment objective or portfolio management team. Accordingly, on the Effective Date, the Summary Prospectuses and Prospectuses are hereby amended as follows: All references to 'ESG Money Market Portfolio' in each Summary Prospectus and Prospectus are hereby deleted and replaced with 'Money Market Portfolio.'"
The filing tells us, "The sections of each Summary Prospectus entitled 'Principal Investment Strategies' and each Prospectus entitled 'Fund Summary -- Principal Investment Strategies' are hereby deleted and replaced with the following: The Fund invests in liquid, high quality U.S. dollar-denominated money market instruments of U.S. and foreign financial and non-financial corporations. The Fund also invests in obligations of foreign governments and in obligations issued or guaranteed by the U.S. Government and its agencies and instrumentalities. The Fund's money market investments may include commercial paper, corporate debt obligations, debt obligations (including certificates of deposit and promissory notes) of U.S. banks or foreign banks, or of U.S. branches or subsidiaries of foreign banks, or foreign branches of U.S. banks (such as Yankee obligations), certificates of deposit of savings banks and savings and loan organizations, asset-backed securities, repurchase agreements and municipal obligations."
It adds, "The Fund operates as a 'retail money market fund,' as such term is defined or interpreted under Rule 2a-7 under the Investment Company Act of 1940, as amended.... A 'retail money market fund' is a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons. As a 'retail money market fund,' the Fund may value its securities using the amortized cost method as permitted by Rule 2a-7 to seek to maintain a stable net asset value per share ('NAV') of $1.00. Like other retail money market funds, the Fund is subject to the possible imposition of liquidity fees and/or redemption gates." (For more, see also these Crane Data News stories: "ESMA, FSB Push European Money Fund Reforms; New HSBC ESG Euro MF" (3/27/23), "Morgan Stanley Names OFN Beneficiary of Impact Shares; ESG to Retail" (10/27/22), "ESG Cash Investments Still Minor Says AFP Liquidity Survey, 6% Over 10%" (6/29/22) and "SEC Names Rule Proposal Could Impact or Ban ESG, Social Money Funds" (6/3/22).
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 August 11) includes Holdings information from 60 money funds (down 25 from 3 weeks ago), which totals $2.553 trillion (down from $3.303 trillion) of the $5.934 trillion in total money fund assets (or 43.0%) tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here.)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.387 trillion (down from $1.730 trillion 3 weeks ago), or 54.3%; Treasuries totaling $728.3 billion (down from $983.0 billion 3 weeks ago), or 28.5%, and Government Agency securities totaling $221.2 billion (down from $275.0 billion), or 8.7%. Commercial Paper (CP) totaled $78.9 billion (down from 3 weeks ago at $107.9 billion), or 3.1%. Certificates of Deposit (CDs) totaled $63.8 billion (down from $82.5 billion 3 weeks ago), or 2.5%. The Other category accounted for $49.7 billion or 1.9%, while VRDNs accounted for $23.5 billion, or 0.9%.
The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $768.8 billion (30.1%), the US Treasury with $728.3 billion (28.5% of total holdings), Federal Home Loan Bank with $163.5B (6.4%), Fixed Income Clearing Corp with $147.6B (5.8%), Federal Farm Credit Bank with $48.3B (1.9%), JP Morgan with $42.7B (1.7%), RBC with $41.0B (1.6%), Goldman Sachs with $39.0B (1.5%), BNP Paribas with $37.0B (1.5%) and Citi with $31.3B (1.2%).
The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($260.5B), JPMorgan US Govt MM ($257.3B), Fidelity Inv MM: Govt Port ($184.1B), Morgan Stanley Inst Liq Govt ($160.8B), JPMorgan 100% US Treas MMkt ($151.2B), Allspring Govt MM ($118.6B), Fidelity Inv MM: MM Port ($107.6B), State Street Inst US Govt ($107.1B), Dreyfus Govt Cash Mgmt ($102.3B) and Goldman Sachs FS Treas Instruments ($88.5B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Finally, 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. This release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in July, prime money market funds held 41.9 percent of their portfolios in daily liquid assets and 59.5 percent in weekly liquid assets, while government money market funds held 81.7 percent of their portfolios in daily liquid assets and 88.5 percent in weekly liquid assets." Prime DLA was down from 43.1% in June, and Prime WLA was up from 58.8%. Govt MMFs' DLA was down from 81.8% and Govt WLA increased from 88.0% the previous month.
ICI explains, "At the end of July, prime funds had a weighted average maturity (WAM) of 22 days and a weighted average life (WAL) of 46 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 24 days and a WAL of 64 days." Prime WAMs were 2 days shorter and WALs were 2 days shorter from the previous month. Govt WAMs were unchanged 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 declined from $451.64 billion in June to $432.67 billion in July. Government money market funds’ holdings attributable to the Americas declined from $4,151.56 billion in June to $4,146.49 billion in July."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $432.7 billion, or 51.1%; Asia and Pacific at $129.8 billion, or 15.3%; Europe at $269.8 billion, or 31.9%; and, Other (including Supranational) at $13.6 billion, or 1.6%. The Government Money Market Funds by Region of Issuer table shows Americas at $4.146 trillion, or 91.0%; Asia and Pacific at $100.7 billion, or 2.2%; Europe at $295.2 billion, 6.5%, and Other (Including Supranational) at $15.1 billion, or 0.3%.
Crane Data's latest Money Fund Intelligence International shows that assets in European or "offshore" money market mutual funds inched higher over the past 30 days to $1.083 trillion while yields jumped. GBP MMF assets fell, while USD and EUR MMFs rose. While up year-to-date, European MMF assets remain well below their record high of $1.101 trillion set in mid-December 2021. These U.S.-style money funds, domiciled in Ireland or Luxembourg but denominated in US Dollars, Pound Sterling and Euros, increased by $4.1 billion over the 30 days through 8/11. The totals are up $53.3 billion (5.2%) year-to-date. (Note that currency moves in the U.S. dollar cause Euro and Sterling totals to shift when they're translated back into totals in U.S. dollars. See our latest MFI International for more on the "offshore" money fund marketplace. These funds are only available to qualified, non-U.S. investors.) (Note too: To learn more about these funds, please join us next month for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh. Make your hotel reservations ASAP -- our discount expires this week!)
Offshore US Dollar money funds increased $6.7 billion over the last 30 days and are up $36.7 billion YTD to $586.2 billion. Euro funds increased E1.1 billion over the past month. YTD, they're up E11.5 billion to E191.8 billion. GBP money funds decreased L3.0 billion over 30 days; they are down by L35.6 billion YTD to L227.9B. U.S. Dollar (USD) money funds (201) account for over half (54.1%) of the "European" money fund total, while Euro (EUR) money funds (111) make up 19.3% and Pound Sterling (GBP) funds (135) total 26.6%. We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers Monday), below.
Offshore USD MMFs yield 5.24% (7-Day) on average (as of 8/11/23), up from 5.04% a month earlier. Yields averaged 4.20% on 12/30/22, 0.03% on 12/31/21, 0.05% on 12/31/20, 1.59% on 12/31/19 and 2.29% on 12/31/18. EUR MMFs finally left negative yield territory in the second half of 2022; they're yielding 3.57% on average, up from 3.35% a month ago and up from 1.48% on 12/30/22, -0.80% on 12/31/21, -0.71% at year-end 2020, -0.59% at year-end 2019 and -0.49% at year-end 2018. Meanwhile, GBP MMFs yielded 5.02%, up 24 bps from a month ago, and up from 3.17% on 12/30/22. Sterling yields were 0.01% on 12/31/21, 0.00% on 12/31/20, 0.64% on 12/31/19 and 0.64% on 12/31/18.
Crane's August MFI International Portfolio Holdings, with data as of 7/31/23, show that European-domiciled US Dollar MMFs, on average, consist of 21% in Commercial Paper (CP), 16% in Certificates of Deposit (CDs), 35% in Repo, 12% in Treasury securities, 14% in Other securities (primarily Time Deposits) and 2% in Government Agency securities. USD funds have on average 60.9% of their portfolios maturing Overnight, 4.7% maturing in 2-7 Days, 6.3% maturing in 8-30 Days, 8.9% maturing in 31-60 Days, 5.0% maturing in 61-90 Days, 10.1% maturing in 91-180 Days and 4.2% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (35.9%), France (13.5%), Canada (10.8%), Japan (10.2%), the U.K. (5.2%), Sweden (5.2%), the Netherlands (4.0%), Australia (2.8%), Germany (2.3%) and Belgium (1.6%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $74.8 billion (12.2% of total assets), Fixed Income Clearing Corp with $41.5B (6.8%), BNP Paribas with $24.1B (3.9%), Credit Agricole with $23.0B (3.7%), RBC with $22.8B (3.7%), Federal Reserve Bank of New York with $20.6B (3.4%), Citi with $20.6B (3.4%), Barclays with $19.6B (3.2%), Bank of America with $18.8B (3.1%) and Sumitomo Mitsui Banking Corp with $17.7B (2.9%).
Euro MMFs tracked by Crane Data contain, on average 40% in CP, 23% in CDs, 22% in Other (primarily Time Deposits), 13% in Repo, 1% in Treasuries and 1% in Agency securities. EUR funds have on average 46.7% of their portfolios maturing Overnight, 10.6% maturing in 2-7 Days, 11.4% maturing in 8-30 Days, 10.5% maturing in 31-60 Days, 5.8% maturing in 61-90 Days, 9.0% maturing in 91-180 Days and 5.9% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (27.5%), the U.S. (12.0%), Japan (11.6%), Sweden (7.4%), Canada (6.7%), Germany (5.2%), the U.K. (4.8%), Belgium (4.8%), the Netherlands (4.3%) and Austria (4.1%),.
The 10 Largest Issuers to "offshore" EUR money funds include: Republic of France with E10.0B (5.5%), Credit Agricole with E9.3B (5.1%), BNP Paribas with E7.6B (4.2%), KBC Group NV with E7.1B (3.9%), Erste Group Bank AG with E5.7B (3.1%), Credit Mutuel with E5.4B (3.0%), DZ Bank AG with E5.2B (2.8%), Societe Generale with E5.2B (2.8%), JP Morgan with E5.0B (2.8%) and Mizuho Corporate Bank Ltd with E4.8B (2.6%).
