News Archives: October, 2018
Money fund yields moved higher in October following the Fed's 8th quarter-point rate hike at the end of September, bringing our Crane 100 Money Fund Index up to the 2.0% level for the first time in 10 years. (Our Crane 100 MF Index measures the average yield of the 100 largest taxable money market funds.) Yields have moved up from 1.88% at the start of October and up from 1.12% at the start of 2018 and 0.43% at the start of 2017. We briefly discuss recent yields, and we also review the ICI's latest Trends and Portfolio Composition releases.
Our broad Crane Money Fund Average, a simple average of 692 taxable money market mutual funds, currently yields 1.82%, up from 1.69% on 9/30/18, and up from 0.92% on Dec. 31, 2017 and 0.26% on Dec. 31, 2016. Prime Institutional MFs yield 2.00% on average, while Government Inst MFs yield 1.91%, a spread of a mere 9 basis points. (Treasury Inst MFs yield 1.89% as of Oct. 29.) Prime Retail MFs yield 1.86% vs. 1.56% for Govt Retail MFs (a much more generous spread of 30 bps). Tax Exempt MFs average a 7-day yield of 1.14% currently. (See our Money Fund Intelligence Daily for the latest yields and averages.)
The top-yielding money funds currently are paying annualized rates of 2.25% and higher. Internal (not available to outside investors) funds Fidelity Money Market Central Fund (FID03) and BlackRock Cash Inst MMF SL (BRC01) are yielding 2.41 and 2.38%, respectively, while DWS ESG Liquidity Cap (ESIXX) yields 2.35%. State Street Inst Liquid Reserves Prem (SSIXX) is yielding 2.34%, Goldman Sachs FS MM Inst (FSMXX) is yielding 2.32%, and (the internal) Vanguard Market Liquidity Fund (VAN01) yields 2.31%. Federated Inst Prime Obligs IS (POIXX) yields 2.30%, Morgan Stanley Inst Liq Prime Inst (MPFXX) yields 2.29%, and Wells Fargo Cash Inv Select (WFQXX) yields 2.29%. Yields should continue inching higher in coming days as the remainder of the Fed's recent move gets passed through.
In other news, the Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing" report yesterday. It shows a $3.4 billion decrease in money market fund assets in September to $2.864 trillion, which follows a $31.6 billion increase in August, a $14.9 billion increase in July, and a $30.1 billion drop in June. In the 12 months through Sept. 30, money fund assets have increased by $115.9 billion, or 4.2%. (Month-to-date in October through 10/29, assets have increased by $30.3 billion, $14.1 billion of which is from Prime MMFs, according to our MFI Daily.)
The monthly "Trends" report states, "The combined assets of the nation's mutual funds decreased by $43.77 billion, or 0.2 percent, to $19.42 trillion in September, 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 $11.26 billion in September, compared with an inflow of $13.05 billion in August.... Money market funds had an outflow of $6.61 billion in September, compared with an inflow of $28.87 billion in August. In September funds offered primarily to institutions had an outflow of $13.21 billion and funds offered primarily to individuals had an inflow of $6.60 billion."
The latest "Trends" shows that Taxable MMFs lost assets and Tax Exempt MMFs gained assets last month. Taxable MMFs decreased by $3.8 billion in September to $2.732 trillion, after increasing by $32.0 billion in August, increasing by $19.3 billion in July, and decreasing by $27.1 billion in June. Tax-Exempt MMFs increased $0.5 billion in September to $131.3 billion. Over the past year through 9/30/18, Taxable MMF assets increased by $111.8 billion (4.3%) while Tax-Exempt funds rose by $4.1 billion over the past year (3.2%). Bond fund assets increased by $0.3 billion in September to $4.166 trillion; they've risen by $175.9 billion (4.4%) over the past year.
Money funds continue to represent 14.7% of all mutual fund assets (the same level as the previous month), while bond funds also still represent 21.4%, according to ICI. The total number of money market funds was still unchanged at 383 in September, but this total is down from 405 a year ago. Taxable money funds were also unchanged at 299 funds, and tax-exempt money funds were unchanged at 84 funds over the last month.
ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which showed a drop in Agencies and Treasuries in September. Repurchase Agreements remained in first place among composition segments; they decreased by $3.7 billion, or -0.4%, to $920.1 billion, or 33.7% of holdings. Repo holdings have risen by $10.5 billion, or 1.2%, over the past year. (For more, see our October 11 News, "October MF Portfolio Holdings: Treasury, Agency Down; FICC Repo Up.")
Treasuries fell by $10.0 billion, or -1.3%, to $765.0 billion, or 28.0% of holdings. Treasury securities have increased by $114.5 billion over the past 12 months, or 17.6%. U.S. Government Agency securities were the third largest segment; they fell by $13.3 billion, or -2.1%, to $620.4 billion, or 22.7% of holdings. Agency holdings have fallen by $45.9 billion, or -6.9%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they increased $4.0 billion, or 2.1%, to $196.9 billion (7.2% of assets). CDs held by money funds have fallen by $6.6 billion, or -3.3%, over 12 months. Commercial Paper remained in fifth place, increasing $73 million, or 0.0%, to $190.0 billion (7.0% of assets). CP has increased by $56.7 billion, or 42.6%, over one year. Notes (including Corporate and Bank) were up by $1.4 billion, or 21.8%, to $7.8 billion (0.3% of assets), and Other holdings increased to $32.2 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 176.5 thousand to 32.538 million, while the Number of Funds remained at 299. Over the past 12 months, the number of accounts rose by 5.901 million and the number of funds decreased by 13. The Average Maturity of Portfolios was 33 days in September, up 3 day from August. Over the past 12 months, WAMs of Taxable money funds have increased by 1 day.
A press release entitled, "U.S. Bank Partners with StoneCastle to Provide High Net Worth Insured Cash Solution" tells us, "U.S. Bank announced today that it has entered into a distribution agreement with StoneCastle Cash Management, LLC to provide FICA For Advisors, a federally insured cash solution, to its registered investment advisor (RIA) clients. The product is designed to maximize yields and provide high levels of FDIC insurance while reducing market, credit and principal risk on clients' cash balances." We review the release, and also cover some recent news on ultra-short bond funds, below.
The release explains, "U.S. Bank is the sixth largest custodian in the United States and the first major custodian to offer the position-traded insured cash solution. The U.S. Bank account is seamlessly connected to a network of more than 800 banks, which enables clients to receive $25 million in federal insurance protection with the ability to insure up to $100 million per account."
Alan Markarian, manager of Investment Advisor Services for U.S. Bank, comments, "We've seen increased demand for alternative investment options in the short-term fixed income and cash space. This product provides a forward-thinking option for our clients that would be difficult for them to replicate on their own. It has a unique risk profile and a yield that clients may find attractive compared to other cash products they may be considering.... The product has a great balance of liquidity, yield, and principal protection."
StoneCastle CEO Dan Farrell adds, "Our business model has always been to connect institutional and retail investors to banks through innovative deposit and cash management solutions.... Partnering with U.S. Bank is a great privilege and a perfect extension of that message, which we are certain will help them become an even more competitive organization while contributing to their clients' business and financial successes."
Finally, StoneCastle says, "Extended FDIC insured products are designed to provide safety and underscore the importance of principal protection on cash holdings. Through a large network of pre-screened banks administered by StoneCastle, U.S. Bank provides an opportunity for its clients to extend FDIC insurance well beyond the $250 thousand dollar threshold normally found on a single deposit."
In other news, J.P. Morgan's latest weekly "Short-Term Fixed Income," features a "Short-term bond fund" update. It tell us, "In general, the rise in interest rates during the course of this year has not been friendly to bond returns. Our GABI aggregate index has returned –2.33% year to date (through 10/24/18). However, the very front end of the bond market universe has fared somewhat better. Data show that many ultrashort bond fund shave managed to generate positive returns that in many cases still exceed average yields earned by MMFs."
JPM continues, "However, short-term bond funds have generally not been able to match the ultrashorts. Even so, based on data from Morningstar, low duration bond funds have continued to see strong growth in recent months. We estimate total AUM across short-term and ultrashort mutual funds and ETFs registered $629bn as of 9/30/18, up $61bn year over year. Perhaps unsurprisingly, most of the increase came from ultrashort funds (those with a portfolio duration between 0.5 and 1.5 years), which grew $49bn to $162bn, though short-term funds, with a slightly longer duration of 1.5 to 3.5 years, have also seen some modest growth, especially in 3Q18."
