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American Banker writes "Banks have a mountain of deposits, so they don't need PPP funding," explaining that, "A record surge in bank deposits has given U.S. lenders more cash than they know what to do with. One thing they don't need: help from the Federal Reserve to fund the government-backed loans they made to small businesses.... That's largely because lenders are sitting on $1.8 trillion of new deposits that have flooded in since March 11 -- a 13% increase, and the biggest two-month jump since at least 1973, when comparable data is available." They quote Keefe, Bruyette & Woods' Brian Klock, "It looks like this excess liquidity in the banking system is going to stick around much longer. So if you don't really need it, why get the Fed loan?" The article explains, "Deposits have surged as drops in securities markets and interest rates for bonds and money market funds pushed savers and investors to banks. Also, a jump in corporate borrowing amid the pandemic has ended up as deposits back at the banks. The Fed loans are pretty cheap at 0.35%, but then deposit costs have gone down considerably as well. Interest-bearing deposits cost JPMorgan Chase 0.52% in the first quarter, and Bank of America paid 0.47% while the average was around 1% for smaller lenders. Meanwhile, non-interest-bearing accounts made up about 30% of all deposits at the four biggest banks, giving them cheaper funding than the Fed's rate. Among the top U.S. firms, only Citigroup's name showed up on the list of 574 banks that used the Fed's lending facility as of May 6.... It had the highest deposit cost among the four biggest banks in the first quarter at 1.1%, and the smallest deposit base."

Federated Hermes' Debbie Cunningham writes in her latest commentary about "Less of zero." She tells us, "Investors have been given plenty of alphabet soup since the onset of the coronavirus. Among the first servings were special purpose vehicles such as the Money Market Mutual Fund Liquidity Facility (MMLF), Commercial Paper Funding Facility (CPFF) and Primary Dealer Credit Facility (PDCF). Then came Congress' CARES Act and a slew of others." Cunningham explains, "More recently, new letters have turned up to forecast the shape of the GDP curve as the U.S. economy recovers from recession. They range from an optimistic prediction of a V-shaped curve to the pessimistic L-shaped one. Our base case is for a U. As communities continue to lower restrictions, we think the economy can recover sooner than many expect. If there are too many hiccups or false starts -- or if we see a resurgence of Covid-19 infections -- the bottom of the U will be longer. But what we have seen in the last month as the U.S. and other countries begin to open up is encouraging." She continues, "No matter the shape of the curve, we aren't expecting a return to the extended zero-rate time frame of 2008 to 2016, but one best measured in quarters, adding up to a couple of years at most. The minutes of the April Federal Open Market Committee revealed this was the Fed's consensus. If anything, the Fed seems to be quietly formulating a withdrawal strategy." Cunningham also writes, "The Fed has been anything but quiet in its pushback on negative rates. In May, policymakers repeated many times they are satisfied that their present tools, such as forward guidance, quantitative easing and lending programs, are effective and that pushing rates below zero is not on the table. Unlike the novel nature of many of its new facilities, there is plenty of evidence of the ineffectiveness of negative rates from the European Central Bank and the Bank of Japan. Fed officials know the score. But many in the marketplace simply aren't listening (don't fight the Fed!) as seen in the recent trading of the fed funds futures contracts in negative territory for early 2021. If you know anything about cash managers, you know we are a conservative bunch, so it should come as no surprise the money fund industry has been exploring what operational changes would be needed if rates did slip below zero." posted "Negative interest rates: What they are, how they work and whether they are coming to the U.S.," which tells us, "Negative interest rates, in the unlikely event that they become pervasive, would drastically alter the playing field for savers as well as borrowers. Here are some things consumers should know.... Everyone is accustomed to paying interest to borrow money and earning interest when depositing money. Negative interest rates would reverse that. A bank might not actually charge savers a negative rate, but it might levy a 'storage fee' that exceeds any positive interest earned, said Dennis Hoffman, an economics professor at Arizona State University. This scenario would represent a 'penalty for holding cash,' he said. By pushing rates ever lower, economic policymakers would be 'encouraging you to rid yourself of cash by spending money and hence stimulating economic activity,' he said." The piece explains, "With deposit accounts, money-market funds and other ultraconservative investments already paying next to nothing, it doesn't take many additional fees, or much inflation, for real returns to slip into negative territory, Hoffman said. But as a practical matter, he considers it more realistic to think about negative interest rates as ‘really low rates.'" The article adds, "For savers, today's ultra-low rate environment makes it more important to shop around for better deals and be wary of fees that can erode returns even further. Many types of fees, including account-maintenance and overdraft fees and ATM charges, were slowly rising at many banks anyway, even before the coronavirus pandemic hit, [BankRate’s Greg] McBride said. Conversely, he noted that it's still possible to obtain fee-free checking accounts at roughly 40% of banks and 80% of credit unions, especially if you sign up for direct deposit. Economists continue to debate how quickly and with what intensity the recovery will materialize, but most see the economy growing again by early next year at the latest. With an economic rebound, interest rates could start pushing higher, relegating further speculation about negative rates to the background."