The GBP funds tracked by MFI International contain, on average (as of 7/31/23): 39% in CDs, 18% in CP, 24% in Other (Time Deposits), 17% in Repo, 2% in Treasury and 0% in Agency. Sterling funds have on average 33.2% of their portfolios maturing Overnight, 17.6% maturing in 2-7 Days, 10.9% maturing in 8-30 Days, 11.6% maturing in 31-60 Days, 9.6% maturing in 61-90 Days, 10.8% maturing in 91-180 Days and 6.3% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (17.6%), Japan (15.5%), Canada (14.3%), the U.K. (12.7%), Australia (7.4%), the U.S. (6.7%), the Netherlands (5.5%), Sweden (4.0%), Spain (3.4%) and Singapore (2.8%).
The 10 Largest Issuers to "offshore" GBP money funds include: Mitsubishi UFJ Financial Group Inc with L10.1B (5.0%), Toronto-Dominion Bank with L9.1B (4.5%), BNP Paribas with L8.7B (4.3%), RBC with L7.1B (3.5%), Mizuho Corporate Bank Ltd with L6.8B (3.4%), Banco Santander with L6.7B (3.3%), BPCE SA with L6.3B (3.1%), Sumitomo Mitsui Trust Bank with L6.0B (3.0%), Credit Agricole with L6.0B (3.0%) and Commonwealth Bank of Australia with L5.7B (2.8%).
The August issue of our Bond Fund Intelligence, which was sent to subscribers Monday morning, features the stories, "WSJ Says Active Bond Funds Struggle vs. Indexes Since '22," which reviews how bond funds have fared over the past year and a half, and "GMO High Yield's Joe Auth: Niche, Alpha-Driven, 'Pointy'," our most recent "profile" interview. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns rose in July while yields were mixed. 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.)
Our lead article "Active Bond Funds" piece states, "The Wall Street Journal writes on 'How Bond Funds Have Fared During the Fed's Rate Hikes.' They tell us, "When it came to helping investors navigate recent debt-market turmoil induced by Federal Reserve rate increases, bond-picking fund managers largely came up short. Of almost 2,000 actively managed bond funds covering a range of investing strategies, 58% failed to beat comparable bond indexes after accounting for the fees that investors pay over the last 18 months -- roughly the stretch of the Fed's campaign -- according to data from Morningstar Direct. With bond prices suffering across the board, only about one in 10 of the funds posted positive returns. Most bond-index funds also lost money over that stretch. But many eked out a slightly better performance than active managers, in part because they cost less."
It tells us, "Passive index funds have posed stiff competition for active investing strategies for decades. Firms like Vanguard and BlackRock's iShares unit have popularized the idea that owning a broad basket of securities is cheaper and no less lucrative than carefully curating a portfolio. But even some investors who have been sold on passive stock strategies still stand by active bond management, arguing that the quirks and complexities of debt investing mean their market is different."
Our "GMO's Joe Auth" interview states: "This month, BFI interviews Joe Auth, Head of Developed Fixed Income at Boston-based, Jeremy Grantham-founded GMO. Auth is portfolio manager of both GMO High Yield Fund and GMO Opportunistic Income Fund. He started in September 2014, coming over from the Harvard Endowment (HMC) to run the structured products business at GMO. He tells us 'The most extensive part of my background in fixed income is in structured products, so mortgages, CLOs, ABS, those types of investments.' We discuss the overall bond market, the High Yield fund and the risks of not owning credit and bonds."
BFI: Give us some history. Auth: I was one of the three people that started the GMO High Yield Fund. The strategy got going in 2017 and then became a mutual fund in the spring of 2018. Of the two main products that I manage at GMO (High Yield and Opportunistic Income), they're very different.... One (Opportunistic Income – the structured products fund) uses a fundamental approach more, and then the other one (High Yield) uses more of a systematic, factor-based approach.... Fixed income isn't something GMO is known for ... but we've been investing in bonds for quite a long time."
Our first News brief, "Returns and Yields Higher in July," states, "Bond fund returns jumped and yields were mostly higher last month. Our BFI Total Index increased 0.47% over 1-month and is up 0.46% over 12 months. The BFI 100 rose 0.41% in July but fell 0.66% over 1-year. Our BFI Conservative Ultra-Short Index was up 0.53% over 1-month and is up 4.01% for 1-year; Ultra-Shorts rose 0.57% and are up 3.66% over 12 mos. Short-Term rose 0.59% and 0.98%, and Intm-Term increased 0.17% but fell 2.51% over 1-year. BFI's Long-Term Index rose 0.03% but fell 2.95%. High Yield rose 1.25% in July but rose 4.53% over 1-year.
A second News brief, "Morningstar on 'The Best Bond Funds,' comments, "Bonds are on the mend in 2023 after a tough 2022: The Morningstar US Core Bond Index is up about 2% so far this year after falling nearly 13% last year. What's next for bonds? Morningstar expects interest rates to begin falling over the next six to 18 months. But regardless of where interest rates are headed, there's a case to be made for holding bond funds in your portfolio. One of the biggest reasons to do so: Bonds are still less risky over the long term than stocks."
Our next News brief, "'BankRate on the 'Best Short-Term Bond Funds in August 2023,' which tells us, "Bond prices fell throughout 2022 as the Federal Reserve hiked interest rates to combat high inflation, but with an end to rate increases potentially in sight, investors may be able to take advantage of attractive yields in short-term bonds. Here's what you should know about short-term bond funds and some of the best ones to consider for your portfolio."
Another brief, "U.S. News on the '7 Best Vanguard Bond Funds to Buy' comments, "Aside from a dismal year in 2022 as interest rates rose sharply, bonds have historically played an important role in portfolio management. Due to their lower correlation with stocks and steady cash flows, bonds can provide ballast for investors, helping to reduce volatility and minimize drawdowns."
A BFI sidebar, "Barron's on Active Bond ETFs," says, "Barron's writes, 'Active Bond ETFs Are Sprouting Up All Over. Should You Bite?' The piece states, 'Bond managers are betting big on active exchange-traded funds. In recent months, two bond kings -- BlackRock's Rick Rieder and Pimco's Dan Ivascyn -- have gotten in on the act. It's another sign of the growing popularity of ETFs as an alternatives to mutual funds, where active managers have long held sway.'"
Finally, another sidebar, "EFAMA 2023 Fact Book," comments, "EFAMA, the European Fund and Asset Management Association, recently published its annual 'Fact Book,' which includes a wealth of statistics on European funds and a section on European bond funds. (See the press release here.) It tells us, 'The year 2022 was an exceptionally difficult year for bond funds. Central banks were forced to tighten monetary policy aggressively as inflation — already on the rise at end 2021 — again increased significantly during 2022. This abrupt end to the era of low-interest rates led to a decrease in bond markets over much of 2022, as outstanding bonds with lower interest rates declined in price.'"
The SEC released its latest quarterly "Private Funds Statistics" report this week, 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 lower in the latest reported quarter (Q4'22) at $318 billion (down from $331 billion in Q3'22 and up from $313 billion in Q4'21). We also briefly review the part of the SEC's latest MMF Reforms which addresses "Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers," below. (Note: For those attending our European Money Fund Symposium, Sept. 25-26, 2024 in Edinburgh, please make your hotel reservations ASAP! Our discount expires next week.)
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 2021 through Fourth Calendar Quarter 2022 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 2022," with the most recent data available, show 71 Liquidity Funds (most of which are "Section 3 Liquidity Funds," which are Liquidity Funds from advisers with over $1 billion total in cash), down 7 from last quarter and down 8 from a year ago. (There are 50 Section 3 Liquidity Funds out of the 71 Liquidity Funds.) The SEC receives Form PF reports from 34 Liquidity Fund advisers (21 of which are Section 3 Liquidity Fund advisers), down 5 from last quarter and down 5 from a year ago.
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $318 billion, down $13 billion from Q3'22 and up $5 billion from a year ago (Q4'21). Of this total, $316 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 $321 billion, down $14 billion from Q3'22 and up $3 billion from a year ago (Q4'21). Of this total, $319 billion in is Section 3 (large manager) Liquidity Funds.
A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $108 billion is held by Other (34.1%), $56 billion is held by Private Funds (17.8%), $65 billion is held by Unknown Non-U.S. Investors (20.6%), $14 billion is held by SEC-Registered Investment Companies (4.3%), $10 billion is held by Insurance Companies (3.0%) and $2 billion is held by Non-Profits (0.8%).
The tables also show that 70.7% of Section 3 Liquidity Funds have a liquidation period of one day, $302 billion of these funds may suspend redemptions, and $275 billion of these funds may have gates. WAMs average a short 27 days (26 days when weighted by assets), WALs are 46 days (47 days when asset-weighted), and 7-Day Gross Yields average 3.65% (3.90% asset-weighted). Daily Liquid Assets average about 53% (54% asset-weighted) while Weekly Liquid Assets average about 61% (67% asset-weighted).
Overall, these portfolios appear shorter with a heavier Treasury exposure than money market funds in general; almost half of them (36.0%) are fully compliant with Rule 2a-7. When calculating NAVs, 72.0% are "Stable" and 28.0% are "Floating." For more, see our Jan. 27, 2022 News, "SEC Proposes Amendments to Form PF Large Liquidity Fund Reporting."
We've been discussing the SEC's Money Market Fund Reforms for weeks, but we've yet to write about the other part, the the "Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers." The release says, "Separately, the amendments will also modify certain reporting forms that are applicable to money market funds and large private liquidity funds advisers."
The "Fact Sheet" explains, "In addition, the Commission adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, to require additional information regarding the liquidity funds they advise that is generally aligned with the amended reporting for money market funds. These amendments were proposed by the Commission in January 2022."
The full final rules tell us, "The Commission is also amending Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds to require additional information regarding the liquidity funds they advise. Liquidity funds are private funds that seek to maintain a stable NAV (or minimize fluctuations in their NAVs) and thus can resemble money market funds. The amendments to section 3 of Form PF will provide a more complete picture of the short-term financing markets in which liquidity funds invest and enhance the Commission's and the Financial Stability Oversight Council's ('FSOC') ability to assess short-term financing markets and facilitate our oversight of those markets and their participants. This, in turn, is designed to enhance investor protection efforts and systemic risk assessment. `We have consulted with FSOC to gain input on these amendments to help ensure that Form PF continues to provide FSOC with information it can use to assess systemic risk."