The piece also says, "Among ultrashort categories, the riskier multi-sector and credit styles have continued to outperform government and conservative credit funds on both an absolute and a risk-adjusted basis.... In the short-term space, government funds consistently underperform, though the picture among the various credit styles is more mixed. This is partly because in addition to being more volatile from month to month, short-term funds show more variation in returns between different funds."
It explains, "Flows have largely followed performance, with ultrashort funds seeing strong inflows across all styles except government funds, and short-term funds largely flat.... Allocations have been relatively stable in recent months, with mostly idiosyncratic changes."
JPM adds, "Looking ahead to 2019, we expect the FOMC to continue to raise policy rates at a pace similar to what we have seen this year, and for the overall yield curve to bearishly flatten. In this environment we expect demand for ultrashorts to persist, while short term funds may struggle if their returns cannot beat MMF yields."
Morningstar also comments on ultra-shorts in a new video entitled, "3 Funds That Could Be Cash Alternatives." They tell us, "Funds in the ultrashort bond category are generally high quality. You have some sector flexibility. Although they maintain durations of one year or less, they aren't replacements for FDIC-insured bank money market funds or certificates of deposit. That being said, here are three Morningstar Medalists in the ultrashort bond category that investors can use to diversify their cash holdings."
Analyst Alaina Bompiedi explains, "Fidelity Conservative Income Bond is indeed conservative, but it is not risk free. The fund invests below the one-year mark on the yield curve in a mix of commercial paper, floating rate, and short-term debt. That's pretty similar to other funds in the ultrashort bond category, but compared to money market funds, this one has a wider investment range. It can invest in taxable municipals, corporates, as well as foreign bonds."
Eric Jacobson adds, "Bronze rated BBH Limited Duration looks for undervalued bonds that have enough income to compensate for the liquidity and credit risks and that have an extra margin of safety. That's not a novel idea, but its process, both quantitative and qualitative, is meant to keep the fund invested in proven robust structures or time and battle tested guarantors."
Finally, Miriam Sjoblom adds, "One of my favorite ultrashort bond funds is PIMCO Enhanced Short Maturity ETF, which gets a Gold analyst rating. One of the reasons we like it, it's got a very experienced team. Jerome Schneider's been running it for nearly a decade and he's supported by PIMCO's vast resources across pretty much every bond sector globally.... Adding it all up, this one's tough to beat."
Federated Investors hosted its "Q3 2018 Earnings Conference Call" on Friday, and, as usual, the management team of the 5th largest manager of money market funds weighed in on a number of issues impacting the cash marketplace. Federated CEO and President Chris Donahue commented, "Total money market asset increased approximately $9 billion with funds up $10 billion and separate accounts down about a billion mainly from seasonality. We had positive money market fund flows from a variety of institutional and intermediary clients in the third quarter.... Prime money market fund assets increased about $6 billion or 18% in the third quarter from $32 billion to $38 billion. Our money market mutual fund market share at the end of the quarter was 7.3%, up from Q2's 7.0%."
He continued, "Managed assets were approximately $436 billion, including $269 billion in money market, $79 billion in equity, $65 billion in fixed income, $18.5 billion in alternative, and $4.5 billion in multi-asset. Money market mutual fund assets were $187 billion. In the institutional channel, RFP and related activity continues to be solid with diversified interest in MDT, EAFE, Kauffmann for equities and trade finance, floating rate and short duration for fixed income."
CFO Tom Donahue added, "Total revenue increased by $52.6 million from the prior quarter due mainly to the addition of Hermes revenue which was $49.7, an additional day about $3 million, and higher average money market assets which brought about $1.5 million. Revenue was up $30 million compared to Q3 of last year due mainly to Hermes, partially offset by the impact of the adoption of the revenue recognition standard, about $9 million, higher waivers, primarily from money market funds, about $5 million, and changes in the asset mix of average money market assets also impacted the revenue by about $2 million."
During the call's Q&A session, J.P. Morgan Analyst Ken Worthington asked, "To what extent, if at all, are you seeing a movement back to funds from bank balance sheets?" Money Market CIO Debbie Cunningham answered, "We are definitely seeing a movement back into money market funds. Our assets are higher; the industry's assets are higher. And I think this is probably reflective of both investors getting comfortable with the regulatory changes that went through in 2016 ... but in addition just higher interest rates in general.... On the retail side [it's] more ticket trades that are new business, presumably coming out of some sort of a bank product or some other type of liquidity product and going in to the prime products."
She said, "From a sweep perspective, there is still not much on the retail side that is set up with prime products. There are a few intermediaries that are able to do that, but for the most part sweep products continue to be through government funds. And prime products are generally on the retail side generating business from a ticket trade perspective. On the Muni side also, we are seeing quite a few flows on the retail side.... The industry itself is fairly flat on the Muni side. [But] we are actually experiencing quite healthy flows in our municipal products, both the national as well as the state-specific."
Cunningham added, "Switching to institutional, we're seeing in our government funds a lot of growth that came basically in chunks from what would be M&A activity. There's been a huge amount of M&A activity that's taken place year-to-date, 2018. Also, from a repatriation trade perspective much of that cash, which is again chunky, goes into the government funds mainly because it doesn't stay there for too, too long. It goes back out again once either the deal closes on the M&A side or the intended use of the repatriated funds are then put in to their final form.... So definitely, we're seeing an uptick in flows, and it doesn't seem to be between sectors, but rather coming from outside sectors. I think post money market reform the assets in the industry were about $2.6 trillion. We're now just under $3 trillion."
Chris Donahue also stated, "If you were to ask -- and this would be an impressionistic number, if you were to ask the sales individuals here who have those relationships on the broker dealer side for those broker dealer sweeps, they would contend that $20 billion has moved out, or some number like that." Analyst Brian Bedell added, "I mean we're seeing this in the online brokers where clients are moving to purchase money market funds, say, for example, from the bank sweep. So [I'm] trying to see what your future opportunity is from that dynamic given that -- and obviously the yield are very competitive with your funds."
Another question, from Robert Lee with KBW, asked about the "money fund business [being an] increasingly a technology driven business." Donahue answered, "We believe that we have the technology to be able to service these clients as well as anybody in the world.... We try to characterize the whole business as a technology business in order to try and get the PE up so that you would see this was technology business.... But what the clients see is the investment management expertise and the need for the underlying product."
He also commented, "And the one other thing that I would add on this bigger picture score is that we and many, many others including issuers in the marketplace have been working on Senate bill S.1117, which basically restores money market funds in the prime area and in the Muni area to $1 net asset value. And this would be a great boon to the marketplace to restore the pricing that the capital markets have on exactly these products right at that point of the short-term area of the curve. And we're still working on this. Others in the industry seem to not be as enthusiastic about this."
Cunningham also said, "If you look at sort of just from a history lesson standpoint when the financial crisis happened back in 2008, at that point in time, deposit products and money market mutual funds were both around $4 trillion. And since that time because of deposit insurance, because of the zero interest rate environment, because of the concerns in the marketplace, money fund assets, you know, went down to $2.6 trillion. They're now about $3 trillion and deposits soared to you know, depending upon what deposits you're looking at anywhere between $10 trillion and $13 trillion."
She explained, "The fact is though that those assets have stagnated in the context of their growth. They're growing 2%-ish on a annual basis and that's compared to more like double-digits, just barely double-digit growth, 10%-ish type growth in the money market mutual fund marketplace. I think, you know, there were moves that were made by the broker dealer clients that we've talked about that make it a more difficult task to reverse. Nonetheless, I think economics win out and with a continuing rising rate environment, which we would expect you to see in 2019, we don't see any reason why the product should lose its momentum."
Cunningham also stated, "Does it get prime back to the peak of $1.7 trillion? Probably not, at least not in the immediate future. Maybe with Senate bill S.1117, it does. Time will tell on that one. But certainly -- because of technology, because of investment expertise, because of client-driven relationships and the ... provision of information that we provide to them on a pretty easy basis, instantaneously, we have a very positive outlook for the future."
Finally, when asked about fee competition, Cunningham responded, "I think part of the government fund fee discussion had to do with a point in time when there was a lot of asset gathering occurring into that sector. Not necessarily from an industry standpoint, but into that sector. So switching out of Prime and Muni and into government from a sector perspective, the trillion dollars have moved in 2016. There were fee waivers that were done to capture market share at that point and I won't say that it set a new standard, certainly, once the movement occurred, fees began to normalize, although not back to the pre-financial -- pre-reform levels." (See also the Pittsburgh Post-Gazette's, "Higher interest rates? Federated Investors sure hopes so.")
