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Cavanal Hill Investments' Senior Tax-Free Portfolio Manager Rich Williams talks in a new video about the manager's new Ultra Short Tax-Free Income Fund. He says, "[We're] excited to launch the ultra short tax free income fund for a couple of reasons: First, we're finally in the right environment where we are seeing some attractive yields in the short end of the maturity curve. We've been in a low rate environment for several years. But the Federal Reserve has raised rates 3 times in 2017, and they've indicated that they'd like to ... continue going into the next year. So it will be nice to have some yields there. Secondly, [there's been] a lot of talk around tax reform of late, and it looks like the main focus for tax reform is going to be on the corporate side. They're leaving the individual rates alone for the most part, with a little bit of tweaking. But what that means for municipal investors, especially those in the higher tax brackets, is municipal yields look very attractive on a tax equivalent basis. Based on the right environment and based on the tax reform situation, we think the timing is right to launch the Ultra Short Tax-Free Fund." He adds, "The basic concept for the new fund will be focusing on variable rate instruments, as well as fixed rate. The variable rate demand notes, the nice thing about those is that they have a reset every week, and they also have weekly liquidity. So those will be able to capture any rate increases if the Fed does raise rates in 2018. They'll be able to capture the incremental yield there, and then on the fixed rate side we'll be looking for opportunities in the 6 to 9 to 12 month range where we can lock in some really nice yields and that would take some of the cyclicality out that the variable rate demand notes have.... We're very excited about the new fund, and we think it's especially attractive for those investors not only in the higher tax brackets but also for those concerned about a rising rate environment."

Bloomberg writes the odd, "Money-Market Roller Coaster Must Contend With Stock Trades." It says, "Thank the U.S. stock swoon for easing pressure on a key corner of besieged global money markets -- the cross-currency basis. It may even help flip the axis for dollar premiums around the world, pushing them into positive territory. A drop in investor demand for equities may have been a catalyst for the recent narrowing in cross-currency basis -- a part of the cost of hedging for foreign investors buying U.S. assets. That dynamic has helped offer some relief as short-term dollar interest rates have risen to crisis-era highs, according to one Wall Street money-market guru." The piece quotes Credit Suisse's Zoltan Pozsar, "We are witnessing the first major example of how an equity selloff impacts basis markets [since global bank-capital rules were tightened].... `Every segment of the global dollar funding market is in flux." Bloomberg adds, "Expecting strong client interest for stock exposure, investment banks had prepared sizable funding for their equity desks, the strategist explained. Yet demand slumped after the February selloff and the glut of cash was quickly shunted to currency desks and out into the market. That accentuated the tightening in the cross-currency basis, the premium investors pay to procure dollars, he said. "`When equity markets fall and client interest to go long equity futures wanes, banks' equity futures desks get overfunded on the margin, which spills over into FX swap market," wrote Pozsar."

As we first reported in our latest Bond Fund Intelligence newsletter, a press release called "PGIM Investments enters the active ETF market with fixed income strategy" announces, "PGIM Investments has entered the exchange-traded fund space with the launch of the PGIM Ultra Short Bond ETF (NYSE ARCA:PULS). The fund is a diversified, fixed income, actively managed ETF that aims to deliver current income and capital appreciation with a focus on managing risk. PGIM Investments is the worldwide distributor of retail products for PGIM, Inc., the $1 trillion global investment management businesses of Prudential Financial, Inc. (NYSE:PRU) -- a top 10 asset manager globally." The release explains, "The first fund on the platform, the PGIM Ultra Short Bond ETF, is priced at 15 bps, making it among the most competitively priced active fixed income ETFs currently available, according to Morningstar data as of Feb. 28. Its risk-managed and short duration approach is designed to help investors hedge against rising rates and enhance or diversify a cash management strategy.... The fund will invest primarily in a portfolio of investment grade, U.S. dollar-denominated short-term fixed, variable and floating-rate debt instruments. PGIM Ultra Short Bond ETF is sub-advised by PGIM Fixed Income, one of the largest global fixed income managers in the world, with more than $700 billion in assets under management as of Dec. 31, 2017. The fund's senior portfolio managers, Joseph Dā€™Angelo and Douglas G. Smith."