It adds, "In a January 2022 release proposing amendments to Form PF, the Commission proposed changes to section 3 of Form PF that were intended to require large liquidity fund advisers to report substantially the same information that the Commission had proposed money market funds to report on Form N-MFP. The proposed amendments to section 3 of Form PF included requirements for additional and more granular information regarding large liquidity fund operational information and assets, portfolio holdings, financing, and investor information as well as a new item concerning the disposition of portfolio securities. Consistent with the final amendments to Form N-MFP, we are adopting largely as proposed the amendments to section 3 of Form PF, with some modifications to better tailor the reporting to private liquidity funds and remain consistent with the final requirements for money market funds under amended Form N-MFP."
Crane Data's August Money Fund Portfolio Holdings, with data as of July 31, 2023, show that Treasury holdings surged in July while Repo and Agencies plunged. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $78.3 billion to a record $5.812 trillion, after increasing $46.1 billion in June, $92.6 billion in May, $81.2 billion in April and $390.5 billion in March. Repo dropped but continues to lead as the largest portfolio segment, falling by nearly $100 billion. Treasuries jumped by over $180 billion but remained in the No. 2 spot. The Federal Reserve Bank of New York's RRP issuance held by MMFs fell $152.0 billion to $1.748 trillion. Agencies were the third largest segment, CP remained fourth, ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among taxable money funds, Repurchase Agreements (repo) decreased $99.4 billion (-3.1%) to $3.102 trillion, or 53.4% of holdings, in July, after decreasing $146.4 billion in June. Repo increased $111.8 billion in May, $33.1 billion in April and $276.3 billion in March. Treasury securities rose $185.5 billion (14.9%) to $1.422 trillion, or 24.5% of holdings, after increasing $355.7 billion in June, but decreasing $116.9 billion in May and $32.3 billion in April. Government Agency Debt was down $66.5 billion, or -9.1%, to $667.4 billion, or 11.5% of holdings. Agencies decreased $119.3 billion in June, increased $58.8 billion in May, $18.5 billion in April and $188.8 billion in March. Repo, Treasuries and Agency holdings now total $5.192 trillion, representing a massive 89.3% of all taxable holdings.
Money fund holdings of CP and CDs both increased in July. Commercial Paper (CP) increased $22.0 billion (8.7%) to $275.4 billion, or 4.7% of holdings. CP holdings decreased $2.3 billion in June, but increased $6.5 billion in May and $7.4 billion in April. Certificates of Deposit (CDs) increased $7.2 billion (4.0%) to $188.1 billion, or 3.2% of taxable assets. CDs increased $7.9 billion in June, $2.1 billion in May and $18.8 billion in April. Other holdings, primarily Time Deposits, increased $29.3 billion (24.9%) to $146.9 billion, or 2.5% of holdings, after decreasing $49.8 billion in June, but increasing $30.4 billion in May and $35.0 billion in April. VRDNs rose to $10.0 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will post our Tax Exempt MMF holdings separately Thursday around noon.)
Prime money fund assets tracked by Crane Data rose to $1.214 trillion, or 20.9% of taxable money funds' $5.812 trillion total. Among Prime money funds, CDs represent 15.5% (up from 15.3% a month ago), while Commercial Paper accounted for 22.7% (up from 21.5% in June). The CP totals are comprised of: Financial Company CP, which makes up 14.7% of total holdings, Asset-Backed CP, which accounts for 4.9%, and Non-Financial Company CP, which makes up 3.1%. Prime funds also hold 5.2% in US Govt Agency Debt, 5.2% in US Treasury Debt, 26.6% in US Treasury Repo, 0.7% in Other Instruments, 9.7% in Non-Negotiable Time Deposits, 5.4% in Other Repo, 6.9% in US Government Agency Repo and 0.6% in VRDNs.
Government money fund portfolios totaled $3.059 trillion (52.6% of all MMF assets), up from $3.041 trillion in June, while Treasury money fund assets totaled another $1.539 trillion (26.5%), up from $1.508 trillion the prior month. Government money fund portfolios were made up of 19.8% US Govt Agency Debt, 17.0% US Government Agency Repo, 16.5% US Treasury Debt, 46.6% in US Treasury Repo, 0.1% in Other Instruments. Treasury money funds were comprised of 55.6% US Treasury Debt and 44.4% in US Treasury Repo. Government and Treasury funds combined now total $4.598 trillion, or 79.1% of all taxable money fund assets.
European-affiliated holdings (including repo) increased by $92.0 billion in July to $652.0 billion; their share of holdings rose to 11.2% from last month's 9.8%. Eurozone-affiliated holdings increased to $442.1 billion from last month's $375.5 billion; they account for 7.6% of overall taxable money fund holdings. Asia & Pacific related holdings rose to $238.6 billion (4.1% of the total) from last month's $224.8 billion. Americas related holdings fell to $4.911 trillion from last month's $4.943 trillion, and now represent 84.5% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (down $168.6 billion, or -6.5%, to $2.432 trillion, or 41.8% of assets); US Government Agency Repurchase Agreements (up $65.1 billion, or 12.1%, to $604.2 billion, or 10.4% of total holdings), and Other Repurchase Agreements (up $4.1 billion, or 6.6%, from last month to $66.2 billion, or 1.1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $15.6 billion to $178.7 billion, or 3.1% of assets), Asset Backed Commercial Paper (up $6.3 billion to $59.0 billion, or 1.0%), and Non-Financial Company Commercial Paper (up $0.1 billion to $37.7 billion, or 0.6%).
The 20 largest Issuers to taxable money market funds as of July 31, 2023, include: the Federal Reserve Bank of New York ($1.748 trillion, or 30.1%), the US Treasury ($1.422T, 24.5%), Federal Home Loan Bank ($544.8B, 9.4%), Fixed Income Clearing Corp ($322.9B, 5.6%), RBC ($128.0B, 2.2%), Federal Farm Credit Bank ($103.0B, 1.8%), JP Morgan ($100.9B, 1.7%), BNP Paribas ($98.8B, 1.7%), Citi ($93.8B, 1.6%), Barclays PLC ($93.0B, 1.6%), Bank of America ($80.9B, 1.4%), Goldman Sachs ($77.8B, 1.3%), Societe Generale ($55.7B, 1.0%), Credit Agricole ($54.6B, 0.9%), Mitsubishi UFJ Financial Group Inc ($51.4B, 0.9%), Sumitomo Mitsui Banking Corp ($46.5B, 0.8%), Wells Fargo ($46.0B, 0.8%), ING Bank ($40.8B, 0.7%), Toronto-Dominion Bank ($38.1B, 0.7%) and Mizuho Corporate Bank Ltd ($37.4B, 0.6%).
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 ($1.748T, 56.4%), Fixed Income Clearing Corp ($322.9B, 10.4%), RBC ($106.6B, 3.4%), JP Morgan ($91.9B, 3.0%), Citi ($83.0B, 2.7%), BNP Paribas ($82.2B, 2.6%), Goldman Sachs ($77.5B, 2.5%), Barclays PLC ($76.2B, 2.5%), Bank of America ($63.5B, 2.0%), and Societe Generale ($44.1B, 1.4%). The largest users of the $1.748 trillion in Fed RRP include: Goldman Sachs FS Govt ($109.8B), Fidelity Govt Money Market ($108.4B), Vanguard Federal Money Mkt Fund ($100.6B), JPMorgan US Govt MM ($99.2B), Fidelity Govt Cash Reserves ($85.0B), Fidelity Inv MM: Govt Port ($79.5B), Fidelity Inv MM: MM Port ($54.1B), Morgan Stanley Inst Liq Govt ($50.0B), Northern Instit Treasury MMkt ($49.9B) and Schwab Treasury Oblig MF ($48.9B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Credit Agricole ($26.2B, 4.8%), Mizuho Corporate Bank Ltd ($23.8B, 4.4%), RBC ($21.4B, 3.9%), Toronto-Dominion Bank ($20.5B, 3.8%), Mitsubishi UFJ Financial Group Inc ($18.5B, 3.4%), Bank of Montreal ($18.4B, 3.4%), Bank of America ($17.4B, 3.2%), Bank of Nova Scotia ($17.4B, 3.2%), ING Bank ($17.1B, 3.1%) and Barclays PLC ($16.8B, 3.1%).
The 10 largest CD issuers include: Credit Agricole ($13.2B, 7.0%), Toronto-Dominion Bank ($12.3B, 6.5%), Sumitomo Mitsui Banking Corp ($12.2B, 6.5%), Mizuho Corporate Bank Ltd ($11.7B, 6.2%), Mitsubishi UFJ Financial Group Inc ($11.1B, 5.9%), Mitsubishi UFJ Trust and Banking Corporation ($10.0B, 5.3%), Sumitomo Mitsui Trust Bank ($9.7B, 5.2%), Bank of America ($9.1B, 4.8%), Canadian Imperial Bank of Commerce ($9.0B, 4.8%) and Bank of Nova Scotia ($6.4B, 3.4%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Bank of Montreal ($13.1B, 5.4%), Societe Generale ($11.6B, 4.8%), RBC ($11.5B, 4.8%), Bank of Nova Scotia ($10.9B, 4.5%), Barclays PLC ($10.9B, 4.5%), JP Morgan ($9.0B, 3.7%), Toronto-Dominion Bank ($7.9B, 3.2%), BNP Paribas ($7.8B, 3.2%), BPCE SA ($7.7B, 3.2%) and UBS AG ($7.6B, 3.1%).
The largest increases among Issuers include: US Treasury (up $186.8B to $1.422T), Credit Agricole (up $21.4B to $54.6B), Barclays PLC (up $20.1B to $93.0B), BNP Paribas (up $13.8B to $98.8B), Citi (up $9.6B to $93.8B), Erste Group Bank AG (up $7.9B to $8.7B), Societe Generale (up $7.1B to $55.7B), Mizuho Corporate Bank Ltd (up $5.2B to $37.4B), BayernLB (up $4.7B to $8.1B) and Swedbank AB (up $4.4B to $10.5B).