Brokerage sweeps, rising rates and cash as a percent of client assets were topics of discussion on a number of earnings calls over the past week, including ones from TD Ameritrade and Morgan Stanley. TD Ameritrade Holding Corp.'s (AMTD) "Q4 2018 Earnings Call" contained a number of comments. During the Q&A, CFO Stephen Boyle commented, "It feels like our clients are pretty fully invested here. We've also seen a pretty significant increase in rates over the last couple years. We are seeing a bit of clients who have excess cash in their accounts ... [who] don't need it for their day-to-day operating who are now moving to get better yields on those funds.... I don't think we would expect to see significant declines or even meaningful declines in our BDA [bank deposit account] balances, but these are the things that I know you and everybody is watching pretty closely."
One analyst said, "It seems that you've taken a view that you'll let the investment cash kind of seek those higher yielding instruments and keep betas relatively low in the remaining transactional cash.... How do you weigh that versus maybe segmenting the clients more and increasing overall betas?"
TD Ameritrade President & CEO Tim Hockey responds, "We view our cash balances as mostly operating cash and we realize that there'll be some clients that will opt to move into purchase money funds, and that's okay. It's good for the client. I think it allows us, as you said, to keep relatively low pricing on that operational cash. All we're really looking to do is optimize spread income and we feel very comfortable that our current strategy is doing that well. We think if we try to raise our betas ... to keep all those balances that we'd be having a lower spread income."
Boyle added, "I'd say, we did a lot of work to try and really understand the betas of our particular tiers client cash and their sensitivity. And so, as a result, we just frankly just think we're a little smarter this time around in terms of really maximizing the opportunity for beta variances across those tiers.... It's really hard to sort through exactly where [clients are moving cash, but] on the institutional side, they're more likely to move into a purchase money market fund. On the retail side, they're more likely to purchase CDs on our platform."
See also our Oct. 15 Link of the Day, "TDAM Liquidating Money Funds, which said, "A Prospectus Supplement ... says, "On September 26, 2018, the Board of Directors of TD Asset Management USA Funds Inc. approved the liquidation of each of the TD Money Market Portfolio, TD U.S. Government Portfolio, TD Municipal Portfolio, TD California Municipal Money Market Portfolio and TD New York Municipal Money Market Portfolio, each a series of the Company, pursuant to the terms of a Plan of Liquidation for each Portfolio. The approval by the Board of the liquidations was based on the recommendation of TDAM USA Inc., the Portfolios' investment adviser ('TDAM'), which has determined that the Portfolios are no longer viable from a business and economic perspective. Under its Plan of Liquidation, each Portfolio will be liquidated on or about November 19, 2018."
On Morgan Stanley's latest Quarterly Earnings Call," CFO Jonathan Pruzan, commented, "Net interest income was $1.1 billion for the quarter up 3% sequentially. Higher NII was primarily driven by increased earning assets as higher asset yields were offset by higher funding costs. This includes the impact of the cash sweep program redesign." (See our July 25 News, "MS Liquidating AA Govt, Wells Pushes Sweep Rates Higher; Weekly Holds.")
Pruzan continued, "[A]s you mentioned we did have some CDs mature during the period.... A good amount of those dollars go into the investments accounts of those clients while some portion gets retained in the savings product.... We've talked about promotional CDs and savings. We're working on new premier cash management products and we continue to enhance our digital strategies around both payments and deposits for our client base."
He added, "We're at historical low levels of cash, and client accounts and our deposits are really more impacted by ... asset allocation than actual rates.... Whereas cash levels had been sort of 8% to 10% for quite some time, yhey’re now down at about 6%. What those do after or -- in light of some of the market volatility -- is really a question that we'll have to see as the markets evolve. But we've been in a prolonged bull market if you will and we've seen those cash levels go down."
Another analyst asked, "[H]ow quickly do your customers in wealth management expect to see higher interest rates passed on ... to keep them satisfied?" Pruzan responded, "I think you've got to think about these deposits for what they are, and historically these are really transactional. People have them in the bottom of their investment accounts to transact, to buy and sell securities, to have a little extra liquidity. What we've seen is as an investment thesis the percentage of cash that people are holding is lower and that is what we've seen reflected in the system."
He said, "In terms of rate rises, we're very competitive with our primary competitors in this space. We have our beta tab outperformed our model betas, so it's really not as rate sensitive if you will, it's really asset allocation sensitive. And as people reduce their cash amounts we'll see continue outflows."
In other news, the ICI's weekly "Money Market Fund Assets" report shows MMF assets rising in the latest week after falling sharply the prior week. Government assets rose while Prime MMFs declined. Overall assets are now up $44 billion, or 1.5%, YTD, and they've increased by $134 billion, or 4.9%, over 52 weeks. Retail MMFs have increased by $71 billion, or 7.0% YTD, while Inst MMFs have decreased $27 billion, or 1.5%. Over 52 weeks, Retail money funds have gained $104 billion, or 10.6%, while Inst money funds are up just $31 billion, or 1.7%.
ICI writes, "Total money market fund assets increased by $9.70 billion to $2.88 trillion for the week ended Wednesday, October 24, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $10.77 billion and prime funds decreased by $1.20 billion. Tax-exempt money market funds increased by $132 million." Total Government MMF assets, which include Treasury funds too, stand at $2.213 trillion (76.8% of all money funds), while Total Prime MMFs stand at $533.9 billion (18.5%). Tax Exempt MMFs total $134.4 billion, or 4.7%.
They explain, "Assets of retail money market funds increased by $1.97 billion to $1.08 trillion. Among retail funds, government money market fund assets increased by $54 million to $645.69 billion, prime money market fund assets increased by $1.58 billion to $312.49 billion, and tax-exempt fund assets increased by $330 million to $126.42 billion." Retail assets account for over a third of total assets, or 37.6%, and Government Retail assets make up 59.5% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $7.74 billion to $1.80 trillion. Among institutional funds, government money market fund assets increased by $10.72 billion to $1.57 trillion, prime money market fund assets decreased by $2.79 billion to $221.38 billion, and tax-exempt fund assets decreased by $198 million to $8.01 billion." Institutional assets account for 62.3% of all MMF assets, with Government Inst assets making up 87.2% of all Institutional MMFs.
The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary Wednesday. It shows that total money fund assets rose by $12.1 billion in September to $3.156 trillion. Prime MMFs jumped $13.8 billion to $746.4 billion, while Govt & Treasury funds dipped $1.9 billion to $2.274 trillion. Tax Exempt funds rose $0.1 billion to $135.2 billion. Yields rose for all Prime and Government funds but were flat for Tax Exempt MMFs in the latest month. 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.
Overall assets increased $12.1 billion in September, after increasing $29.9 billion in August, $15.2 billion in July, and decreasing by $51.8 billion in June. Total MMFs increased by $45.6 billion in May, increased $31.0 billion in April, and decreased $48.2 billion in March. Over the 12 months through 9/30/18, total MMF assets increased $121.2 billion, or 4.0%. (Note that the SEC's series includes a number of private and internal money funds not reported to ICI or others, though Crane Data tracks most of these.)
Of the $3.156 trillion in assets, $746.4 billion was in Prime funds, which increased by $13.9 billion in September. Prime MMFs increased by $31.2 billion in August, increased by $24.3 billion in July, and decreased by $8.9 billion in June. Prime funds represented 23.7% of total assets at the end of September, their highest level since 9/30/16. They've increased by $82.0 billion, or 12.3%, over the past 12 months. They've increased by $6.6 billion over the past 2 years. (Over $1.1 trillion shifted from Prime to Government money market funds in the year leading up to October 2016's Money Fund Reforms.)
Government & Treasury funds totaled $2.274 trillion, or 72.1% of assets. They were down $1.9 billion in Sept., $1.8 billion in August, $4.4 billion in July, and $39.4 billion in June. But they were up $38.1 billion in May and up $10.0 billion in April. Govt & Treas MMFs are up $36.1 billion over 12 months, or 1.6%. Tax Exempt Funds increased $0.1B to $135.2 billion, or 4.3% of all assets. The number of money funds was 383 in September, the same as last month.
Yields on Taxable MMFs moved higher again in September, their 12th month in a row of increases. The Weighted Average Gross 7-Day Yield for Prime Funds on Sept. 30 was 2.26%, up 7 basis points from the previous month and up 0.98% from September 2017. Gross yields increased to 2.12% for Government/Treasury funds, up 0.11% from the previous month, and up 104 bps from September 2017. Tax Exempt Weighted Average Gross Yields remained flat at 1.59%; they've increased by 63 bps since 9/30/17.
The Weighted Average Net Prime Yield was 2.09%, up 0.08% from the previous month and up 1.02% since 9/30/17. The Weighted Average Prime Expense Ratio was 0.18% in September (the same as the previous five months). Prime expense ratios are down by 3 bps over the past year. (Note: These averages are asset-weighted.)
