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The Federal Reserve issued its latest "FOMC statement" and its "Economic Projections" yesterday. The former says, "In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.... The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans." The Wall Street Journal writes in "Fed to Start Paring Holdings, Keeps December Rate Rise on the Table," "The Federal Reserve indicated Wednesday it remained on track to raise short-term rates later this year and said it would begin shrinking its portfolio of bonds next month, starting to close the books on an unprecedented and sometimes controversial policy experiment. The Fed left rates unchanged and penciled in one more rate rise in 2017, signaling continued optimism about the economy even though persistently low inflation has prompted some officials to voice greater skepticism about a move this year."

Fitch Ratings wrote the paper, "CEF ARPS Ten Years After the Financial Crisis," which says, "Roughly $5 billion of closed-end fund (CEF) ARPS [auction-rate preferred securities] remain outstanding (as reported year end 2016), down 93% from over $60 billion in 2007. CEFs continue to redeem auction-rate preferred shares (ARPS) at discounts to par, albeit at a slow pace. In 2016, $443 million of ARPS were redeemed, $407 million of which was at a discount. So far in 2017, $166 million of ARPS have been redeemed, $64 million at a discount. Fitch expects the redemptions to continue for CEF ARPS that remain outstanding.... Over the last few years alternative financing options to ARPS have grown significantly. For municipal funds these include preferred shares placed with banks, money funds, and bond funds. For taxable funds alternatives include notes and preferred shares placed with insurance companies and retail investors as well as bank financing. While initially more expensive than ARPS, these options may be attractive for CEFs in a rising rate environment, especially when combined with a discounted ARPS tender.... Since the ARPS auctions froze in 2008, fund managers have been actively redeeming these securities. The chart below shows that taxable CEFs' outstanding ARPS balances have declined 93%, from approximately $31.5 billion to $2.2 billion as of end 2016. Municipal CEFs were slower to reduce balances, but have almost caught up, declining 91.6% from approximately $30.2 billion to $2.5 billion."

Citi Research's Steve Kang features in his latest "Short-Term Research Notes" a piece entitled, "Let's watch the paint dry," which reviews "balance sheet normalization and its impact on rates." He says, "Fed Chair Yellen likes to say that the balance sheet normalization process will be like "watching paint dry". For longer-term rates, we agree with the sentiment and expect little near-term impact. However, we advise money market investors to keep an eye out as the reserve drain could disrupt the global dollar funding markets and widen XCCY and LIBOR basis. We also review the normalization's implications on Treasury supply." The piece comments, "The Fed is expected to announce the start of the normalization ... most likely commencing from October. We continue to expect only marginal day one-impact on term premium because the market is likely to be pricing much of the effect already, given that the near-term trajectory of the normalization is quite deterministic.... Though we expect little impact on duration, money market rates are likely to be disrupted once the Fed B/S normalization is well underway." Kang adds, "The redemption cap set by the Fed would ensure a slower increase in supply than otherwise, but it is still ramping up quickly in CY 2018/2019 by $226b/$266bn.... Combined with possible fiscal reform in 2018 (the likelihood increased with the earlier resolution of the debt ceiling), we expect to see an increase in coupon issuance in 2018. We pared down our subjective probability of a coupon increase for this November as the short-term debt ceiling suspension reduces the expected funding needs by $200bn (as cash balance is expected to stay low). In our base case, the first increase in coupons is likely to be seen in February 2018. Figure 5 shows our expectations for the net and gross supply of coupons."