The largest decreases among Issuers of money market securities (including Repo) in July were shown by: Federal Reserve Bank of New York (down $152.0B to $1.748T), Federal Home Loan Bank (down $60.6B to $544.8B), Sumitomo Mitsui Banking Corp (down $5.1B to $46.5B), Federal Home Loan Mortgage Corp (down $3.5B to $11.3B), JP Morgan (down $2.4B to $100.9B), Fixed Income Clearing Corp (down $2.4B to $322.9B), Goldman Sachs (down $2.3B to $77.8B), Toronto-Dominion Bank (down $2.2B to $38.1B), Canadian Imperial Bank of Commerce (down $1.3B to $35.5B) and Bank of America (down $1.2B to $80.9B).
The United States remained the largest segment of country-affiliations; it represents 79.7% of holdings, or $4.633 trillion. Canada (4.8%, $278.1B) was in second place, while France (4.5%, $262.8B) was No. 3. Japan (3.7%, $215.5B) occupied fourth place. The United Kingdom (2.5%, $142.9B) remained in fifth place. Netherlands (1.3%, $72.9B) was in sixth place, followed by Germany (0.9%, $54.4B), Sweden (0.8%, $49.1B), Australia (0.5%, $30.5B), and Spain (0.3%, $17.5B). (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, 2023, Taxable money funds held 65.4% (down from 68.1%) of their assets in securities maturing Overnight, and another 7.4% maturing in 2-7 days (down from 7.8%). Thus, 72.8% in total matures in 1-7 days. Another 7.6% matures in 8-30 days, while 7.4% matures in 31-60 days. Note that over three-quarters, or 87.8% 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 3.9% of taxable securities, while 5.2% matures in 91-180 days, and just 3.1% 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 Wednesday, and we'll be writing our regular monthly update on the new July 31 data for Thursday's News. But we also uploaded a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Tuesday. (We continue to merge the two series, and the N-MFP version is now available via our Portfolio Holdings file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of July 31, includes holdings information from 956 money funds (down 24 from last month), representing record assets of $5.965 trillion (up from $5.919 trillion). Prime MMFs now total $1.228 trillion, or 20.6% of the total. We review the new N-MFP data, and we also look at our revised MMF expense data, which shows charged expenses flat but money fund revenues hitting another record in July. (Note: Click here to see the replay of our recent Money Fund Wisdom Demo & Training, and register soon and make hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh.)
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds totaling $3.118 trillion (down from $3.233 trillion), or 52.3% of all assets. Treasury holdings totaled $1.415 trillion (up from $1.244 billion), or 23.7% of all holdings, and Government Agency securities totaled $688.9 billion (down from $754.6 billion), or 11.5%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $5.222 trillion, or a massive 87.5% of all holdings.
Commercial paper (CP) totals $284.2 billion (up from $262.5 billion), or 4.8% of all holdings, and the Other category (primarily Time Deposits) totals $152.9 billion (up from $122.9 billion), or 2.6%. Certificates of Deposit (CDs) total $188.2 billion (up from $181.2 billion), 3.2%, and VRDNs account for $117.8 billion (down from $121.1 billion last month), or 2.0% of money fund securities.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $179.4 billion, or 3.0%, in Financial Company Commercial Paper; $59.4 billion or 1.0%, in Asset Backed Commercial Paper; and, $45.4 billion, or 0.8%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($2.451 trillion, or 41.1%), U.S. Govt Agency Repo ($595.4B, or 10.0%) and Other Repo ($71.5B, or 1.2%).
The N-MFP Holdings summary for the Prime Money Market Funds shows: CP holdings of $277.9 billion (up from $256.2 billion), or 22.6%; Repo holdings of $478.4 billion (down from $520.8 billion), or 38.9%; Treasury holdings of $66.7 billion (up from $45.4 billion), or 5.4%; CD holdings of $188.2 billion (up from $181.2 billion), or 15.3%; Other (primarily Time Deposits) holdings of $143.8 billion (up from $114.7 billion), or 11.7%; Government Agency holdings of $66.1 billion (down from $75.3 billion), or 5.4% and VRDN holdings of $7.3 billion (up from $6.9 billion), or 0.6%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $179.4 billion (up from $164.2 billion), or 14.6%, in Financial Company Commercial Paper; $59.4 billion (up from $53.4 billion), or 4.8%, in Asset Backed Commercial Paper; and $39.1 billion (up from $38.6 billion), or 3.2%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($327.7 billion, or 26.7%), U.S. Govt Agency Repo ($84.5 billion, or 6.9%), and Other Repo ($66.2 billion, or 5.4%).
In related news, money fund charged expense ratios (Exp%) were mostly flat in July. Our Crane 100 Money Fund Index and Crane Money Fund Average were 0.26% and 0.37%, respectively, as of July 31, 2023. 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 Tuesday 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, yesterday.) Visit our "Content" page for the latest files.
Our Crane 100 Money Fund Index, a simple average of the 100 largest taxable money funds, shows an average charged expense ratio of 0.26%, unchanged from last month's level (but 18 bps higher than 12/31/21's 0.08%). The average is close to back at the level (0.27%) it was on Dec. 31, 2019, so we estimate that funds are charging normal expenses (though they are waiving a minimal amount of fees for competitive purposes). The Crane Money Fund Average, a simple average of all taxable MMFs, showed a charged expense ratio of 0.37% as of July 31, 2023, down 1 bp from the month prior and now slightly below the 0.40% at year-end 2019.
Prime Inst MFs expense ratios (annualized) average 0.28% (down 3 bps from last month), Government Inst MFs expenses average 0.26% (unchanged from last month), Treasury Inst MFs expenses average 0.29% (down 1 bp from last month). Treasury Retail MFs expenses currently sit at 0.52%, (unchanged from last month), Government Retail MFs expenses yield 0.55% (unchanged from last month). Prime Retail MF expenses averaged 0.48% (unchanged from last month). Tax-exempt expenses were also unchanged at 0.40% on average.
Gross 7-day yields rose again during the month ended July 31, 2023. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 751), shows a 7-day gross yield of 5.24%, up 14 bps from the prior month. The Crane Money Fund Average was 1.72% at the end of 2019, 0.15% at the end of 2020 and 0.09% at the end of 2021. Our Crane 100's 7-day gross yield was up 15 bps, ending the month at 5.16%.
According to our revised MFI XLS and Crane Index numbers, we now estimate that annualized revenue for all money funds is a record $15.554 billion (as of 7/31/23). Our estimated annualized revenue totals increased from $15.521B last month and are up from $15.403B two months ago. Revenue levels are more than five times larger than May's 2021's record-low $2.927B level. Charged expenses and gross yields are driven by a number of variables, but revenues should continue their climb higher as money funds continue to rake in assets from uninsured bank deposits.
Crane Data's latest monthly Money Fund Market Share rankings show assets were again higher among the largest U.S. money fund complexes in July. Money market fund assets grew by $21.4 billion, or 0.4%, last month to a record $5.895 trillion. Total MMF assets have increased by $203.4 billion, or 3.6%, over the past 3 months, and they've increased by $854.5 billion, or 17.0%, over the past 12 months. The largest increases among the 25 largest managers last month were seen by JPMorgan, Allspring, SSGA, Schwab and Vanguard, which grew assets by $16.2 billion, $12.7B, $11.1B, $9.6B and $3.2B, respectively. Declines in July were seen by Invesco and Goldman Sachs, which decreased by $12.4 billion and $9.6B, 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, and look at money fund yields, which also moved higher in July, below. (Note: Click here to see the replay of our recent Money Fund Wisdom Demo & Training, and register soon and make hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh.)
Over the past year through July 31, 2023, Schwab (up $229.2B, or 132.2%), Fidelity (up $215.2B, or 23.4%), JPMorgan (up $162.7B, or 37.8%), Vanguard (up $75.0B, or 16.6%) and Federated Hermes (up $64.9B, or 19.7%) were the `largest gainers. JPMorgan, Fidelity, Schwab, Allspring and Vanguard had the largest asset increases over the past 3 months, rising by $71.8B, $40.4B, $36.9B, $30.0B and $15.6B, respectively. The largest declines over 12 months were seen by: American Funds (down $43.5B), HSBC (down $26.3B), Morgan Stanley (down $11.3B), SSGA (down $8.5B) and BlackRock (down $4.7B). The largest decliners over 3 months included: Goldman Sachs (down $18.3B) and American Funds (down $15.9B).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $1.133 trillion, or 19.2% of all assets. Fidelity was up $2.9B in July, up $40.4 billion over 3 mos., and up $215.2B over 12 months. JPMorgan ranked second with $592.9 billion, or 10.1% market share (up $16.2B, up $71.8B and up $162.7B for the past 1-month, 3-mos. and 12-mos., respectively). Vanguard ranked in third place with $526.4 billion, or 8.9% of assets (up $3.2B, up $15.6B and up $75.0B). BlackRock ranked fourth with $494.9 billion, or 8.4% market share (down $4.0B, up $9.6B and down $4.7B), while Goldman Sachs was the fifth largest MMF manager with $420.5 billion, or 7.1% of assets (down $9.6B, down $18.3B and up $28.6B for the past 1-month, 3-mos. and 12-mos.).
Schwab was in sixth place with $402.5 billion, or 6.8% (up $9.6B, up $36.9B and up $229.2B), while Federated Hermes was in seventh place with $394.2 billion, or 6.7% of assets (down $104M, up $2.6B and up $64.9B). Morgan Stanley ($257.3B, or 4.4%) was in eighth place (down $5.9B, down $2.5B and down $11.3B), followed by Dreyfus ($253.2B, or 4.3%; down $4.5B, down $8.7B and up $12.1B). Allspring (formerly Wells Fargo) was in 10th place ($183.0B, or 3.1%; up $12.7B, up $30.0B and up $31.5B).