WALs and WAMs were mostly higher in September. The average Weighted Average Life, or WAL, was 62.2 days (up 2.2 days from last month) for Prime funds, 88.9 days (up 1.9 days) for Government/Treasury funds, and 30.3 days (up 6.0 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 30.5 days (down 0.7 days from the previous month) for Prime funds, 33.4 days (up 3.6 days) for Govt/Treasury funds, and 27.3 days (up 6.2 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 31.2% in September (down 3.6% from previous month). Total Weekly Liquidity was 49.6% (down 0.2% from previous month) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country, September 2018" table, Canada topped the list with $105.0 billion, followed by Japan with $71.2B, the US with $71.0 billion, France with $60.9B, and Sweden with $40.9B. The UK ($38.3B), Germany ($35.4B), Australia/New Zealand ($31.4B), the Netherlands ($29.6B), and Switzerland ($10.7B) rounded out the top 10 countries.
The gainers among Prime MMF bank related securities for the month included: Canada (up $14.6B), Japan (up $4.8B), Norway (up $3.7B), Singapore (up $2.4B), France (up $1.2B), Germany (up $1.1B), Australia/New Zealand (up $836M), and China (up $106M). The biggest drops came from Switzerland (down $8.3B), the UK (down $6.3B), Sweden (down $5.6B), the Netherlands (down $2.6B), Belgium (down $787M), the US (down $652M), Other (down $386M), and Spain (down $51M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $234.9B (down $17.9B from last month), while the Eurozone subset had $133.7B (down $1.3B). The Americas had $177.0 billion (up $14.2B), while Asia Pacific had $119.7 billion (up $7.9B).
Of the $743.6 billion in Prime MMF Portfolios as of Sept. 30, $246.2B (33.1%) was in CDs (up from $240.4BB), $186.7B (25.1%) was in Government securities (including direct and repo) (down from $189.3B), $108.5B (14.6%) was held in Non-Financial CP and Other Short Term Securities (up from $103.7B), $154.7B (20.8%) was in Financial Company CP (up from $151.2B), and $47.5B (6.4%) was in ABCP (up from $45.8B).
The Proportion of Non-Government Securities in All Taxable Funds was 18.7% at month-end, up from 18.2%. All MMF Repo with the Federal Reserve rose to $44.9B in September from $0.4B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 35.2% were in maturities of 60 days and over (down from 35.8%), while 8.3% were in maturities of 180 days and over (up from 7.9%).
A press release entitled, "Northern Trust Asset Management Announces Updates to its Money Market Fund Line Up in Europe" explains, "Northern Trust Asset Management today announced it will migrate the Sterling and US Dollar sub-funds of its Irish UCITS money market funds, Northern Trust Global Funds plc, from constant net asset value (CNAV) to low volatility net asset value (LVNAV), as at close of business on 30 November 2018, subject to regulatory approval. The move rounds out the firm's European money market fund offering, which includes The Sterling and The US Dollar funds and the short-term variable net asset value (VNAV) The Euro Liquidity Fund. The product line up will provide investors with access to fund structures within the construct of the new European Money Market Reform (European MMFR) regulation consistent with the funds current investment approach."
Peter Yi, Northern Trust Asset Management's director of cash management, comments, "As one of the world's largest cash managers, we are experienced in helping investors navigate changing market environments -- and in delivering investment solutions to meet their needs.... With our existing VNAV offering, and the transition of our US and Sterling funds to an LVNAV structure, we're confident we can continue to meet investors' evolving liquidity needs and preferences -- today and in the future."
Northern's Marie Dzanis adds, "As we enter a new era for European Money Market funds, it is essential that we continue to provide our clients with flexible, transparent and competitive investment opportunities. Our strategies are well-positioned to do just that."
The release continues, "The European MMFR, which requires money market funds offered into Europe to be compliant by 21 January 2019, will see money market funds categorized into two types of money market funds: short-term money market funds and standard money market funds. As such, Northern Trust Asset Management will migrate two of its CNAV funds -- The Sterling Fund and The US Dollar -- to short-term LVNAV structures at the close of business on 30 November 2018. The transition will appear seamless to investors."
It adds, "According to European MMFR, funds are not required to be rated. However, for full transparency, Northern Trust Asset Management money market funds will continue to be rated by leading credit agencies." For more on European Money Market Fund Reforms, see these recent Crane Data News stories: Oct. MFI Profile: Highlights from European MFS: Irish Funds' Rooney (10/19), Sept. MFI Profile: New IMMFA Chair Hochfeld on European MMF Reforms (9/20), and JPMorgan on European MMF Reforms; Aviva First to Convert to LVNAV (9/5).
In other news, yesterday's Wall Street Journal featured the page 1 article, "Banks' Golden Deposits Are Heading Out the Door." They explain, "After nearly three years of rate increases from the Federal Reserve, customers are pulling billions of dollars out of accounts that don't earn interest and putting their money into higher-yielding alternatives. That will crimp banks' ability to grow profits going forward."
The piece continues, "The four largest U.S. banks -- JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. -- reported a combined 5% drop in U.S. deposits that earn no interest in the third quarter compared with a year ago. Customers withdrew more than $30 billion from U.S. bank accounts that don't earn interest over the year that ended June 30, the first such annual decline in more than a decade, according to Federal Deposit Insurance Corp. data."
The Journal writes, "Before the financial crisis, noninterest bearing deposits made up a much smaller portion of money at banks. In 2007, the Fed started cutting interest rates in an effort to combat mounting economic problems. The central bank left them near zero for seven years in an unprecedented move. For many individual depositors, rates were so low for so long on money-market and savings accounts across the industry that they opted to keep their money in checking accounts that earned nothing at all."
They tell us, "Noninterest deposits also became more attractive to corporate customers because the government offered unlimited insurance for many of these in the years after the crisis. Another incentive for corporate customers: They often earn credits to cover fees on other bank products when they put money in noninterest accounts. With rates so low, those credits were often worth more than they would have earned in an interest-bearing account. Slowly, lenders started paying higher rates to some savvy corporate and wealth-management customers who might otherwise take their money elsewhere. Still, money in noninterest accounts continued to grow."
The piece adds, "That is now reversing, even if slowly. Noninterest deposits of around $3.2 trillion were equal to 26.3% of domestic deposits at U.S. banks in the second quarter, according to FDIC data. Although way above precrisis levels, the ratio is down from 27.5% a year ago. That equates to about $30.6 billion less in noninterest accounts."
Finally, they say, "The push for a better deposit deal is coming mostly from businesses, which have more to gain because of their large amounts of cash. Lenders including Bank of America, JPMorgan and regional lender PNC Financial Services Group Inc. all said on earnings calls that business customers moved money from accounts that earn zero interest into accounts that pay more in the third quarter."
This month, Bond Fund Intelligence speaks with UBS Asset Management's David Rothweiler, US Fixed Income Portfolio Manager, and Thomas Cameron, Executive Director on the Global Liquidity Management team, about the recent launch of the UBS Ultra Short Income Fund. The fund, the latest entry in the growing category of Conservative Ultra-Short Bond Funds, has grown to over $1 billion in just over 4 months since its launch. Our Q&A follows. (Note: This profile is reprinted from the Sept. issue of our Bond Fund Intelligence publication. Contact us if you'd like to see the full issue, or if you'd like to see our BFI XLS performance spreadsheet, our BFI Indexes and averages, or our most recent Bond Fund Portfolio Holdings data set, which was published yesterday.)
BFI: Tell us about your history. Rothweiler: UBS has a history of managing a wide range of global fixed income assets, and our domestic money fund complex goes back four decades to 1978. We've been running short duration SMAs about as long, and presently, our short duration strategies have a significant presence globally at the firm.
I've been in fixed income for over 20 years, and I've been part of the liquidity management team at UBS Asset Management for almost 15 years. In that time, I've traded and managed a wide range of fixed income assets including intermediate accounts, 2a-7 funds, and ultrashort strategies. Cameron: This January, I will celebrate 18 years at UBS. I've been fortunate to work with Dave and Rob Sabatino and his PM team the entire time.
BFI: Tell us about Ultra Short Income. Rothweiler: UBS Asset Management has a broad range of fixed income products, and over the years we have experienced steady demand in our ultrashort duration separate account strategy. Recently we have seen demand coming from both ends of the curve. Clients with stable cash have sought additional yield vs MMFs without going too far out the curve. From the long end, we have seen demand from clients seeking to shorten duration and reduce principal risk as we enter a period of expected rising rates. With the Fed steadily raising the overnight rate, Treasury and credit curves have continued to flatten out and investors are finding the Ultra Short Income Fund’s current yield attractive given it is not that far off from a 10-year Treasury.