The Financial Times writes, "Microsoft shows how corporate cash piles blur lines with Wall St." The article tells us, "At first glance, Microsoft seems exceptionally cautious with its balance sheet. About 84 per cent of its $133bn in cash is invested in US government and agency securities, the greatest share of its peer group. But company filings and public documents show that one of the world's largest technology companies doesn't just dump its excess cash into bonds and leave it there. It has taken an approach to the $14tn Treasury market that is more akin to that of professional money managers. Beyond the risk of Microsoft facing losses on its bond holdings in the event of a sharp rise in yields, the company's portfolio of short-term secured lending has grown notably over the past year, according to SEC filings). In this type of lending, an entity with large amounts of cash or securities, such as bonds or stocks, on their balance sheets lend them out in an effort to generate income. In return, they accept safe assets like cash or government securities as collateral. Of the 30 US companies the FT analysed with large amounts of cash on their balance sheet, Microsoft had by far the fastest growth in this type of lending in the 12 months to June 30. The only other company with a sizeable increase in short-term lending was chipmaker Intel Corp, and its collateral value rose about 2.6 times over. Microsoft's surged twelvefold. The expansion in Microsoft's short-term secured lending underscores its unusual role in the Treasury market. It also points to how the need of American companies to manage their large cash piles accumulated overseas -- and which they are reluctant to repatriate for tax reasons -- is blurring the distinction between activities on Wall Street and in non-financial companies."

The Investment Company Institute's latest "Money Market Fund Assets" report show Prime money market funds rising for the 6th week in a row, the 12th week in the past 13, and the 16th week in the past 19 (up $38.9, or 9.6%). They've now increased by $70.5 billion, or 19.0%, year-to-date. ICI writes, "Total money market fund assets increased by $16.77 billion to $2.74 trillion for the week ended Wednesday, September 13, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $13.03 billion and prime funds increased by $4.46 billion. Tax-exempt money market funds decreased by $725 million." Total Government MMF assets, which include Treasury funds too, stand at $2.168 trillion (79.2% of all money funds), while Total Prime MMFs stand at $442.5 billion (16.2%). Tax Exempt MMFs total $128.1 billion, or 4.7%. They explain, "Assets of retail money market funds increased by $692 million to $971.02 billion. Among retail funds, government money market fund assets increased by $147 million to $588.18 billion, prime money market fund assets increased by $1.01 billion to $260.49 billion, and tax-exempt fund assets decreased by $467 million to $122.34 billion." Retail assets account for over a third of total assets, or 35.5%, and Government Retail assets make up 60.6% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds increased by $16.08 billion to $1.77 trillion. Among institutional funds, government money market fund assets increased by $12.89 billion to $1.58 trillion, prime money market fund assets increased by $3.45 billion to $182.02 billion, and tax-exempt fund assets decreased by $258 million to $5.80 billion." Institutional assets account for 64.5% of all MMF assets, with Government Inst assets making up 89.4% of all Institutional MMFs.

We stumbled across an odd report entitled, "Deutsche Bank AG: New EU money market fund regulation: Will growth continue?" It says, "In the past three years, European money market funds (MMFs) have grown by an impressive EUR 260 bn to EUR 1.16 trillion in invested assets. MMFs have attracted large inflows, which have particularly gone into non-euro assets benefiting from rising USD yields. In addition, the appreciation of the dollar has led to higher assets under management (AuM) measured in euro. Yields on euro assets have been low or even negative but in line with alternative money market investments." The piece adds, "EU regulation issued in June 2017 and taking effect in 2018 aims at bolstering MMFs against financial distress. It introduces tighter rules on portfolio diversification, liquidity and transparency. Sponsor support is explicitly prohibited. Newly introduced MMF categories are likely to accommodate current investor preferences as regards accounting methods (variable or constant net asset value).... A "hard Brexit" could trigger a repatriation of GBP-denominated and UK-focused MMFs with approximately EUR 213 bn in AuM. Furthermore, a proprietary UK regulation similar to old EU rules could spark regulatory competition for the offshore USD MMF market. Currently, euro area MMFs manage EUR 326 bn in USD-denominated assets. USD- and GBP-denominated funds are predominantly domiciled in Ireland and Luxembourg."