The 11th through 20th-largest U.S. money fund managers (in order) include: American Funds ($174.9B, or 3.0%), SSGA ($171.6B, or 2.9%), Northern ($157.7B, or 2.7%), Invesco ($157.6B, or 2.7%), First American ($132.6B, or 2.2%), UBS ($89.3B, or 1.5%), T. Rowe Price ($53.1B, or 0.9%), HSBC ($36.6B, or 0.6%), DWS ($35.0B, or 0.6%) and Western ($27.1B, or 0.5%). Crane Data currently tracks 60 U.S. MMF managers, unchanged from last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg and the Cayman Islands -- are included, the top 10 managers are the same as the domestic list, except: BlackRock moves up to the No. 3 spot, Goldman Sachs moves up to No. 4 and Vanguard moves down to the No. 5 spot. Also, SSGA replaces Allspring at the No. 10 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 ($1.143 trillion), JP Morgan ($807.1B), BlackRock ($707.4B), Goldman Sachs ($557.2B) and Vanguard ($526.4B). Schwab ($402.5B) was in sixth, Federated Hermes ($402.5B) was seventh, followed by Morgan Stanley ($329.9B), Dreyfus/BNY Mellon ($273.7B) and SSGA ($210.3B), which round out the top 10. These totals include "offshore" U.S. Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into U.S. dollar totals.
The August issue of our Money Fund Intelligence and MFI XLS, with data as of 7/31/23, shows that yields increased again in July across the Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 751), rose to 4.94% (up 13 bps) for the 7-Day Yield (annualized, net) Average, the 30-Day Yield increased to 4.84% (up 5 bps). The MFA's Gross 7-Day Yield rose to 5.21% (up 11 bps), and the Gross 30-Day Yield also moved up to 5.12% (up 4 bps). (Gross yields will be revised Tuesday at noon, though, once we download the SEC's Form N-MFP data for 7/31/23.)
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 5.08% (up 16 bps) and an average 30-Day Yield at 4.92% (up 1 bp). The Crane 100 shows a Gross 7-Day Yield of 5.13% (up 12 bps), and a Gross 30-Day Yield of 5.00% (unchanged). Our Prime Institutional MF Index (7-day) yielded 5.11% (up 12 bps) as of July 31. The Crane Govt Inst Index was at 5.01% (up 12 bps) and the Treasury Inst Index was at 5.00% (up 14 bps). Thus, the spread between Prime funds and Treasury funds is 11 basis points, and the spread between Prime funds and Govt funds is 10 basis points. The Crane Prime Retail Index yielded 4.97% (up 13 bps), while the Govt Retail Index was 4.71% (up 11 bps), the Treasury Retail Index was 4.80% (up 17 bps from the month prior). The Crane Tax Exempt MF Index yielded 3.40% (down 17 bps) as of July.
Gross 7-Day Yields for these indexes to end July were: Prime Inst 5.31% (up 11 bps), Govt Inst 5.22% (up 20 bps), Treasury Inst 5.22% (up 13 bps), Prime Retail 5.26% (up 11 bps), Govt Retail 5.17% (up 10 bps) and Treasury Retail 5.04% (up 15 bps). The Crane Tax Exempt Index fell to 2.70% (down 10 bps). The Crane 100 MF Index returned on average 0.42% over 1-month, 1.23% over 3-months, 2.68% YTD, 3.93% over the past 1-year, 1.41% over 3-years (annualized), 1.48% over 5-years, and 0.92% over 10-years.
The total number of funds, including taxable and tax-exempt, was down 3 in July to 880. There are currently 751 taxable funds, down 2 from the previous month, and 129 tax-exempt money funds (down 1 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 out to subscribers Monday morning, features the articles: "Money Fund Managers Comment on SEC Reforms," which reviews various articles on MMF Reforms; "SEC’s Money Fund Reforms: Swing Pricing Out, Liquidity In," which excerpts from the latest pending money fund rules; and, "European Commission Report on EU MMF Regs; LVNAVs OK," which reviews Europe's 5-year review of money fund rules. We also sent out our MFI XLS spreadsheet Monday a.m., and we've updated our Money Fund Wisdom database with 7/31/23 data. Our August Money Fund Portfolio Holdings are scheduled to ship on Wednesday, August 9, and our August Bond Fund Intelligence is scheduled to go out on Monday, August 14. (Note: Click here to see the replay of our recent Money Fund Wisdom Demo & Training, and register soon and make hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh.)
MFI's "MF Managers" article says, "In the 3 1/2 weeks since the SEC passed its latest 'Money Market Fund Reforms,' a number of money fund managers and others have published summaries and commentary. We quote from a number of these below, and we’ll continue to monitor the postings in coming days."
It explains, "The first, Allspring’s 'Amendments to Rules Governing Money Market Funds,' explains, 'On July 12, 2023, the Securities and Exchange Commission (SEC) approved amendments to Rule 2a-7 of the Investment Company Act of 1940, which governs money market funds (MMFs). The amendments are designed to improve the resilience and transparency of MMFs. The amended rule includes the following changes: Increased portfolio minimum liquidity requirements; Removal of temporary redemption gates and the link between portfolio liquidity and liquidity fees; New liquidity fee framework; Measures to address potential negative interest rate environment.'"
We write in our SEC Reforms recap, "We continue analyzing the SEC’s 424-page “Money Market Fund Reforms” final rules, and we continue to like what we see. (See the MMF Reforms press release and the Fact Sheet.) The rule’s summary explains, 'The Securities and Exchange Commission is adopting amendments to certain rules that govern money market funds under the Investment Company Act of 1940. These amendments are designed to improve the resilience and transparency of money market funds. The amendments will revise the primary rule that governs money market funds to remove the ability for a fund board to temporarily suspend redemptions if the fund’s liquidity falls below a threshold. In addition, the amendments will remove the tie between liquidity thresholds and the potential imposition of liquidity fees. The amendments will also require certain money market funds to implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors. In addition, the Commission is increasing the daily liquid asset and weekly liquid asset minimum requirements to 25% and 50%, respectively.”
The rule continues, “The Commission also is amending certain reporting requirements on Form N-MFP and Form N-CR and making certain conforming changes to Form N-1A to reflect amendments to the regulatory framework for money market funds. In addition, the Commission is addressing how money market funds with stable net asset values may handle a negative interest rate environment, including by adopting amendments that will permit these funds to use share cancellation, subject to certain conditions…. In addition, the Commission is adopting amendments to Form PF concerning the information large liquidity fund advisers must report for the liquidity funds they advise.”
Our "European Commission" piece states, "The European Commission published 'Report from the Commission to the European Parliament and the Council' on the 'adequacy of Regulation (EU) 2017/1131 of the European Parliament and of the Council on money market funds from a prudential and economic point of view.' Its Intro says, 'Regulation (EU) 2017/1131 on money market funds (the MMF Regulation) was proposed in the aftermath of the global financial crisis, which exposed certain weaknesses of financial markets and their regulatory regimes around the globe. Since entering into application in January 2019, this Regulation has significantly strengthened the regulatory regime for MMFs in the EU, following recommendations by the Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO) and the European Systemic Risk Board (ESRB)."
It adds, "The new regulatory framework was put to the test by the market stress related to the COVID-19 pandemic. The impact of this stress on MMFs differed across jurisdictions due to differences in the structures of MMF markets (e.g the predominant types of MMFs, investor profiles, and underlying investments) and residual differences in the regulatory framework for MMFs.”
MFI also includes the News brief, "Money Fund Yields Break 5.0%," which says, "Money fund yields rose over the past month, breaking the 5.0% level on average for the first time since August 2007. We expect them to keep rising in coming day and weeks following the July 26 25-basis point hike by the Federal Reserve. Our Crane 100 Money Fund Index (7-Day Yield) was up 14 bps to 5.08% in the month ended 7/31/23.'"
Another News brief, "Money Fund Assets Break $5.9 Trillon (Crane) or $5.5 Trillion (ICI)," tells readers, "Assets rose for the 10th month in a row, increasing $21.0 billion to a record $5.896 trillion in July, according to our MFI XLS. Our MFI Daily shows assets breaking $5.9 trillion as we move into August. The Investment Company Institute’s latest 'Money Market Fund Assets' series broke the $5.5 trillion level for the first time ever, and shows MMFs up almost $1.0 trillion, and over 20%, over the past year. Assets are up by $781 billion, or 16.5%, year-to-date in 2023. Over the past 52 weeks, money fund assets have risen $940 billion, or 20.5%, with Retail MMFs rising by $576 billion (39.1%) and Inst MMFs rising by $364 billion (11.7%)."
A third News brief, "MarketWatch Asks, 'Want 5% yields? After Fed hike, it may be time to ditch high-yield savings accounts for money-market funds.' The article says, 'People focused on saving cash are poised to get another boost from the Federal Reserve <b:>`_…. Even so, `rising interest rates have not been lifting all accounts equally. The Fed raised the benchmark rate by 25 basis points to 5.25%-5.50%, the highest rate in 22 years. It marks the 11th rate hike of the Fed’s last 12 meetings. Many high-yield savings accounts now have annual percentage yields of around 4%, up from an average of approximately 0.5% in March 2022, according to DepositAccounts.com <b:>`_…. `However, yields for many money-market mutual funds are now hovering at 5%, up from an average of 0.43% in March 2022, according to Crane Data.'"
A sidebar, "Earnings: Cash Sorting Slows," says, "A number of asset managers, brokerages and banks reported second-quarter in July, and the few glimpses of money fund and bank deposit trends so far show that the massive 'cash sorting' and shift into money funds from bank deposits continued but slowed in Q2. Charles Schwab CFO Peter Crawford states, “Net interest revenue declined 10% from the prior year to $2.3 billion as the incorporation of higher cost liabilities brought our net interest margin down by 32 basis points sequentially to 1.87%. While anticipated client cash realignment, along with net equity buying during June, pushed cash levels lower, we observed a continued and substantial deceleration in the daily pace of cash outflows versus prior months. The continuation of this trend through the end of the quarter further strengthens our conviction that this realignment activity will inflect before the end of 2023, unlocking growth in client cash held on the balance sheet."
Our August MFI XLS, with June 30 data, shows total assets increased $21.0 billion to a record $5.896 trillion, after increasing $20.3 billion in June, $152.7 billion in May, $56.5 billion in April, $345.1 billion in March, $56.0 billion in February, $22.5 billion in January, $70.2 billion in December and $55.4 billion in November. MMFs rose $42.2 billion in October, $1.7 billion in September, $2.3 billion in August and $26.0 billion in July.