Cameron: There was clear demand from prospects in the ultrashort space. We continue to offer SMAs across the spectrum but those accounts require a higher minimum investment than that available at the fund level. We created the fund to fill that gap.
Rothweiler: With the Fed staying on course, we saw this as an opportunity to enhance our product offerings by introducing this fund to benefit a broader scope of clients. It appeals to investors seeking income with low volatility of principal and who want to maintain liquidity with a quarter year duration. It is somewhat of a sweet spot for the investment community.
BFI: What's your biggest challenge? Rothweiler: I think sourcing attractive corporate paper is probably at the top of my list. Front end corporate paper is very much in demand, so supply can be limited at times which is probably one of the more challenging aspects. To help mitigate this supply constraint, we manage the fund along with our money markets desk, so we are able to take advantage of the scale of our entire liquidity management complex. At times this allows us to purchase commercial paper offering better relative value than some short corporates.
BFI: What strategies can and can't you use? Rothweiler: I think one of the most important is the use of floating rate debt. Floating rate debt allows us to better manage interest rate risk. Within that space, I typically purchase longer dated Libor floaters with final maturities such as in the 2 year area. This is mostly outside of the realm of 2a-7 funds which presents an opportunity for the Ultra Short strategy.
Additionally, we utilize Tier 2 commercial paper, and in some select cases short-dated Tier 3. This commercial paper can sometimes present attractive opportunities in very short maturities. Getting back to the overall strategy of the fund, we can have a maximum duration of up to one year. But to minimize NAV volatility, we do not typically go that far out the curve. We're therefore hovering around the quarter-year mark. If you want to equate that to a WAM, it's roughly 90 days from an interest rate sensitivity standpoint, versus a typical 2a-7 fund that often has a WAM in the 1-month area.
BFI: Can you buy junk? Rothweiler: We cannot purchase junk or even split rated paper. We can only purchase investment grade debt. Our bottom credit rung is low BBB at purchase; if it's later downgraded below that level, we can still hold it. Typically, most of our BBB exposure is going to be mid-BBB and higher, so it's pretty clean from that standpoint. Another thing we invest in is asset-backeds. We typically buy AAA, prime with asset classes such as autos, credit cards, and some equipment-type structures that usually have less than a one year average life.
What we like about our current AAA-rated ABS exposure is that it enhances the overall credit quality of the fund. From a liquidity standpoint, AAA-rated ABS is frequently very tight on a bid-offer basis. We look at this ABS as oftentimes offering as much spread as some corporates, but are better rated and have better liquidity. Essentially, it's an attractive diversification tool.
BFI: Are you looking at other products? Cameron: We are working on similar offerings for other clients in USD as well as in other currencies depending on the demand for those offerings.
BFI: Tell us about your investors. Cameron: Our distribution model is very diverse. Currently the Fund's investor base is heavily retail, but as [the fund] reaches significant size we are seeing increasing interest and investment from institutions.
BFI: Can you comment on the economic environment and the Fed? Rothweiler: We do see the Fed raising one more time this year, probably this December. We see them raising probably two to three times in 2019. If you take the Fed at their word, they're aiming for roughly a 3% Fed Funds rate. U.S. fiscal policies are in essence pulling growth forward via fiscal stimulus such as tax cuts. But we believe growth will continue into 2019.
One thing we watch is financial conditions, and that still seems to be pretty favorable. But obviously as the Fed reduces accommodation, at some point financial conditions will begin to tighten which may, probably with a lag, start to slow the economy. We view that as more of a 2019, 2020 type story.
BFI: What are the risks? Rothweiler: A strategy with a duration of 0.25 years has somewhat diminished interest rate risk. One of the bigger risks is where we are in the credit cycle, as well as market liquidity. We look at a lot of our CP holdings as generally providing yield opportunities with generally shorter maturities. Not only does this enhance the liquidity profile of the fund, it can help reduce risk by having this exposure mature if credit volatility increases. For us it comes down to maintaining liquidity in the fund and monitoring the credit profile, which helps minimize NAV volatility going forward.
BFI: What about the future? Rothweiler: Higher fed fund levels should continue to support this kind of product. Looking at the S&P 500, investors have a dividend yield of about 1.8% with potential volatility. If you look at cash as an asset class, the investor often times has yield opportunities north of 2.0% with a fairly stable NAV. From a risk-return standpoint, these types of products offer significant value for the first time in quite a few years. I think as long as that continues, these funds will benefit.
Cameron: One of the comparisons that we point out to clients and prospects is that presently you can get roughly 80% of the yield of the 10-year Treasury using the Ultra Short strategy, with significantly less duration risk. Our portfolio management team continues to wisely use our credit resources and focus on low price volatility.
A press release entitled, "Invesco announces Combination with OppenheimerFunds," tells us, "Invesco Ltd. (IVZ) ... announced a combination with OppenheimerFunds, a strategic partnership with Massachusetts Mutual Life Insurance Company (MassMutual) and a $1.2 billion common stock buyback program." Invesco is the 13th largest manager of money funds with $57.8 billion, while Oppenheimer is the 29th largest manager with $8.0 billion. A combined Invesco/OppenheimerFunds would still rank 13th (below SSGA) with $65.8 billion. We review this deal, as well as a couple of recent advertisements from money funds and ultra-short bond funds, below.
Invesco President and CEO Martin Flanagan comments, "The combination with OppenheimerFunds and the strategic partnership with MassMutual will meaningfully enhance our ability to meet client needs, accelerate growth and strengthen our business over the long term.... This is a compelling, highly strategic and accretive transaction for Invesco that will help us achieve a number of objectives: enhance our leadership in the US and global markets, deliver the outcomes clients seek, broaden our relevance among top clients, deliver strong financial results and continue attracting the best talent in the industry."
He adds, "We have long held OppenheimerFunds' people and strong investment performance track record in high regard.... OppenheimerFunds' culture and commitment to high-conviction investing complement our own, and the combination will create significant opportunities for the talented professionals of both companies."
The WSJ, in "Invesco to Buy OppenheimerFunds From MassMutual," explains, "Invesco Ltd. agreed to buy rival Massachusetts Mutual Life Insurance Co.'s OppenheimerFunds Inc. unit for $5.7 billion, adding to a string of acquisitions that have transformed the firm into a $1 trillion money manager." Normally, the integration and/or merger of funds related to advisor combinations takes a number of months, but we'll be watching to see how quickly they move on their money fund lineups.
In other news, we noticed a two-page sponsored content ad in the most recent issue of Pensions & Investments featuring DWS's new ESG Liquidity Fund. The piece, entitled, "Liquidity management gets responsible," says, "Most plan sponsors searching for investment managers include some questions about the managers' approach to environmental, social and governance investing in their standard RFP. While these initiatives have long been associated with equity mandates, they are becoming increasingly used in fixed income as well."
It continues, "In Europe, to be sure, ESG has been a fixed income feature for some time. Today it is appearing in a variety of U.S. fixed income strategies. And while institutional investors grapple with the specter of rising interest rates, a pick-up in inflation and climbing stock prices, clients are also seeking to address the issue of responsible investing."
Fiona Bassett of DWS comments, "In the U.S., the ESG market is still relatively nascent.... We believe the U.S. is underserved in this respect across all segments, especially in fixed income, and in particular on the short end of the curve. This has become very apparent in our discussions with clients."
Finally, the piece adds, "One of the reasons fixed income is becoming a hotbed of ESG investing is the increasing level of data that issuers are releasing into the market. This is at least partially a result of money managers seeking to build ESG analysis into their investment processes." (For more, see our October 17 Link of the Day, "SustainableInvest on DWS ESG Fund," our Sept. 7 News, "DWS ESG Liquidity Goes Live; Federated Explains Prime Private Fund," and our August 13 News, "DWS Converts Variable NAV to DWS ESG Money Fund, First ESG Offering.)
We also noticed an advertisement for Northern Trust's "RAVI" ETF being run on WSJ.com." The landing page for this ad says, "FlexShares Ready Access Variable Income Fund (RAVI) is an actively managed ETF that attempts to help short-duration fixed income investors maintain liquidity and reach for higher potential returns, without undue volatility.... Liquidity doesn't have to water down your returns. Today, short-term investors who want to maintain liquidity must separate their needs for principal stability vs. income."
The info page also contains a link to a white paper entitled, "Rethinking Ultra-Short Duration Investing," which tells us, "The financial crisis and its aftermath significantly changed the landscape for ultra-short duration fixed income a.k.a. 'liquidity investing.' Though market dynamics remain in flux, especially globally, there is no going back to the markets, regulation or products of old. As investors became more aware of the shifting dynamics, they began to identify and prioritize their objectives for liquidity investments -- and created a need for new vehicles that manage liquidity assets."