The Financial Times writes "US companies transformed into 800lb gorilla in bond market." The article, subtitled, "Corporate America is ploughing its excess cash into a wider range of assets," explains, "Apple, Alphabet and Microsoft are among a host of top-tier US companies that have become a force in the global bond market, as they pump hundreds of billions of dollars into government and corporate debt. Thirty US companies together have more than $800bn of fixed-income investments, according to a Financial Times analysis of their most recent filings with the US Securities and Exchange Commission. Their holdings of Treasuries, corporate, agency and municipal debt, as well as asset- and mortgage-backed securities, means they collectively have more firepower in debt and credit markets than high-profile asset managers including AllianceBernstein, Invesco and Franklin Templeton. "They are asset managers in their own right," Ramaswamy Variankaval, head of JPMorgan's corporate finance advisory group, said of the companies. A reluctance by American multi-nationals to repatriate profits generated overseas has pushed the size of the US corporate cash piles to more than $2tn, a rise of 50 per cent over the past decade and more than double the levels at the turn of the century, according to the Federal Reserve. The emergence of US companies as a leading investor in corporate debt alongside traditional asset managers comes at a time many in the market express concern about a bond market bubble that could be vulnerable to bursting should inflation and economic growth accelerate.... In total, the 30 companies, which include venerable household names like Ford, Coca-Cola and Boeing, have more than $1.2tn in cash, cash equivalents, marketable securities and investments, according to the FT analysis. While corporate treasurers typically first turn to a deposit in a commercial bank account or an investment in short-term money market funds and time deposits, they are increasingly extending beyond that sector as interest rates have remained near zero for much of the past decade. The 30 companies have amassed a portfolio of more than $400bn of US corporate bonds, representing nearly 5 percent of the outstanding market.... The willingness to invest in a wider array of fixed-income instruments is also partly a legacy of the financial crisis, when runs on ultra-safe money market funds forced corporate treasurers to pay more attention to how they invest their cash. "They [the companies] recognise that with all these changes in the marketplace -- money market reform, low rates, the evolution of credit risk -- they realise the world is more sophisticated than it was 10 years ago and they can't simply put money into a money-market account," said Jerome Schneider, head of Pimco's short-term and funding desk."

Money market mutual fund distributors and corporate cash managers are making preparations for `AFP 2017, the Association for Financial Professionals' gathering of Treasury Managers, which takes place this year in San Diego, Oct. 15-17. Sessions involving money funds and cash investing include: Perspectives on Liquidity Investing, which features Scott Wachs from Morgan Stanley, Kimberly Kelly-Lippert from American Honda Motor Company, Chris Ginieczki from NVIDIA Corporation, and Karen Mercer from AARP. Its description says, "Post-SEC money market fund reform, institutional cash investors have encountered challenges in investing and diversifying their cash holdings in the short-term space. Join this expert panel as they provide a background on market dynamics and share their perspectives on liquidity investing and provide best practices to support your investment practices, manage changes in market liquidity, select the right investment products and cope with a volatile regulatory environment." Another session is entitled, "Disruption: Turning Change into Opportunity in Liquidity Management Practices," which features Jason Granet of Goldman Sachs Asset Management, Geoffrey Nolan of Qualcomm, and Rene Bustamante of FedEx Corporation. A third session, "Trapped Cash and Other Pitfalls of Managing Global Balances," involves Tom Wolfe from Marriott Vacations Worldwide Corporation, Sanford Pallotta from Rockefeller Group International, Inc., and Josh Ormond from J.P.Morgan. Yet another session, "When Cash Comes at a Cost: Efficient Methods for Managing Global Cash in Today's Regulatory Regime," includes: Geoffrey Nolan of Qualcomm, Jamie Cortas of Dell, and Beccy Milchem of BlackRock. Finally, the last cash session, "The Return of Returns: Transforming your Investment Strategy for a Nonzero Interest-Rate World," features Dana Laidhold of The Carlyle Group, Zeke Loretto of eBay Inc., and Garret Sloan of Wells Fargo Securities, LLC. The description says, "Since 2008, the decision to "sit in cash" has had little impact on the performance of treasury portfolios. But the long, cold winter of zero interest rates has begun to thaw. To capitalize on these changes, treasury teams need to: 1) develop a new investment strategy for a shifting interest-rate environment, 2) have a clear picture of the company's liquidity position, and 3) communicate investment strategies effectively with senior leaders. Hear from the treasurer of The Carlyle Group and eBay's head of global investments as they discuss developing their post-2008 investment policies and strategies, optimizing the treasury investment function for a non-ZIRP world, and best practices for building world-class treasury investment programs." We hope to see you in San Diego, and please stop by Crane Data's booth (#1101) if you're at the show!

