News Archives: August, 2017
The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing" and its latest "Month-End Portfolio Holdings of Taxable Money Funds" yesterday. The first report confirms that money fund assets increased, while the second verifies a jump in Treasuries and Agencies, and a drop in Repo, in July. (See our August 10 News, "August Money Fund Portfolio Holdings: Repo Down, Treas, Agencies Up.") We review these releases below, and we also look at the latest asset totals for August.
ICI's latest "Trends in Mutual Fund Investing - July 2017" shows a $13.6 billion increase in money market fund assets in July to $2.647 trillion. The increase follows a $20.9 billion decrease in June, a $12.6 billion increase in May, a $24.0 billion decrease in April, a $17.7 billion decrease in March, a $0.4 billion dollar increase in February, and a $46.6 billion increase in January. In the 12 months through July 31, money fund assets were down $60.0 billion, or -2.2%.
The monthly report states, "The combined assets of the nation's mutual funds increased by $278.52 billion, or 1.6 percent, to $17.71 trillion in July, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."
It explains, "Bond funds had an inflow of $20.38 billion in July, compared with an inflow of $19.92 billion in June.... Money market funds had an inflow of $12.74 billion in July, compared with an outflow of $22.24 billion in June. In July funds offered primarily to institutions had an inflow of $9.34 billion and funds offered primarily to individuals had an inflow of $3.40 billion."
The latest "Trends" shows that both Taxable MMFs and Tax-Exempt MMFs gained assets last month. Taxable MMFs increased by $11.9 billion in July, after decreasing $20.3 billion in June, increasing $11.3 billion in May, decreasing $21.9 billion in April and $17.5 billion in March, increasing $0.8 billion in February, and decreasing $46.8 billion in January. Tax-Exempt MMFs increased $1.7 billion in July, after decreasing $0.6 billion in June, increasing $1.5 billion in May, decreasing $2.2 billion in April, $0.3 billion in March, and $0.3 billion in February. Over the past year through 7/31/17, Taxable MMF assets decreased by $7.5 billion while Tax-Exempt funds fell by $52.5 billion.
Money funds now represent 14.9% (down from 15.1% last month) of all mutual fund assets, while bond funds represent 22.2%, according to ICI. The total number of money market funds decreased by 5 to 412 in July, down from 433 a year ago. (Taxable money funds fell by one to 316 and Tax-exempt money funds fell by 4 to 96 over the last month.)
ICI's Portfolio Holdings showed a rebound in Treasuries, a jump in Agencies and a decline in Repo in July. Repo remained the largest portfolio segment, down $36.2 billion, or 4.0%, to $857.9 billion or 34.1% of holdings. Repo has increased by $224.1 billion over the past 12 months, or 35.4%. Treasury Bills & Securities remained in second place among composition segments; they grew by $35.0 billion, or 5.6%, to $659.4 billion, or 26.2% of holdings. Treasury holdings rose by $119.9 billion, or 22.2%, over the past year. U.S. Government Agency Securities remained in third place; they rose by $32.6 billion, or 5.1% to $675.5 billion or 26.8% of holdings. Govt Agency holdings rose by $89.1 billion, or 15.2%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they increased $12.5 billion, or 7.1%, to $189.1 billion (7.5% of assets). CDs held by money funds fell by $240.2 billion, or -56.0%, over 12 months. Commercial Paper remained in fifth place but increased $3.0B, or 2.4%, to $127.5 billion (5.1% of assets). CP has plummeted by $114.6 billion, or -47.3%, over one year. Notes (including Corporate and Bank) were up by $854 million, or 12.1%, to $7.9 billion (0.3% of assets), and Other holdings declined to $12.1 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 327.2 thousand to 26.087 million, while the Number of Funds declined by one to 316. Over the past 12 months, the number of accounts rose by 2.320 million and the number of funds declined by 5. The Average Maturity of Portfolios was 32 days in July, down one day from June. Over the past 12 months, WAMs of Taxable money funds have shortened by 2 days.
Month-to-date in August through 8/29/17, our Money Fund Intelligence Daily shows total assets up by $62.7 billion, with Prime MMFs are up by $16.3 billion. Assets appear poised to break into positive territory year-to-date, though the big jumps in late July and most of August appear to be subsiding. Over the past week, money fund assets have declined by $18.1 billion, though Prime MMFs remain slightly positive.
The looming debt ceiling and a possible, though unlikely, technical default in the Treasury bill market has been a major topic of conversation in the money markets over the past week. Bank of America Merrill Lynch is the latest to weight in on the discussion, with a "Liquid Insight" entitled, "Debt limit and government shutdown FAQs." We excerpt from this update, as well as from a recent release from Citi, below. We also briefly look back at Crane Data's coverage of previous episodes of debt ceiling showdowns.
BofA Merrill's Mark Cabana, Adarsh Sinha and Yang Chen write, "September is fraught with political risk in the US: Republicans need to deliver details on their long awaited tax plan, Congress has to raise the debt limit, and a new budget needs to be passed to avoid a government shutdown. These risks have increased as President Trump threatened a government shutdown and called the debt limit approval process "a mess". This focus has resulted in numerous client questions on the debt limit and government shutdown, which we address in this note."
They tell us, "Our baseline is for both the debt limit and government funding to be resolved in a timely manner, but further volatility is likely. This is especially true since there are only 12 joint congressional working days after lawmakers return from their summer recess on 5 September. Markets are already showing early signs of concern around the debt limit despite Republican control of the White House and Congress.... We address frequently asked questions on the debt limit and government shutdown given our expectation that US political risks will likely rise in the weeks ahead."
BofA explains, "The debt limit and government shutdown are two distinct and separate issues. The debt limit is the total amount that the US government is authorized to borrow and is legally determined by Congress. The debt limit was reinstated as of 15 March this year at the level of $19.8tn and the US government has been operating using extraordinary measures or accounting maneuvers, which we forecast to last until 1H October.... A government shutdown occurs when Congressional appropriations expire and there is no approved budget that authorizes federal spending."
They write, "Debt limit episodes typically have had the largest impact on the Treasury bill market and coupon securities with impacted principal or interest payments. Treasury bills are typically the "canary in the coal mine" for the debt limit since they mature with greater frequency around the "X" date and holders are subject to delayed payment risks. There is a distinct hump in the Treasury bill curve for October maturities and these issues trade cheap to surrounding issues by as much as 14bp. It is unusual to see such an early market response and this likely reflects (1) government MMF risk aversion and larger footprint in the bill market post 2a-7 MMF reform ... and (2) the market is anticipating a challenging resolution. Treasury coupon securities with mid-October interest payments are also showing signs of cheapening in relation to surrounding issues, though price action has been less pronounced versus bills."
The piece adds, "The debt limit also has implications for Treasury supply, especially at the front end of the curve. The Treasury is currently in the process of dropping their cash balance to meet outstanding obligations and cutting bill supply to ensure there is enough debt limit headroom to settle new coupons. Once the debt limit is resolved it is expected that the Treasury will quickly increase its cash balance through a rebound in bill issuance that could total $380-400bn over 4Q. As we wrote here, this supply should cause bills and agency discos to cheapen, front end swap spreads to narrow, repo to shift higher, and could place modest upward pressure on short-term unsecured borrowing costs."
Citi's latest "Short-End Notes" features a brief entitled, "Walls, ceilings and boxed in." It says of the Debt ceiling, "The dislocation in the bills curve can continue, though we give very little likelihood of the government default. Money market funds have been rebalancing their portfolios but further adjustments are likely to be made as we get closer to the X-date."
Steve Kang writes, "The premium of Oct bills over Sept/Nov has widened by +10bp this week due to mostly antagonizing remarks over the shutdown and the debt limit. The dislocations are getting closer to the levels we saw back in 2013. We saw growing disruptions in 2011/2013 episodes but it was much more muted in 2015, as the market expected (1) eventual resolution under the previous leadership and (2) the deal was reached in about a week prior the announced X-date, stopping the dislocation before growing exponentially. We also see dislocations earlier as the market expects disruption from the debt limit impasse over the years. Uncertainty over the new administration seems to be catalyzing this earlier move. The dislocation can grow larger from here, as further 2a7 rebalancing is likely (more on this later)."
Citi explains, "This year, we think dislocation of Oct bills can be more severe given the larger Gov MMF AUM due to the reform in 2016. Looking at the monthly 2a7 portfolio data at the end of July from Crane, we do see that US money market funds decreased the share of bill holdings in Oct maturities and barbelled their purchases to hold more Sept/Nov issues.... Even with some decrease in share, MMFs still owned a sizable amount of October bills at the end of July (63bn, or 20% of total outstanding), even as Oct bills sold off by 10bp during July. Given that MMF community started clearing up at-risk bill issuance just 2-3 weeks going into the reform, we may see further sales going forward. Of course, some of that dynamic may be behind us since the data is as of end of July."
For more on past episodes and commentary on debt ceiling showdowns and the potential impact of a technical Treasury default on money market funds, see the following Crane Data articles: "Bloomberg writes 'Money Funds' Risk Rises Over Debt Cap Debate'" (7/27/11), "More Debt Ceiling" (7/22/11), "Fidelity's Huyck Comments on Debt Ceiling Countdown, Answers FAQs" (8/1/11), Fitch Writes Money Market Funds: What a U.S. Default Would Mean (7/19/11), "AP writes "With risk of debt default allayed, money funds remain safe bet" (8/8/11), "ICI on S and P Downgrade, Reviews Flows During Debt Ceiling Debate (8/8/11), "Strategists on Treasury Debt Ceiling; SEC Stats on Liquidity Funds (10/19/15).
This month, Bond Fund Intelligence again talks again with J.P. Morgan Asset Management Managing Director & Portfolio Manager Dave Martucci. (See too our March 2015 article "JPM's Martucci & Rehman: Defining Conservative Ultra Short.") Martucci oversees over $65 billion in separately managed accounts and conservative ultra-short funds. We discuss the state of the ultra-short market, the Managed Reserves strategy, and a number of issues in the bond space. Our Q&A follows. (Note: This "profile" is reprinted from the August issue of BFI. Contact us if you'd like to see the full issue or if you'd like to see our new Bond Fund Portfolio Holdings "beta" product.)
BFI: Tell us about your history. Martucci: Here at J.P. Morgan Asset Management, we've been managing liquidity or ultra-short type investments for over 30 years. I've been in the business for 17 years, managing ultra-short all the way out to intermediate-type funds. But over the past 10 years, I've really focused on the ultra-short space. Our current offering in the ultra-short space is what we have branded, the Managed Reserves product.
The Managed Reserves Strategy is ... made up of 155 different entities that we manage money for, including four conservative ultra-short funds. We also manage an ETF called the JP Morgan Ultra-Short Income ETF that was launched in May 2017. All of the funds are co-mingled vehicles, which total $12.8 billion, and another $50+ billion is from separately managed accounts.
BFI: What are the funds? Martucci: The ‘JP Morgan Managed Income Fund <b:>`_ is our flagship fund at $9.2 billion and has an inception date of September 30, 2010. We also have two Luxembourg-based funds: JP Morgan Managed Reserves Fund, and the JP Morgan Sterling Managed Reserves Fund; and one Switzerland-based fund. JP Morgan Swiss Managed Reserves Fund. These funds make up $3.6 billion. Of the $65 billion that I mentioned, around roughly $2 billion US dollar equivalent is Sterling and Euro denominated separately managed accounts.
BFI: What are your big challenges? Martucci: The biggest challenge is the flatness of the yield and the credit curves. There's not much yield pickup, and spreads have collapsed on top of each other. There's not much differentiation. So [another] big challenge is to continue to maintain our discipline in here and not stretch for yield by adding too much interest rate or spread duration. [We want to] make sure if we are going to go out and take that additional risk that we're getting compensated for it.
We're still hitting new AUM highs in the Managed Reserves space. A big driver of that has been money market fund reform [money] and clients being better about cash segmentation. But in addition to that, we are starting to see clients move down the yield curve because of the nervousness over the Fed raising rates.... We expect that [gradual move higher] to continue over the foreseeable future. So it's been a nice space to be in, and we continue to expect inflows.
BFI: Compare these with a money fund. Martucci: The most common definition of the ultra-short space is one year and in, in interest rate duration. Other than that, it's pretty wide open. Now what we have done in the Managed Reserves space is listen to our clients, and that has matched up well with our areas of expertise. We've focused on operating in the 'conservative' segment of the ultra-short space. We helped you label that space, which has been very helpful in educating clients. We are not only focusing on interest rate risks, we are also focusing on credit risk at the security level. We also have maximum spread duration of one year across the Managed Income Fund.
In addition to that, we are also taking the best practices that have worked in money market funds. We have an 'approved for purchase list,' so any corporate credit that winds up in our portfolio has to be approved by our credit team, with a specific concentration limit based on the internal rating.... We're buying a lot of the similar bank names that prime money market funds are buying. We're usually just extending out duration in those names, whether it be 6 months to 3 years.... Managed Income Fund has about 60% of its portfolio coming due in one year.... By not having to stay as short as the money market funds, and being able to go down to investment grade or better, we are able to diversify more than a money market fund can. So, typically a money market fund will have anywhere from 80-95 percent in banks, the Managed Income Fund is probably going to have anywhere from 40-60 percent. [T]he rest in industrial paper or non-financial paper. We'll also invest in asset-backed securities as well, so that’s one of the differentiators that we have versus the money market funds.
Since money market reform, we have more and more of the historically large wholesale money market fund issuers coming to us directly. So like you would expect, Canadian, Australian, Japanese, and French banks are coming to us directly or through the Street. This has allowed these issuers to fill some of the funding void from the flight to Government Money Market Funds and has also allowed us to be in the driver seat of many 1-2 year issues from these issuers. This will continue to be an opportunity for ultra short investors.
BFI: What do you do about liquidity? Martucci: For our fund, we typically keep around roughly 5% in true liquidity. Any cash will sweep into the JP Morgan Prime Money Market Fund. The way we come up with the 5% is looking at historical flows, and building in a buffer ... so we're never caught in a situation where we have to be a forced seller in a very short amount of time.... Other places that we will look for liquidity is Treasuries, which are always good to consider in your liquidity bucket. Typically, we're running anywhere from 3 to 5% in Treasuries.... At the moment, the market is very liquid in all the sectors that we're playing in and we're very comfortable with that, and we expect that to continue over the foreseeable future.
BFI: Tell us more about your investors? Martucci: As the fund is getting bigger, we're starting to see a bigger 'bite' size that's more institutional. For instance, over the past few weeks we've had a couple of hundred million dollar inflows, where historically this fund wouldn't be considered for that, and those flows would go to a separately managed account.... I will say though that still a majority of the assets in these funds are more retail-oriented or ultra-high net worth. But we are seeing more traction [as larger] clients become more and more comfortable with the idea of the ultra-short space. We look forward to more success in that area. We are also excited about the launch of the JP Morgan Ultra-Short Income ETF and tapping into the investor base that is looking for an ETF solution.
BFI: What are the risks? Martucci: There is a risk that the Fed starts hiking faster than the market anticipates. If the Fed does surprise ... I think ultra-short is still well positioned. Speaking for the Managed Reserves products, we have roughly 40% in floating rate notes and we have 60% coming due within one year. You have a market [where] the yield curve is very flat, so ... really a faster than expected Fed would lead to steepening out the curve. If anything, that will create a little bit of angst in longer term investors. So you may get some of those investors coming down the curve into the ultra-short space. I think the ultra-short space does look like a sweet spot given the current flat yield curve.
Geopolitically, I think North Korea is front and center right now. We can't ignore that, but I don't think anyone could tell you what the outcome is there.... But in general the global environment is pretty attractive. It's kind of a slow and steady growth. It seems like Europe has turned the corner. It seems like China has stabilized. The U.S. continues to trend along and from the ultra-short perspective is a very attractive environment to invest in. Volatility continues to be at historical lows and at some point that will change. Given the amount of natural maturities in the Managed Reserves product, we would be well positioned to take advantage of any additional volatility.
BFI: What about the future? Martucci: I think the future is definitely still bright, whatever scenario plays out. If it is sharp rise in the rates, I think you’re going to see money come down the curve into the Ultra Short Space. The million dollar question is going to be valuations from a credit perspective, or differentiation. There's not much differentiation across different credits. We have to be aware of that, and I think that plays into J.P. Morgan's hands, again because of our global credit team and the resources we have dedicated to understanding all the credit.... I think at the end of the day, all aspects ... do point to [good things for] the ultra-short space, whether it's clients segmenting their cash to consider the ultra short space or clients coming down the yield curve, flows should continue to be positive in.
Federal Reserve Chair Janet Yellen spoke Friday in Jackson Hole, Wyoming, on "Financial Stability a Decade after the Onset of the Crisis." She comments, "A decade has passed since the beginnings of a global financial crisis that resulted in the most severe financial panic and largest contraction in economic activity in the United States since the Great Depression. Already, for some, memories of this experience may be fading -- memories of just how costly the financial crisis was and of why certain steps were taken in response. Today I will look back at the crisis and discuss the reforms policymakers in the United States and around the world have made to improve financial regulation to limit both the probability and the adverse consequences of future financial crises." (See Crane Data's Aug. 11 News, "MMF Assets Jump, Prime Up Again; 10 Years Ago: Subprime Crisis Starts," and also see a timeline of the financial crisis from the Federal Reserve Bank of St. Louis.")
