Link of The Day

Archives »

We saw another liquidation in the money fund space this week, from Morgan Stanley Liquid Asset Fund. A Prospectus Supplement says, "On March 9, 2017, the Board of Directors of the Fund approved the redemption (the "Redemption") of all issued and outstanding shares of stock of the Fund. Prior to the Redemption, the Fund will suspend the offering of shares to all investors on or about March 31, 2017. The Redemption is expected to occur on or about May 31, 2017." See our Aug. 15, 2016 News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes." The old article says, "Though at this point it appears everybody is selling or switching, brokerage sweep accounts continue to be the major contributor of the now over $500 billion shift from Prime and Muni into Government MMFs. As we hinted, shifts by Morgan Stanley money funds drove much of last week's flows. According to our Money Fund Intelligence Daily, which tracks daily asset flows, yields, MNAVs and WLA liquidity figures, Morgan Stanley Govt Sec Inst took in a massive $21.5 billion in the week through Thursday, while while MSIM's Prime and Municipal Active Assets, and Liquid Assets funds showed declines of $12.9 billion. While there is no official word that their retail Prime and Muni funds are liquidating, they did lose over half of their assets and are showing single-digit WAMs (often a sign of an imminent liquidation). We review a recent statement by Morgan Stanley brokerage on changes to their sweep program, and also quote from an ignites article on strike and cutoff times below. Though there is no mention of any liquidations in Active Assets' recent filings, a recent Morgan Stanley "Bank Deposit Program Disclosure Statement" says, "Under the Bank Deposit Program, free credit balances in your Active Assets Account ... will be automatically deposited into deposit accounts established for you by and in the name of Morgan Stanley Smith Barney LLC and Morgan Stanley Bank, NA, and Morgan Stanley Private Bank, NA ... and for free credit balances above $2 million, Morgan Stanley will sweep such balances into a Sweep Fund.")

The Federal Reserve's "Minutes of the Federal Open Market Committee, May 2-3, 2017" says, "Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.... Members expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate. Members agreed that the federal funds rate was likely to remain, for some time, below levels that they expected to prevail in the longer run. However, they noted that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data." The FOMC's next meeting is June 13-14 and markets are estimating the odds of an increase at about 80%. See also, The Wall Street Journal's "Fed Minutes Signal Officials Ready to Raise Rates Again Soon." The article says, "Federal Reserve officials expected at their policy meeting this month that it would "soon be appropriate" to raise short-term interest rates, a signal the U.S. central bank could move in June at its next gathering. The Fed also moved toward a consensus on a proposal to start gradually shrinking its $4.5 trillion in holdings of Treasury and mortgage securities later in the year, according to minutes of the gathering released Wednesday. Under the approach discussed, they would allow increasing amounts of those securities to mature over time, without reinvesting the proceeds. Fed officials left their benchmark short-term interest rates unchanged within a range between 0.75% and 1% at the meeting May 2-3. Several Fed officials in recent weeks have said they believe the economy will still be strong enough to warrant two more quarter-percentage-point rate increases this year."

First American Funds recently celebrated its 35th Anniversary by posting a 35th Anniversary Video and sending gift boxes to some that included relics from 1982, including Michael Jackson's Thriller album. See their 35th Anniversary release here. The U.S. Bank-affiliated manager also put out a new update entitled, "First American Adjusts Ratings Coverage on Several Funds." It explains, "As part of First American Funds' prudent management of expenses, a decision was made to remove five separate ratings from four of the First American Funds. As a result, First American Funds requested that Standard & Poor's (S&P), Moody's Investors Service (Moody's) and Fitch Ratings (Fitch) remove the following ratings: Institutional Prime Obligations - Fitch AAAmmf rating withdrawn on March 17, 2017, S&P (AAAm) and Moody's (Aaa-mf) remain; US Treasury Money Market - Fitch AAAmmf rating withdrawn on April 20, 2017, S&P (AAAm) and Moody's (Aaa-mf) remain; Retail Prime Obligations - S&P AAAm rating withdrawn on April 13, 2017, Moody's Aaa-mf rating withdrawn on April 28, 2017; Retail Tax Free Obligations - S&P – AAAm rating withdrawn on April 13, 2017." The statement adds, "We believe this level of ratings coverage is consistent with the industry norm and meets or exceeds the needs of our customers for third party oversight by a Nationally Recognized Statistical Rating Organization. Nationally Recognized Statistical Rating Organizations (NRSRO) evaluate the creditworthiness of organizations that issue debt in public markets including corporations, nonprofit organizations and governments, and provide credit ratings that are used by investors as well as federal and state agencies. Generally, to be considered an NRSRO, the agency has to be “nationally recognized” in the U.S. and provide reliable and credible ratings. Also taken into consideration is the size of the credit rating agency, operational capability and its credit rating process. Three of the largest NRSROs are Standard & Poor's, Moody's Investors Service Inc. and Fitch Ratings. Triple-A Rating is the highest possible rating assigned to the bonds of an issuer by credit rating agencies."