An add for J.P. Morgan Asset Management on Treasury Today mentioned a piece entitled, "Time to get your house in order: Gearing up for European Money Market Fund (MMF) Regulation." They say, "Two months on from the finalisation of the European MMF Regulation, it's all too easy to feel that implementation in January 2019 is a long way off. But, as a treasurer, taking a proactive approach to thinking ahead can position you to make the most of the opportunities that the regulation will bring. So what do you need to do? And, crucially, when do you need to do it? There's still plenty of time to tackle the implications of European MMF regulation for your organisation, but it's important to start planning now. Let's break things down into three manageable chunks, beginning with the steps you need to consider between now and the end of this year. First, start by getting to grips with the detail of the regulation itself. As part of this process, you'll need to make sure all internal stakeholders understand exactly what the regulation entails and what the changes mean for your organisation. You'll also need to define the cash that could fall within the scope of the regulation. What's next? In the first half of 2018, think about reviewing your investment policy and decide if you need to make changes in order to take full advantage of all the options available under the new rules. Some of the new rules require changes to the funds' constitutional documents, so your MMF client advisor may ask you to vote on the changes by post at an extraordinary general meeting. This is a functional requirement that enables the regulation to be implemented. You'll also need to think through any implications for accounting platforms and treasury workstations, and engage with trading portals and sweep platforms as appropriate. And finally, in the second half of 2018, you must be ready to communicate your decision on the options that best suit your cash requirements, as MMF sponsors will likely be looking to convert their funds to the new regulation during the final quarter of 2018, ahead of the deadline. This is also your chance to test and review all changes to your internal processes and system ahead of implementation in January 2019."

Overall money fund assets rebounded in the latest week after a sharp drop at month end, we learned from the Investment Company Institute's" latest report. Prime MMFs rose for the 12th week straight and for the 18th week in the past 20 (up $44.8, or 11.3%). They've now increased by $66.0 billion, or 17.5%, year-to-date. ICI writes, "Total money market fund assets increased by $11.08 billion to $2.73 trillion for the week ended Wednesday, September 6, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $9.89 billion and prime funds increased by $983 million. Tax-exempt money market funds increased by $207 million." Total Government MMF assets, which include Treasury funds too, stand at $2.155 trillion (79.0% of all money funds), while Total Prime MMFs stand at $443.0 billion (16.2%). Tax Exempt MMFs total $128.9 billion, or 4.7%. They explain, "Assets of retail money market funds increased by $2.10 billion to $970.33 billion. Among retail funds, government money market fund assets increased by $1.10 billion to $588.04 billion, prime money market fund assets increased by $898 million to $259.48 billion, and tax-exempt fund assets increased by $102 million to $122.81 billion." Retail assets account for over a third of total assets, or 35.6%, and Government Retail assets make up 60.6% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds increased by $8.98 billion to $1.76 trillion. Among institutional funds, government money market fund assets increased by $8.79 billion to $1.57 trillion, prime money market fund assets increased by $85 million to $183.47 billion, and tax-exempt fund assets increased by $105 million to $6.06 billion." Institutional assets account for 64.4% of all MMF assets, with Government Inst assets making up 89.2% of all Institutional MMFs.