Our broad Crane Money Fund Average 7-Day Yield was up 13 bps to 4.94%, and our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 14 bps to 5.08% in July. On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA and the Crane 100 both were both higher at 5.21% and 5.13%, respectively. Charged Expenses averaged 0.38% and 0.26% for the Crane MFA and the Crane 100. (We'll revise expenses on Tuesday once we upload the SEC's Form N-MFP data for 7/31/23.) The average WAM (weighted average maturity) for the Crane MFA was 24 days (down 1 day from previous month) while the Crane 100 WAM was down 1 to 23 days. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
S&P Global published "U.S. Domestic 'AAAm' Money Market Fund Trends (Second-Quarter 2023" recently, which tells us, "MMFs continued to attract inflows in the second quarter of 2023, while stress in the U.S. banking sector carried over from the first quarter, although abated. Growth was slower relative to the first quarter for both rated government and prime funds, in part due to seasonal withdrawals related to corporate tax payments in June. Rated government MMF assets increased 3% quarter-over-quarter, hitting nearly $3.2 trillion. Prime MMF assets increased 5%, ending the quarter at $485 billion." (Note: Click here to see the replay of our recent Money Fund Wisdom Demo & Training, and register soon and make hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh.) (Note too: The SEC's recently passed "Money Market Fund Reforms" were just published in the Federal Register yesterday, so the 60 day clock is now ticking on the effective date of the new rules.)
The piece explains, "Yields climbed higher, advancing MMFs as a desirable place for investors to park cash. The seven-day and 30-day net yields for government funds increased to 4.78% and 4.76%, respectively. The seven-day net yield for prime funds surpassed the 500 basis point (bps) range, reaching 5.01%, and the 30-day net yield rose to 4.99%. As we expected, the Federal Reserve is slowing rate hikes due to current economic data. The Fed raised the federal funds rate 25 bps in May, bringing it to 5.00%-5.25%, and held it steady in June. However, economic resilience has spurred uncertainty about the level of additional rate hikes and the probability of a recession."
S&P writes, "Post the U.S. debt ceiling resolution in late May, MMF managers, especially on the government side, welcomed a spike in Treasury bill issuance. Rated government MMFs increased their average Treasury bill exposure to 20% from 15% this quarter versus the first quarter. With the pickup in Treasury bills, repurchase agreements (repo) weighting continued to decline in the second quarter to 58% from 60%. The Fed's reverse repo program (RRP) remained a sizable portion of government funds' repo holdings, but exposure to the RRP overall fell. Additionally, purchases of agency debt decreased due to the recent Treasury issuance and lower supply in the agency space. Prime fund managers also bought additional Treasury bills."
They state, "Contrary to the extremely short bias at the beginning of the year, the maturity profiles of government and prime MMFs lengthened during the second quarter. Weighted average maturities (WAMs) increased by seven days for government funds and five days for prime funds. We think additional extending is likely once the terminal rate peaks, but managers may extend more cautiously in the near future given that the current rate hiking cycle may be pushed out longer considering recent economic data."
The update adds, "The SEC opted for mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5% of net assets, rather than swing pricing. The impacts of such reforms on the industry are yet to be realized. Fund sponsors and investors alike will take time to digest the reforms, and MMFs will have 12 months from when the rules are sent to the federal register to comply with the requirements."
S&P also published, "European 'AAAm' Money Market Fund Trends (Second-Quarter 2023)," which tells us, "In the second quarter of 2023, there was renewed demand for rated European-domiciled MMFs denominated in euros, with net assets increasing 9.8% to €140.2 billion. Net assets for sterling-denominated MMFs declined by 6.3% to £217.6 billion, which followed a fall of 8.6% in the first quarter.... U.S. dollar-denominated funds saw a modest outflow of 0.55% during the quarter to $537.7 billion. We note that U.S.-dollar MMFs ended the first quarter of 2023 with the largest month-end total since we began tracking quarterly risk metrics. When comparing the second quarter of 2023 to this time last year, net assets across all three currencies are up, with euros 37.8% higher, sterling 3.8%, and U.S. dollar MMFs up 10.5%."
It continues, "MMFs seven-day net yields continued to benefit from central bank policy, as yields strengthened in all three currencies in during the quarter. In the second quarter of 2023, the European Central Bank (ECB) and the Bank of England (BOE) each raised rates at their policy meetings. The U.S. Federal Reserve (the Fed) raised rates for a 10th consecutive time in May, before committee members voted to pause the campaign of monetary tightening at their June meeting. Seven-day net yields in euro MMFs averaged 3.4%, in sterling MMFs 4.4%, and in U.S.-dollar MMFs 5.1%. As yields stand in this interest rate environment, MMFs are an attractive asset class for investors that are not only looking for returns, but also liquidity and stability."
S&P says, "Weighted average maturities (WAM) for euro-denominated funds lengthened for funds in all three currencies. Euro MMFs saw the biggest jump in WAM, as maturities moved to 27 days at the end of June from 19 days in March. The WAM of sterling funds saw only a slight increase, to 33 days from 32 days, while the WAM extension was more pronounced in U.S.-dollar MMFs, increasing to 26 days as of June 30, 2023, from 20 in the first quarter. The increase in WAM across the three currencies may indicate that portfolio managers are finding value farther out on the yield curve, since markets are expecting central banks' policy tightening to pause at the end of this year."
Finally, S&P Global Ratings also posted, "'AAAm' Local Government Investment Pool Trends (Second-Quarter 2023)." The report states, "Prime LGIPs' assets rose slightly in the second quarter, to $244 billion, from $235 billion the prior quarter, while government strategies saw outflows of $6 billion to finish the second quarter at $81 billion. Together, these equate to a 0.9% increase in total prime and government assets.... Outflows and slower growth are common in the second quarter owing to the cyclical nature of LGIPs. But overall asset growth in 2023 has been robust, generally attributed to improving tax receipts and competitive returns over money market funds and bank deposits."
It explains, "Following the U.S. Federal Reserve's 25-basis-point interest rate hike in May 2023, LGIP seven-day yields broke through the 5% barrier.... In our view, LGIPs continue to provide a rate of return that can compete with institutional money market funds and interest on bank deposits. The net asset value (NAV) per share averaged 0.99988 in the second quarter of 2023, about 23 basis points higher than our lowest NAV threshold of 0.9975 for 'AAAm' rated PSFRs.... Notably though, managers have continued to follow a prudent investment focus, navigating the rapid interest rate moves with measures to reduce portfolio hazards and improve liquidity."
S&P writes, "LGIP managers continue to concentrate on the Fed's interest rate policy when developing investment strategy. Recently, uncertainty around the debt ceiling faded as the limit was raised through early 2025. Banking sector volatility still raises concerns for investors, leading to a continuation of high credit quality positioning. Government-focused LGIPs, on average, had 68% of their assets maturing weekly in June 2023. Considering maturity extension, prime LGIPs experienced a slight decline in weekly liquidity, dropping to 40% from the previous quarter's 45%."
They add, "The increase in weighted average maturities--a key indicator of interest rate risk--can be attributed to managers predicting a nearing conclusion to rate hikes.... On average, government-focused LGIPs had a weighted average maturity (WAM) of 24 days in June, up from 17 days in the first quarter. Prime LGIPs averaged a 36-day WAM in June, an increase from 30 days. The rise is noteworthy, especially when considering the substantial WAM declines in 2022 on the back of a dramatic increase in inflation prompting aggressive actions from the Fed. When rates peak, a further extension of WAMs is likely."
In other ratings news, Fitch Ratings posted a release, "Money Market Fund Ratings Not Impacted by U.S. Sovereign Rating Downgrade." It says, "The downgrade of the United States' long-term rating (LTR) to 'AA+' from 'AAA' has no immediate impact on money market fund (MMF) ratings, according to Fitch Ratings. A downgrade of the LTR to 'AA+' does not impact the Portfolio Credit Factor (PCF) calculation for Fitch-rated MMFs, which is a primary driver of MMF ratings. Per Fitch's MMF Rating Criteria, credit risk factors of 0.0 are applied to securities issued or guaranteed by highly rated sovereign governments, supranationals and government agencies benefiting from strong market liquidity. Furthermore, the U.S. sovereign maintains its 'F1+' short-term rating despite the downgrade of the LTR."
It's been 3 weeks since the SEC passed and published its 424-page "Money Market Fund Reforms," and we continue to dig through and discuss the details with money fund professionals, investors and servicers. Of particular interest to Crane Data are the latest "Amendments to Reporting Requirements," which should produce yet another bonanza of data and business for us as market participants look for assistance in compiling, navigating and interpreting the updated batch of data disclosures. Below, we quote from the rule's section on disclosures and reporting. The new reporting amendments become effective June 11, 2024. (See the MMF Reforms press release and Fact Sheet, and see our previous News pieces: "Money Fund Managers Publishing, Educating on Latest SEC MMF Reforms" (7/26), "More from the SEC's Money Market Fund Reforms: Liquidity Fee Excerpts" (7/24) and "SEC's Money Market Fund Reforms: Swing Pricing Out, More Liquidity In" (7/14).)
The "Reporting Requirements" section says about "Amendments to Form N-CR," "We are adopting the amendments to Form N-CR as proposed. In particular, the final amendments add a new requirement for a money market fund to report publicly if it experiences a liquidity threshold event (i.e., the fund has invested less than 25% of its total assets in weekly liquid assets or less than 12.5% of its total assets in daily liquid assets) because such an event represents a significant drop in liquidity of which investors should be aware. We are also adopting all other proposed amendments to Form N-CR, including the structured data requirement, to improve the availability, clarity, and utility of information about money market funds."
It explains, "As proposed, the final rule will require money market funds to file reports on Form N-CR in a custom eXtensible Markup Language ('XML')-based structured data language created specifically for reports on Form N-CR.... The few comments the Commission received on this topic were mixed. In support, one commenter regarded it as a reporting enhancement that would increase transparency for institutional and retail investors, and allow regulators and policymakers to better assess the state of the financial system. In opposition, one commenter suggested that structured data is more expensive and not used by investors."