It explains, "Due to new global regulations for banks and money market funds as well as supply-and-demand changes, money market yields are extremely low -- sometimes even going negative. In the current environment, investors and central bankers have come to view these low yields on top-quality, short-dated fixed income paper as being the new normal. And as many of the recent money market regulatory reforms continue to be implemented, many investors will continue to see increased risks or lower yields on their short-term investments. If they have not already done so, it is time for investors to reexamine their liquidity strategy and investigate new vehicles that better match their goals risk tolerances."
Northern's paper comments, "Investors are developing a sharper understanding of the tradeoffs among safety of principal, income and access to funds in managing liquidity. Many now recognize a single product solution may no longer be viable. The regulatory and ultra-low rate environment is forcing them to be more open-minded about the broader menu of investment options available in today's liquidity investing marketplace."
It adds, "To help investors capitalize on the opportunities presented by the new paradigm, FlexShares introduced the Ready Assets Variable Income ETF, or RAVI, an ultra-short duration ETF with a variable NAV. Based on decades of Northern Trust fixed income investing experience, RAVI is designed for investing liquidity. We believe the fund's investment guidelines allow it to capture investment opportunities not available to investors in preservation products as it seeks to provide competitive income, ease of access and minimal principal volatility."
Crane Data hosted its 6th annual European Money Fund Symposium [last month] in London, and European Money Market Fund Reforms took center stage. Below, we highlight from one of the keynotes, "Irish & European Fund Issues," which featured Patrick Rooney, Senior Regulatory Affairs Manager at Irish Funds. He presented a number of statistics on money funds domiciled in Ireland, the largest segment of the European money fund industry, and gave an Irish take on the new regulations and the fate of the RDM, reverse distribution mechanism. (Note: The following article is reprinted from the October issue of our Money Fund Intelligence newsletter. Contact us at info@cranedata.com to request the full issue or the binder from European Money Fund Symposium. Next year's show will be Sept. 24-25, 2019, in Dublin.)
Rooney says, "Firstly, the MMF industry in Ireland is one of very significant scale.... We're talking about €490 billion in terms of assets ... the largest domicile by quite some margin in Europe, followed by France and Luxembourg. There has been significant growth ... in the past 5 years, with 77% growth [over this period]. So it is a very strong and growing industry in Ireland."
He continues, "The number of funds stands at 115 today; that is down slightly from 122 in 2012. So while assets have been growing, there has been a slight amount of consolidation in the industry. This is an industry of scale.... We have quite a few big players with very big funds, so there is a lot of concentration. But there is still broad diversity, too. We count 48 MMF managers ... from 11 countries."
Rooney explains, "Predominantly the managers in funds of scale are coming from the U.S., the U.K. and Germany. This industry [MMF] accounts for 20% of our [overall fund] assets. So it is an industry that is vital to Irish Funds and one that we have fought vigorously to defend throughout the MMF reform, which hasn't been easy, in order to ensure that this is a sector that can continue to thrive."
He also comments, "Looking now at the profile of the types of funds that are in Ireland, they are predominantly, overwhelmingly short-term and they are predominately CNAV, as I'm sure you're aware. In terms of the currencies offered, the currencies are Euro, GBP, and USD. The Euro is currently standing around €70 billion, or around 14%. USD and GBP are neck in neck at around 43% each."
Rooney continues, "In terms of the issuers, they are predominantly banks, followed by government. So I think that speaks to a significant LVNAV offering and significant government fund offering, as well. The investor base is heavily concentrated in Europe ... and there's quite a few multinationals.... Of course, the U.K. is a big portion of the investor base... We do have a significant investor base outside Europe, as well."
He adds, "All of these statistics point to the global scale and international nature of the money market funds sector in Ireland. I think it is very important for us to maintain that international, outward-looking perspective in the ongoing EU dialogue."
Rooney states, "Looking at money market fund regulation implementation in Ireland, 'What has the public sector been doing?' We have the European Union Money Market Funds Regulations, which apply MMFR in Ireland. MMFR does of course have direct effect as an EU regulation.... The [Irish] Central Bank [has been designated] as the competent authority in respect to MMFR."
He says, "The central bank has also issued application forms in respect to MMFR, and they follow the usual kind of checklist format ... dealing with the constitutional document, the prospectus and various confirmations, referring back to the regulations in terms of compliance and statements that must be included in those documents. You also need to file your depository agreement with the application forms. The central bank filing deadline for 1 September for applications for those existing MMFs that need to transition by 21 January 2019 in order to ensure an orderly managed transition. Obviously that filing deadline has gone and managers will need to file their applications. It is a very structured process and one that is well underway."
The Irish Funds manager also comments, "[Here is] an overview of project planning for MMFR implementation and it is actually one we provided to ESMA back in March on the back at a meeting we had with them. (See the chart at right.) In response to their comments that there was no hurry in closing out on RDM … this was just to demonstrate the amount of project planning that goes into a comprehensive, regulatory change such as this, which should be obvious. But I think sometimes the obvious needs to be stated. In terms of what a manager needs to do, there are a lot of moving parts there. You've got the scoping and analysis, internal decision making, the board approval aligning to your products.... A shareholder vote as well is required in many cases. And all the while of course you need to communicate with your shareholders and they will have their own internal decision-making processes to go through."
He explains, "In terms of the key compliance areas ... it is wide-ranging. But the good news is managers are able to carry over their existing strategies and existing holdings.... We're looking at tighter limits, but managers by and large would be operating within those parameters.... I think one of the biggest changes is really the scope ... around the product categories themselves, assessing those products and aligning your offerings to those products, deciding which ones suit your investors and business model [such as the LVNAV]."
Rooney also comments, "There is already a lot of transparency in the IMMFA Code and the CNAV area, and what we're seeing is the standardization [of this].... There will be plenty of regulatory reporting. ESMA has fortunately listened to many of our comments and pared back some.... To recap, I think the key changes and areas of focus are: the product categories, valuations, liquidity, and escalating procedures."
On the RDM, "which is the key outstanding issue," he tells us, "Unfortunately, there has been a fundamental misunderstanding on what RDM is.... RDM is an operational mechanism which is there literally to pass along negative interest to investors by cancelling the appropriate quantity of shares.... It is a part of the separation of capital and yield, which forms the basis of maintaining a stable NAV. For 20 or more years before this ... capital and yield have been separated, with income distributed … in order to maintain the stable NAV. RDM is simply the inverse.... It's based on a standing instruction to redeem shares."
Finally, Rooney adds, "Unfortunately, we are dealing with a predisposition against RDM, which is very hard to counter. There is persistent uncertainty.... It remains to be seen if the Commission will respond and how it will respond. We’re not sure.... The backdrop is not good, and we don't know how this will end.... We are reaching an end-game pretty soon because time is running out."
Vanguard, the second largest manager of money market funds with $327.3 billion, posted a new blog entry entitled, "Are games being played with your cash? Author Karen Risi writes, "With stocks on a nine-year bull market run, many of us probably haven't paid much attention to the yield on our cash accounts. But, maybe we should. Because some firms are playing games with your cash. Games that might leave you, well, shortchanged. Most of us have a cash account of some type -- the bank account from which we pay our bills, the money market fund that we'll tap for emergency expenses, or the brokerage account where our stock and ETF dividends are directed. And while your cash account may not represent the lion's share of your portfolio, it's worth paying attention to -- especially in this rising rate environment."
The piece continues, "If you have a savings account or a money market fund at another institution, you might want to ask some questions. Is your account giving you the best possible return? Are high fees eating into your returns? Are interest rate increases being passed along to you? Let's start there. Interest rates are rising. For the first time in many years, you have an opportunity to earn higher yields. With a bank savings account, it's doubtful that you're benefiting from rising rates."
Vanguard tells us, "Simply put, banks profit from what they earn on your deposits and what they pass on to you in the form of annual percentage yields (APYs). At the Federal Reserve's September meeting, the fed funds rate -- a gauge of short-term interest rates -- was raised to 2.25%. Yet, the average APY on a bank savings account is only 0.09% (as of September 30, 2018). That's relatively low compared to other cash options."
The blog says, "But what about opportunity cost? That's a high price to pay for services like overdraft protection and ATM access, and, to be fair, FDIC protection. You'll have to weigh those against the higher yields available on money market mutual funds, which on average are yielding 1.69% (as of September 30, 2018). I'll note here, the key word is average. Some money market funds yield north of 2.00%."