The Wall Street Journal writes "Here's Why the Fed Will Stay Central to Markets. They say, "Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank's precrisis role on the sidelines of financial markets, analysts and central-bank watchers say. A long list of programs adopted to help foster economic growth, along with changes in money markets and bank regulation, have vastly expanded the Fed's balance sheet and its involvement in markets. The Fed's assets now total $4.5 trillion, up from less than $1 trillion a decade ago. Since 2013 the central bank has become one of the largest traders with U.S. taxable money-market funds, according to Crane Data." The piece adds, "The ultimate size will be closely tied to which system the central bank decides to use to control interest rates in the future. A handful of Fed officials have already begun questioning the wisdom of returning to the blueprint for controlling rates that they used before the crisis, although they have more time to decide. At the center of the debate is a special investment program the Fed launched in 2013. Through the facility, it lends money-market funds and others Treasurys in exchange for cash, temporarily draining excess cash from money markets and discouraging lenders from lending at rates below the target range for interest rates. Initially, the central bank said it would reduce the capacity of this so-called reverse repo facility "fairly soon after" it had begun raising short-term rates in 2015. Today, the Fed has no current plans to do so. Mr. Dudley suggested in April the Fed likely wouldn't phase out the facility. Without the Fed repos, short-term rates could slip too low, and demand for Treasurys in the open market would surge, causing problems for money-market funds seeking alternative places to park cash overnight. Removing the program would "cause huge dislocations from a bond-market standpoint," said Debbie Cunningham, chief investment officer for global money markets at Federated Investors. A balance sheet that is smaller than today's, yet still substantial, would enable the Fed to keep the reverse repos around. It would also support the Fed's foreign repos for overseas accounts, where weekly balances have averaged $250 billion, up from $30 billion precrisis, as well as the $1.5 trillion in currency outstanding and changing cash-management policies at the Treasury Department."

Wells Fargo Securities writes in its latest "Daily Short Stuff, "The weekly SIMFA index reset at 78 basis points this week, 14 basis points less than the 92 basis point high reached about a month ago. The 92 basis point level reached four weeks ago was the highest level for this index over an eight year timeframe. Now that tax season has passed, the index has continued to inch lower, as expected. Commercial paper outstanding grew by $5.0 billion, ending the week at $986.6 billion on a seasonally adjusted basis. Nonfinancial CP and asset-backed CP outstanding fell while financial commercial paper increased. Nonfinancial commercial paper ended the week at $280.8 billion, a $0.9 billion reduction WoW, with domestic issuers falling by $2.3 billion and foreign issuers adding $1.4 billion. Asset-backed CP closed the week at $249.0 billion, a $2.6 billion drop in comparison to the prior week. And lastly, financial CP closed the week at $455.8 billion, an $8.5 billion increase from the prior week. Domestic financial issuers added $2.7 billion and foreign financial issuers added an additional $5.9 billion."

ICI's new "Money Market Fund Assets" report shows Prime assets rising for their fourth week in a row. They gained $1.1 billion, after increasing $1.9 billion last week and $5.5 billion the week before, when they broke over the $400 billion barrier. Year-to-date, Prime MMF assets are up by $27.8 billion, or 7.2%. ICI says, "Total money market fund assets decreased by $5.13 billion to $2.64 trillion for the week ended Wednesday, May 17, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $6.50 billion and prime funds increased by $1.09 billion. Tax-exempt money market funds increased by $278 million." Total Government MMF assets, which include Treasury funds too, stand at $2.109 trillion (79.7% of all money funds), while Total Prime MMFs stand at $406.6 billion (15.4%). Tax Exempt MMFs total $129.6 billion, or 4.9%. It explains, "Assets of retail money market funds decreased by $2.10 billion to $963.13 billion. Among retail funds, government money market fund assets decreased by $1.86 billion to $588.25 billion, prime money market fund assets decreased by $410 million to $251.16 billion, and tax-exempt fund assets increased by $174 million to $123.72 billion." Retail assets account for over a third of total assets, or 36.4%, and Government Retail assets make up 61.1% of all Retail MMFs. The release continues, "Assets of institutional money market funds decreased by $3.03 billion to $1.68 trillion. Among institutional funds, government money market fund assets decreased by $4.64 billion to $1.52 trillion, prime money market fund assets increased by $1.50 billion to $155.47 billion, and tax-exempt fund assets increased by $104 million to $5.86 billion." Institutional assets account for 63.6% of all MMF assets, with Government Inst assets making up 90.4% of all Institutional MMFs.