The SEC writes, "We also are adopting the following amendments to Form N-CR as proposed: (1) require the registrant name, series name, and legal entity identifiers ('LEIs') for the registrant and the series to improve identifying information on the form; (2) add definitions of LEI, registrant, and series to Form N-CR for clarity and consistency with the same defined terms on Form N-MFP; (3) remove the reporting events that relate to liquidity fees and redemption gates, as money market funds will no longer be permitted to impose redemption gates under rule 2a-7, and other disclosure about the imposition of liquidity fees is more appropriate than Form N-CR disclosure under the final rule's amended liquidity fee framework; and (4) amend Part C of Form N-CR, which relates to the provision of financial support to the fund. Specifically, when such support involves the purchase of a security from the fund, the final rule, as proposed, will require reporting of the date the fund acquired the security, which will allow better identification of, and context for, support that occurs within a short period of time."
The "Amendments to Form N-MFP" and "New Information Requirements" section (starting on page 135) states, "We are adopting, with the modifications discussed below, the reporting requirements regarding additional information about the composition and concentration of money market fund shareholders and about prime funds' sales of non-maturing investments. In addition, similar to the proposed requirement to report information about the use of swing pricing, we are requiring funds to report information about their application of liquidity fees under the final rule. Further, because the final rule will permit stable NAV funds to use share cancellation in a negative interest rate environment, we are requiring reporting related to share cancellation."
Discussing "Shareholder Concentration," the rules tell us, "In a change from the proposal, after considering comments raising privacy and related concerns, we will not require money market funds to disclose the name of each person who is known by the fund to own beneficially or of record 5% or more of the shares outstanding in the relevant class. Rather, the final rule requires money market funds to report only the type of beneficial or record owner who owns 5% or more of the shares outstanding in the relevant class. Accordingly, amended Form N-MFP includes the following categories of owner types from which filers will make the appropriate selection: retail investor; non-financial corporation; pension plan; non-profit; state or municipal government entity (excluding governmental pension plans); registered investment company; private fund; depository institution or other banking institution; sovereign wealth fund; broker-dealer; insurance company; and other. The shareholder concentration information the final amendments require will provide the Commission and investors with a greater ability to monitor redemption and liquidity risks."
It continues, "As proposed, the final amendments require funds to use a 5% ownership threshold for the shareholder concentration reporting requirement. Commenters generally did not engage substantively on the proposed 5% ownership threshold, though one commenter did agree that 5% would be an appropriate threshold. Funds currently provide similar ownership information using a 5% threshold on an annual basis in their registration statements. More frequent reporting of information on Form N-MFP is designed to facilitate monitoring of a fund's potential risk of redemptions by an individual or a small group of investors that could significantly affect the fund's liquidity."
The rule then says, "Some commenters objected to the proposal that funds must publicly disclose the names of specific investors on the basis that the information is private and confidential. For instance, one commenter suggested that disclosure of investor names would be anti-competitive and give other fund sponsors a window into shareholder composition of money market funds. Another commenter suggested such reporting may cause investors to adjust holdings as of month end to avoid public disclosure of their money market fund holdings and drive redemptions. To address these concerns, some commenters suggested that the information should only be reported to the Commission on a confidential basis, particularly given the frequency of the reporting."
The SEC writes, "Upon consideration of the comments, the amended rule will not require funds to report the names of the greater than 5% owners. Although shareholder concentration information is already reported publicly by funds on an annual basis on Form N-1A, we recognize the sensitivities associated with publicly reporting the names of owners with ownership of more than 5% on a monthly basis. Accordingly, the amendments instead require funds to provide information about the types of owners who invest 5% or more in a class of the fund.... In response to comments questioning the value of shareholder concentration information, we believe that more frequent information about shareholder concentration will assist both the Commission and investors in monitoring a fund's potential risk of redemptions."
On "Shareholder Composition," the new rule tells us, "We are adopting, as proposed, amendments requiring a money market fund that is not a government money market fund or a retail money market fund to provide information about the composition of its shareholders by type. Accordingly, funds must identify the percentage of investors within the following categories: non-financial corporation; pension plan; non-profit; state or municipal government entity (excluding governmental pension plans); registered investment company; private fund; depository institution and other banking institution; sovereign wealth fund; broker-dealer; insurance company; and other. This information is designed to assist with monitoring the liquidity and redemption risks of institutional money market funds, as different types of investors may pose different redemption risks. We are not requiring this information of government money market funds because these funds have lower redemption and liquidity risks than other money market funds. In addition, we are not applying this requirement to retail funds because these funds, by definition, are limited to retail investors."
Discussing "Prime Money Market Funds' Selling Activity," the SEC comments, "We are adopting, as proposed, an amendment to require information about the gross market value of portfolio securities a prime money market fund sold or disposed of during the reporting period. Commenters did not address this aspect of the proposed requirement. This information will facilitate monitoring of prime money market funds' liquidity management, as well as their secondary market activities in normal and stress periods. It also will improve the availability of data about how selling activity by money market funds relates to broader trends in short-term funding markets. A prime fund will be required to disclose the aggregate amount it sold or disposed of for each category of investment. The categories of investments mirror the categories funds already use on Form N-MFP for identifying their month-end holdings (e.g., certificate of deposit, non-negotiable time deposit, financial or non-financial company commercial paper, or U.S. Treasury debt). To focus the disclosure on secondary market activity, as proposed, portfolio securities held by a fund until maturity are excluded from the disclosure."
For "Liquidity Fees," they require, "Consistent with the changes described above in the liquidity fee mechanism section, and in a change from the proposal, we are amending Form N-MFP to require money market funds to report the date on which the liquidity fee was applied, the type of liquidity fee, and the amount of the liquidity fee applied by the fund. In addition, we are removing existing reporting requirements on Form N-CR related to the application of liquidity fees because we believe monthly reporting of the frequency, type, and size of liquidity fees on Form N-MFP is more consistent with the modified liquidity fee framework we are adopting than requiring current reporting on Form N-CR."
Discussing changes in disclosure around repo, the rules say, "We are adopting amendments that will require additional information about repurchase agreement transactions and standardize how filers report certain information. Specifically, the final amendments will require, as proposed, that filers identify (1) the name of the counterparty in a repurchase agreement; (2) whether a repurchase agreement is centrally cleared and the name of the central clearing counterparty, if applicable; (3) if a repurchase agreement was settled on a triparty platform; and (4) the CUSIP of the securities involved in the repurchase agreement. As proposed, the final amendments will also include 'cash' as a category of investment that most closely represents the collateral in repurchase agreements. However, in a change from the proposal, we are not adopting the amendments to remove the ability of funds to aggregate certain required information if multiple securities of an issuer are subject to the repurchase agreement."
The SEC also writes, "Our proposed amendments to Form N-MFP also included amendments to specify that, for purposes of reporting a fund's schedule of portfolio securities in Part C of Form N-MFP, filers would be required to provide information separately for the initial acquisition of a security and any subsequent acquisitions of the security (i.e., lot-level reporting).... After considering these comments, we understand the concern that requiring public lot-level reporting and trade date information may subject filers to the risk that predatory traders and other bad actors may seek to misuse this information. While we continue to believe such information could, among other things, help facilitate the Commission's understanding of money market fund portfolio turnover during normal and stressed market condition, we are also adopting other amendments to Form N-MFP that will help facilitate the Commission's understanding in this area, including new Part D to Form N-MFP, which includes information on prime money market fund portfolio securities sold or disposed of during the reporting period, and more frequent data reporting of daily liquidity, net asset value, and flow data. In light of the potential risks identified by commenters coupled with the other amendments to Form N-MFP that we are adopting, we are not requiring public lot-level reporting at this time."
They add, "We are also adopting as proposed a new item in Form N-MFP that would require filers to indicate whether the fund is established as a cash management vehicle for affiliated funds and accounts. This item is designed to make it easier and more efficient to identify privately offered institutional money market funds. Separately, and as proposed, we are adopting an amendment to the form to require a fund to affirmatively state whether it seeks to maintain a stable price per share, consistent with our proposal."
Finally, under "More Frequent Data Points," the final rule states, "As proposed, we are amending Form N-MFP to require a money market fund to provide in its monthly report certain daily data points to improve the utility of the reported information. Specifically, the amendments require a fund to report its percentage of total assets invested in daily liquid assets and in weekly liquid assets, net asset value per share (including for each class of shares), and shareholder flow data for each business day of the month. Currently, in monthly reports on Form N-MFP, a money market fund must provide the same general information on a weekly basis.... As proposed, we are also increasing the frequency with which funds report certain yield information. Currently, funds must report 7-day gross yields (at the series level) and 7-day net yields (at the share class level) as of the end of the reporting period. We are amending Form N-MFP to require funds to report this information for each business day."
The Commodity Futures Trading Commission proposed a new rule entitled, "Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap," which contains a section expanding the types of money market funds eligible as collateral (from Treasury only to Government and repo). The summary tells us "The Commodity Futures Trading Commission is proposing to amend the margin requirements for uncleared swaps applicable to swap dealers and major swap participants for which there is no prudential regulator. The proposed amendment would revise the definition of 'margin affiliate' to provide that certain collective investment vehicles that receive all of their start-up capital, or a portion thereof, from a sponsor entity would be deemed not to have any margin affiliates for the purposes of calculating certain thresholds that trigger the requirement to exchange initial margin for uncleared swaps.... The Commission is also proposing to eliminate a provision disqualifying the securities issued by certain pooled investment funds ('money market and similar funds') that transfer their assets through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, and similar arrangements from being used as eligible IM [initial margin] collateral, thereby expanding the scope of assets that qualify as eligible collateral ('Money Market Funds Proposal')." (See the press release, entitled, "CFTC Approves Final DCO Reporting and Information Requirement and Three Proposals at the Commission Open Meeting.")
The "Money Market Funds Proposal section (on page 29) says, "The Commission proposes to amend Commission Regulation 23.156(a)(1)(ix) to eliminate the restriction on the use of securities of money market and similar funds that transfer their assets through repurchase or similar arrangement (the asset transfer restriction). The Commission is also proposing an amendment to the haircut schedule set forth in Commission Regulation 23.156(a)(3)(i)(B) to add a footnote that was inadvertently omitted when the rule was originally promulgated."
The CFTC explains, "In adopting the CFTC Margin Rule, the Commission added redeemable securities in money market and similar funds to the list of eligible collateral in response to comments arguing for the inclusion of MMF securities as eligible collateral for IM. The Commission explained that the addition of money market and similar fund securities to the list of eligible collateral would provide flexibility while maintaining a level of safety, noting that to qualify, such fund securities would need to meet the conditions in Commission Regulation 23.156(a)(1)(ix), including the asset transfer restriction in paragraph (C), which has the effect of disqualifying the securities of funds that transfer their assets through repurchase or similar arrangements."