Yellen explains, "A resilient financial system is critical to a dynamic global economy--the subject of this conference.... Because of the reforms that strengthened our financial system, and with support from monetary and other policies, credit is available on good terms, and lending has advanced broadly in line with economic activity in recent years, contributing to today's strong economy. At the same time, reforms have boosted the resilience of the financial system. Banks are safer. The risk of runs owing to maturity transformation is reduced. Nonetheless, the scope and complexity of financial regulatory reforms demand that policymakers and researchers remain alert to both areas for improvement and unexpected side effects."
She continues, "I will start by reviewing where we were 10 years ago. I will then walk through some key reforms our country has put in place to diminish the chances of another severe crisis and limit damage during times of financial instability. After reviewing these steps, I will summarize indicators and research that show the improved resilience of the U.S. financial system--resilience that is due importantly to regulatory reform as well as actions taken by the private sector. I will then turn to the evidence regarding how financial regulatory reform has affected economic growth, credit availability, and market liquidity."
Yellen tells us, "The U.S. and global financial system was in a dangerous place 10 years ago. U.S. house prices had peaked in 2006, and strains in the subprime mortgage market grew acute over the first half of 2007. By August, liquidity in money markets had deteriorated enough to require the Federal Reserve to take steps to support it.... As we now know, the deterioration of liquidity and solvency within the financial sector continued over the next 13 months."
She says, "Accumulating strains across the financial system, including the collapse of Bear Stearns in March 2008, made it clear that vulnerabilities had risen across the system. As a result, policymakers took extraordinary measures: The Federal Open Market Committee (FOMC) sharply cut the federal funds rate, and the Federal Reserve, in coordination with the Treasury Department and other agencies, extended liquidity facilities beyond the traditional banking sector, applying to the modern structure of U.S. money markets the dictum of Walter Bagehot, conceived in the 19th century, to lend freely against good collateral at a penalty rate. Still, the deterioration in the financial sector continued, with Fannie Mae and Freddie Mac failing in early September."
Yellen's speech explains, "But the deterioration from early 2007 until early September 2008 -- already the worst financial disruption in the United States in many decades -- was a slow trickle compared with the tidal wave that nearly wiped out the financial sector that September and led to a plunge in economic activity in the following months. Not long after Fannie and Freddie were placed in government conservatorship, Lehman Brothers collapsed, setting off a week in which American International Group, Inc. (AIG), came to the brink of failure and required large loans from the Federal Reserve to mitigate the systemic fallout; a large money market fund "broke the buck" (that is, was unable to maintain a net asset value of $1 per share) and runs on other money funds accelerated, requiring the Treasury to provide a guarantee of money fund liabilities; global dollar funding markets nearly collapsed, necessitating coordinated action by central banks around the world; the two remaining large investment banks became bank holding companies, thereby ending the era of large independent investment banks in the United States; and the Treasury proposed a rescue of the financial sector."
She adds, "Within several weeks, the Congress passed -- and President Bush signed into law -- the Emergency Economic Stabilization Act of 2008, which established the $700 billion Troubled Asset Relief Program; the Federal Reserve initiated further emergency lending programs; and the Federal Deposit Insurance Corporation (FDIC) guaranteed a broad range of bank debt. Facing similar challenges in their own jurisdictions, many foreign governments also undertook aggressive measures to support the functioning of credit markets, including large-scale capital injections into banks, expansions of deposit insurance programs, and guarantees of some forms of bank debt."
Yellen states, "The vulnerabilities within the financial system in the mid-2000s were numerous and, in hindsight, familiar from past financial panics. Financial institutions had assumed too much risk, especially related to the housing market, through mortgage lending standards that were far too lax and contributed to substantial overborrowing. Repeating a familiar pattern, the "madness of crowds" had contributed to a bubble, in which investors and households expected rapid appreciation in house prices.... As a result, market and supervisory discipline was lacking, and financial institutions were allowed to take on high levels of leverage. This leverage was facilitated by short-term wholesale borrowing, owing in part to market-based vehicles, such as money market mutual funds and asset-backed commercial paper programs that allowed the rapid expansion of liquidity transformation outside of the regulated depository sector.... Securitization and the development of complex derivatives products distributed risk across institutions in ways that were opaque and ultimately destabilizing."
She explains, "In response, policymakers around the world have put in place measures to limit a future buildup of similar vulnerabilities.... U.S. leadership of global efforts through bodies such as the Basel Committee on Banking Supervision, the Financial Stability Board (FSB), and the Group of Twenty has contributed to the development of standards that promote financial stability around the world.... Preeminent among these domestic and global efforts have been steps to increase the loss-absorbing capacity of banks, regulations to limit both maturity transformation in short-term funding markets and liquidity mismatches within banks, and new authorities to facilitate the resolution of large financial institutions and to subject systemically important firms to more stringent prudential regulation."
The Jackson Hole speech continues, "Reforms have also addressed the risks associated with maturity transformation. The fragility created by deposit-like liabilities outside the traditional banking sector has been mitigated by regulations promulgated by the Securities and Exchange Commission affecting prime institutional money market funds. These rules require these prime funds to use a floating net asset value, among other changes, a shift that has made these funds less attractive as cash-management vehicles. The changes at money funds have also helped reduce banks' reliance on unsecured short-term wholesale funding, since prime institutional funds were significant investors in those bank liabilities. Liquidity risk at large banks has been further mitigated by a new liquidity coverage ratio and a capital surcharge for global systemically important banks (G-SIBs). The liquidity coverage ratio requires that banks hold liquid assets to cover potential net cash outflows over a 30-day stress period. The capital surcharge for U.S. G-SIBs links the required level of capital for the largest banks to their reliance on short-term wholesale funding."
Finally, Yellen says, "The evidence shows that reforms since the crisis have made the financial system substantially safer. Loss-absorbing capacity among the largest banks is significantly higher, with Tier 1 common equity capital more than doubling from early 2009 to now. The annual stress-testing exercises in recent years have led to improvements in the capital positions and risk-management processes among participating banks. Large banks have cut their reliance on short-term wholesale funding essentially in half and hold significantly more high-quality, liquid assets. Assets under management at prime institutional money market funds that proved susceptible to runs in the crisis have decreased substantially. And the ability of regulators to resolve a large institution has improved, reflecting both new authorities and tangible steps taken by institutions to adjust their organizational and capital structure in a manner that enhances their resolvability and significantly reduces the problem of too-big-to-fail."
Money fund assets jumped for the 5th week in a row and Prime MMFs rose for the 10th week straight, we learned from the Investment Company Institute's" latest report. Government money funds continued their rebound, also jumping for the fifth week in a row, after they showed outflows during most of the first half of the year. Prime MMFs rose for the 16th week in the past 18 (up $44.5, or 11.2%), and showed their biggest inflows of 2017 They've now increased by $63.4 billion, or 16.8%, year-to-date. We review the latest asset flows below, and we also look at a recent comment letter from EFAMA on ESMA's Consultation Paper on pending EU Money Market Fund Regulations.
ICI writes, "Total money market fund assets increased by $29.65 billion to $2.74 trillion for the week ended Wednesday, August 23, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $23.89 billion and prime funds increased by $6.75 billion. Tax-exempt money market funds decreased by $998 million." Total Government MMF assets, which include Treasury funds too, stand at $2.165 trillion (79.1% of all money funds), while Total Prime MMFs stand at $440.9 billion (16.1%). Tax Exempt MMFs total $129.7 billion, or 4.7%.
They explain, "Assets of retail money market funds increased by $289 million to $969.40 billion. Among retail funds, government money market fund assets decreased by $391 million to $587.67 billion, prime money market fund assets increased by $1.44 billion to $257.96 billion, and tax-exempt fund assets decreased by $761 million to $123.77 billion." Retail assets account for over a third of total assets, or 35.4%, and Government Retail assets make up 60.6% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $29.36 billion to $1.77 trillion. Among institutional funds, government money market fund assets increased by $24.28 billion to $1.58 trillion, prime money market fund assets increased by $5.31 billion to $182.96 billion, and tax-exempt fund assets decreased by $237 million to $5.96 billion." Institutional assets account for 64.6% of all MMF assets, with Government Inst assets making up 89.3% of all Institutional MMFs.
It explains, "ICI reports money market fund assets to the Federal Reserve each week. Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website." Note: Crane Data also publishes a daily money fund assets series via our Money Fund Intelligence Daily product, and a monthly asset series via our MFI XLS.
In other news, yesterday we reviewed some more comment letters on the European Securities and Markets Authority's recent technical paper, which discuss issues with implementing pending European MMF Reforms." Today, we excerpt from another letter, this one from EFAMA, the European trade group for mutual funds. (See our May 30 News, "`ESMA Publishes Consultation on European MMF Regs; Fitch on European.")
EFAMA writes, "The European Fund and Asset Management Federation (EFAMA) is pleased to have the opportunity to answer to ESMA's consultation paper “on draft technical advice, implementing technical standards, and guidelines under the MMFR. EFAMA is the representative association for the European investment management industry through its 28 member associations and 62 corporate members. We represent EUR 23 trillion in assets under management of which EUR 14.1 trillion managed by 58,400 investment funds at end 2016. 30,600 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds, with the remaining 27,800 funds being AIFs (Alternative Investment Funds)."
They explain, "We summarise below our general views on different topics covered in ESMA's consultation as well as our remarks on the dates of application of the reporting template and the guidelines. At the outset, we would like to stress that the new requirements should not go beyond what is specified in the MMF Regulation. We also consider that, references to either banking regulation or US regulation should be avoided, given the differences between the business model and market practices of banks and MMFs and between US and European Union MMFs."
On "Reverse Repos," EFAMA tells us, "We welcome ESMA's choice to consider the collateral as a second step defence. The first level of risk should indeed be linked to the quality of the counterparty.... We recommend that there is flexibility given to the manager to determine the haircut policy taking into account the credit quality of the counterparty and the quality/maturity of the collateral received. This is particularly important in order to ensure that MMMFs are not placed at a competitive disadvantage when engaging in reverse repo transactions. The flexibility left to MMF managers to negotiate an appropriate level of haircut would not prevent some managers who would like to apply recognised standardisation from doing so."
Regarding ESMA's "Reporting Template," they write, "The reporting template should be finalized on the basis of what is specifically asked for in the MMFR. From this perspective, we consider that the reporting template proposed by ESMA is too much based on the AIFMD Annex IV reporting template, which has been developed to capture a very broad universe of funds. This approach would impose new onerous obligations to most MMFs because the vast majority of MMFs are UCITS. Furthermore, as noted by ESMA, the list of information to be provided by managers that is explicitly mentioned in the MMF Regulation differs, to a large extent, from the one in the AIMFD. More generally, fund managers should ideally be allowed to report information on their funds on the basis of a single template."
EFAMA comments on "Credit quality assessment," "The technical advice should not be prescriptive but be "principle-based". This would allow MMF managers to comply with the requirements by adapting their existing procedures rather than by developing new processes from scratch. In addition, small asset managers should benefit from more flexible rules in line with the principle of proportionality.... Along the same line, we consider that the advice should not introduce an obligation to develop a credit quality assessment based on a "scale of credit rating"."
Finally, they say about "Stress Testing," "EFAMA believes that the stress test tool should be applied with the aim of checking potential vulnerabilities of a fund, in a context that would limit governance and IT costs. The key variables that are relevant are spreads, redemptions, liquidity and interest rates. For this reason, we believe that the guidelines should be developed for illustrative purpose and not to impose "minimum requirements". More generally, we strongly recommend to adopt a principle-based approach for stress testing that considers only relevant factors for MMFs and takes into consideration existing practices on stress testing where these are already in place."
On August 17, we wrote about BlackRock's comment letter on the European Securities and Markets Authority's "Consultation Paper on Draft technical advice, implementing technical standards and guidelines under the MMF Regulation". Today, we review several more of the dozen comment letters, which include feedback from European fund associations IMMFA, Irish Funds Industry Association, EFAMA, Assogestioni, BVI and ICI Global, and asset managers Amundi, AXA, and AFG. Like the BlackRock letter, the main concerns of commenters relate to share destruction, reverse repo and stress testing. (See ESMA's technical paper European MMF Reforms and see our May 30 News, "ESMA Publishes Consultation on European MMF Regs; Fitch on European" for more.)
IMMFA, the London-based Institutional Money Market Funds Association, writes, "The European Securities and Markets Authority (ESMA) invites responses to the specific questions listed in Consultation Paper on Draft technical advice, implementing technical standards and guidelines under the MMF Regulation (MMF), published on the ESMA website. The Institutional Money Market Funds Association Ltd ("IMMFA") is pleased to submit its comments on the ESMA Consultation Paper on Draft technical advice, implementing technical standards and guidelines under the MMF Regulation." (Note also that IMMFA Chair Reyer Kooy and Secretary General Jane Lowe will give the keynote to our European Money Fund Symposium, which will take place Sept. 25-26 in Paris, France.)
They explain, "IMMFA represents the European institutional money market fund industry that manages and promotes investment funds based on providing a constant Net Asset Value per share to investors. All IMMFA members' funds are UCITS, although it is possible that new entrants to the market could use the AIF structure in future. All but one are domiciled in Luxembourg and the Republic of Ireland (there is one UK fund). The funds offer cash management services, effectively intermediating between investors and issuers in the money markets (prime and government), as well as providing risk diversification away from direct deposit taking by banks. Typically the investor profile includes institutions such as corporations, investment firms including banks, pension funds, charities, local authorities and other public bodies."
The letter continues, "The money funds provide significant amounts of short term funding to the market, much of it for banks. At the end of May 2017, funds under management for IMMFA members' money market funds amounted to E647 billion.... We recognize that ESMA has to respond to specific tasks included in the Level 1 Regulation, and that the time available to do so is short. Nonetheless, we would urge that requirements are developed that take full account of the specificities of money market funds. The current level of prescription appearing in the draft advice and guidance would benefit from being more tailored to the way the money funds operate."
It tells us, "An overarching comment is that the consultation does not always appear to have taken full account of the very short term nature of the portfolios of money market funds, Short Term MMFs in particular.... Insufficient weight been given to the substantial tightening of the rules around each MMF type in the MMF Regulation. The consequence is that the draft advice and the guidance are in places over-extensive and do not acknowledge that the provisions of Level 1 already deal substantially with certain issues. For example the requirements for reverse repo collateral that goes beyond 397 days maturity are already restricted in the Level 1 text to government securities only, and in the case of third country government debt this is also already subject in Level 1 to the full rigours of the credit assessment process. The required advice on liquidity and credit quality should be sharply focused to the narrowed band of collateral remaining."
They add, "As mentioned, we were surprised to see, in paragraph 186, a potential policy statement on share destruction effectively buried within requirements on reporting. IMMFA does not share the interpretation that ESMA appears to be making in this paragraph. The creation and cancellation (destruction) of shares is a dynamic process that currently operates in accordance with UCITS directive provisions, as authorised by a number of EU Competent Authorities. It is the mechanism by which all open-ended investment funds handle inflows and outflows of investment. We are not aware of any reference in the MMF Regulation that seeks to change this process, nor would it be workable for any fund if this were the case. If, as we believe may be the case, ESMA is referring to a prohibition on reverse distribution mechanisms, for example to deal with negative yield, we still do not accept that there is a prohibition on this in the Level 1 text. Share cancellation is an approved and widely accepted mechanism."
Another comment letter writes, "The Irish Funds Industry Association ("Irish Funds") is the representative body for the international in-vestment fund community in Ireland. Our members include fund managers, fund administrators, transfer agents, depositaries, professional advisory firms and other specialist firms involved in the international fund services industry in Ireland. Ireland is the largest fund domicile in the EU for money market funds and the net assets of Irish domiciled MMFs amount to over E486 billion (Source: Central Bank of Ireland, May 2017). ESMA's Consultation Paper on the MMF Regulation is therefore of particular significance and relevance for the funds industry in Ireland."
It continues, "We commend ESMA for the significant body of work that it has undertaken to produce this Consultation Paper within a short timeframe and welcome the opportunity to respond to the detailed questions included therein.... In that regard, we wish to highlight a number of key points from our perspective: Destruction of shares – ESMA has included a statement that the destruction of shares is not allowed under the MMF Regulation. In this context, we wish to highlight the fact that the practice of reverse distribution, i.e. cancellation of units to deal with negative yield, is widespread, has been accepted by NCAs and is understood and utilised by investors. Reverse distribution is entirely consistent with MMFR and the UCITS Directive and in keeping with the objective under Article 1.1 of offering returns in line with money market rates, as well as a MMF's authority to redeem shares in circumstances set forth in the MMF's constitutional documents."