The website Treasury & Risk features a piece written by ICD's Justin Brimfield entitled, "Money Fund Madness in March." It explains, "Although markets have now returned to a relatively normal state, movement in money funds bordered on irrational in March of this year. As the impacts of the Covid-19 pandemic began to sink in, volatility reached the highest levels in decades and markets went 'risk off.' Corporate treasurers drew down credit lines and poured cash into the seemingly safest alternatives -- government and Treasury money-market funds (MMFs). The ICD analysis reveals that MMFs, as an asset class, performed flawlessly. They provided corporate investors with daily liquidity at net asset value (NAV), even as those investors' emotions led them to de-risk. Even prime funds, which directly reflect stress in the credit market, maintained market NAVs of $0.99914 at their lowest, only a $0.00086 deviation." The piece quotes Crane Data's Peter Crane, "These funds didn't come close to breaking the buck, and no one triggered gates or fees.... Never was a corporate in jeopardy of failing to get their money back on the same day. Most funds were far more liquid than required. That's a victory for prime and for money funds as a whole." T&R comments, "Another indication of the performance of MMFs as an asset class is its ability to absorb vast amounts of cash. Through the five-week analysis period, the market took in $782 billion in new assets." It also quotes Crane, "I think the reason why prime funds held up so well is because government funds held up so well, and that took the pressure off of prime.... Because investors were bucketing their funds, they didn't have to hit their liquidity so hard and so fast in the prime space. They knew they had government assets, and they were raising more assets. Money was flowing in.... I think it was a confluence of events that caused people to doubt the future and sell off everything in the stock and bond markets.... That happened, and then the same thing happened as in 2008, when even safe investments were scrutinized.... Having diversity between funds and being able to move between them -- regardless of which bucket springs a leak -- is always a good idea." Finally, the article tells us, "For now, the market has stabilized on all fronts. The government has shown its willingness to support money-market funds from a fiscal and monetary policy perspective, and professionals have settled from March's market chaos and the move from office to home. Corporate investment managers are currently finding balance at work, at home, and in their portfolios. The next time chaos engulfs the financial markets, treasury teams would do well to remember the solid performance of money-market funds during the global financial crisis and the current pandemic. Historically, a balanced portfolio has been shown to optimize liquidity, safety, and returns."

A press release entitled, "J.P. Morgan Asset Management partners with Calastone to power Money Market Funds" explains, "J.P. Morgan Asset Management has partnered with Calastone, the largest global funds network, to introduce new levels of automation to money market funds via its 'Morgan Money' trading platform." It tells us that JPMAM "will initially use Calastone to enhance its entire settlements process" and says, "Morgan Money will be the first in the market to offer automated settlements to its users via Calastone's innovative technology. Calastone digitalises the investment and reporting process for money market portals, fund providers and investors. The service enables the highest levels of automation, comprising of trade placement, settlement, reporting and cash balance sweeps." The release continues, "Calastone's solution provides a fully digitalised market ecosystem offering firms greater immediacy, accuracy and certainty of execution through automated workflows. Through this partnership, Morgan Money is able to provide customers with industry leading experience, optimised for current and future market needs." Calastone's Dan Kramer comments, "We are delighted to welcome JP Morgan onto our new suite of Money Markets Services -- and as the first to make automated settlements available to their users. Now more than ever, it is essential for fund providers to stay competitive, attractive and meet the future needs of investors. We are thrilled that, through our technology, we can help JP Morgan provide its users with a market-leading customer experience across Europe, USA, Asia and other global markets." JPMAM's Paul Przybylski adds, "Morgan Money has been designed to deliver a best in class customer experience, centred on seamless integration and operational efficiency. With that in mind, we are excited to partner with Calastone to bring automated settlements to the platform, allowing our users to settle trades in real time, with automated trade workflow."