A press release entitled, "Fitch Assigns First-Time Rating to PFM Funds Government Select Series," tells us, "Fitch Ratings has assigned a 'AAAmmf' rating to the PFM Funds Government Select Series, managed by PFM Asset Management LLC.... The 'AAAmmf' rating assignment reflects: The fund's overall credit quality and diversification; Low exposure to interest rate and spread risks. Holdings of daily and weekly liquid assets consistent with shareholder profile and concentration; Maturity profile consistent with Fitch's 'AAAmmf' rating criteria; and, The capabilities and resources of PFM Asset Management LLC." The release says, "The fund seeks to maintain a diversified, high credit quality portfolio consistent with Fitch's criteria for 'AAAmmf' rated money market funds (MMFs), by investing in highly rated securities with limited exposure to individual issuers. The fund has a policy of investing at least 99.5% of its assets in cash, U.S. government securities (including securities issued or guaranteed by the U.S. government or its agencies or instrumentalities) and/or repurchase agreements that are collateralized fully.... The investment objective for this fund is to provide high current income consistent with stability, safety of principal, and liquidity, and to maintain a stable net asset value of $1.00 per share." Fitch adds, "The fund's investment adviser is PFM Asset Management LLC, based in Harrisburg, PA. PFM Asset Management LLC specializes in high quality short- and intermediate-duration investment strategies within the institutional public sector. As of Dec. 31, 2017, the firm had approximately $123 billion in total assets, including $81 billion discretionary assets under management and $42 billion in assets under advisement.... Fitch views PFM Asset Management LLC's investment advisory capabilities, financial and resource commitments, operational controls, corporate governance and compliance procedures as consistent with the 'AAAmmf' rating assigned to the funds."

On Wednesday, the New England Association for Financial Professionals (AFP) starts its 33rd Annual Sources of Education Conference at the Seaport World Trade Center in Boston (April 18-20). Crane Data's Peter Crane will speak Wednesday morning on "Money Market Funds: Past, Present & Future." This session will be "geared towards corporate cash managers, and other professionals dealing with money markets. Money fund expert Peter Crane will review past problems in money market investments, the current state of yields, asset flows and cash options, and the outlook for money fund products and investments going forward. Attendees will learn how to maximize their yield and avoid potential risks in a rising rate environment, whether prime money funds are still (or again) a valid investment alternative for cash, and what higher-yielding (and higher risk) products and strategies investors are exploring in 2018." NEAFP will also feature a number of other sessions involving money funds and cash investments. These include: "Comparing New Investment Alternatives: Products and Strategies," with Anthony Carfang of Treasury Strategies and Ian Rasmussen of Fitch Ratings, "Navigating the New Treasury Investing Environment" with Kirk Black of BNY Mellon, "Seeking to Optimize Corporate Liquidity," with Jamie Cortas of Dell and Kerry Pope of Fidelity Investments, "How Exchange Traded Funds Work & Why Treasurers Should Care," with Will Goldthwait of State Street Global Advisors, and "Short Corporate Ladders as an Effective Alternative for Corporate Treasurers," with Andrew Goodall of Eaton Vance. Crane Data will also be exhibiting along with a number of money fund providers. We hope to see some of you in Boston later this week at the show! Note: We'll also be speaking, exhibiting and/or attending the following upcoming shows: SIFMA's AMA Roundtable (Phoeniz, May 6-8), the ICI General Membership Meeting (Washington, May 23), the New York Cash Exchange (New York City, May 30-31), and of course our big Money Fund Symposium (Pittsburgh, June 25-27). (Contact us if you'd like more details on any of these.)

Money market mutual fund assets dipped after inching higher for 3 weeks in a row. The Investment Company Institute's latest "Money Market Fund Assets" report shows that year-to-date, MMF assets have decreased by $15 billion, or -0.5%. Over 52 weeks they've increased by $183 billion, or 6.9%. ICI's numbers also show Prime money market fund assets increasing; they've risen in 4 out of the past 5 weeks, while Govt MMF assets fell. ICI writes, "Total money market fund assets decreased by $5.29 billion to $2.83 trillion for the week ended Wednesday, April 11, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $7.86 billion and prime funds increased by $3.50 billion. Tax-exempt money market funds decreased by $934 million." Total Government MMF assets, which include Treasury funds too, stand at $2.236 trillion (79.1% of all money funds), while Total Prime MMFs stand at $458.1 billion (16.2%). Tax Exempt MMFs total $132.4 billion, or 4.7%. They explain, "Assets of retail money market funds decreased by $2.89 billion to $1.01 trillion. Among retail funds, government money market fund assets decreased by $811 million to $623.54 billion, prime money market fund assets decreased by $1.04 billion to $262.06 billion, and tax-exempt fund assets decreased by $1.04 billion to $125.69 billion." Retail assets account for over a third of total assets, or 35.8%, and Government Retail assets make up 61.7% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds decreased by $2.40 billion to $1.82 trillion. Among institutional funds, government money market fund assets decreased by $7.05 billion to $1.61 trillion, prime money market fund assets increased by $4.54 billion to $196.01 billion, and tax-exempt fund assets increased by $105 million to $6.72 billion." Institutional assets account for 64.2% of all MMF assets, with Government Inst assets making up 89.8% of all Institutional MMFs.

Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary" tells us, "Even as the FOMC confirmed market expectations for a steeper path for future rates, the London Interbank Offered Rate and Overnight Index Swap (LIBOR-OIS) rate spread widened to levels not seen since 2016, indicating possible stresses in the money markets. `The LIBOR-OIS spread is the difference between LIBOR and the OIS rate. It represents the difference between an interest rate with some credit risk built in (LIBOR) and one that is relatively risk free (OIS) over a certain time period and reflects not only credit risk but also term premiums. Typically the LIBOR-OIS spread widens as a result of credit stresses in the banking sector or a decline in demand from investors. For example, in 2008, this spread widened to 3.64 (3.64% or 364 bps) on October 10 as the full impact of the deterioration of creditworthiness hit the financial markets in the wake of Lehman Brothers' bankruptcy on September 15." But it adds, "The current LIBOR-OIS spread widening likely is due to a smorgasbord of supply/demand reasons and not due to credit stress. On the supply side, we see elevated Treasury bill (T-bill) and repo supply (discussed in greater detail in the government section) and an increase in the amount of commercial paper outstanding. On the demand side, yields are being influenced by the reduction of excess reserves, a decline in prime fund assets during the first quarter, and reduced demand from other short-term investors -- likely a result of tax reform and possibly repatriation effects. This combined increase in supply and reduction in demand is causing unsecured bank funding levels to rise. In fact, March is going out like a lion, too, with no abatement to the widening: LIBOR-OIS spreads started March at 0.41, close to the reform-related wides, and ended March at 0.59 with the pace of increase slowing toward month-end."

Citi's Steve Kang writes in a brief entitled, "SOFR So Good," "On Tuesday the NY Fed started publishing the Secured Overnight Financing Rate (SOFR), which is now published near 8am each morning for the previous day. SOFR is an overnight Treasury repo rate based a volume weighted median of tri-party, GCF, and bilateral rates. Going forward, the goal is for SOFR to be LIBOR's replacement, in the far future, as the benchmark for interest rate derivatives.... The Fed also introduced BGCR, which excludes FICC bilateral trades from SOFR, and also TGCR, which further excludes GCF repo (i.e. just tri-party). Large dealers tend to be net borrowers in Tri-party and net lenders in bilateral repo and GCF. Tri-party repo rates (TGCR) serve the market in being about the lowest o/n wholesale money rate ā€“ and it is where the money market funds tend to lend to a select group of large dealers." The update adds, "SOFR made its debut this Tuesday trading around flat to IOER and TGCR traded around 5bp below them.... It was an interesting time to debut SOFR, as repo rates are trading in a different regime with a dramatic increase in T-bill supply. There has been a +$320bn net increase in supply from early-February (when the debt ceiling was suspended), which was the largest 2-month change in T-bills outstanding since the crisis.... So far the upward pressure from bill yields is felt on all market-based o/n rates with investors, with RRP as an alternative investment vehicle (such as tri-party and by extension GC repo and fed funds rates). With other MMF o/n offering more value, the usage of the Fed's RRP facility plummeted to paltry 5bn this month."

WealthManagement.com writes "Cashing in on Ultra-Short Bond Funds." The website asks, "With yields on sweep accounts, money-market funds and savings accounts stuck near historical lows, what's an adviser to do in trying to garner more income for clients out of their cash reserves?" They explain, "Ultra-short-term bond funds -- those with bonds of maturities three years or less -- are one option." The piece comments, "The average sweep account yield was only 0.14 percent as of March 23 for accounts of $100,000, according to Crane Data, with money-market yields averaging 1.24 percent. And savings accounts averaged a yield of only 0.09 percent as of March 30, according to Bankrate. Meanwhile, ultra-short-term bond funds had an average yield to maturity of 2.2 percent, as of March 27, according to Morningstar Direct. Morningstar counts 91 ultra-short-term bond funds (including ETFs) in total, with combined assets of $162 billion." The article adds, "But you and your clients must understand that while ultra-short bond funds are less risky than their longer-term brethren, they are riskier than money-market funds. That's because when short-term interest rates rise, such as now, the share price of an ultra-short bond fund falls, potentially wiping out the yield."