Irish Funds also highlights, "Reverse repurchase agreements and liquidity – the liquidity requirements imposed on LVNAV and CNAV MMF under Article 24(1)(e) and (g) mean that, following the implementation of MMFR, MMFs will become more reliant on short-term reverse repos. This fact underscores the importance of ensuring that the conditions for reverse repos falling under Article 15(6) are appropriately calibrated and future-proofed.... For entities that are not listed under Article 3, ESMA proposes additional requirements under Article 4. We agree with ESMA that haircuts should apply to such counterparties but we are not in favour of a standardised haircut framework which would deny managers the ability to adapt the haircut, when appropriate and necessary, to react to market conditions."
They say about "Regulatory reporting," "[W]e note the expansive nature of the regulatory reporting template proposed by ESMA. ESMA will be aware, from responses to previous consultations by the Commission under CMU and from discussions with industry stakeholders, of the significant administrative burden that the increase in regulatory reporting has created in recent years. With this in mind, we would urge ESMA to keep the reporting template strictly to the information required under Article 37(2) and (3) of the MMFR and to refrain from requesting additional data. We understand ESMA's rationale for taking the AIFMD reporting template as a starting point for MMFs. However, much of the reporting inspired from AIFMD is irrelevant in the context of MMFs."
Finally, they write about "Stress testing," "[W]e do not consider that the aggregation of stress testing results is appropriate in the context of investment funds or would serve any meaningful purpose. Each fund will have its own specific characteristics relating to portfolio composition, investor base, currency focus, etc., and consequently, funds will experience stress scenarios differently. Each fund is separate and portfolio management and risk management are done at the fund level, which gives the man-ager and the NCA the most accurate account of the relevant risks in the relevant fund."
As we mentioned in our August 9 Link of the Day, Irish law firm Dillon Eustace published a brief review of pending European Money Market Fund Reforms, entitled, "Ireland: A Guide To Money Market Funds Under The MMFR." The paper states, "After protracted negotiations, the Council and the European Parliament reached political agreement on the final text of the Regulation on MMFs (the "MMFR") in November 2016." We review the guide in more detail below, with a focus on pending disclosure requirements for European-domiciled money market funds. (Note: Our European Money Fund Symposium, which will take place Sept. 25-26 at The Renaissance Paris La Defense Hotel in Paris, France, will discuss European Money Market Fund Reforms in detail too.)
The law firm explains, "MMFs are a considerable source of short-term financing for credit institutions, governments and corporations. For investors, MMFs are mainly used to invest excess cash within short timeframes and offer diversification of their investment portfolio while maintaining a high level of liquidity. MMFs in issue in the EU manage assets of approximately E1 trillion representing approximately 15% of the EU’s fund industry. As of 31 May 2017, Irish domiciled MMFs had assets under management of approximately E486.5 billion reflecting Ireland's status as the leading European domicile for MMFs."
It continues, "The Council formally adopted the MMFR on 16 May 2017 following the Parliament's approval of the agreed text on 5 April 2017. The MMFR entered into on 20 July 2017 (having been published in the Official Journal of the European Union on 30 June 2017) and will become effective from 21 July 2018 with the exception of certain provisions imposing obligations on the European Commission to adopt delegated acts and implementing technical standards, which provisions came into effect on 20 July 2017. Consequently the provisions of the MMFR will not impact new MMFs until 21 July 2018 and existing UCITS and AIFs that meet the definition of an MMF under the MMFR will have 18 months (i.e. by 21 January 2019) to comply with the requirements of the MMFR and submit an application to their national competent authority for authorisation under the MMFR."
The paper tells us, "The purpose of this briefing is to summarise and clarify the: Key elements of the MMFR i.e. scope; types of MMFs; investment policy requirements regarding eligible assets, diversification, concentration and credit quality; risk management requirements regarding portfolio rules (such as WAM, WAL and liquidity buckets), MMF credit ratings, know your customer and stress testing; valuation and dealing requirements; specific requirements for Public Debt CNAV MMFs and LVNAV MMFs; external support; transparency and reporting requirements; and, Next steps in the implementation of the MMFR."
It says, "MMFs may be set up as one of the following types under the MMFR: a VNAV MMF; a Public Debt CNAV MMF; or a LVNAV MMF. The "LVNAV MMF" or low volatility net asset value MMF is a new category of MMF and has been made available as a viable alternative to existing CNAV MMFs given: LVNAV MMFs may apply the amortised cost method of valuation to their assets that have a residual maturity of up to 75 days. However, where the difference between the market value of any asset and the amortised cost method of valuation of that asset does deviate by more than 0.10%, the price of that asset must be calculated using its market value; and LVNAV MMF may only offer shares for subscription or redemption at a constant net asset value per share where such price does not deviate by more than 0.20% from the net asset value per share of the MMF calculated in accordance with market prices."
Dillon Eustace writes, "MMFs must be classified as either: Short-Term MMFs; or Standard MMFs. Although Short-term MMFs may be structured as Public Debt CNAV, LVNAV or VNAV MMFs, Standard MMFs may only be structured as VNAV MMFs.... Compared to Short-Term MMFs, Standard MMFs are subject to less onerous requirements under the MMFR relating to: weighted average maturity ("WAM") and weighted average life ("WAL")." European Short-Term MMFs will, like US MMFs, have maximum WAMs of 60 days and maximum WALs of 120 days, while Standard MMFs (unbelievably) will have maximum WAMs of 6 months and maximum WALs of 1 year.
The paper says the new regulations ban external support and outline new "Transparency and Reporting Requirements," saying, "The manager of an MMF must, at least weekly, make all of the following information available to the investors of the MMF: the maturity breakdown of the portfolio of the MMF; the credit profile of the MMF; the WAM and WAL of the MMF; details of the 10 largest holdings in the MMF; the total value of the assets of the MMF; and the net yield of the MMF."
It adds, "In addition to reporting already required under the UCITS Directive and the AIFM Directive, the manager of an MMF must report to the competent authority of the MMF on at least a quarterly basis ... a detailed list of information on the MMF, including the type and characteristics of the MMF, portfolio indicators, results of stress tests and information on the assets and liabilities held in the portfolio. Competent authorities must collect and transmit that data to ESMA which is tasked with creating a central database of MMFs."
The law firm comments, "The manager of a LVNAV MMF must also report the following additional information: every event in which the price of an asset valued by using the amortised cost method deviates from the price of that asset calculated in accordance with the mark-to-market/mark-to-model by more than 10 basis points; every event in which the constant net asset value per share deviates from the net asset value per share by more than 20 basis points; and every event in which (i) the proportion of weekly maturing assets falls bellows 30% and net daily redemptions on a single business day exceed 10%; or (ii) the proportion of weekly maturing assets falls bellows 10%, and the measures taken by the board of the MMF."
Finally, they say, "By 21 January 2019, an existing UCITS or AIF regulated by the Central Bank of Ireland (the "Central Bank") that invests in short-term assets and has as a distinct or cumulative objective the offering of returns in line with money market rates or preserving the value of the investment must submit an application to the Central Bank together with all documents and evidence necessary to demonstrate compliance with the MMFR. Within two months of receiving a complete application, the Central Bank must assess whether the UCITS or AIF is compliant with the MMFR and issue a decision."
See too our August 15 News, "SnP on Uncertainty in European Money Funds; MFI International Holdings" and our August 2 News, "Risks in Chinese Money Funds? Fitch on European Money Fund Reform."
This month, Money Fund Intelligence interviews Sam Silver, Vice President & Chief Fixed Income Officer at American Beacon Advisors, which manages the American Beacon U.S. Government Money Market Select Fund. We discuss the firm's presence in money funds and in local government investment pools (or LGIPs), the dramatic changes over the past year in the space, and the outlook for the cash investment world going forward. Our Q&A follows. (Note: This interview is reprinted from the August issue of our flagship MFI newsletter; contact us at info@cranedata.com to request the full issue.)
MFI: How long have you been running money funds? Silver: I first joined American Beacon in 1999 and have been involved in the MMF Industry since 1989. American Beacon has provided cash management since 1986 and opened its first MMF in 1987. American Beacon currently manages over $60 billion between Mutual Funds and Separately Managed Accounts. The makeup of the assets includes Equity, Fixed Income and Money Market/Cash Management accounts. In the cash management space, we manage corporate cash accounts along with Local Government Investment Pools (LGIPs).... Our government money market fund is an institutional fund, so it is made up of primarily corporate accounts who are looking for a stable NAV with a reasonable yield.
MFI: What is your biggest priority? Silver: We are primarily focused on the Fed, since they've been active here recently. So [we're watching] the Fed and economic data, just to make sure all the portfolios are properly positioned during this rising interest rate environment.... As far as looking at opportunities ... we continue to look for clients with stable assets that are a good fit for our government money market fund. For those who want a stable value alternative to prime funds, we also offer customized separate accounts. [S]ome clients like to have separate guidelines slightly different from money market funds to provide more flexibility than what a money market fund can offer.
MFI: Did you guys "Go Government" like much of the industry? Silver: Last year, we decided to go with Government only money market funds and ... closed our Prime Institutional MMF. Those assets went over to our government money market fund, and this was primarily the result of our clients wanting to be invested in a stable NAV portfolio over a variable NAV portfolio.
MFI: What's your biggest challenge? Silver: Managing cash with new liquidity requirements is a new challenge. There've also been [some] disconnects over the last couple of years between what the markets are expecting versus what the Fed is actually doing. For a long time, the Fed kept talking about ... rais[ing] rates, and the market really didn't believe it.... Now that the Fed has started, they seem to be on a mission to normalize rates. It was obviously a challenging environment from 2008 until the end of 2015 when we were in that zero interest rate environment, because there were a lot of fee waivers going on with money market funds, especially retail funds. Institutional funds, with lower expense ratios, were in better shape. But [some] still had to waive fees during that environment just to keep a positive yield.
MFI: What are you buying now? Silver: It depends on the account or fund. But many of the portfolios that we manage are rated and we must adhere to those guidelines as well. We are buying top-tier commercial paper, CDs, U.S. Government agencies and U.S. Treasuries. This includes both fixed and floating/variable rate securities, because during this interest rate environment we're not buying long, fixed securities. We're buying shorter fixed and buying some floating and variable rate type of securities.... We have seen pressure in October of this year on some Treasury bills. It is a little unusual right now, but the Treasury rates are above the short agencies in that 3-month period [due to the debt ceiling]. So, we're limiting exposure, but we do have some.
MFI: What are your biggest customer concerns these days? Silver: It depends on the type of account, but mostly structural reform. With the local government investment pools, you have a much more stable asset base and different rules to follow. So there wasn't as much of a concern there once they found out they weren't going to have to follow all the new 2a-7 rules. GASB oversees all the LGIPs, versus the SEC for 2a-7 funds. Otherwise, for years it was the low interest rate environment that was bothering clients.... Now they're feeling much better.
MFI: Do you guys run internal fund cash too? Silver: Yes, we do. We sweep the cash assets from our mutual fund lineup here at American Beacon into the government fund. So we do manage that cash.
MFI: Tell us more about LGIPs and GASB? Silver: There are some slight changes to the LGIPs with new regulations. But GASB was watching all the money market reforms, and they [decided against] the fees and gates. So that's one thing they left out. They do follow the overnight and 7-day liquidity requirements of 10 and 30 percent, respectively, and they also follow the WAM and WAL [limits] for the 60 and 120 days.... That's for the AAA-type local government investment pools... We're mainly involved with LGIPs in Louisiana and Texas.... They're nice accounts because you build a relationship with those involved in the LGIP, and you get a good feel for seasonal flows.... Whereas, in a government fund or within money market funds in general, a lot of times you don't get to know the underlying shareholders as well.
MFI: How did fee waivers impact you? Silver: It's a relief that the fee waivers are no longer in place. Since we only manage institutional money or institutional only money market funds, our fees were fairly low to begin with. We were waiving [some] management fees to keep a positive yield.... That went on basically from 2009 until 2015. Then that's when we got the first rate hike [and didn't have to] waive fees any longer.... So, yes, we were able to get out of that fee waiver situation after the first rate hike. Now that we've had 4 rate hikes, and we're in that 1 to 1 1/4 percent range on Fed funds, I believe all institutional funds and most funds are not waiving any longer. We've seen recent stories that some of the last funds that were waiving are no longer waiving.
MFI: Can you comment further on last year's MMF reforms? Silver: The implementation of MMF Reform by the money market industry seemed to go smoothly, since there was plenty of lead time going into it <b:>`_. This allowed the industry to prepare and get client feedback on their intensions with regards to Prime versus Government MMFs. The hardest part was trying to decide whether to keep a Prime MMF or go all Government, since there was a substantial cost to Prime and the variable NAV.
Silver continues: Also, making sure that all the systems and websites accounted for new disclosures properly was a challenge.... We were able to accommodate [the changes] without any hiccups. There were a lot of questions going into it.... But all in all it seems like the whole money fund industry handled that pretty well. You didn't really hear much about stress in the market, other than just rates in general.
MFI: Do you guys manage ultra-short bonds or offshore funds? Silver: We don't have offshore funds. Some of the separate accounts that we manage have similar characteristics to ultra-short bond funds, and we've been managing LGIPs since 2000. We have close working relationships with these accounts, which allows us to provide responsive investment strategies with a high level of service. American Beacon also has a selection of bond funds that are managed by outside managers, similar to our equity funds. Internally, we focus primarily on money market assets and cash management, which we've been doing for over 30 years.
MFI: What is your outlook for rates and MMFs? Silver: I think the Fed will continue its path of raising short-term rates and begin reducing its balance sheet. I'm expecting one more rate hike of 25 bps before year-end, and that the Fed will begin the reduction of its balance sheet also before the end of the year.... It's nice to see the increases in short-term rates have not disrupted markets, and clients looking for attractive short-term yields are finally starting to get paid again on their cash.
Silver adds: I think MMFs are going to continue to provide a valuable service to those looking for a safe place to park their money. They provide a good alternative to banks, which may not be looking for cash or paying much for it. Investors want liquidity along with attractive short-term yields, so I think money market funds will remain in demand. I believe the shift in MMF assets from Prime to Government Funds will remain, as long as Government Funds continue to transact at a stable $1 NAV and Institutional Prime Funds continue to transact at a variable NAV.
The U.S. Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary Friday. It shows that total assets were up ($19.9 billion) in July to $2.917 trillion, and Prime funds rose for the 7th month in a row. Prime MMFs gained $9.5 billion (after gaining $4.0 billion in June and $2.5 billion in May) and rose to $624.9 billion. Government money funds increased by $8.0 billion, and Tax Exempt MMFs rose by $2.3 billion. Gross yields rose again for Prime and Govt MMFs, but decreased for Tax Exempt MMFs. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review their latest numbers below.
Money market fund assets increased by $19.9 billion in July to $2.917 trillion. (The SEC's series includes some private and internal funds not reported to ICI or other reporting agencies; note that Crane Data has now added many of these to our collections.) Overall assets decreased by $23.7 in June, increased $3.8 billion in May, and decreased by $12.7 billion in April. Over the past 12 months through 7/31/17, total MMF assets have declined by $96.7 billion, or 3.2%.
Of the $2.917 trillion in assets, $624.9 billion was in Prime funds, which increased by $9.5 billion in July. Prime MMFs increased $4.0 billion in June, $2.5 billion in May, $9.8 billion in April, $12.1 billion in March, $24.9 billion in February, and $11.7 billion in Jan. But they decreased $15.5 billion in December, increased $3.4 billion in Nov., and decreased by $177.4 billion in October. Prime funds represented 21.4% of total assets at the end of July. They've declined by $609.4 billion the past 12 months, or -49.4%, but they've increased by $74.6 billion, or 13.5%, YTD.
Government & Treasury funds totaled $2.157 billion, or 73.9% of assets,, up $8.0 billion in July, just their second monthly increase this year. They were down $26.9 in June, up $0.4 billion in May, down $19.9 billion in April, $14.5 billion in March, $10.1 billion in February, $53.8 billion in January and $10.2 billion in Dec. But Govt MMFs rose $56.4 billion in November, and $148.0 billion in October. Govt & Treas MMFs are up $567.6 billion over 12 months (26.3%). Tax Exempt Funds increased $2.3 billion to $135.4 billion, or 4.6% of all assets. The number of money funds is 406, down 4 funds from last month and down 47 from 7/31/16.
Yields were up again in July for Taxable MMFs. The Weighted Average Gross 7-Day Yield for Prime Funds on July 31 was 1.27%, up 4 basis point from the previous month, and more than double the 0.55% of July 2016. Gross yields increased to 1.06% for Government/Treasury funds, up 0.06% from the previous month and up 0.65% since 7/16. Tax Exempt Weighted Average Gross Yields decreased 0.05% in July to 0.88%, but they've almost doubled since 7/31/16.
The Weighted Average Net Prime Yield was 1.05%, up 0.04% from the previous month and up 0.71% since 7/16. The Weighted Average Prime Expense Ratio was 0.22% in July (unchanged from the previous month). Prime expense ratios have remained relatively flat over the past year, rising by just one basis point. (Note: These averages are asset-weighted.)