Morningstar writes, "The Rise and Fall of Bank-Loan Funds," which tells us, "Bank-loan funds have had a difficult time. The Morningstar Category has endured outflows since late 2018, and following the March 2020 sell-off, it has shrunk to its smallest size since 2012. And the category's narrow return spread--a function of loans' ties to rock-bottom short-term interest rates and limited upside because of call risk--means that fees eat up a larger percentage of returns than in many other categories and make it difficult for individual funds to separate themselves from the pack. Meanwhile, the bank-loan market itself has evolved in a direction that has undercut its traditional role as a credit-sensitive asset with more resilience than high-yield bonds. In fact, the bank-loan sector's traditional downside protection versus high-yield has been eroding for some time. More than ever before, bank-loan investors must ask themselves what they want out of their allocation and whether bank-loan funds are still able to deliver it." The piece continues, "Corporate bonds, both investment-grade and high-yield, typically come with call protections or make-whole features that allow them to trade above par value more easily, increasing their potential total return. But callability means that bank-loan upside is typically capped, while bond upside is not, so improving economic fundamentals--which tend to parallel rising short-term rates--can only go so far in terms of driving up a loan's price. For example, roughly 70% of bank-loan issuance activity in 2017 was used to refinance or reprice existing loans." Morningstar adds, "There is also reason to believe that bank loans' traditional downside protection will not hold as strongly going forward. Huge demand for loans has fostered incredible growth over the years.... Of course, massive growth in both supply and demand paved the way for a loosening of credit standards. As a result, a larger and larger percentage of the market is now made up of covenant lite and loan-only capital structures.... All of this means that bank-loan funds are in a tough place. If outflows continue, the category is likely to experience liquidations or mergers as asset managers shut down uneconomic products. Growth in both supply and demand has engendered changes that have weakened the sector's traditional downside protection. And the lack of call protection will remain an impediment to upside performance whenever credit markets rally, especially in a world of near-zero interest rates that neutralizes one of the sector's defining features and return generators. Given the disadvantages that the category faces, only the very highest level of team and approach--and low fees--can be expected to outperform."

Barron's writes that "TIAA Says Negative Yields Could Soon be a Possibility in Money-Market Products." The piece, based on an e-mail sent out by Independent Adviser for Vanguard Investors' editor Dan Wiener, explains, "Negative yields could be a possibility for U.S. investors sooner than expected -- at least, for investors in a couple of money-market products managed by TIAA. In a notice to investors this week, TIAA said it plans to temporarily waive fees on the CREF Money Market Account and TIAA Access's Money-Market Fund.... But notably, TIAA said it would not renew the waiver after the end of 2020. What's more, it said it could recoup those waived fees as soon as next year, if U.S. interest rates rise far enough to provide a positive yield." (Crane Data Note: These are not money market mutual funds, but variable annuity money market products with big extra layers of fees. We do not expect any true money funds to go negative.) Barron's adds, "TIAA's notice marks a significant change from the way most money-market funds managed near-zero interest rates in the years after the 2008-09 financial crisis. Most funds waived fees as long as interest rates were near zero to avoid negative yields." They quote our Peter Crane, "In the money-fund space, people are thinking seriously about negative yields and how they might handle them. The last go-round we merely saw fee waivers, so yields stayed positive.... People are starting to think about what might happen if yields do go full-scale negative. And with funds, how they pass that through to investors -- and how that's perceived -- will be a big deal." Wiener comments in his update, "When I last wrote you about Vanguard's money market yields plunging I had no idea that other fund complexes were already so close to the zero-yield that they'd have to start waiving fees. But that's what's happening. The attached email from TIAA, shared by a colleague, is shocking not only because TIAA says it will only waive fees on its CREF Money Market Account through the end of 2020 but that the yield on the fund could go negative AND TIAA reserves the right to recoup the waived fees down the road.... TIAA investors should begin looking for a better alternative, and for those stuck in 403(b) plans they should be asking their administrators for better alternatives as well."