They comment, "As discussed above, market participants, and the GMAC Margin Subcommittee, have urged the Commission to eliminate the asset transfer restriction in paragraph (C), noting that it disqualifies the securities of most MMFs and significantly restricts the ability of swap counterparties to use such form of collateral. Based on its experience implementing the margin requirements for several years and for the reasons described below, the Commission preliminarily recommends the elimination of the restriction."
The proposal continues, "MMFs are regulated, short-term investment vehicles that are subject to liquidity and diversification requirements under U.S. regulations, such as SEC Rule 2a-7. The MMFs that could qualify as eligible IM collateral under Commission Regulation 23.156 invest in high quality underlying instruments, namely securities issued or unconditionally guaranteed as to the timely payment of principle and interest by the U.S. Department of the Treasury and cash. More generally, the Margin Subcommittee Report stated that the Commission has recognized MMFs as safe, high quality investments, noting that, for example, Commission Regulation 1.25 permits the investment of customer margin by futures commission merchants ('FCM') in MMFs without an asset transfer restriction."
It tells us, "The elimination of the asset transfer restriction in paragraph (C) of Commission Regulation 23.156(a)(1)(ix) would allow for a broader range of money market and similar fund securities to qualify as eligible IM collateral. This is consistent with the Commission’s intent in identifying certain fund securities as eligible collateral when it adopted the CFTC Margin Rule. The Commission stated that it intended to permit MMF securities to be pledged as IM collateral in order to permit flexibility, while also 'maintaining a level of safety.' As noted above, according to the Margin Subcommittee Report, most multi-billion dollar MMFs available to the institutional marketplace use repurchase or similar arrangements as part of their management strategy. Given the widespread use of repurchase and similar arrangements by MMFs, only a few of the MMFs currently available to institutional clients satisfy the asset transfer restriction in paragraph (C). As a result, unless the restriction is eliminated, this form of margin collateral would be of very limited availability to swap counterparties, contrary to the intent of the Commission."
The proposal also says, "The Commission preliminarily believes that expanding the scope of eligible money market and similar fund securities may lead to more efficient collateral management practices. In particular with respect to the use of MMF securities as IM collateral, the Margin Subcommittee Report noted that many custodians offer money market sweep programs, which facilitate buy-side market participants' timely meeting margin calls in cash that is subsequently used to purchase MMF securities, thereby avoiding the settlement delays or additional costs associated with the purchase and posting of non-cash assets. This is particularly important given that under the custodian arrangement rules under Commission Regulation 23.157, IM collateral in cash must be promptly converted into other types of eligible collateral, such as securities of MMF or similar funds, to avoid the possibility that cash collateral may become a deposit liability of the custodian and to prevent rehypothecation by the custodian."
The CFTC writes, "Moreover, the Report stated that the use of MMF securities as collateral may enable market participants to avoid potential negative interest rate charges that may be applied by custodian banks on cash collateral. Finally, according to the Report, the sweep of cash into MMF securities helps market participants mitigate the risk of custodian insolvency as non-cash assets would not be consolidated with the custodian's balance sheet or estate from a supplemental leverage ratio or bankruptcy perspective."
They write, "Allowing a broader selection of money market and similar fund securities to serve as collateral may address the potential concentration of margin collateral in the securities of a few MMFs. The removal of the asset transfer restriction could lead to an increased use of MMF securities as margin collateral. The Commission acknowledges the risk of concentration of collateral in particular assets and reiterates, as stated in the preamble to the CFTC Margin Rule, that CSEs should take concentration into account and prudently manage their margin collateral. For the same reasons, the Commission preliminarily believes that CSEs should consider the overall investment strategy of a money market or similar fund, including the terms of repurchase or similar arrangements the fund may undertake, in determining whether to use the fund's securities to meet margin obligations under the CFTC rules."
The proposal adds, "Commission Regulation 23.156(a) aims to identify assets as eligible collateral that are liquid, and, with haircuts, will hold their value in times of financial stress. Current paragraph (C) of Commission Regulation 23.156(a)(1)(ix) furthers the goal that money market and similar fund securities posted as IM collateral remain liquid and retain their value during times of financial stress. More specifically, paragraph (C) disqualifies the securities of money market and similar funds that transfer their assets through repurchase or similar arrangements to mitigate the potential impact of such transfers on the liquidity or value of fund securities."
Finally, it states, "Given these safeguards and the recognition that the asset transfer restriction is severely limiting the use of money market and similar fund securities as eligible collateral, the Commission preliminary believes that it is appropriate to eliminate the asset transfer restriction. The Commission also notes that the elimination of the restriction would bring the CFTC's eligible collateral framework more in line with the SEC approach, which does not impose asset transfer restrictions on funds whose securities are used as collateral for margining purposes and expressly permits the use of government money market fund securities as collateral, thereby potentially leading to a reduction in costs for those market participants that dually register as SDs and security based swap SDs with the CFTC and the SEC, respectively."
Money fund yields rose over the past week, breaking the 5.0% level on average for the first time since August 2007. We expect them to keep rising in coming day and weeks following last Wednesday's 25 basis point hike by the Federal Reserve. Our Crane 100 Money Fund Index (7-Day Yield) was up 8 bps to 5.04% in the week ended Friday, 7/28, after increasing by just 1 bp the past week. Yields are up from 4.94% on June 30, 4.90% on May 31, 4.64% on April 30, 4.61% on March 31, 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. Almost three-quarters of money market fund assets now yield 5.0% or higher and one fund hit the 5.5% level on Friday. (It should get lots of company in coming days.) Assets of money market funds fell by $11.2 billion last week to $5.865 trillion according to Crane Data's Money Fund Intelligence Daily, but they rose by $18.9 billion for the month of July. Weighted average maturities inched up by one day last month to 24 days (Crane 100), after increasing by 3 days during June. (Note: Click here to see the replay of our recent Money Fund Wisdom Demo & Training, and register soon and make hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh.)
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 682), shows a 7-day yield of 4.93%, up 7 bps in the week through Friday. Prime Inst MFs were up 8 bps at 5.13% in the latest week. Government Inst MFs were up 8 bps at 5.00%. Treasury Inst MFs up 7 bps for the week at 4.99%. Treasury Retail MFs currently yield 4.77%, Government Retail MFs yield 4.69%, and Prime Retail MFs yield 4.95%, Tax-exempt MF 7-day yields were up 81 bps to 3.21%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (7/28), 36 money funds (out of 811 total) yield under 3.0% with just $16.6 billion in assets, or 0.3%; 95 funds yield between 3.00% and 3.99% ($98.9 billion, or 1.7%), 330 funds yield between 4.0% and 4.99% ($1.447 trillion, or 24.7%) and 348 funds now yield 5.0% or more ($4.302 trillion, or 73.4%). Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.59% after last rising 11 weeks ago.
The latest Brokerage Sweep Intelligence, with data as of July 28, shows that there was no changes over the past week. Three of the 11 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
In other news, The Wall Street Journal published an editorial entitled, "Gary Gensler's Money-Market Gamble." They comment, "Regulators rarely admit mistakes, but lo and behold, the Securities and Exchange Commission did this month when it scrapped two money-market rules. Alas, Chair Gary Gensler's rewrite could cause more strain on short-term funding markets when financial trouble arrives. The SEC is attempting for the third time since the 2008 financial panic to write regulations to prevent runs on prime money-market funds. These funds invest in high-quality commercial paper and short-term government securities. They are supposed to hold a stable value, and investors can redeem their shares at any time."
The piece continues, "Large companies and institutional investors use these funds to manage cash flow, and they typically offer higher yields than funds solely invested in government securities. They also provide a source of liquidity for big banks and businesses. But they are also vulnerable to runs when markets come under stress. The collapse of Lehman Brothers in 2008 triggered a run on the Reserve Primary Fund, which lost its $1 a share peg. Investors in other funds panicked, and short-term credit markets froze. Treasury and the Federal Reserve swooped in with a government guarantee."
It states, "The SEC in 2010 issued rules prescribing duration, credit quality and liquidity requirements for fund holdings. Four years later, the SEC required that prime funds with institutional investors report a floating net asset value rather than a stable $1 a share price, which had given investors a false sense of security. We supported this rule. However, the SEC at the same time adopted two other rules that allowed fund managers to suspend redemptions and impose withdrawal fees when their liquidity dropped below a certain threshold. The goal was to halt panics. But as we warned, the rules would give investors an incentive to withdraw their money at the first sign of market stress."
The Journal tells us, "And what do you know? That's what happened in March 2020. Amid the pandemic uncertainty, fund managers sought to maintain liquidity above the SEC threshold by selling longer-dated securities at a loss. These fire-sales caused short-term credit markets to seize up again and prompted another government intervention. The SEC is now scrapping its 2014 rules that allowed funds to suspend and impose fees on redemptions."
It adds, "Yet Mr. Gensler's mulligan could fuel more turmoil the next time financial markets come under stress. The new rule increases the minimum share of a fund's assets that managers must be able to liquidate in a business day to 25% from 10% and in a week to 50% from 30%. Managers of institutional prime funds would also be required to impose a fee on withdrawing investors when their daily redemptions exceed 5% of fund assets."
The editorial summarizes, "Altogether, the new rules 'may reduce the viability of prime money market funds as an asset class,' the SEC concedes. However, it says the reallocation of cash to insured bank products and government money-market funds 'may be efficient.' Driving more investors into government funds may help support the Treasury market during the Fed's quantitative tightening. But the rules could also make markets overall less resilient. 'Is one of our goals to kill prime funds?' GOP Commissioner Hester Peirce mused in a dissent." [Gensler said, "No," for the record.]
Finally, they write, "'Today's adoption contains the same flaw that tanked the 2014 money market fund rulemaking -- an insistence that our own judgment is superior to that of money market funds, their sponsors, their boards, and their shareholders,' she writes. 'A better approach would be to permit funds to choose approaches that work for them.' Such one-size-fits-all regulation often creates systemic financial vulnerabilities that become apparent only when markets are in distress. We may find out if Mr. Gensler is smarter than markets only when it's too late."