WALs and WAMs were up mixed in July, up for Prime and Tax Exempt but down for Govt funds. The average Weighted Average Life, or WAL, was 65.1 days (up 0.3 days from last month) for Prime funds, 87.1 days (down 0.3 days) for Government/Treasury funds, and 23.5 days (up 0.4 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 31.2 days (up 0.8 days from the previous month) for Prime funds, 32.3 days (down 1.3 days) for Govt/Treasury funds, and 20.7 days (up 0.2 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 32.1% in July (down 3.4% from previous month). Total Weekly Liquidity was 49.6% (down 0.5%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $79.4 billion, followed by the U.S. with $61.0 billion, France with $56.6 billion, Japan with $48.3B, then Sweden ($39.1B), Australia/New Zealand ($36.5B), Germany ($27.0B), and the UK ($25.7B). The Netherlands ($24.2B) and Switzerland ($12.9B) rounded out the top 10.
The gainers among Prime MMF bank related securities for the month included: France (up $11.3B), Germany (up $8.2 billion), the Netherlands (up $8.0B), Belgium (up $6.2B), Norway (up $2.8B), the U.K. (up $2.7B), the U.S. (up $1.7B), China (up $85M), and Spain (up $46M).. The biggest drops came from Sweden (down $3.7B), Switzerland (down $2.7B), Australia/New Zealand (down $1.7B), Japan (down $1.1B), Canada (down $1.0B), Other (down $945M), and Singapore(down $762M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $210.8B (up $32.0B from last month), while the Eurozone subset had $120.5 billion (up $33.6B). The Americas had $140.8 billion (up from $140.2B), while Asian and Pacific had $98.3 billion (down from $101.9B).
Of the $622.3 billion in Prime MMF Portfolios as of July 31, $255.8B (41.1%) was in CDs (up from $231.7B), $136.5B (21.9%) was in Government securities (including direct and repo), down from $154.7B, $88.5B (14.2%) was held in Non-Financial CP and Other Short Term Securities (up from $83.5B), $103.9B (16.7%) was in Financial Company CP (up from $101.6B), and $37.7B (6.1%) was in ABCP (down from $38.0B).
The Proportion of Non-Government Securities in All Taxable Funds was 17.5% at month-end, up from 16.8% the previous month. All MMF Repo with Federal Reserve decreased to $184.0B in July from $364.4B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 38.3% were in maturities of 60 days and over (down from 39.7%), while 10.3% were in maturities of 180 days and over (up from 8.8%).
Money fund assets jumped for the 4th week in a row and Prime MMFs rose for the 9th week straight, we learned from the Investment Company Institute's latest "Money Market Fund Assets" report. Government money funds continued their rebound, also jumping for the fourth week in a row, after they showed outflows during most of the first half of the year. Prime MMFs rose for the 17th week in the past 19 (up $37.0%, or 9.3%), and they've now increased by $56.6 billion, or 15.0%, year-to-date. We review the latest asset flows below, and we also look at a recent comment letter from BlackRock on ESMA's Consultation Paper on pending EU Money Market Fund Regulations.
ICI writes, "Total money market fund assets increased by $12.61 billion to $2.71 trillion for the week ended Wednesday, August 16, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $9.26 billion and prime funds increased by $3.36 billion. Tax-exempt money market funds decreased by $11 million." Total Government MMF assets, which include Treasury funds too, stand at $2.141 trillion (79.1% of all money funds), while Total Prime MMFs stand at $434.2 billion (16.0%). Tax Exempt MMFs total $130.7 billion, or 4.8%.
They explain, "Assets of retail money market funds increased by $7.07 billion to $969.11 billion. Among retail funds, government money market fund assets increased by $5.93 billion to $588.06 billion, prime money market fund assets increased by $1.48 billion to $256.52 billion, and tax-exempt fund assets decreased by $339 million to $124.53 billion." Retail assets account for over a third of total assets, or 35.8%, and Government Retail assets make up 60.7% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $5.54 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $3.34 billion to $1.55 trillion, prime money market fund assets increased by $1.88 billion to $177.65 billion, and tax-exempt fund assets increased by $327 million to $6.20 billion." Institutional assets account for 64.2% of all MMF assets, with Government Inst assets making up 89.4% of all Institutional MMFs.
It explains, "ICI reports money market fund assets to the Federal Reserve each week. Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website." Note: Crane Data also publishes a daily money fund assets series via our Money Fund Intelligence Daily product, and a monthly asset series via our MFI XLS.
In other news, BlackRock replied to the European Securities and Markets Authority's recent technical paper on European MMF Reforms with a letter entitled, "Re: Consultation Paper on Draft technical advice, implementing technical standards and guidelines under the MMF regulation." They give ESMA feedback on "share destruction," reverse repos and stress testing. (See our May 30 News, "`ESMA Publishes Consultation on European MMF Regs; Fitch on European.")
They write, "BlackRock is one of the world's leading asset and risk management firms, and is a global leader in the cash management business. In Europe, we manage over E100 billion in cash portfolios on behalf of a wide range of companies and other investors. BlackRock remains supportive of ESMA's efforts to bring additional resiliency to the MMF sector via the introduction of L2 rules and we look forward to continue to work with ESMA towards that aim. We welcome the opportunity to comment on ESMA's Consultation Paper (CP) on the Level 2 (L2) measures for the EU Money Market Fund Regulation (MMFR)."
BlackRock's letter continues, "We have engaged with policymakers at the global and European levels with regard to Money Market Fund (MMF) reform over recent years, and look forward to continuing the dialogue towards the aim of finalising the full suite of rule changes for MMFs. We share the aim of policymakers to ensure that there are appropriate measures in place to promote MMF resiliency and preserve investor utility. BlackRock has worked with a range of trade associations on their responses to this consultation -- amongst others, the Institutional Money Market Funds Association (IMMFA), European Fund and Asset Management Association (EFAMA), and IrishFunds -- and we support the collective input from their submissions. However, in addition, we would like to highlight three specific areas which are of particular importance to us (below)."
On the topic of "Share destruction," they comment, "The statement within the reporting section that ESMA understands the Regulation to prohibit share destruction (line 186) is troubling. We do not share the interpretation of the Level 1 text that the practice of 'reverse distribution' is prohibited by the Regulation. All funds create and destroy shares as part of normal subscription and redemption processes, and we consider it impractical that the Regulation should prohibit such a practice. However, we expect that this comment is intended to refer more specifically to 'reverse distribution', which has become a relatively common practice amongst many European Constant-NAV (CNAV) funds to deal with the challenges of negative interest rates, and involves the destruction of shares to account for the negative yield (not to account for mark-to-market fluctuations of the portfolio)."
The letter tells us, "While there are of course no additional rules being proposed with regard to share destruction within this consultation, or indeed, within the Level 2 rulemaking process itself, nevertheless, we find the statement in the CP to be concerning. We already anticipate that the considerable implementation process will require much of the transition period for existing funds in order to build new systems and processes to adapt to the new product rules; additional uncertainties on such a fundamental concept to be, at this stage, create confusion. We recommend that ESMA clarify that reverse distribution is permitted to address negative yields."
BlackRock also comments on "Reverse repo," saying, "We believe that the rules on reverse repo collateral are some of the most consequential rules in the Level 2 process. The Regulation itself forces (in particular) Government CNAV MMFs to rely on reverse repo in order to meet the strict liquidity requirements, meaning that a fund will need to, at all times, have access to reverse repo in order to be compliant with the Regulation. Repo markets in Europe have already been clearly experiencing stress at regular intervals (at quarter- and year-end especially, but increasingly at month-end as well), where market participants are experiencing supply constraints and pricing dislocation."
Finally, on "Stress testing," they add, "Stress testing funds is a critical risk management tool and we believe the MMF industry will be more robust as a result of the new requirements both in Europe and the US. We support much of what has been suggested by ESMA in the proposed Guidelines. However, we urge caution on the recommendation that managers might potentially stress test their MMFs in aggregate. We note that this specific recommendation originates from the FSB recommendations on potential structural vulnerabilities related to specific asset management activities." (Note: Our upcoming European Money Fund Symposium, which will take place Sept. 25-26 in Paris, France, will feature a number of sessions addressing pending European money fund reforms.)
As we mentioned in our August 14 Link of the Day, the Association for Financial Professionals hosted a webinar Tuesday on "Managing Operating Cash Post Reform." The event, which followed last month's release of the AFP 2017 Liquidity Survey, featured AFP's Tom Hunt, Crane Data's Pete Crane, Qualcomm's Geoffrey Nolan and SSGA's Don Cooley. The description said, "In this webinar, hear from participants as they discuss the short term investing market, strategies to segmenting cash, and investment policy considerations." We quote from some of the webinar highlights below.
The AFP's Hunt comments, "Our survey [focused on] operating cash, with 90 days or less generally type of cash that we tend to look at.... Safety is absolutely paramount with 67% [ranking it the highest priority] this year. Liquidity is 30%; yield is a distant third, which is very consistent. If we look back over the history, we're coming up on the 10-year anniversary of the start of the banking crisis. If we look back ... and compare yield versus 2008 versus now, in level of importance, it really hasn't changed all that much. Liquidity has [declined] a little bit but certainly safety of principal has been very important. [C]ompanies want ... safety of that principal, the return of principal versus return on principal."
The survey summary tells us, "Indeed, a general feeling of apprehension is reflected in companies' heavy reliance on bank deposits as their investment vehicles of choice: 53 percent of all corporate cash holdings are still maintained at banks. That is slightly lower than the 55 percent reported last year." Hunt comments, "Looking at some of ... those bank deposit instruments ... basically it's four different categories.... Time deposits for the most part stayed relatively stable, it went down just a little bit year over year. However the structured bank deposit market ... increased rapidly."
Crane told listeners, "The AFP survey shows that cash continues to grow.... Just totaling bank savings and thrifts' money market deposit accounts and savings accounts, and money market funds, together you're talking about a number that's over $11.5 trillion. Everybody always talks about this 'wall of cash,' the buildup of cash, but that number just keeps going up. Whether that's because of the crisis in general, the environment were in, or just because the economy keeps getting bigger albeit at a slow pace, the levels of cash just have continued rising throughout the decade. So I don't think it should be a surprise that cash keeps going up if the economy keeps going up."
He continues, "What's really interesting is ... bank deposits have broken above $9.0 trillion and about half of that is uninsured. It's still remnants from that TAG, transactions account guarantee, program that ended back in 2012. That's where your heavy institutional dollars are ... they are well beyond the FDIC insurance limits. There are signs that that number is starting to peak. They're starting to go down, but it is still early. It's been climbing, but just the last 2-3 months you've seen dips in those Fed numbers which you haven't seen in almost a decade."
Crane adds, "Money market funds, looking over the longer term, they've basically have been flat for [almost] a decade, 7 years or so.... You've had this massive shift from Prime or general purpose money funds, $1.1 trillion, shift into government money market funds. Those assets have remained there but [now] you are seeing prime inflows."
He tells the webinar, "The AFP liquidity survey, if you dig through it, really shows bank deposits as flat, but there was a little down-tick in the numbers of investors favoring bank deposits. Money funds are seeing a little bit of an uptick just recently, so whether that continues, stay tuned. But it certainly has the makings of a shift in the trend."
Crane explains, "If you look at year-to-date, prime money fund assets, which were savaged last year with that massive shift to government ... have been growing. They have grown three weeks in a row, 8 weeks out of 10 weeks, and every month year-to-date.... You're seeing positive numbers into prime money funds. They have not been big. But if you tally them up, you're looking at prime up about $50 billion YTD, which is 14%. Prime as a total, retail and institutional is about $430 billion currently. So there are very encouraging signs that prime money market funds may be in the midst of recovery here."
He adds, "The spreads are ... bigger than they were historically, but, interestingly enough, government money fund yields have risen a little bit faster [than prime] as of late. So if you look at the averages, you're looking at prime institutional money funds of just below 1%. The average is just about to touch 1% and the leading edge is already well over 1%. They're about 22+ basis points over the government money fund and treasury funds, and that's actually shrunk a little bit over the last several months."
SSGA's Cooley comments, "For those investors that truly bucket their cash, and I think that as an industry we've seen a shift here and people are doing a much better job of bucketing their cash, for those investors there are opportunities in the prime space.... [But] there are still other hurdles there for them. I think one of the big ones is the size of the fund. People have left some assets in prime funds, but those funds are significantly smaller than they were several years ago. So it may be a long time before their allowed to get back up to any sizeable balances in those funds."
He adds, "The 3 o'clock cut off time for prime funds is [also] going to be challenging, especially for those West Coast investors. That's always been a challenge, but I think it becomes a little bit more so in this environment. When you talk about spread.... I see the results here coming up. In talking to clients, I get the feeling that spread might be a little bit of a moving target. Right now, we're at about somewhere between 20 and 25 basis points between a government and a prime fund."
Finally, Qualcomm's Nolan tells us, "The world is a changing place. It's constantly changing, whether it's reform we're going through, more cash is coming in to invest, the Fed is on the move, turbulence, etc.... As Pete put it, 'Stuff does happen.' As a result, since I sit on the corporate side, there's a lot of others on the phone who are also on the corporate side managing this money. [Prudence] dictates because this is corporate cash and this is not a hedge fund, you develop a portfolio and you design it to the extent that you can."
Note: Fore more on the "`AFP Liquidity Survey, see the AFP's press release. (See also our July 12 Link of the Day.)
Capital Advisors Group published a research paper entitled, "Higher Deposit Rates - Where Art Thou?" The Abstract explains, "Bank deposits have not benefitted from recent fed funds rate increases. The absence of higher rates contrasts sharply with the yields on marketable securities and compares unfavorably with deposit rates seen in two previous Fed tightening cycles. Although prospects for higher deposit rates may improve soon, for now, liquidity investors should consider a portfolio approach that includes deposits and direct purchases, possibly through separately managed accounts." We excerpt from this paper, and also review the ICI's latest monthly "Money Market Fund Holdings", below.
Capital Advisors' Lance Pan writes, "Deposit relationships provide essential liquidity solutions for most treasury organizations. Several of our recent whitepapers have discussed the transformation of corporate deposits following significant regulatory changes in the banking and money market fund industries. Recent Federal Reserve data and industry surveys continue to support the popularity of deposits among institutional investors. On the other hand, depositors have not yet seemed to benefit from the Federal Reserve's recent interest rate actions. While the yield on short-term marketable securities such as commercial paper (CP), has risen in tandem with the fed funds rate's 1.00% increase since December 2015, deposit rates have not kept pace."
He explains, "In this paper, we will compare deposit rates in the current interest rate environment with those of two previous Fed tightening cycles to demonstrate that, while deposits generally lag the market when rates are rising, this lagging effect is more pronounced today than in the past. We will discuss potential causes for this phenomenon and the potential timeframe for improvement in deposit rates. We will also offer our take on how institutional investors can best utilize deposits along with other short-term liquidity instruments in a portfolio approach."
Pan tells us, "Bank accounts have been a main liquidity tool for as long as modern banking has existed. Beginning in the late 1990s, however, their popularity declined as investment in money market funds (MMFs) surged. This trend continued until the financial crisis of 2008 forced investors to reassess the latter's resilience as stable liquidity vehicles during market tumults. Since then, as the Federal Reserve's Flow of Funds report indicates, the combined savings and checking account balances have consistently accounted for nearly three quarters of the liquid balances at non-financial firms in the United States. Survey results from institutional liquidity investors confirm deposits' popularity. A 2017 liquidity survey ... by the Association for Financial Professionals found that 59% of the organizations' short-term portfolios are allocated to bank deposits and Eurodollar deposits."
He states, "It is safe to assume that institutional liquidity investors' preference for deposits in recent years have not been driven by attractive yield opportunities as a sizeable portion of the cash has been in non-interest bearing transactional accounts. Also, banks have not been generous in handing out higher yield as the Fed continues with interest rate normalization.... From December 2015 through June 2017, the Federal Reserve has raised the short-term rates four times at 0.25% increments. Short-term market rates have climbed in response, but bank rates have yet to see meaningful increases."
The CAG paper says, "A comparison to the two previous Fed tightening cycles (June 1999–May 2000 and June 2004–June 2006) indicates that banks today are comparatively less willing to pay up on deposits.... To conclude, despite the 1.00% total increase in the fed funds over the last 19 months, money market and short-term CD rates barely budged. Historically, these rates tended to rise with the fed funds rate, sometimes exceeding the benchmark rate increases. By contrast, short-term market rates rose along with FFR in all three periods by about the same magnitude."
Finally, they tell us, "What has contributed to the low deposit rates seen in the current cycle? We can think of several possible causes, most of which trace back to the aftermath of the 2008 financial crisis: Abundant bank reserves ...; Restrictive banking regulations ...; Investor inertia after a long period of yield drought: After enduring nearly a decade of zero interest rates, some depositors may not have adjusted their expectations for higher income returns as the first few Fed hikes have occurred. They may become more demanding now that short-term benchmark rates are greater than 1.00%; and, MMF reform."