Money market mutual fund assets showed gains for the twelfth week in a row, hitting yet another record but just inching up closer the $4.8 trillion level. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets increased by $1.41 billion to $4.79 trillion for the week ended Wednesday, May 20, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $12.85 billion and prime funds increased by $13.84 billion. Tax-exempt money market funds increased by $419 million." ICI's stats show Institutional MMFs falling $8.6 billion and Retail MMFs increasing $10.0 billion. Total Government MMF assets, including Treasury funds, were $3.912 trillion (81.7% of all money funds), while Total Prime MMFs were $742.5 billion (15.5%). Tax Exempt MMFs totaled $135.3 billion, 2.8%. Money fund assets are up an eye-popping $1.157 trillion, or 31.9%, year-to-date in 2020, with Inst MMFs up $950 billion (42.0%) and Retail MMFs up $208 billion (15.2%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.659 trillion, or 53.0%, with Retail MMFs rising by $363 billion (29.8%) and Inst MMFs rising by $1.296 trillion (67.7%). They explain, "Assets of retail money market funds increased by $9.99 billion to $1.58 trillion. Among retail funds, government money market fund assets increased by $5.74 billion to $999.23 billion, prime money market fund assets increased by $4.29 billion to $458.16 billion, and tax-exempt fund assets decreased by $40 million to $120.25 billion." Retail assets account for just under a third of total assets, or 33.0%, and Government Retail assets make up 63.3% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $8.58 billion to $3.21 trillion. Among institutional funds, government money market fund assets decreased by $18.59 billion to $2.91 trillion, prime money market fund assets increased by $9.55 billion to $284.31 billion, and tax-exempt fund assets increased by $459 million to $15.07 billion." Institutional assets accounted for 67.1% of all MMF assets, with Government Institutional assets making up 90.7% of all Institutional MMF totals. (Note: Crane Data has its own separate, and larger, daily and monthly asset series.)

A press release with the unwieldy title, "Fidelity Uses Financial Strength and Scale to Deliver Unmatched Value With First of Its Kind Fidelity Rewards+ Program," tells us, "Fidelity Investments ... today launched Fidelity Rewards+, a new program designed to give eligible Fidelity Wealth Management customers exclusive opportunities to earn and save more. To be eligible, customers must have a minimum $250,000 invested through Fidelity Wealth Services, Fidelity Strategic Disciplines, or a combination of both.... Fidelity Rewards+ features no-cost enrollment, automatic renewal with qualifying assets, and automatic upgrades to higher benefit tiers." Among other benefits, it includes: "Access to Fidelity's Higher-Yielding Money Market Funds -- Fidelity challenged conventional industry practices by automatically investing customers' idle cash into higher yielding cash sweep options available for new retail brokerage and retirement accounts. Now, Rewards+ members can invest in many of our highest yielding money market funds without the typical investment minimums, providing the potential to earn more. " The release explains, "Fidelity Rewards+ includes three levels of benefits based on assets -- Gold, Platinum, and Platinum Plus. Once customers are enrolled in the program, if their eligible assets increase to the next level, Fidelity will boost the rewards automatically." (Website ignites first covered the news in the article, "Fidelity Rolls Out Rewards Program With Money Fund Perks.") Finally, yesterday's CD News piece, "Northern Liquidating Prime Obligs; NY Fed on PDCF; Weekly Port Holds" discussed the liquidation of Northern Prime Obligations. Reueters also writes about the liquidation in, "Northern Trust shutting fund in latest prime money market stress."

Wells Fargo Funds' latest "Overview, strategy, and outlook," tells us, "Money market fund assets continued their upward flight in April, albeit at a slightly more shallow trajectory than in March. With more than $450 billion flowing into the money markets, money fund assets reached an all-time high on April 30 of $5.04 trillion, growing by over 27% since March 1. As was the case last month, government and Treasury money market funds were the primary beneficiaries of these cash flows, amassing $363 billion in April on the heels of March's $790 billion. Total growth in that sector in just the past two months has been slightly under $1.2 trillion, an increase of more than 42%. With lower market volatility and stabilizing net asset values (NAVs), prime and muni funds proved attractive to some investors. The prime sector, which contracted by $160 billion, or 14.6%, in March, experienced four consecutive weeks of positive cash flow through the end of April. With over $82 billion flowing back into the sector, total prime fund attrition since the beginning of March has been cut by more than half to -7.08%, or $78 billion. And muni funds, which shrank 4.2% in March, saw inflows of almost $6 billion, virtually reversing the prior month's outflows. As a result of all these flows, investment activity this month, which usually experiences net outflows due to tax season, was atypically robust." On the U.S. Government sector, the piece adds, "The bottom line is that rates are back at zero. The zero-interest-rate policy (ZIRP) that dominated the past decade is back, and it's hard to see it ending anytime soon. On the one hand, the economic pain is likely just beginning, and the nearly complete lack of visibility on the public health and economic paths forward will have the Fed solely focused on its role as rescuer. Tomorrow's important issues, like the country's unprecedented indebtedness and the unwind of the Fed's rescue efforts, including higher rates, can wait. On the other hand, the Fed has consistently declined to show any affection for negative interest rates, so lower rates seem just as unlikely. In the money markets, then, we're left with small meandering movements in rates within the Fed's target range, somewhere around zero, driven by changes in supply and demand and regulatory and official actions."