A release entitled, "Moody's Assigns Aaa-mf Rating to HSBC Australian Dollar Liquidity Fund," tells us, "Moody's Investors Service ... has today assigned a Aaa-mf rating to HSBC Australian Dollar Liquidity Fund (a sub-fund of HSBC Global Liquidity Funds PLC), a soon-to-be launched prime constant net asset value money market fund domiciled in Ireland managed by HSBC Global Asset Management (Hong Kong) Limited.... The rating reflects Moody's view that the Fund will have a very strong ability to meet the dual objectives of providing liquidity and preserving capital. This view is supported by the portfolio's very high scores for each of the key rating factors, including credit quality, asset profile, liquidity and exposure to market risk. The analysis was performed on a model portfolio provided by the fund sponsor. The rating agency expects the Fund to be managed in line with the model portfolio. However, Moody's noted that if the Fund's investment portfolio deviates materially from the model portfolio, the Fund's rating could be changed." Moody's adds, "We expect the investments held in the Fund will be of high credit quality as they must be rated P-1 at the time of purchase. The Fund's assets are expected to be primarily invested in short-dated commercial paper and deposit securities as well as short-dated bonds from government, agency, corporate and financial issuers. The rating also benefits from the expectation that the Fund will maintain a short weighted average maturity (WAM) in line with a score of '1' and an asset concentration below 30%, which results in a score of '2' for this factor. While the Fund's shareholder base is likely to exhibit some higher shareholder concentrations until the Fund grows, our expectation is that the Fund will maintain a strong liquidity profile supported by high levels of overnight and near-term liquidity in the portfolio. Overnight liquidity will typically be in the form of overnight deposits and securities with one business day to maturity. The institutional investor base for this Fund will primarily be made of Asia-based entities from multinational corporations, insurance companies, and sovereign wealth funds."

Website Law360 writes "EU Waves Through E1T Money Market Fund Rules." The article explains, "Tough new rules covering the €1 trillion ($1.07 trillion) money market funds sector were formally adopted by European Union lawmakers on Tuesday, bringing greater oversight to areas of shadow banking. The EU’s General Affairs Council, made up of foreign ministers and member states, adopted the regulations without discussion, after the European Parliament voted overwhelmingly in support of the proposals in April." The piece quotes Malta's Minister and current European Council President Edward Scicluna, "These rules will go a long way in improving supervision and regulation of a largely unregulated sector. Whilst money market funds are vital to investors and issuers alike, the crisis showed us that they can also be vulnerable to shocks." Law360 adds, "The new rules, which will come into force 12 months after being adopted, set out investment requirements for the funds. MMFs must be invested in a diverse pool of assets with good credit quality to restrict the funds' risk levels. The rules also introduce common standards for all MMFs, to increase their liquidity and ensure they do not collapse when faced with a sudden surge of redemption requests. In addition, the regulation prohibits sponsor support from third parties, including banks." (For more, see our April 5 News, "HSBC's Curry Talks on Pending European Money Fund Reform, LVNAV.")

Wells Fargo Money Market Funds asks, "Why should we care about the Fed normalizing its balance sheet?" in its latest "Portfolio Manager Commentary." They explain, "The majority of Americans probably shouldn't and won't care about this topic as it is unlikely to affect them, either directly or indirectly, in many ways. For those of us active in the markets, it is important. It is impossible to overstate the influence the Fed has in these markets as a regulator, a policymaker, and an investor. Its portfolio is enormous, weighing in at approximately 23% of our gross domestic product (GDP) and about 12% of the privately held Treasury market. It is the single-largest repo counterparty in the markets, lending over 55% of Treasury collateral and about 38% of both Treasury and MBS collateral. In fact, its repo book alone is bigger than the sum of all other Treasury repo providers combined. The Fed is, in short, a behemoth capable of profoundly changing the face of the money markets, as it has done in the past. So the idea that its largest tool, and the money markets' largest investment, could go away could have profound supply implications for money market funds.... With fewer banks needing reserves, trading in the federal funds market became thinner and less relevant. To restore balance to the money markets and strengthen its control over the federal funds rate, the Fed created its RRP program, which provided a floor under money market rates by offering a practically unlimited supply of what were considered risk-free assets -- repos collateralized by Treasury securities held in its SOMA."