In other news, the Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of July 31, 2017) yesterday. This release reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in July, prime money market funds held 29.2 percent of their portfolios in daily liquid assets and 42.7 percent in weekly liquid assets, while government money market funds held 56.5 percent of their portfolios in daily liquid assets and 75.4 percent in weekly liquid assets." Prime DLA decreased from 29.6% last month and Prime WLA decreased from 43.9% last month. We review the ICI's latest Holdings update, below.
ICI explains, "At the end of July, prime funds had a weighted average maturity (WAM) of 34 days and a weighted average life (WAL) of 74 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 32 days and a WAL of 88 days." Prime WAMs were up one day from the prior month, and WALs were up 2 days. Govt WAMs decreased by 2 days and WALs remained unchanged from last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas declined from $179.16 billion in June to $174.32 billion in July. Government money market funds' holdings attributable to the Americas declined from $1,761.29 billion in June to $1,686.38 billion in July." (See too Crane Data's August 10 News, "August Money Fund Portfolio Holdings: Repo Down, Treas, Agencies Up.")
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $174.3 billion, or 41.7%; Asia and Pacific at $84.2 billion, or 20.2%; Europe at $157.0 billion, or 37.5%; and, Other (including Supranational) at $2.6 billion, or 0.7%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.686 trillion, or 79.7%; Asia and Pacific at $99.6 billion, or 4.7%; and Europe at $327.6 billion, or 15.5%.
S&P Global Ratings published a paper entitled, "How Uncertainty In Global Markets Affected 'AAAm' Rated Money Market Funds," last week. They tell us, "The first half of 2017 proved to be a busy period for European money market funds (MMFs), which faced an array of uncertainties surrounding unfolding geopolitical events, settled regulatory reforms, cloudy economic forecasts, and somewhat "rewarding" monetary policies." We excerpt from this paper, and we also review our latest Money Fund Intelligence International statistics and MFII Portfolio Holdings data below. (Note: We're still accepting registrations for our European Money Fund Symposium, which is Sept. 25-26 at The Renaissance Paris La Defense Hotel in Paris, France.)
S&P writes, "More so than ever, assessing contentious political landscapes now plays an integral role in executing investment strategies, primarily as MMFs seek to avoid the consequences of investor uncertainty resulting from headline risks. In our view, the E1 trillion European money market industry has very little room to hide in today's interconnected world. Uncertainties in global markets and continued negative rates across the eurozone have led MMFs to continually adjust asset allocations, credit quality, and maturity profiles; despite this, we still expect our ratings on funds rated 'AAAm' to remain generally unchanged."
The paper continues, "In the early part of 2017, the French presidential elections kept some MMFs cautious about their exposures to French banks, with some MMFs reducing their overall tenors or placing maturities well-beyond any potential volatility surrounding the election dates. More recently, developments in the ongoing diplomatic crisis in Qatar prompted MMFs to adjust their tenors to Middle Eastern banks."
It says, "A year after the Brexit referendum, the U.K. economy is holding up better than predicted, but uncertainty surrounding EU exit negotiations has dampened wider economic investment. More focused concerns is the future of "passporting" rights of investment products including MMFs post BREXIT which have significantly benefited from the UCITS (Undertakings for Collective Investment in Transferable Securities) structure being recognized by investors and the associated benefits of selling across the EU. Under UCITS, with assets of nearly E9 trillion, a fund can be regulated in Luxembourg, managed in London, and sold in Paris."
S&P comments, "In the U.S., the Trump Administration continues to advocate for tax reform, including a repatriation of trillions of dollars in profit earned abroad by U.S.-based multinational corporations (MNCs), who for years have stockpiled cash overseas to avoid the 40% U.S. corporate tax rate, which is especially high compared with the EU average of 21.5%. Despite the contentious political climate in Washington, a Republican-controlled Congress increases the probability of the administration passing tax reform over the coming years. Should the U.S. host a tax holiday, it is likely there would be some significant outflow of assets from European MMFs as MNCs transfer cash back to the U.S, primarily as more than half of EU-domiciled MMF assets are held in U.S. dollars."
They add, "Not long after the U.S. implementation of MMF reform in October 2016, the most notable event for EU MMFs of 2017 (separate to all of the geopolitical and macro events) was the approval of European Union (EU) MMF reform on May 16, 2017 (see "EU Money Market Reform: The Wait Is Finally Over," published May 31, 2017). Although not effective until January 2019, the new regulations will be the key in shaping the future composition of the industry."
Crane Data's latest MFI International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), up $55 billion year-to-date to $786 billion as of 8/11/17. U.S. Dollar (USD) funds (148) account for over half ($414 billion, or 52.6%) of the total, while Euro (EUR) money funds (93) total E90 billion and Pound Sterling (GBP) funds (104) total L210. USD funds are up $43 billion, YTD, while Euro funds are up E3 billion and GBP funds are up L31B. USD MMFs yield 0.97% (7-Day) on average (8/11/17), up 81 basis points from 12/31/16. EUR MMFs yield -0.50% on average, down 31 basis points YTD, while GBP MMFs yield 0.13%, down 15 bps YTD.
Crane's latest MFI International Money Fund Portfolio Holdings data (as of 7/31/17) shows that European-domiciled US Dollar MMFs, on average, consist of 17% in Treasury securities, 22% in Commercial Paper (CP), 23% in Certificates of Deposit (CDs), 19% in Other securities (primarily Time Deposits), 16% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 31.4% of their portfolios maturing Overnight, 13.3% maturing in 2-7 Days, 19.3% maturing in 8-30 Days, 11.1% maturing in 31-60 Days, 9.5% maturing in 61-90 Days, 11.4% maturing in 91-180 Days, and 4.1% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (26.9%), France (14.9%), Canada (10.1%), Japan (9.8%), Sweden (6.1%), the Netherlands (5.4%), Australia (4.9%), United Kingdom (4.5%), Germany (4.0%), and Singapore (3.0%), and China (2.5%).
The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $79.2 billion (16.8% of total assets), BNP Paribas with $19.6B (4.1%), Credit Agricole with $15.6B (3.3%), Toronto-Dominion Bank with $12.6B (2.7%), RBC with $10.3B (2.2%), Mitsubishi UFJ with $10.2B (2.2%), Wells Fargo with $9.3B (2.0%), Skandinaviska Enskilda Banken AB with $9.2B (1.9%), Natixis with $8.9B (1.9%), Societe Generale with $8.6B (1.8%), DnB NOR Bank ASA with $8.4B (1.8%), Svenska Handelsbanken with $8.1B (1.7%), Rabobank with $7.5B (1.6%), Bank of Nova Scotia with $7.5B (1.6%), Mizuho Corporate Bank Ltd with $7.5B (1.6%), Bank of Montreal with $7.3B (1.5%), Commonwealth Bank of Australia with $6.9B (1.5%), Federal Reserve Bank of New York with $6.9B (1.5%), Sumitomo Mitsui Banking Co with $6.7B (1.4%), and KBC Group NV with $6.7B (1.4%).
Euro MMFs tracked by Crane Data contain, on average 40% in CP, 28% in CDs, 22% in Other (primarily Time Deposits), 8% in Repo, 1% in Treasury securities and 1% in Agency securities. EUR funds have on average 22.1% of their portfolios maturing Overnight, 8.8% maturing in 2-7 Days, 18.8% maturing in 8-30 Days, 16.8% maturing in 31-60 Days, 14.2% maturing in 61-90 Days, 15.7% maturing in 91-180 Days and 3.6% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (27.4%), Japan (13.3%), US (13.2%), Sweden (7.9%), Netherlands (7.4%), Belgium (6.9%), Switzerland (6.4%), Germany (3.7%), and China (2.6%).
The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E4.5B (5.3%), Rabobank with E3.7B (4.4%), Svenska Handelsbanken with E3.5B (4.1%), Credit Agricole with E3.4B (4.1%), Proctor & Gamble with E3.2B (3.8%),Credit Mutuel with E2.9B (3.4%), KBC Group NV with E2.8B (3.3%), Nordea Bank with E2.7B (3.2%), Mizuho Corporate Bank Ltd with E2.6B (3.0%), Dexia Group with E2.5B (3.0%), Agence Central de Organismes de Securite Sociale with E2.5B (3.0%), Sumitomo Mitsui Banking Co. with E2.5B (2.9%), Credit Suisse with E2.3B (2.7%), Mitsubishi UFJ Financial Group Inc with E2.1B (2.5%), and BPCE SA with E2.1B (2.5%).
The GBP funds tracked by MFI International contain, on average (as of 7/31/17): 43% in CDs, 25% in Other (Time Deposits), 20% in CP, 10% in Repo, 2% in Treasury, and 0% in Agency. Sterling funds have on average 24.9% of their portfolios maturing Overnight, 8.5% maturing in 2-7 Days, 14.1% maturing in 8-30 Days, 17.3% maturing in 31-60 Days, 12.8% maturing in 61-90 Days, 17.3% maturing in 91-180 Days, and 5.1% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (18.7%), Japan (17.4%), United Kingdom (13.6%), Netherlands (7.8%), Sweden (6.4%), Germany (6.0%), US (4.9%), Canada (4.7%), Australia (4.2%), and Singapore (2.9%).
The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L8.7B (5.2%), Credit Agricole with L7.3B (4.4%), Mitsubishi UFJ Financial Group Inc. with L6.4B (3.9%), ING Bank with L6.3B (3.8%), Sumitomo Mitsui Banking Co. with L6.1B (3.7%), Nordea Bank with L6.0B (3.6%), BNP Paribas with L5.9B (3.5%), Mizuho Corporate Bank Ltd. with L5.9B (3.5%), BPCE SA with L5.5B (3.3%), Credit Mutuel with L5.4B (3.2%), Rabobank with L5.3B (3.2%), Sumitomo Mitsui Trust Bank with L4.7B (2.8%), Bank of America with L4.4B (2.7%), DZ Bank AG with L4.1B (2.5%), Standard Chartered Bank with L4.1B (2.5%), Svenska Handelsbanken with L4.1B (2.4%), UBS AG with L3.5B (2.1%), National Bank of Abu Dhabi with L3.4B (2.1%), Dexia Group with L3.4B (2.0%), and Oversea-Chinese Banking Co. with L3.0B (1.8%).
The August issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Monday, features the lead story, "Fidelity Joins Index Fund Fee Wars; Short Term Bond Index," which reviews recent fee reductions and fund launched in bond index funds. BFI also includes the "profile" article, "J.P. Morgan A.M.'s Martucci: Ultra-Short Outlook Bright," with J.P. Morgan Asset Management Managing Director & Portfolio Manager Dave Martucci. In addition, we recap the latest Bond Fund News, which includes briefs on lower yields but higher returns in July, continued inflows and more. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the August issue below. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS data spreadsheet, and watch for our latest Bond Fund Portfolio Holdings data next week.)
Our lead Bond Fund Intelligence story says, "The battle for bond index fund assets just became more intense. Fidelity recently cut expenses on a host of index funds, and they've also filed to launch a new Short-Term Bond Index Fund. We review these moves, and changes Vanguard is making to three of its Government Bond Index funds, below."
It continues, "A press release, "Fidelity Brings Even Greater Value to Index Investors," subtitled, "Fidelity Cuts Expenses on 14 Index Mutual Funds," tells us, "Fidelity Investments ... announced that effective August 1, 2017 it will reduce total expenses on 14 of its stock and bond index mutual funds. With this action, 100% of Fidelity's stock and bond index mutual funds and sector ETFs will have total net expenses lower than their comparable Vanguard fund."
BFI adds, "Fidelity's Colby Penzone comments, "For index investors focused on cost, there's no need to look further than Fidelity. Already one of the industry's lowest cost index fund providers, we now offer an even better value.... We believe we have an index value proposition unsurpassed in our industry.... [W]e believe Fidelity provides the best customer experience and value in the industry."
Our latest profile says, "This month, Bond Fund Intelligence again talks again with J.P. Morgan Asset Management Managing Director & Portfolio Manager Dave Martucci. (See too our March 2015 article "JPM's Martucci & Rehman: Defining Conservative Ultra Short.") Martucci oversees over $65 billion in separately managed accounts and conservative ultra-short funds. We discuss the state of the ultra-short market, the Managed Reserves strategy, and a number of issues in the bond space. Our Q&A follows."
BFI says, "Give us some history." Martucci responds, "Here at J.P. Morgan Asset Management, we've been managing liquidity or ultra-short type investments for over 30 years. I've been in the business for 17 years, managing ultra-short all the way out to intermediate-type funds. But over the past 10 years, I've really focused on the ultra-short space. Our current offering in the ultra-short space is what we have branded, the Managed Reserves product."
He explains, "The Managed Reserves Strategy is ... made up of 155 different entities that we manage money for, including the 4 conservative ultra-short funds. We also manage an ETF called the JP Morgan Ultra-Short Income ETF that was launched in May 2017. All of the funds are co-mingled vehicles, which total $12.8 billion, and another $50+ billion is from separately managed accounts."
BFI asks, "What are the other funds?" He responds, "The JP Morgan Managed Income Fund is our flagship fund at $9.2 billion and has an inception date of September 30, 2010. We also have two Luxembourg-based funds; JP Morgan Managed Reserves Fund and the JP Morgan Sterling Managed Reserves Fund, and one Switzerland-based fund; JP Morgan Swiss Managed Reserves Fund. These funds make up $3.6 billion. Of the $65 billion that I mentioned, around roughly $2 billion US dollar equivalent is Sterling and Euro denominated separately managed accounts." (Watch for more excerpts of this article later this month, or ask us to see the full issue of BFI.)
Our Bond Fund News includes a brief entitled, "Yields Higher; Returns Mixed in July." It says, "Yields dipped across most of our Crane BFI Indexes last month, but returns were higher for most major sectors. The BFI Total Index averaged a 1-month return of 0.52% and gained 1.87% over 12 months. The BFI 100 had a return of 0.54% in July and rose 2.36% over 1 year. The BFI Conservative Ultra-Short Index returned 0.14% and was up 1.17% over 1-year; the BFI Ultra-Short Index had a 1-month return of 0.13% and 1.58% for 12 mos. Our BFI Short-Term Index returned 0.29% and 1.63% for the month and past year. The BFI High Yield Index increased 1.01% in July and is up 8.59% over 1 year. (See p. 6+ or BFI XLS for more returns.)
The new issue also includes a News brief entitled, "Investment News: "Vanguard Winning at Bond Inflows, Too." The article explains, "Most people know that Vanguard has been vacuuming up stock assets faster than an elephant in a peanut warehouse. But what company is leading in scooping up bond-fund assets? That would be Vanguard. Of the 30 top-selling taxable bond mutual funds and exchange-traded funds in the Morningstar database, 10 are Vanguard funds. Altogether, they have seen estimated net flows of $113 billion in the past 12 months, or 49% of the total net inflows to the 30 best-selling funds and ETFs. The top-selling Vanguard bond fund, Vanguard Total Bond Market II Index Fund (VTBIX), saw net inflows of $28.9 billion in the past 12 months, according to Morningstar estimates."
Finally, the August issue of BFI also includes a sidebar, "Big Bond Inflows Continue." It says, "The ICI's latest "Combined Estimated Long-Term Fund Flows and ETF Net Issuance" tells us, "Bond funds had estimated inflows of $7.01 billion for the week, compared to estimated inflows of $6.37 billion during the previous week. Taxable bond funds saw estimated inflows of $6.11 billion, and municipal bond funds had estimated inflows of $899 million." Over the past 5 weeks through August 2, bond funds and ETFs have seen almost $38.0 billion in inflows."
Money fund assets jumped for the third week straight and Prime MMFs rose for the 8th week in a row, we learned from the Investment Company Institute's latest "Money Market Fund Assets" report. Government money funds continued their rebound, also jumping for the third week in a row, after they showed outflows during most of the first half of the year. Meanwhile, the slow and steady Prime recovery continues. Prime MMFs rose for the 16th week in the past 18 (up $34.4%, or 8.6%), and they've now increased by $53.2 billion, or 14.1%, year-to-date. We review the latest asset flows below, and we also look at the 10th anniversary of the start of the Subprime Liquidity Crisis. We quote from a new WSJ brief, as well as Crane Data's News coverage from that fateful week 10 years ago. (See our August 8 Link of the Day, "10 Years Ago: Subprime Liquidity Crisis Began in Money Markets With ABCP Extensions.")
ICI writes, "Total money market fund assets increased by $33.05 billion to $2.69 trillion for the week ended Wednesday, August 9, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $29.58 billion and prime funds increased by $3.83 billion. Tax-exempt money market funds decreased by $365 million." Total Government MMF assets, which include Treasury funds too, stand at $2.132 trillion (79.2% of all money funds), while Total Prime MMFs stand at $430.8 billion (16.0%). Tax Exempt MMFs total $130.7 billion, or 4.9%.
They explain, "Assets of retail money market funds increased by $1.15 billion to $962.04 billion. Among retail funds, government money market fund assets increased by $464 million to $582.14 billion, prime money market fund assets increased by $772 million to $255.04 billion, and tax-exempt fund assets decreased by $90 million to $124.87 billion." Retail assets account for over a third of total assets, or 35.7%, and Government Retail assets make up 60.5% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $31.90 billion to $1.73 trillion. Among institutional funds, government money market fund assets increased by $29.11 billion to $1.55 trillion, prime money market fund assets increased by $3.06 billion to $175.77 billion, and tax-exempt fund assets decreased by $275 million to $5.87 billion." Institutional assets account for 64.3% of all MMF assets, with Government Inst assets making up 90.1% of all Institutional MMFs.