Capital Advisors Group published a new report entitled, "Institutional Cash Investments in the Covid-19 New Reality." It tells us, "Extraordinary market volatility from COVID-19 led to a complete reset of portfolio strategies and expectations in cash investments. While liquidity has turned the corner, the path to recovery and a normal investment environment may be a long one. Fighting credit issues on one hand and the risk of negative interest rates on the other, treasury professionals should remain focused on liquidity management, take comfort in the Fed's support programs, and proactively extend portfolio duration." The CAG report continues, "Extraordinary actions were taken by the Federal Reserve and the Trump Administration to provide much-needed lifelines to the financial markets and direct cash payments and loans to keep businesses operating and to support furloughed employees.... Institutional cash portfolios must also contend with a different interest rate and credit landscape from two months ago. While we see plenty of signals to suggest that liquidity has turned the corner, the path to recovery and a normal investment environment may be a long and winding one." It adds, "While medical and economic solutions may be months away, financial markets adjusted swiftly to a lower-for-longer interest rate environment -- which presents a big challenge to treasury professionals. As securities roll off and are replaced with new purchases, portfolio yields are expected to decline precipitously in money market funds and separate accounts. The story is similar in the deposit space, as the Federal Reserve again flushes the banking system with ample reserves that depress deposit rates. Meanwhile, credit conditions may deteriorate further as shutdowns linger, putting more stress on corporate balance sheets and bank loan books. What is a treasury investor to do in this environment? The urge to wait out the yield drought may not work this time, as COVID-19 will likely cast a long shadow on the economy. The possibility of the Fed doing more to help the economy introduces concerns about negative interest rates. Protecting cash portfolios from COVID-related credit issues and principal erosion from negative rates creates tension in portfolio strategies that treasury professionals cannot avoid. To decide where to go from here, it helps to understand where we were and how we came to the current state of the liquidity market."

Reuters Breakingviews discusses money funds in its piece, "ZIRP's the limit." Regarding negative rates, they tell us, "A major concern, aside from banks, would be money market funds. These are mutual funds that hold mostly safe, short-term debt and, traditionally at least, always maintain their $1 per share net asset value while paying at least a smidgen of interest. Investors, both retail and institutional, tend to treat them as an alternative to bank deposits. Ructions in money market funds can quickly turn into a problem of confidence. When one 'broke the buck' in the wake of Lehman Brothers' collapse in 2008, investors raced for the exits -- a bit like a bank run -- forcing the Fed to intervene." They ask, "Are money market funds that significant, though? In the United States, yes. After two huge months of inflows, their assets just topped $5 trillion for the first time at the end of April, according to Crane Data's tally. The safest variety of the vehicles accounted for nearly $4 trillion, investing in securities like government paper or Treasury repurchase agreements. Repo is one area of financial markets that briefly went bonkers earlier this year." The piece adds, "Some other types of money market funds are, since 2016 reforms, detached from the purity of never 'breaking the buck.' But their assets include a lot of commercial paper, still a significant source of short-term funding for many companies. That's another linkage policymakers worry about. The Fed's coronavirus response includes backing for these funds." Finally, Breakingviews adds, "Investors expect them to hold their value. To cover their costs, they need to make a little money from their ultra-low-risk assets. That becomes increasingly hard if rates go negative. Even if fund managers were willing to forgo fees for a while, these funds could become unsustainable longer term. And if investors withdraw money or managers shut them down in a hurry, there would be a risk of knock-on damage to repo markets and corporate borrowers, among others. Don't these funds exist in Europe too? Yes, albeit in lesser amounts and slightly different forms. Negative rates haven't killed them off so it's not certain that the Fed's worries are justified. Yet the financial systems are different: Europe has a more bank-dependent lending market, for example, while America's money market funds and mountain of mortgage-backed debt are more significant factors than in Europe."

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