A press release entitled, "Federated Investors, Inc. Founder John F. Donahue Dies at Age 92" said Friday, "With deep sadness, Federated Investors, Inc. today announced the passing of John F. Donahue, who founded the company in 1955 and served as chairman emeritus until his death at age 92 on May 11, 2017. Donahue served Federated for more than 60 years, playing a pivotal role in shaping the company and the investment management industry as a tireless advocate for the value of mutual funds to everyday investors. Federated's position as a leader in innovative investment management solutions and services reflects Donahue’s entrepreneurial spirit." Federated President & CEO J. Christopher Donahue, "My father was a remarkable business leader and a man of tremendous faith who dedicated his life to building Federated and his community. He was also a wonderful husband, father, grandfather and great-grandfather who made faith the center of our family. While he will be deeply missed by all who knew him, his entrepreneurial spirit will continue to encourage and inspire us all." Jack Donahue's Obituary says, "The late 1970s brought a new and innovative product to Federated, the money market mutual fund, which led to fast and enormous growth. Thanks to money funds and Mr. Donahue's leadership, Federated by the early 1980s had grown to become the second-largest mutual fund company in the country as it focused sales efforts on bank trust departments using mutual funds to manage their cash assets. Today, Federated manages more than $360 billion in equity, fixed-income and cash products for investors in the U.S., Canada, Latin American, Great Britain, Ireland, Germany and Asia." The Pittsburgh Post Gazette wrote the article, "Federated Investors co-founder John 'Jack' Donahue dies; firm pioneered money market funds." They say, "John F. "Jack" Donahue, co-founder of Federated Investors, philanthropist, and energetic believer in the Catholic faith, died at his Naples, Fla., home Thursday. He was 92. Mr. Donahue, a United States Military Academy graduate and former pilot for the Strategic Air Command, founded Federated Investors in 1955 with Central Catholic High School graduates Richard B. Fisher and the late Thomas J. Donnelly. The Downtown firm pioneered offerings of money market funds and today manages $362 billion from offices in the United States, Canada, Latin America, Great Britain, Ireland, Germany and Asia. Federated began offering money market mutual funds in the 1970s as a way for banks to manage their cash more effectively. The innovation spurred growth that attracted the attention of Aetna Life & Casualty, which acquired Federated in 1982 for about $256 million. Federated's managers bought controlling interest in the company back in 1989, with Aetna retaining a 25 percent that Federated subsequently bought out in 1996. Federated became a publicly traded company in 1998 and today has a market value of $2.6 billion."

ICI's new "Money Market Fund Assets" report shows Prime assets rising for their third week in a row. They gained $1.9 billion, after increasing $5.5 billion last week, when they broke over the $400 billion barrier. Year-to-date, Prime MMF assets are up by $29.2 billion, or 7.8%. ICI says, "Total money market fund assets increased by $6.16 billion to $2.65 trillion for the week ended Wednesday, May 10, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.91 billion and prime funds increased by $1.89 billion. Tax-exempt money market funds increased by $370 million." Total Government MMF assets, which include Treasury funds too, stand at $2.115 trillion (79.8% of all money funds), while Total Prime MMFs stand at $405.5 billion (15.3%). Tax Exempt MMFs total $129.3 billion, or 4.9%. It explains, "Assets of retail money market funds decreased by $3.94 billion to $965.23 billion. Among retail funds, government money market fund assets decreased by $3.44 billion to $590.11 billion, prime money market fund assets decreased by $410 million to $251.57 billion, and tax-exempt fund assets decreased by $100 million to $123.55 billion." Retail assets account for over a third of total assets, or 36.4%, and Government Retail assets make up 61.1% of all Retail MMFs. The release continues, "Assets of institutional money market funds increased by $10.10 billion to $1.68 trillion. Among institutional funds, government money market fund assets increased by $7.34 billion to $1.52 trillion, prime money market fund assets increased by $2.30 billion to $153.96 billion, and tax-exempt fund assets increased by $460 million to $5.75 billion." Institutional assets account for 63.6% of all MMF assets, with Government Inst assets making up 90.5% of all Institutional MMFs.

The Federal Reserve Bank of New York's Liberty Street Economics blog writes, "Which Dealers Borrowed from the Fed's Lender-of-Last-Resort Facilities?" They tell us, "During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions -- the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more.... In response to the difficulties dealers faced in borrowing in short-term funding markets, the Fed created two lender-of-last-resort (LOLR) facilities—the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF)." The piece also says, "Borrowing from the TSLF grew quickly, from an initial Schedule 2 auction size of $75 billion in March 2008 to a peak of $200 billion (Schedules 1 and 2 combined) after the crisis intensified with the Lehman bankruptcy in September 2008.... Demand for TSLF borrowing declined as private funding markets improved, and then dropped to zero after the July 16, 2009, auction. The last TSLF auction was held January 7, 2010, and authorization for lending officially expired on February 1, 2010." It adds, "Central banks limit borrowing by establishing standards for collateral quality, by charging a penalty rate, and by monitoring borrowers' financial health. However, in a crisis, when financial conditions change rapidly, regulators face the difficult challenge of knowing which signals to rely on. Our results show that market signals of financial health (such as equity prices) predicted how much dealers borrowed from the Fed's liquidity facilities during the crisis and that financially weaker firms, rather than opportunistic ones, were the heaviest users."

Archives »