It explains, "ICI reports money market fund assets to the Federal Reserve each week. Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website." Note: Crane Data also publishes a daily money fund assets series via our Money Fund Intelligence Daily product, and a monthly asset series via our MFI XLS.
In other news, The Wall Street Journal writes, "Ten Years On, the Crisis Still Looms Large." They explain, "Wednesday marks the 10th anniversary of one of the defining events of the global financial crisis. There had been rumblings before, but Aug. 9, 2007 saw money markets seize up after BNP Paribas suspended three funds holding U.S. asset-backed securities, saying they were impossible to value and blaming a 'complete evaporation of liquidity.'"
Below, we excerpt from Crane Data's News Archives from August 2007. On August 9, 2007, we wrote, "`"Money Funds May Hold Subprime Too" Says Wall Street Journal <i:https://cranedata.com/archives/all-articles/905/>`_." The brief says, "Thursday's WSJ article names names, saying that Evergreen Institutional Money Market Fund held recently-extended Broadhollow Funding LLC debt earlier this year, according to SEC filings. The Journal also incorrectly mentions Putnam Premier Income Trust, but this is a bond fund and not a money market fund. (Putnam says they've never held Broadhollow in their money funds.) The Journal says money fund managers will likely "pay closer attention to what is backing the commercial paper they buy, demand additional compensation for investing in a particular type pf vehicle that issues some asset-backed commercial paper and call for greater transparency in the market". The article quotes several fund managers, including Schwab's Linda Klingman, Advantus' Jon Thompson, and William Blair's Jim Kaplan. The subprime problem "isn't likely to cause big losses at these funds or endanger them" adds the piece."
Ten years ago today (8/11), we wrote, "Standard and Poor's Says No Downgrades on Rated Money Market Funds." The piece says, "S&P Director Peter Rizzo tells us, "Standard & Poor's assigns principal stability fund ratings to more than 450 money market funds globally. Of these, only a handful have any exposure to the ABCP programs that were extended this week. We are monitoring the credit market situation closely and to date have not taken any actions on any rated funds."
On August 13, 2007, we commented in "Commercial Paper and Money Market Seizure: Last Week in Review," "Money fund yields jumped on Friday in reaction to the spike in overnight Fed funds, repo and commercial paper rates. While the crisis seems to be easing, higher rates should continue working their way through funds this week, and money markets should remain on edge. Here we list links to last week's Crane Data News coverage on the Extendible ABCP Crisis of 2007: "`Trouble in ABCP Market as Secured Liquidity Notes Extended <i:https://cranedata.com/archives/news/2007/8/#item-901>`_;" "Bloomberg: "Subprime Tsunami Hits CP";" "Extendible ABCP Troubles Trigger;" and, "'Money Funds May Hold Subprime Too' (WSJ)."
Finally, we wrote on 8/14, "CFTC Sentinel Management Pool Is NOT a Money Market Mutual Fund," "CNBC reported Tuesday morning that Sentinel Management Group has asked the Commodities Futures Trading Commission (CFTC) to halt redemptions from its pooled accounts. The CNBC report erroneously identified the managed account as a money market mutual fund. It is not a money fund, and no money market mutual funds have halted redemptions, dropped in value or suffered any losses on any securities to date. Money funds do not appear to be in danger from recent market events, contrary to some reports, but we of course are watching events closely. CNBC also incorrectly labelled the Luxembourg-based AXA Libor Plus fund, which has declined in value, a money fund last Friday."
Crane Data released its August Money Fund Portfolio Holdings Wednesday, and our latest collection of taxable money market securities, with data as of July 31, 2017, shows a sharp drop in Repo after quarter end but increases in most other composition segments. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $61.5 billion to $2.692 trillion last month, after decreasing $60.8 billion in June, increasing $59.8 billion in May, and decreasing $3.2 billion in April. Repo remained the largest portfolio segment, while `Treasuries and Agencies were neck and neck for the number two spot. CDs increased and remained in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us if you'd like to see a sample of our latest Portfolio Holdings Reports.)
Among all taxable money funds, Repurchase Agreements (repo) decreased $55.6 billion (-5.8%) to $898.7 billion, or 33.4% of holdings, after rising $12.4 billion in June, $83.7 billion in May, and $24.6 billion in April. Treasury securities rose $36.7 billion (5.7%) to $678.2 billion, or 25.2% of holdings, after falling $31.4 billion in June, $27.5 billion in May, and $53.5 billion in April. Government Agency Debt increased $48.4 billion (7.7%) to $677.0 billion, or 25.1% of all holdings, after decreasing $1.7 billion in June, $1.4 billion in May, and rising $4.0 billion in April. Repo, Treasuries and Agencies total $2.254 trillion, representing a massive 83.7% of all taxable holdings.
CDs and CPs increased slightly last month, along with Other (mainly Time Deposits) securities. Certificates of Deposit (CDs) increased $13.6 billion (8.5%) to $174.5 billion, or 6.5% of taxable assets, after decreasing $19.5 billion in June, remaining unchanged in May, and increasing $8.1 billion in April. Commercial Paper (CP) was up $8.0 billion (5.0%) to $166.7 billion, or 6.2% of holdings (after decreasing $0.5 billion in June, $0.9 billion in May, and increasing $10.4 billion in April). Other holdings, primarily Time Deposits, rose by $14.7 billion (20.1%) to $87.8 billion, or 3.3% of holdings. VRDNs held by taxable funds decreased by $4.2 billion (-31.1%) to $9.4 billion (0.3% of assets).
Prime money fund assets tracked by Crane Data increased to $593 billion (up from $575 billion last month), or 22.0% (up from 21.3%) of taxable money fund holdings' total of $2.692 trillion. Among Prime money funds, CDs represent just under a third of holdings at 29.4% (up from 28.0% a month ago), followed by Commercial Paper at 28.1% (up from 27.6%). The CP totals are comprised of: Financial Company CP, which makes up 16.9% of total holdings, Asset-Backed CP, which accounts for 6.2%, and Non-Financial Company CP, which makes up 5.0%. Prime funds also hold 3.6% in US Govt Agency Debt, 8.2% in US Treasury Debt, 8.5% in US Treasury Repo, 0.4% in Other Instruments, 12.2% in Non-Negotiable Time Deposits, 1.6% in Other Repo, 1.6% in US Government Agency Repo, and 1.2% in VRDNs.
Government money fund portfolios totaled $1.468 trillion (54.5% of all MMF assets), up from $1.451 trillion in June, while Treasury money fund assets totaled another $631 billion (23.4%), up from $605 billion the prior month. Government money fund portfolios were made up of 44.6% US Govt Agency Debt, 18.0% US Government Agency Repo, 13.9% US Treasury debt, and 23.2% in US Treasury Repo. Treasury money funds were comprised of 67.4% US Treasury debt, 32.3% in US Treasury Repo, and 0.2% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.099 trillion, or 78.0% of all taxable money fund assets, up from 76.3% last month.
European-affiliated holdings increased $13.7 billion in July to $543.2 billion among all taxable funds (and including repos); their share of holdings increased to 20.2% from 15.4% the previous month. Eurozone-affiliated holdings increased $11.6 billion to $368.6 billion in July; they account for 13.7% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $4.4 billion to $206.4 billion (7.7% of the total). Americas related holdings decreased $80.6 billion to $1.942 trillion and now represent 72.1% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $71.9 billion, or -10.8%, to $595.0 billion, or 22.1% of assets; US Government Agency Repurchase Agreements (up $19.1 billion to $275.6 billion, or 10.2% of total holdings), and Other Repurchase Agreements ($28.2 billion, or 1.0% of holdings, down $2.8 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $3.5 billion to $100.5 billion, or 3.7% of assets), Asset Backed Commercial Paper (down $0.7 billion to $36.7 billion, or 1.4%), and Non-Financial Company Commercial Paper (up $5.2 billion to $29.5 billion, or 1.1%).
The 20 largest Issuers to taxable money market funds as of July 31, 2017, include: the US Treasury ($678.2 billion, or 25.2%), Federal Home Loan Bank ($529.1B, 19.7%), Federal Reserve Bank of New York ($184.1B, 6.8%), BNP Paribas ($109.1B, 4.1%), Federal Farm Credit Bank ($63.4B, 2.4%), RBC ($62.5B, 2.3%), Credit Agricole ($60.7B, 2.3%), Wells Fargo ($53.4B, 2.0%), Nomura ($50.5B, 1.9%), Federal Home Loan Mortgage Co. ($49.2B, 1.8%), HSBC ($45.7B, 1.7%), Societe Generale ($44.3B, 1.6%), Mitsubishi UFJ Financial Group Inc. ($38.4B, 1.4%), JP Morgan ($35.8B, 1.3%), Citi ($33.0B, 1.2%), Barclays PLC ($33.0B, 1.2%), Bank of America ($32.4B, 1.2%), Bank of Nova Scotia ($32.0B, 1.2%), Natixis ($31.4B, 1.2%), and Toronto-Dominion Bank ($30.7B, 1.1%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($184.1B, 20.5%), BNP Paribas ($95.4B, 10.6%), Nomura ($50.5B, 5.6%), Credit Agricole ($48.0B, 5.3%), RBC ($44.7B, 5.0%), Wells Fargo ($40.8B, 4.5%), HSBC ($40.5B, 4.5%), Societe Generale ($39.4B, 4.4%), JP Morgan ($28.9B, 3.2%), and Bank of America ($27.5B, 3.1%).
The 10 largest Fed Repo positions among MMFs on 7/31 include: Northern Trust Trs MMkt ($16.5B in Fed Repo), Fidelity Cash Central Fund ($13.2B), JP Morgan US Govt ($11.9B), Vanguard Market Liquidity Fund ($11.2B), Fidelity Sec Lending Cash Central ($8.7B), Morgan Stanley Inst Lq Gvt Sec ($8.4B), Fidelity Inv MM: Treasury Port ($8.2B), Northern Inst Gvt Select ($6.6B), Goldman Sachs FS Gvt ($6.5B), and Vanguard Prime MMkt Fund ($6.4B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($17.8B, 4.8%), Mitsubishi UFJ Financial Group Inc. ($15.5B, 4.1%), Toronto-Dominion Bank ($14.2B, 3.8%), BNP Paribas ($13.7B, 3.7%), Bank of Montreal ($12.8, 3.4%), Credit Agricole ($12.6B, 3.4%), Wells Fargo ($12.5B, 3.4%), Canadian Imperial Bank of Commerce ($11.8B, 3.1%), Bank of Nova Scotia ($11.5B, 3.1%), and Citi ($10.7B, 2.9%).
The 10 largest CD issuers include: Toronto-Dominion Bank ($12.9B, 7.4%), Wells Fargo ($12.4B, 7.2%), Bank of Montreal ($12.4B, 7.1%), Mitsubishi UFJ Financial Group Inc ($11.0B, 6.3%), Sumitomo Mitsui Banking Co ($9.7B, 5.6%), RBC ($9.7B, 5.6%), Citi ($7.8B, 4.5%), Sumitomo Mitsui Trust Bank ($7.4B, 4.3%), Landesbank Baden-Wurttemberg ($7.0B, 4.0%), and Svenska Handelsbanken ($6.3B, 3.6%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Bank of Nova Scotia ($8.0B, 5.6%), Commonwealth Bank of Australia ($7.3B, 5.1%), Westpac Banking Co ($6.8B, 4.8%), JP Morgan ($6.3B, 4.4%), BNP Paribas ($6.1B, 4.3%), National Australia Bank Ltd ($5.1B, 3.5%), RBC ($4.6B, 3.2%) Canadian Imperial Bank of Commerce ($4.3B, 3.0%), Toyota ($4.2B, 2.9%), and Mitsubishi UFJ Financial Group Inc ($4.1B, 2.9%).
The largest increases among Issuers include: Federal Home Loan Bank (up $48.3B to $529.1B), Credit Agricole (up $38.3B to $60.7B), US Treasury (up $36.7B to $678.2B), Barclays PLC (up $18.0B to $109.1B), Societe Generale (up $15.1B to $44.3B), JP Morgan (up $12.0B to $35.8B), Natixis (up $11.8B to $31.4B), Credit Suisse (up $10.9B to $19.7B), and ING Bank (up $5.4B to $28.4B).
The largest decreases among Issuers of money market securities (including Repo) in July were shown by: Federal Reserve Bank of New York (down $173.5B to $184.1B), Bank of America (down $6.6B to $32.4B), Svenska Handelsbanken (down $5.0B to $10.5B), Federal Home Loan Mortgage Co (down $4.6B to $49.2B), Bank of Montreal (down $3.9B to $27.9B), UBS AG (down $3.3B to $4.8B), RBC (down $3.1B to $62.5B), HSBC (down $1.2B to $45.7B), Nordea Bank (down $1.1B to $10.4B), and Swedbank AB (down $1.1B to $7.0B).
The United States remained the largest segment of country-affiliations; it represents 65.5% of holdings, or $1.762 trillion. France (9.6%, $257.3B) moved up to second place ahead of Canada (6.7%, $179.6B) in 3rd. Japan (5.7%, $154.3B) stayed in fourth, while the United Kingdom (3.6%, $97.3B) remained in fifth place. The Netherlands (1.8%, $49.4B) moved into sixth place ahead of Germany (1.8%, $49.1B) and Australia (1.4%, $38.5B), Sweden (1.4%, $38.0B). Switzerland (1.0%, $26.9B) ranked tenth. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of July 31, 2017, Taxable money funds held 31.4% (down from 36.5%) of their assets in securities maturing Overnight, and another 14.1% maturing in 2-7 days (up from 13.5%). Thus, 45.6% in total matures in 1-7 days. Another 18.6% matures in 8-30 days, while 12.3% matures in 31-60 days. Note that over three-quarters, or 76.4% of securities, mature in 60 days or less (down slightly from last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 8.5% of taxable securities, while 11.4% matures in 91-180 days, and just 3.7% matures beyond 181 days.
The Federal Reserve Bank of New York's Liberty Street Economics blog published the paper, "Regulatory Incentives and Quarter-End Dynamics in the Repo Market" earlier this week. The NY Fed's notice tells us, "Our bloggers study how differences in the implementation of regulations impact rates and quantities borrowed in the U.S. repo market. They find that disparities in the implementation of the leverage ratio in the United States compared with Europe appear to have a significant impact on the U.S. repo market." (Note: Watch for the latest Repo totals in our new Money Fund Portfolio Holdings update Wednesday. The Form N-MFP cut of our holdings was posted to our Content center Tuesday.)
Written by James Egelohf, Antoine Martin, and Noah Zinsmeister, the article explains, "Since the global financial crisis, central bankers and other prudential authorities have been working to design and implement new banking regulations, known as Basel III, to reduce risk in the financial sector. Although most features of the Basel III regime are implemented consistently across jurisdictions, some important details vary.... ` In this post, we study the impact of this difference in regulatory implementation on rates and quantities borrowed in the U.S. repo market <b:>`_."
It continues, "Quarter-end reporting might create incentives for banks to temporarily adjust their balance sheet -- decreasing leverage around quarter-end dates and increasing it on other days, for example. These dynamics have been discussed in academic research, by New York Fed officials, most recently in a speech by Simon Potter, the head of the Bank's Markets Group, and in a recent blog post <i:http://libertystreeteconomics.newyorkfed.org/2016/12/investigating-the-proposed-overnight-treasury-gc-repo-benchmark-rates.html>`_on `plans for future general collateral repo reference rates. A recent report published by the Committee on the Global Financial System provides a more global view on the effect of regulation on repo markets."
The NY Fed blog comments, "The U.S. repo market provides a useful setting to look at quarter-end dynamics for several reasons. We have good data on this market and it has several segments in which we can observe differences that help highlight the economic mechanisms at play. The U.S. repo market is also very liquid, which makes it easy for banks to temporarily reduce balances. Finally, repo transactions, particularly those backed by Treasury securities, are very safe; hence, they are quite likely to be affected by the leverage ratio."
It states, "Indeed, because these transactions are so safe, their effect on the size of a bank's balance sheet, when weighted by risk, is small. However, by design the leverage ratio treats all bank assets equally, regardless of risks. Very safe transactions have a low return and are thus less attractive to banks than other activities that have higher risk and a higher return, if the leverage ratio binds."
They explain, "We first look at the tri-party repo market, where large investment banks obtain cash against their inventory of securities, or the securities of their clients. Here we use the term "bank" to include securities dealers, most of which are part of regulated banking organizations. We exclude interbank transactions -- cleared through the General Collateral Finance Repo Service (GCF Repo) -- which are considered separately below."