Federated Investors' also posted a brief, entitled, "Market Memo: Let's talk debt ceiling...again." Written by Sue Hill, Head of Federated's Govt MMFs, it says, "The more critical issue to those operating within the markets is the debt limit, the amount of debt Congress authorizes the federal government to issue. The Treasury has hit the $19.8 trillion allotted for 2017 and is operating with the use of extraordinary measures, which are expected to run out in early October. Although the debt ceiling is separate from a shutdown, the two often are linked in the minds of the public and investors because the debt limit is useful leverage for politicians negotiating spending bills." (Note: This was written prior to the announcement that a deal may have been reached to extend the debt ceiling 3 months.) Hill explains, "Ultimately, we do not believe the Treasury will be forced into technical default. Treasury Secretary Steven Mnuchin and congressional leaders have pledged to take whatever steps are necessary to raise the debt ceiling. But we understand investors may be concerned by headlines. We expect either a short-term deal that pushes the issue off for a few months or a longer-term agreement. But short-term markets have begun to reflect concern, with early October Treasury bill yield 10-15 basis points higher than surrounding maturities.... [W]e have been shying away from Treasury coupon-bearing securities that mature within this period: not because we believe they will default, but because we understand our shareholders may perceive a risk in those holdings. It is only prudent to do contingency planning. We have found most of our client concerns are liquidity and price volatility. In past debt-ceiling episodes we have proactively raised liquidity levels for an added buffer in the event of prolonged market dislocations. We would expect to make the same decisions this time. To the extent we become uncomfortable with the market, we could to boost our usage of the Fed's reverse repo facility or hold investments in cash. Very short-term Treasury bills have exhibited some volatility in past debt-limit fights, but we have the tools to mitigate the effects on our portfolios. Volatility's impact on a money fund's net asset value (NAV) from an increase in yield falls well short of what would be necessary to challenge the stability of principal." She adds, "Even in the very remote circumstance of a default on a Treasury security, SEC Rule 2a-7 would not require a fund to dispose of that security. Rather, its board could -- and in all likelihood would -- determine it would be best to hold the security given the certainty of eventual repayment in full. Furthermore, there are no cross-default provisions in Treasury securities; a technical default on a Treasury security that has, say, an Oct. 15 maturity date or coupon payment does not automatically mean that all Treasury securities are in default. Other Treasury securities could still be considered eligible for money funds. Lastly, we have found Treasury and market participants quite resourceful in term of devising plans that would allow even securities threatened with default to continue to trade in the market, thereby mitigating the effects the challenging circumstances."

S&P published a "VRDO Ratings Recap," which says, "S&P Global Ratings is providing a comprehensive summary of its ratings on variable-rate demand obligations (VRDOs) related to municipal and corporate obligors. The data consist of all outstanding ratings as of August 1, 2017. We have 2,228 outstanding ratings on VRDOs with an outstanding par balance of $69.57bn. Overall, 99.2% of the ratings fall within the 'AAA', 'AA', and 'A' rating categories, with the highest total par at the 'AA−' level (22.5%). We took rating actions on 19 issues on the portfolio in 2017, which consisted of 11 upgrades of one notch, two affirmations, and six CreditWatch negative placements. We expect issuance levels to be in-line with 2016 levels for the remainder of the year. Despite the recent outflows from institutional investors in tax-exempt funds after money market reform, demand from competing funds remains high amid continued low VRDO supply. Prolonged low rates, as well as the current regulatory environment, make direct bank financing an attractive option for obligors. However, VRDOs continue to remain relevant due to their high quality and liquidity attributes." S&P lists its "Top 10 LOC (Letter of Credit) Providers as: Bank of America N.A. (14.65% of Total), JPMorgan Chase Bank N.A. (9.75%), Wells Fargo Bank N.A. (8.63%), U.S. Bank N.A. (7.55%), TD Bank N.A. (6.22%), Citibank N.A. (6.18%), Sumitomo Mitsui Banking Corp. (5.75%), MUFG Union Bank N.A. (5.15%), Barclays Bank PLC (2.92%), and PNC Bank N.A. (2.85%).

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