Late last week, The Wall Street Journal wrote "Cashing In: Why Cash Should Be in Your Portfolio Again." It says, "Holding cash is investment heresy after a decade of the lowest interest rates in history. It is time to consider the sacrilegious and add cash back into portfolios. The value of cash was demonstrated in the first quarter: Both stocks and bonds lost money -- the first quarter that has happened since the aftermath of Lehman's failure in 2008. Cash turned out to be the safe asset. The past three months highlighted the lack of risk, at least in nominal terms, of holding cash. But cash and near-cash products have three properties that ought to be appealing at the moment: a yield above inflation, a guaranteed value to cushion a portfolio and the firepower to buy back in after a dip. The combination of the Federal Reserve's rate increases and the Trump administration's fiscal profligacy has pushed up the yield on cash and cash-like instruments to the highest level since October 2008. A bank deposit still pays next to nothing, but money-market funds are offering as much as 1.75%." The Journal piece adds, "There are good reasons to worry that both the short-term cushion provided by bonds when equities drop and the longer-run gains from falling yields could be coming to an end. If they do, cash will be a better way to shield a portfolio against stock price falls than bonds.... Finally, a cash cushion gives investors the freedom to take advantage of selloffs. Last year this optionality was worthless, as the market went up almost in a straight line. With the return of volatility, the firepower a cash pile gives to enter the market after a selloff is valuable again -- at least for those brave enough to buy when everyone else wants to sell." See also, the Journal's "Goldman's Latest Push: Managing Cash for Big Companies."

Money market mutual fund assets rose slightly for the third week in a row, after falling sharply in mid-March (and intra-week at month-end). The Investment Company Institute's latest "Money Market Fund Assets" report shows that year-to-date, MMF assets have decreased by $10 billion, or -0.4%. Over 52 weeks they've increased by $184 billion, or 7.0%. ICI's numbers also show Prime money market fund assets increased for the third week in the past 4, while Govt MMF assets rose for the third week in a row. ICI writes, "Total money market fund assets increased by $3.12 billion to $2.83 trillion for the week ended Wednesday, April 4, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $2.21 billion and prime funds increased by $1.31 billion. Tax-exempt money market funds decreased by $410 million." Total Government MMF assets, which include Treasury funds too, stand at $2.244 trillion (79.2% of all money funds), while Total Prime MMFs stand at $454.6 billion (16.1%). Tax Exempt MMFs total $133.3 billion, or 4.7%. They explain, "Assets of retail money market funds increased by $5.94 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $5.53 billion to $624.35 billion, prime money market fund assets increased by $782 million to $263.10 billion, and tax-exempt fund assets decreased by $364 million to $126.73 billion." Retail assets account for over a third of total assets, or 35.8%, and Government Retail assets make up 61.6% of all Retail MMFs. ICI's release adds, "Assets of institutional money market funds decreased by $2.83 billion to $1.82 trillion. Among institutional funds, government money market fund assets decreased by $3.31 billion to $1.62 trillion, prime money market fund assets increased by $531 million to $191.47 billion, and tax-exempt fund assets decreased by $45 million to $6.61 billion." Institutional assets account for 64.2% of all MMF assets, with Government Inst assets making up 89.1% of all Institutional MMFs.

Kiplinger's Personal Finance writes "Money-Market Funds Offering Juicier Yields." The brief explains, "For years, money market mutual funds have paid practically nothing. But each time the Federal Reserve lifts short-term interest rates, yields on money market funds tend to rise in tandem. 'That's one of their most attractive qualities,' says Peter Crane, president of Crane Data, a money fund research company. Many money funds yield more than 1%, and Crane expects yields on some funds to surpass 2% this summer. Rates on savings accounts from banks have also been increasing but have not kept pace with Fed rate hikes." The piece adds, "Money market funds invest in high-quality, short-term securities, such as Treasury bills, commercial paper and certificates of deposit. Although they carry little risk, they are not protected from losses by the Federal Deposit Insurance Corp. Cash that must be in a safe place, such as an emergency fund, is best stashed in an FDIC-insured bank account. Money funds provide a convenient holding place for cash in, say, a linked brokerage account. You are more likely to get a higher payout if you invest in a money fund with low expenses. Vanguard Prime Money Market Investor (VMMXX) yielding 1.6%, has an expense ratio of 0.16%. Taxable money funds generally offer higher yields than tax-free municipal money funds. But if you're in one of the top federal income tax brackets and live in a state with high income taxes, you may come out ahead with a tax-free fund."

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