The blog says, "Our expectation is that institutions that report quarter-end snapshots will reduce their repo borrowing around these days as they reduce the size of their balance sheet, and that institutions that report daily averages over the quarter will either keep the same level of activity or, perhaps, increase their activity to pick up some of the slack. [A] chart ... provides strong evidence that euro area and Swiss (hereafter European) banks pull away from the tri-party repo market around quarter-end dates, while we see little change for institutions from other jurisdictions. Perhaps surprisingly, we do not observe much change in behavior among Japanese banks, which are included in the "Other" category. This is consistent with the work of Ben Munyan, who also observes much larger swings in repo borrowing for European banks."
It tells us, "As European banks sharply decrease their demand for cash around quarter-end dates, we would expect, all else equal, that the repo rate would decrease as lenders compete by lowering the rate that they are willing to accept to invest cash with the remaining borrowers. Instead, the preceding chart shows that the Fed's overnight reverse repo (ON RRP) program reduces the disruptions this retrenchment might otherwise cause by accepting the cash that lenders cannot invest otherwise. As a result, repo rates remain stable."
The blog comments, "We now turn to the GCF repo market. This segment, which includes interdealer activity settled on the tri-party platform, is interesting, in part, because interdealer repos are cleared by the Fixed Income Clearing Corporation (FICC). FICC plays the role of central counterparty in this market, meaning that it stands between counterparties to a trade, becoming the buyer to every seller and the seller to every buyer. This is important because accounting and regulatory capital rules allow a bank to record the net value of two transactions on its balance sheets if these transactions have the same counterparty and maturity date and satisfy other technical requirements."
It says, "U.S. banks also exhibit quarter-end trends in the GCF repo market -- a pattern they do not display in the tri-party repo market. This is largely because of the nature of GCF repo transactions; in this market, the net position across all banks must always be zero, as every dollar lent by one bank must be borrowed by another. In other words, any change in the net activity of a subset of banks has to be offset by a corresponding change for the other banks. Thus, the quarter-end movements of U.S. banks are likely a result of European banks' shifts in activity. Indeed, while European banks reduce their gross activity somewhat on quarter-end dates to achieve their desired net-zero position, U.S. banks increase their gross activity."
The blog states, "If the shift in net lending at quarter-end is driven by European banks' reduced willingness to lend, then borrowers should need to increase the rate they offer to pay to attract the cash they need. The chart below, which displays the spread between the rate in the GCF repo market and the ON RRP offering rate, shows that this is the case (albeit not at the end of 2016)."
Finally, it adds, "Our findings suggest that the implementation details of financial regulations can have important implications for global financial markets. In this example, differences in implementation of the leverage ratio in the United States compared to Europe appear to have a significant impact on the U.S. repo market. Another important lesson is that financial regulations can impact monetary policy implementation. Here, the ON RRP facility appears to have played a useful role as a shock absorber in the tri-party repo market by limiting the effect of variations in European banks' demand for funds on broader money market conditions."
Crane Data's latest Money Fund Market Share rankings show assets in U.S. money fund complexes were up in July, as overall assets increased by $34.3 billion, or 1.2%. Total assets have increased by $25.3 billion, or 0.9%, over the past 3 months. They've increased by $205.9 billion, or 7.8%, over the past 12 months through July 31, but note that our asset totals have been inflated by the addition of a number of funds. (Crane Data added batches of previously untracked funds in December, February and April. These funds, which total over $200 billion, include a number of internal funds that we hadn't been aware of prior to disclosures of the SEC's Form N-MFP.) The biggest gainers in July were Dreyfus, whose MMFs rose by $10.0 billion, or 6.0%, Fidelity, whose MMFs rose by $10.0 billion, or 1.9%, and Invesco, whose MMFs rose by $5.3 billion, or 9.1%. (Note: Columbia rose by $13.3 billion, but their totals were driven by the addition of the $13.4 billion Columbia Short Term Cash Fund this month to our collections.)
BlackRock, Northern, and Schwab also saw assets increase in July, rising by $4.0B, $2.3B, and $1.1B, respectively. The biggest declines were seen by JP Morgan, Federated, Goldman Sachs, SSgA and First American. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.) We review these market share totals below, and we also look at money fund yields the past month, which moved higher again.
Over the past year through July 31, 2017, Vanguard (up $83.1B), Fidelity (up $82.1B), Dreyfus (up $26.9B), and T Rowe Price (up $24.7B) were the largest gainers, but JP Morgan (up $9.4B, or 4.1%) and Dreyfus (up $26.9B, or 17.8%) would have been the largest gainers had we adjusted for the previous addition of internal fund assets. These were followed by Columbia (up $12.7B, or 829.4%), Prudential (up $12.3B, or 1879.2%), and First American (up $8.3B, or 20.8%).
Dreyfus, Columbia, Invesco, BlackRock, and Fidelity had the largest money fund asset increases over the past 3 months, rising by $18.5B, $13.3B, $9.5B, $6.9B and $4.5B, respectively. The biggest decliners over 12 months include: Federated (down $25.3B, or -12.4%), Goldman Sachs (down $21.7B, or -11.7), Wells Fargo (down $18.3B, or -16.5%), Western (down $15.0B, or -35.1%), SSgA (down $13.7B, or -14.8%), and Morgan Stanley (down $10.8B, or -8.7%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $535.9 billion, or 18.9% of all assets. It was up $10.0 billion in July, up $4.5 billion over 3 mos., and up $82.1B over 12 months. Vanguard is second with $273.0 billion, or 9.6% market share (up $1.1B, down $2.5B, and up $83.1B), while BlackRock is third with $260.2 billion, or 9.2% market share (up $4.0B, up $6.9B, and up $15.4B for the past 1-month, 3-mos. and 12-mos., respectively). JP Morgan ranked fourth with $243.3 billion, or 8.6% of assets (down $5.2B, down $6.8B, and up $9.4B for the past 1-month, 3-mos. and 12-mos., respectively), while Federated was ranked fifth with $178.9 billion, or 6.3% of assets (down $4.2B, down $4.3B, and down $25.3B).
Dreyfus was in sixth place with $178.6 billion, or 6.3% of assets (up $10.0B, up $18.5B, and up $26.9B), while Goldman Sachs was in seventh place with $163.5 billion, or 5.8% (down $2.2B, down $12.0B, and down $21.7B). Schwab ($155.0B, or 5.5%) was in eighth place, followed by Morgan Stanley in ninth place ($114.4B, or 4.0%) and Northern in tenth place ($97.1B, or 3.4%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Wells Fargo ($93.2B, or 3.3%), SSGA ($78.9B, or 2.8%), Invesco ($64.5B, or 2.3%), First American ($47.9B, or 1.7%), T Rowe Price ($39.8B, or 1.4%), UBS ($39.1B, or 1.4%), Western ($27.8B, or 1.0%), DFA ($27.0B, or 1.0%), Franklin ($21.4B, or 0.8%), and Deutsche ($17.4B, or 0.6%). The 11th through 20th ranked managers are the same as last month. Crane Data currently tracks 66 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except JPMorgan moves ahead of Vanguard and BlackRock, BlackRock moves ahead of Vanguard, Goldman Sachs moves ahead of Federated and Dreyfus, and SSgA moves ahead of Wells Fargo.
Looking at our Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families include: Fidelity ($545.5 billion), JP Morgan ($404.4B), BlackRock ($386.5B), Vanguard ($273.0B), and Goldman Sachs ($258.2B). Dreyfus/BNY Mellon ($210.7B) was sixth and Federated ($187.8B) was in seventh, followed by Schwab ($155.1B), Morgan Stanley ($148.2B), and Northern ($114.0B), which round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
The August issue of our Money Fund Intelligence and MFI XLS, with data as of 7/31/17, shows that yields moved higher again in July across our Taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 751), was up 5 bps to 0.68% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 9 bps to 0.64%. The MFA's Gross 7-Day Yield increased 6 bps to 1.12%, while the Gross 30-Day Yield was up 8 bps to 1.08%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.86% (up 5 bps) and an average 30-Day Yield of 0.83% (up 9 bps). The Crane 100 shows a Gross 7-Day Yield of 1.14% (up 4 bps), and a Gross 30-Day Yield of 1.11% (up 9 bps). For the 12 month return through 7/31/17, our Crane MF Average returned 0.32% and our Crane 100 returned 0.47%. The total number of funds, including taxable and tax-exempt, decreased to 984, down 12 from last month. There are currently 751 taxable and 233 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 0.96% (up 6 bps) as of July 31, while the Crane Govt Inst Index was 0.74% (up 5 bps) and the Treasury Inst Index was 0.75% (up 8 bps). Thus, the spread between Prime funds and Treasury funds is 21 basis points, down 2 bps from last month, while the spread between Prime funds and Govt funds is 22 basis points, up one bps from last month. The Crane Prime Retail Index yielded 0.75% (up 5 bps), while the Govt Retail Index yielded 0.38% (up 5 bps) and the Treasury Retil Index was 0.49% (up 8 bps). The Crane Tax Exempt MF Index yield decreased to 0.37% (down 4 bps).
Gross 7-Day Yields for these indexes in July were: Prime Inst 1.30% (up 4 bps), Govt Inst 1.04% (up 5 bps), Treasury Inst 1.06% (up 8 bps), Prime Retail 1.28% (up 4 bps), Govt Retail 1.02% (up 8 bps), and Treasury Retail 1.06% (up 7 bps). The Crane Tax Exempt Index decreased 6 basis points to 0.87%. The Crane 100 MF Index returned on average 0.07% for 1-month, 0.18% for 3-month, 0.35% for YTD, 0.47% for 1-year, 0.21% for 3-years (annualized), 0.14% for 5-years, and 0.53% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The August issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Monday morning, features the articles: "Managers Flee from State Tax Exempt Money Funds," which reviews the recent spate of liquidations among Tax Exempt MMF managers, "American Beacon's Silver on Govt MMFs, Rates and LGIPs," which profiles Vice President & Chief Fixed Income Officer Sam Silver, and, "AFP Liquidity Survey Shows MMFs Up, Deposits Down," which reviews the Association for Financial Professionals' latest findings. We have also updated our Money Fund Wisdom database with July 31, 2017, statistics, and we sent out our MFI XLS spreadsheet Monday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our August Money Fund Portfolio Holdings are scheduled to ship Wednesday, August 9, and our August Bond Fund Intelligence is scheduled to go out Monday, August 14.
MFI's "Managers Flee from State Tax Exempt" article says, "Though overall consolidations and liquidations in the money fund sector have slowed since the money fund reforms went into effect and the Fed began raising rates, exits have continued in the Tax Exempt sector, particularly among State T-E MMFs. Just within the past two months, USAA, Schwab, Dreyfus and Western have all announced or implemented liquidations. We review a number of the recent ones below."
The piece continues, "Tax-exempt MMFs have seen assets decline precipitously over the past decade, and in particular over the past year, falling from $385.6 billion in mid-2007 to $251.7 billion at the start of 2016, to $134.9 billion currently. The number of Tax Exempt funds has also shrunk dramatically, declining from 390 in 2007 to 353 in 2015 to 233 on 7/31/17. State Tax Exempt MMFs have dropped from 187 to 105 over the past 2 years."
Our "profile" reads, "This month, Money Fund Intelligence interviews Sam Silver, Vice President & Chief Fixed Income Officer at American Beacon Advisors, which manages the American Beacon U.S. Government Money Market Select Fund. We discuss the firm's presence in money funds and local government investment pools (or LGIPs), the dramatic changes over the past year in the space, and the outlook for the cash investment space going forward. Our Q&A follows."
MFI asks, "How long have you been running money funds?" Silver explains, "I first joined American Beacon in 1999 and have been involved in the MMF Industry since 1989. `American Beacon has provided cash management since 1986 and opened its first MMF in 1987. American Beacon currently manages over $60 billion between Mutual Funds and Separately Managed Accounts. The makeup of the assets includes Equity, Fixed Income and Money Market/Cash Management accounts."
He explains, "In the cash management space we manage corporate cash accounts along with Local Government Investment Pools (LGIPs). Our government money market fund is an institutional fund, so it is made up of primarily corporate accounts who are looking for a stable NAV with a reasonable yield."
Silver says his biggest priorities include, "We are primarily focused on the Fed, since they've been active here recently. So the Fed and the economic data, just to make sure all the portfolios are properly positioned during this rising interest rate environment that we're in.... As far as looking at opportunities ... we continue to look for clients with stable assets that are a good fit for our government money market fund, and for those who want a stable value alternative to prime funds, we also offer customized separate accounts. [S]ome clients like to have separate guidelines slightly different from money market funds to provide more flexibility than what a money market fund can offer."
Our "AFP Liquidity Survey" update explains, "The Association for Financial Professionals released its "2017 AFP Liquidity Survey" last month. Its summary says, "Treasury and finance professionals remain cautiously optimistic. Safety is still of the utmost importance to them. Despite encouraging signs from the Federal Reserve ... organizations' investment policies are still not focused on yield. Indeed, a general feeling of apprehension is reflected in companies' heavy reliance on bank deposits as their investment vehicles of choice: 53 percent of all corporate cash holdings are still maintained at banks. That is slightly lower than the 55% reported last year."
It continues, "AFP writes, "Seventy-two percent of organizations have a written investment policy that dictates their short-term investment strategy.... `Safety of principal continues to be paramount: two-thirds (67 percent) of survey respondents indicate that safety is the most important short-term investment objective for their organizations.... Thirty percent of survey respondents indicate their organizations' most important cash investment policy objective is liquidity.... Yield continues to be ranked a distant third as the most important objective of an organization's cash investment policy."
In a sidebar, "Schwab: Fee Waivers Over," we write, "A press release entitled, "Schwab Reports Record Quarterly Net Income of $575 Million, up 27%," tells us, "The Charles Schwab Corporation announced today that its net income for the second quarter of 2017 was a record $575 million, up 2% from $564 million for the prior quarter, and up 27% from $452 million for the second quarter of 2016. Net income for the six months ended June 30, 2017 was $1.1 billion, up 32% from the year-earlier period.
Our August MFI XLS, with July 31, 2017, data, shows total assets increased $32.6 billion in July to $2.830 trillion after decreasing $20.2 billion in June, increasing $20.3 billion in May and $68.9 billion in April, but decreasing $25.2 billion in March. (Note that we added $67.3 billion in new funds in April.) Our broad Crane Money Fund Average 7-Day Yield was up 5 bps to 0.68% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 5 bps to 0.86% (7-day).
On a Gross Yield Basis (7-Day) (before expenses were taken out), the Crane MFA rose 0.04% to 1.12% and the Crane 100 rose 5 bps to 1.14%. Charged Expenses averaged 0.44% and 0.29% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 31 days (unchanged from last month) and for the Crane 100 was 32 days (down 1 day from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows a big jump in money fund assets for the second week in a row and an increase in Prime MMFs for the 7th week in a row. Government money funds jumped for the second week in a row after showing outflows during most of the first half of the year, while Prime MMFs rose for the 13th increase in the past 15 weeks. Prime assets have risen by $18.7 billion over the past 11 weeks, money funds have made up over half of their year-to-date deficit (they're now down just $69 billion, or 2.5%, YTD). We review recent asset trends below, and we also cover yet another set of liquidations, including another Tax Free MMF withdrawal (this one from Western).
ICI writes, "Total money market fund assets increased by $20.43 billion to $2.66 trillion for the week ended Wednesday, August 2, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $14.68 billion and prime funds increased by $4.32 billion. Tax-exempt money market funds increased by $1.44 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.102 trillion (79.0% of all money funds), while Total Prime MMFs stand at $427.0 billion (16.0%). Tax Exempt MMFs total $131.1 billion, or 4.9%.
They explain, "Assets of retail money market funds increased by $5.69 billion to $960.90 billion. Among retail funds, government money market fund assets increased by $3.06 billion to $581.67 billion, prime money market fund assets increased by $1.27 billion to $254.27 billion, and tax-exempt fund assets increased by $1.35 billion to $124.96 billion." Retail assets account for over a third of total assets, or 36.1%, and Government Retail assets make up 60.5% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $14.75 billion to $1.70 trillion. Among institutional funds, government money market fund assets increased by $11.61 billion to $1.52 trillion, prime money market fund assets increased by $3.05 billion to $172.71 billion, and tax-exempt fund assets increased by $90 million to $6.15 billion." Institutional assets account for 63.9% of all MMF assets, with Government Inst assets making up 89.5% of all Institutional MMFs.
In other news, ICI also published a report entitled, "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2015." It comments, "The bulk of 401(k) assets were invested in stocks. On average, at year-end 2015, 66 percent of 401(k) participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Twenty-seven percent of assets were in fixed-income securities such as stable value investments, bond funds, and money funds."
The report shows money fund assets remaining at 4% of 401k plan assets, the sixth year in a row they've been at that level. GICs and stable value funds represented 6% of assets, while bond funds represented 8%. ICI writes, "Younger participants tended to favor equity funds and balanced funds, while older participants were more likely to invest in fixed-income securities such as bond funds, GICs and other stable value funds, or money funds."
The report says of 401k plans, "Over the past three decades, 401(k) plans have become the most widespread private-sector employer-sponsored retirement plan in the United States. In 2015, an estimated 54 million American workers were active 401(k) plan participants. By year-end 2015, 401(k) plan assets had grown to $4.4 trillion, representing 19 percent of all retirement assets." Thus, money funds in 401k plans total approximately $176 billion (4% of $4.4 trillion).
Finally, we ran into a couple more liquidation filings, including another State Tax Exempt money fund. Western Asset Management says in a filing for Western Asset Liquid Reserves, "The fund's Board of Trustees has determined that it is in the best interests of the Fund and its shareholders to terminate and wind up the Fund. The Fund is expected to cease operations on or about July 28, 2017. In preparation for the termination of the Fund, the assets of the Fund will be liquidated and the Fund will cease to pursue its investment objective."
It adds, "Shareholders of the Fund who elect to redeem their shares prior to the completion of the liquidation will be redeemed in the ordinary course at the Fund's net asset value per share. Each shareholder who remains in the Fund will receive a liquidating distribution equal to the aggregate net asset value of the shares of the Fund that such shareholder then holds. In the interim, effective immediately, the Fund will be closed to new purchases and incoming exchanges, except that dividend reinvestment will continue until the Fund is terminated."
Another filing for Western California Tax-Free Money Fund tells us, "The fund's Board of Trustees has determined that it is in the best interests of the Fund and its shareholders to terminate and wind up the Fund. The Fund is expected to cease operations on or about July 28, 2017. In preparation for the termination of the Fund, the assets of the Fund will be liquidated and the Fund will cease to pursue its investment objective."
It continues, "Shareholders of the Fund who elect to redeem their shares prior to the completion of the liquidation will be redeemed in the ordinary course at the Fund's net asset value per share. Each shareholder who remains in the Fund will receive a liquidating distribution equal to the aggregate net asset value of the shares of the Fund that such shareholder then holds. In the interim, effective immediately, the Fund will be closed to new purchases and incoming exchanges, except that dividend reinvestment will continue until the Fund is terminated. Current shareholders (including those investing through a systematic investment plan or payroll deduction) will be permitted to purchase additional Fund shares until July 14, 2017."
USAA is the latest in a long line of money fund managers to liquidate state-specific municipal, or tax-exempt money market funds. Tax-exempt MMFs have seen assets decline precipitously over the past decade, and in particular over the past year, falling from $385.6 billion in mid-2007 to $251.7 billion at the start of 2016, to $133.1 billion currently. The number of Tax Exempt funds has also shrunk dramatically, declining from 390 in 2007 to 353 in 2015 to 245 on 6/30/17. State Tax Exempt MMFs have dropped from 187 to 116 over the past 2 years. USAA has terminated its CA, NY and VA MMFs, but continues to offer USAA Tax-Exempt MMF, USAA MMF, and USAA Treasury MM. (See our August 1 Link of the Day, "Dreyfus Liquidating AMT-Free MMF," and our June 13 News, "Schwab Liquidating MA, NJ, PA MFs.") We also review a new SEC update on Private Liquidity funds below.
The USAA filing says, "The Board of Trustees (Board) of USAA Mutual Funds Trust (the Trust) has approved a Plan of Liquidation and Dissolution (the Plan) for USAA California Money Market Fund, USAA New York Money Market Fund, and USAA Virginia Money Market Fund (the Funds) pursuant to which the Funds will be liquidated on or about July 26, 2017 (the Liquidation Date). In approving the liquidations, the Board determined that the liquidation of each Fund is in the best interest of that Fund and its shareholders."
It adds, "The Funds may begin positioning their respective portfolios for liquidation, which may cause a Fund to deviate from its stated investment objective and strategies. It is anticipated that each Fund's portfolio will be positioned into cash on or some time prior to the Liquidation Date. Effective as of the close of business on June 14, 2017, each Fund will be closed to new investors. Shareholders of a Fund may redeem their shares prior to the Liquidation Date in accordance with the procedures described in the Fund's prospectus. If you choose not to do so prior to the Liquidation Date, we will redeem your Fund shares in accordance with the Plan and send you a check equal to the net asset value of your shares as of the Liquidation Date."
Another filing tells us that Dreyfus is liquidating the Participant shares of its AMT-Free NY MMF. It says, "Effective on or about July 31, 2017, Participant shares of Dreyfus AMT-Free New York Municipal Cash Management and Dreyfus Institutional Preferred Money Market Fund will no longer be offered by either fund and will be terminated as a separately designated class of the fund." (See the filing for more details on pending moves too.)
In other news, the SEC released it latest quarterly "Private Funds Statistics" report, which summarizes Form PF statistics and includes some data on "Liquidity Funds." The publication shows a modest increase in overall Liquidity fund assets in the latest quarter to $565 billion. Their previous press release, entitled, "SEC Staff Supplements Quarterly Private Funds Statistics" tells us, "The U.S. Securities and Exchange Commission staff ... published a suite of new data and analyses of private fund statistics and trends. The Private Funds Statistics ... offers investors and other market participants valuable insights by aggregating data reported by private fund advisers on Form ADV and Form PF. New analyses include ... characteristics of private liquidity funds." We review the latest SEC report below.
The document's "Introduction" explains, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from First Calendar Quarter 2015 through Fourth Calendar Quarter 2016 as reported by Form PF filers.... Form PF is still a relatively new reporting requirement for advisers to private funds. The Staff continues to work with the data and filers to identify and correct filing errors."
The tables in the SEC's "Private Funds Statistics: Fourth Calendar Quarter 2016," the most recent data available, now show 113 Liquidity Funds (including "Section 3 Liquidity Funds," which are Liquidity Funds from advisors with over $1 billion total in cash), up 10 funds from the prior quarter and up seven from a year ago. (There are 69 Liquidity Funds and 44 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 39 Liquidity Fund advisers and 24 Section 3 Liquidity Fund advisers, or 63 advisers in total, seven more than last quarter (and five more than a year ago).
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $565 billion, up $28 billion from Q3'16 and down $2 billion from a year ago (Q4'15). Of this total, $292 billion is normal Liquidity Funds while $273 billion is in Section 3 (large manager) Liquidity Funds.
A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $81 billion is held by Private Funds, $65 billion is held by Unknown Non-U.S. Investors, $52 billion is held by Other, $16 billion is held by SEC-Registered Investment Companies, $10 billion is held by Banking/Thrift Inst., $9 billion is held by Insurance Companies, $5 billion is held by Pension Plans, and $4 billion is held by Non-U.S. Individuals. Non-Profits and State/Muni Govt Pension Plans also held $1 billion each.
The tables also show that 80.9% of Section 3 Liquidity Funds have a liquidation period of one day, $253 billion of these funds may suspend redemptions, and $220 billion of these funds may have gates (out of a total of $270 billion). The Portfolio Characteristics show that these funds are very close to money market funds. WAMs average a short 29 days (40 days when weighted by assets), WALs are a very short 60 days (71 days when asset-weighted), and 7-Day Gross Yields average about 0.64% (0.62% asset-weighted). Daily Liquid Assets average about 45% while Weekly Liquid Assets average about 60%. Overall, these portfolios appear shorter with a much heavier Treasury exposure than money market funds in general; half of them (50.0%) are fully compliant with Rule 2a-7.
With less than two months to go before our European Money Fund Symposium (Sept. 25-26 in Paris, France), Crane Data will be ramping up its news coverage of money market funds outside the U.S. Today, we review a new article on Chinese money funds, and we also quote from a recent teleconference on European money funds. The website Asian Investor writes "Fears rise over China money market fund risks." The article says, "Money market products account for 51% of China's mutual fund assets, and Tianhong's Yu'e Bao makes up nearly a third of MMF assets. Analysts are worried about concentration risks."
The site explains, "Fears continue to rise about the concentration of risk in China's swelling money-market funds, as they increasingly dominate the country's mutual fund landscape. Tianhong Asset Management extended its lead as the biggest mutual fund house in China in the first half of 2017, thanks to a dramatic 80% increase in assets at Yu'e Bao, its money market fund (MMF)."
Asian Investor writes, "Yu'e Bao now accounts for 28% of China MMF AUM, with the next two biggest -- both ICBC Credit Suisse products -- according for 7% between them. Tianhong's Assets under management (AUM) totaled Rmb1.5 trillion as of June 30 for a 15% share of the Rmb5.1 trillion($752 billion) mutual fund market, compared with 9.22% at the end of 2016. Yu'e Bao makes up 90% of Tianhong's AUM. It is now the world's biggest MMF, having surpassed the JP Morgan US Government MMF in the first quarter of this year. MMFs as a whole now contribute 51% of all mainland mutual fund assets, according to the Asset Management Association of China."
It continues, "The high concentration in MMFs is cause of worry for some analysts.... MMFs began growing rapidly in China from the second half of 2013 thanks to strong retail demand, not least via Yu'e Bao. Institutional Investor demand drove a second wave of development in the second half of 2015, as stock markets turned volatile and banks sought to outsource some of their cash management, said Huang Li, co-author of [a] Fitch Report."
Finally, the piece says, "It appears that regulators are looking to dampen the rapid growth of MMFs. Yu'e Bao has been forced to cut its Rmb1 million ($145,000) investment cap to Rmb250,000 since late May.... In addition, the China Securities Regulatory Commission (CSRC) began consulting in March on strengthening the rules for the liquidity management of MMFs, particularly institutional MMFs with concentrated investor bases."
In other "offshore" news, Fitch Ratings recently hosted a webinar entitled, "European Money Fund Reform Finalised; What Happens Next?" The recording's description says, "Fitch Ratings held a teleconference to discuss European money market fund reform. The reforms were signed into law on 30th June 2017 with the implementation period starting 20 days later -- Thursday 20th July 2017. The reforms will herald important changes to the European money market fund landscape which investors will need to understand and update investment policies and practices."
Fitch's Evangelia Gkeka, explains, "European Money Market Fund Reform means that the existing money funds will cease to exist in their current form.... I will focus on the [new types of] funds available to short-term investors and their main features and characteristics. I will also briefly discuss the impact of the new regulations in asset management and their credit and risk management."
She continues, "The types of funds [include]: LVNAV funds, or low volatility NAV funds, short-term [MMFs], and standard VNAV funds. There are certain factors that differentiate ... funds from one another, [including] maturity profile, liquidity, diversification and valuation. Starting with public debt CNAV funds, which are categorized as short-term money market funds, this fund has 99.5% of their assets issued in government issued and guaranteed paper, repo but by government issued and guaranteed paper and cash.... The next category is again a short-term money market fund named Low-Volatility Net Asset Value Fund, or LVNAV.... Both of these fund types will be subject to liquidity fees and redemption gates, if liquidity [falls] below specific thresholds."
Gkeka adds, "The remaining two fund types, the short-term VNAV and standard variable net asset value, already existed pre-reform. These account for approximately 15-35% of the market respectively. As a result of the reform, CNAV funds will need to convert to one of these 4 fund types. From the conversations that I've had with asset managers, we will anticipate the majority of CNAV's will opt to convert to LVNAV. This will allow the fund to maintain a stable net asset value which is what investors of CNAV are used to, however the type of restrictions LVAV funds have, can cause a few CNAV to rather opt to become short-term VNAV."
Finally, Fitch's Alastair Sewell comments, "Changes are ahead for the short-term investors ... in Europe.... So what really matter here is the measurement and the segment of the risks embedded in the portfolio of the money market fund. [R]eform ... changes the funds available in Europe and the ... different fund types, but that doesn't necessarily matter so much if the risk embedded in the fund itself doesn't change.... In terms of timing ... just a reminder that [it] is the 21st of July of 2018. That's next year for new funds and the 21st of January of 2019 for the conversion of existing funds."
This month, Bond Fund Intelligence featured the profile article, "`Pros & Cons of Ultra-Short BFs by Crane, Pope & Olsen." We wrote in our July issue about our June Money Fund Symposium conference in Atlanta, which featured the ultra-short bond session with our Peter Crane, along with Fidelity's Kerry Pope and Northern Trust's Morten Olsen. The three discussed the growing use of ultra-short bond funds by institutional cash investors. We quote from this session below. (Note: This "profile" is reprinted from the July issue of BFI. Contact us if you'd like to see the full issue or if you'd like to see our new Bond Fund Portfolio Holdings "beta" product, which ships to subscribers Monday.)
Crane explained, "Ultra-short bond funds have been one of the great hopes [in the near 'cash' space].... The good news about the space is that after several years of a lot of launches and a lot of pushing from providers, there is a [now] awareness. Big corporate investors who've been targeted now know about ultra-short bond funds [as an] alternative to prime money funds, and as an alternative to get more yield. The other good news is, they're starting to gain critical mass."
Pope tells us, "We had the benefits of the 2007-2008 enhanced cash product [experience and problems] when we were creating these new ultra-short products. They're different for a couple of reasons. One is that we're focused on ... volatility, and [not] simply providing a higher rate return rather than a money market fund. They're not holding a tremendous amount of structured product [or] mortgage securities in these types of products."
He continues, “The client base that we’re selling to is: 1) a more stable client base, primarily because we’ve explained to people the use of this type of a product is not for operating cash, it’s for strategic liquidity, liquidity that has some level of dormancy around it. As opposed to back in the day, when they were selling enhanced cash products, those products were designed to compete directly with money market funds."
Pope adds, "They were sold as operating cash equivalents. They were highly rated [but] most of the product ... was structured product.... We all know what happens in times of stress with structured products, there's no liquidity.... [Before they were] certainly mis-marketed, mis-sold and poorly managed."
He continues, "So part of the lessons learned is that what we're now selling are basically products that you used to buy as money market products. These are basically the old 2a-7 money market products, but because of rate reform, money market funds have become shorter in duration and more conservative. We used to manage to a $1.00 NAV very protectively back when we had 90 day weighted average maturities or 120 day weighted average maturities in the money market space. What we're really looking to recreate is that conservative profile."
Pope explains, "There's been a tremendous number of forces that have reshaped the liquidity space. We've had 2a-7 rate reform, where money market funds have become more and more conservative, and now prime [potentially have] fees associated with [them and] 4 decimal places. We have banks that now have different regulatory requirements that encourage the lengthening of their liabilities, and then, of course, we have now rates moving higher. So all of these come together to create an environment [in which] it's appropriate to step back and look at how cash is being managed and what the credit methodology is. Corporations should be thinking about managing the liquidity that they have."
Pope says of Fidelity's Conservative Income Fund, "When we did the analysis, we were concerned initially about bumping up against some of the regulatory forces. We wanted to circle that with what the SEC was looking to do. So we knew we didn't want to replicate a current 2a-7 kind of structure. Initially, we wanted to position this product differently ... to those clients that have strategic liquidity [needs, giving them] additional value by creating a little bit of a different structure."
Olsen says of Northern's offerings, "One of the big differences is we can buy the full investment grade spectrum and that means that [other very short] ultra-short funds are mostly in financial securities.... With money fund reform [about] 70-80% of [fund holdings are in] financial issues.... That's much lower than our ultra-short fund; it's closer to 40%.... We buy Treasuries, we always have roughly 15% relating to Treasuries and agencies. So our ultra-short funds is a very well diversified investment vehicle.... We don't buy any derivatives; we don't buy cross-currency, because everything is dollar denominated.... We take a bit of duration risk; we take a bit of credit risk. We feel like it's well controlled, and we focus on the two things we need to do that, which is the yield curve and credit."
We ask Pope, "How do we know funds are 'conservative' ultra-shorts?" He answers, "There are differences in all of the various ultra-shorts, even the conservatives are different. So you really have to look at the prospectus. From our perspective, we can get investment grade and [a] higher percentage of A-rated debt. That too is extremely important... We want a short duration, so we target 4.5 months. But during this time of rising interest rates we've shortened that to about 2 [months]. It's at 0.2 year at this point in terms of duration."
He says, "Then in terms of weighted average maturity, we are 3/4 of a year or shorter, and we think that's appropriate to help us [dampen] volatility.... [T]o launch this type of product, we went back to the 2008 crisis to understand the type of volatility and its potential in the product. Certainly in times of stress, there will be some volatility, especially as credit spreads move. But generally speaking ... we're looking at providing a product that, if your holding period [is] 2 months or longer, you will have a positive experience versus over in the prime money fund."
Pope adds, "Ours has been up and running for over 6 years. It took 3 years to get a decent track record.... Once you get past the 3-year mark, people are much more comfortable in understanding how the performance works with NAV volatility.... One of the other things that is difficult: Morningstar evaluates the whole Ultra-Short category, and they don't specify the conservatives. So we're competing in that ultra-short category with funds that have double-B, single-B types of credit. So for us to get a 3-star rating on Morningstar is saying a lot, given that we're not taking nearly the level of credit risk of interest rate risk."
Finally, he tells us, "We've had great success [with this product]. [This is mainly] a function of our salespeople, [who] really jumped on this bandwagon early and recognized the opportunity ... and how many of our clients continue to carry structural liquidity.... This product was really appropriate for that.... They recognized that money market funds are going to need to be more conservative and subject to liquidity gates and fees. They did a very good job marketing it, so much so that in many cases we had clients that would come to us looking to jump in [with] several hundred million dollars.... We had to limit that flow of investor enthusiasm to something more appropriate."