It comments, "Unfortunately, there's one more questionable practice to bring to your attention. Money market funds were traditionally used by brokerage firms as 'sweep' accounts, where idle cash is kept and dividends from long-term holdings are 'swept.' No more. Some brokerage firms are increasingly -- and without warning -- switching investors' default sweep accounts from money market funds to much lower-yielding bank accounts. These bank sweep accounts are typically owned by the brokerage firm's parent company and are an easy and lucrative source of revenue -- at your expense."
Risi adds, "Let's be clear about where Vanguard stands on this topic. Our only sweep account is Vanguard Federal Money Market Fund, which has an SEC yield of 2.00% (as of September 30, 2018) and an expense ratio of only 0.11%. We don't surreptitiously sweep cash into a lower-yielding bank account. We don't charge high expense ratios or keep your potential earnings for ourselves. We don't offer teaser rates. And we have nothing to hide."
In related news, Charles Schwab continues to take steps to move brokerage "sweep" assets from its money market funds to lower-yielding bank deposit options. A Prospectus Supplement for the Sweep Shares of Schwab Treasury Obligations Money Fund, Schwab U.S. Treasury Money Fund, Schwab AMT Tax-Free Money Fund, Schwab Municipal Money Fund, Schwab CA Municipal Money Fund and Schwab NY Municipal Money Fund" says, "At a meeting held on September 25, 2018, the Board of Trustees of The Charles Schwab Family of Funds (the Trust) approved the liquidation and redemption of, and the related Plan of Liquidation and Redemption for, the Sweep Shares (the Liquidating Classes) of each Fund." (See also Crane Data's October 2 News, "Schwab Liquidating Cash Reserves, Shift to Sweeps; Rates Inch Higher.")
Schwab explains, "Each Fund will redeem all of its outstanding Sweep Shares on or about April 10, 2019 (the Liquidation Date), and distribute the proceeds to its Sweep Shares shareholders in amounts equal to each shareholder's proportionate interest in the net assets of the Fund's Sweep Shares after it has paid or provided for all of its charges, taxes, expenses and liabilities. It is expected that this distribution will be at a $1.00 net asset value per share. Additionally, each Fund anticipates making a distribution of any net income and realized capital gains of the Liquidating Classes prior to or on the Liquidation Date, which may be taxable to Fund shareholders."
They write, "For taxable shareholders of the Liquidating Classes, the redemption of shares on the Liquidation Date will generally be treated as any other redemption of shares, i.e., as a sale that may result in a gain or a loss for federal income tax purposes. Instead of waiting until the Liquidation Date, a shareholder may voluntarily redeem his or her shares prior to the Liquidation Date.... Once the Sweep Shares of the Funds have been liquidated, all references to the Funds' Sweep Shares will be deleted from the Funds' Summary Prospectuses, Statutory Prospectuses and SAIs."
In Charles Schwab's most recent earnings release, CFO Peter Crawford comments, "Net interest revenue grew 41% year-over-year to a record $1.5 billion due to larger client cash sweep balances, as well as the cumulative effect of the Fed's rate normalization. Asset management and administration fees declined 6% to $809 million, reflecting lower money market fund revenue as a result of transfers to bank sweep, client asset allocation choices, and our 2017 fee reductions."
He adds, "The company's consolidated balance sheet reached $272 billion at month-end September, a $10 billion quarterly increase, largely driven by bank sweep transfers and client activity. We transferred balances totaling $23 billion from sweep money market funds to bank sweep in the quarter, bringing our 2018 transfers to $68 billion and leaving $33 billion remaining in sweep funds at quarter-end." (The Sweep Shares of the funds liquidating above total $8.4 billion.)
Both J.P. Morgan Securities and Citi Research commented recently on the latest cut of Money Fund Portfolio Holdings, in particular the jump in FICC repo. JPM's "September MMF holdings update" tells us, "[T]he recent release of the September MMF holdings reports provides fresh data to highlight how the repo market is evolving. In the past year, it has not only seen yields move higher, but the market has grown larger, broader and deeper. It's also the case the Federal Reserve's presence has greatly declined and innovative uses of sponsored repo have provided both lenders and borrowers new opportunities." We review these below, and we also summarize our latest Form N-MFP Holdings and Weekly Portfolio Holdings data.
J.P. Morgan's latest "Short-Term Fixed Income" tells us, "The September 2018 MMF reports show that total repo outstandings held by MMF registered $966bn, shy of last May's record $1.01tn, but still one of the highest months ever.... Part of this increase is attributable to the growth of FICC sponsored repo programs. FICC balances peaked at $81bn in September, and averaged $54bn across 3Q18 vs $10bn in 3Q17."
They explain, "The number of active dealers involved in repo with MMFs in 3Q was 49, up from 45 a year prior. More impressively, 42 of the dealers had increased borrowing from MMFs over the past year with a median increase of $4bn. We are excluding Fed ONRRP and FICC sponsored repo from these numbers, to reflect the change in dealer led activity.... We can further categorize repo by collateral type, breaking the outstandings into Treasuries, agencies and 'other'. In comparing 3Q18 and 3Q17, dealer participation grew in all three categories."
Citi's Steve Kang also comments on "More competitive repo with FICC sponsor program." He writes, "We saw an increase in sponsored repo program participation from the 2a7 community at the end of September, to 81bn vs 37bn in August and 51bn in June, placing FICC as the second largest repo counterparty, with the Fed being the 6th at 45bn."
Kang continues, "This explains the tamer quarter-end that we have seen in September vs June, where the RRP facility usage was lower and repo spread spike was lower. The sponsor repo program worked as a pressure release valve here -- with the sponsor being Bank of New York Mellon (BK) and State Street (STT)."
He adds, "The quarter-ends are when netting needs are greater due to quarter-end snapshots of foreign banks. Sponsors can convert 2a7 cash into DTCC net-able funding for foreign banks to use -- while earning a spread between GCF - TGCR (Crane data notes that 2a7s been receiving TGCR on FICC repo in the past two QEs). In other words, rather than 2a7 cash being thrown out to Fed’s RRP facility, it stays in the system via sponsoring banks.... RRP gets disintermediated here."
Crane Data's latest monthly Money Fund Portfolio Holdings statistics were published last week, but we didn't do our normal summary on the Form N-MFP cut of the data then since some filings (notably Fidelity) were missing. (Our N-MFP Holdings files are available to our Money Fund Wisdom subscribers.) Our summary, with data as of Sept. 30, includes holdings information from 1,227 money funds (up from 1,225 on August 31), representing $3.132 trillion (down from $3.138 trillion). We review the latest data below.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows that Repurchase Agreement (Repo) holdings in money market funds total $986.6 billion (up from $966.4 billion on August 31), or 31.5% of all assets. Treasury holdings total $827.3 billion (down from $854.9 billion) or 26.4%, and Government Agency securities total $660.2 billion (down from $668.8 billion), or 21.1%. Commercial Paper (CP) totals $250.9 billion (up from $241.2 billion), or 8.0%, and Certificates of Deposit (CDs) total $180.3 billion (down from $180.5 billion), or 5.8%. The Other category (primarily Time Deposits) totals $125.4 billion or 4.0%, and VRDNs account for $101.7 billion, or 3.2%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $154.7 billion, or 4.9%, in Financial Company Commercial Paper; $47.1 billion or 1.5%, in Asset Backed Commercial Paper; and, $49.1 billion, or 1.6%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($589.4B, or 18.8%), U.S. Govt Agency Repo ($358.7B, or 11.5%), and Other Repo ($38.5B, or 1.2%).
The N-MFP Holdings summary for the the 223 Prime Money Market Funds shows: CP holdings of $246.5 billion (up from $235.2 billion August 31), or 33.2%; CD holdings of $180.3B (up from $179.0B) or 24.2%; Repo holdings of $121.8B (up from $101.8B), or 16.4%; Other (primarily Time Deposits) holdings of $85.0B (up from $83.9B), or 11.4%; Treasury holdings of $62.8B (down from $90.4B), or 8.4%; Government Agency holdings of $39.9B or 5.4%; and VRDN holdings of $7.2B, or 1.0%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $154.7 billion, or 20.8%, in Financial Company Commercial Paper; $47.1billion, or 6.3%, in Asset Backed Commercial Paper; and, $44.7 billion, or 6.0%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($55.6B, or 7.5%), U.S. Govt Agency Repo ($28.3B, or 3.8%), and Other Repo ($37.9B, or 5.1%).
Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday, which tracks a shifting subset of our monthly Portfolio Holdings collection. The latest cut, with data as of Oct. 12, includes Holdings information from 55 money funds (down from 63 on Oct. 5), representing $868.8 billion (down from $1.290 trillion) of the $2.924 T (29.7%) in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our Oct. 11 News, "October MF Portfolio Holdings: Treasury, Agency Down; FICC Repo Up.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $320.6 billion (down from $471.8 billion on Oct. 5), or 36.9% of holdings, Treasury debt totaling $276.7 billion (down from $401.6 billion) or 31.9%, and Government Agency securities totaling $172.3 billion (down from $251.7 billion), or 19.8%. Commercial Paper (CP) totaled $38.3 billion (down from $54.9 billion), or 4.4%, and Certificates of Deposit (CDs) totaled $29.9 billion (down from $49.0 billion), or 3.4%. A total of $19.0 billion or 2.2% was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $11.8 billion, or 1.4%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $276.7 billion (31.9% of total holdings), Federal Home Loan Bank with $128.2B (14.8%), BNP Paribas with $46.0 billion (5.3%), RBC with $35.6B (4.1%), Federal Farm Credit Bank with $31.6B (3.6%), Credit Agricole with $23.9B (2.8%), ING Bank with $20.0 B (2.3%), Fixed Income Clearing Co with $19.0B (2.2%), Fidelity with $18.9B (2.2%), and Nomura with $16.4B (1.9%).
The Ten Largest Funds tracked in our latest Weekly Holdings update include: Fidelity Inv MM: Govt Port ($112.2B), Goldman Sachs FS Govt ($103.3B), Wells Fargo Govt MMkt ($69.2B), Dreyfus Govt Cash Mgmt ($57.1B), Goldman Sachs FS Trs Instruments ($56.4B), Morgan Stanley Inst Liq Govt ($54.4B), Fidelity Inv MMkt Port ($41.2B), First American Govt Oblg ($39.4B), Dreyfus Treas Sec Cash Mg ($30.8B), and Fidelity Inv MM Treasury Port ($25.3B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Crane Data's latest MFI International shows total 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 slightly year-to-date in 2018. Through 10/12/18, MFII assets are up $3 billion to $834 billion. Offshore USD money funds are up $8 billion YTD, continuing to defy predictions of repatriation-related outflows. Euro funds, however, are feeling the pain of negative rates and pending European MMF reforms; they're down E7 billion YTD. GBP funds are up L5B. U.S. Dollar (USD) money funds (159) account for over half ($433 billion, or 51.9%) of this "European" money fund total, while Euro (EUR) money funds (98) total E91 billion and Pound Sterling (GBP) funds (103) total L224 billion. We summarize our "offshore" money fund assets, as well as our latest Money Fund Intelligence International Portfolio Holdings totals, below.
USD MMFs yield 2.03% (7-Day) on average (as of 10/12/18), up from 1.19% at the end of 2017 and 0.56% at the end of 2016. EUR MMFs yield -0.48 on average, up from -0.55% on 12/29/17 and -0.49% on 12/30/16, while GBP MMFs yield 0.60%, up from 0.24% at the end of 2017 and 0.19% at the end of 2016. (See our latest MFI International for more on the "offshore" money fund marketplace.)
Crane's latest MFI International Money Fund Portfolio Holdings, with data (as of 9/30/18), show that European-domiciled US Dollar MMFs, on average, consist of 29% in Commercial Paper (CP), 21% in Certificates of Deposit (CDs), 15% in Treasury securities, 18% in Repurchase Agreements (Repo), 15% in Other securities (primarily Time Deposits), and 2% in Government Agency securities. USD funds have on average 32.6% of their portfolios maturing Overnight, 13.2% maturing in 2-7 Days, 19.2% maturing in 8-30 Days, 11.2% maturing in 31-60 Days, 10.2% maturing in 61-90 Days, 10.9% maturing in 91-180 Days, and 2.6% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (25.8%), France (15.4%), Japan (10.4%), Canada (10.4%), United Kingdom (6.1%), The Netherlands (5.7%), Germany (5.6%), Sweden (5.4%), Australia (3.2%), China (2.8%), Singapore (2.6%), and Belgium (2.0%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $71.6 billion (15.0% of total assets), BNP Paribas with $30.1B (6.3%), Mitsubishi UFJ Financial Group Inc with $15.4B (3.2%), Wells Fargo with $14.9B (3.1%), Toronto-Dominion Bank with $12.4B (2.6%), Mizuho Corporate Bank Ltd with $11.1B (2.3%), Skandinaviska Enskilda Banken AB with $9.9B (2.1%), Barclays PLC with $9.5B (2.0%), Societe Generale with $9.4B (2.0%), and Bank of Montreal with $9.2B (1.9%).
Euro MMFs tracked by Crane Data contain, on average 50% in CP, 25% in CDs, 19% in Other (primarily Time Deposits), 6% in Repo, 0% in Agency securities, and 0% in Treasuries. EUR funds have on average 21.9% of their portfolios maturing Overnight, 10.3% maturing in 2-7 Days, 14.9% maturing in 8-30 Days, 16.1% maturing in 31-60 Days, 14.5% maturing in 61-90 Days, 20.3% maturing in 91-180 Days and 2.0% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (28.8%), Japan (15.0%), the US (9.9%), Germany (7.7%),the Netherlands (6.8%), Sweden (6.7%), the U.K. (4.3%), Switzerland (4.2%), China (4.0%), and Belgium (3.2%).
The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E4.4B (5.2%), BNP Paribas with E4.3B (5.2%), BPCE with E3.3B (3.9%), Mitsubishi UFJ Financial Group Inc with E3.0B (3.6%), Societe Generale with E2.9B (3.4%), Mizuho Corporate Bank Ltd with E2.9B (3.4%), Rabobank with E2.7B (3.2%), Credit Mutuel with E2.7B (3.2%), Sumitomo Mitsui Trust Bank with E2.7B (3.2%), and Svenska Handelsbanken with E2.6B (3.1%).
The GBP funds tracked by MFI International contain, on average (as of 9/30/18): 37% in CDs, 28% in Other (Time Deposits), 20% in CP, 9% in Repo, 6% in Treasury, and 0% in Agency. Sterling funds have on average 26.4% of their portfolios maturing Overnight, 6.6% maturing in 2-7 Days, 16.2% maturing in 8-30 Days, 16.4% maturing in 31-60 Days, 10.1% maturing in 61-90 Days, 20.6% maturing in 91-180 Days, and 3.6% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: Japan (17.4%), United Kingdom (16.8%), France (15.9%), The Netherlands (8.2%), Canada (7.4%), Sweden (5.5%), Australia (5.5%), Germany (5.1%), United States (4.8%), and China (2.7%).
The 10 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L14.8B (9.4%), Sumitomo Mitsui Banking Co with L6.3B (4.0%), Mitsubishi UFJ Financial Group Inc with L6.2B (4.0%), Sumitomo Mitsui Trust Bank with L6.2B (3.9%), BNP Paribas with L6.0B (3.8%), BPCE SA with L5.5B (3.5%), Mizuho Corporate Bank Ltd with E5.1B (3.3%), Nordea Bank with L5.1B (3.2%), Toronto-Dominion Bank with L5.0B (3.2%), and Rabobank with E4.9B (3.1%).
In related news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Sept. 28, 2018) Friday. This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See also Crane Data's October 11 News, "October MF Portfolio Holdings: Treasury, Agency Down; FICC Repo Up Jumps.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in September, prime money market funds held 25.7 percent of their portfolios in daily liquid assets and 43.2 percent in weekly liquid assets, while government money market funds held 61.1 percent of their portfolios in daily liquid assets and 76.9 percent in weekly liquid assets." Prime DLA decreased from 30.9% in August, and Prime WLA increased from 43.6% in August. Govt MMFs' DLA decreased from 61.5% in August and Govt WLA decreased from 78.7% last month.
ICI explains, "At the end of September, prime funds had a weighted average maturity (WAM) of 32 days and a weighted average life (WAL) of 69 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 34 days and a WAL of 89 days." Prime WAMs were up one day from last month, and WALs were up by three days. Govt WAMs were up four days from August and Govt WALs were up by one day from last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $213.42 billion in August to $226.26 billion in September. Government money market funds’ holdings attributable to the Americas rose from $1,675.69 billion in August to $1,736.95 billion in September."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $226.3 billion, or 42.8%; Asia and Pacific at $103.7 billion, or 19.6%; Europe at $192.9 billion, or 36.5%; and, Other (including Supranational) at $6.3 billion, or 1.2%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.737 trillion, or 79.4%; Asia and Pacific at $125.3 billion, or 5.7%; and Europe at $318.6 billion, or 14.6%.
The October issue of our Bond Fund Intelligence, which was sent out to subscribers Monday morning, features the lead story, "Worldwide Bond Fund Assets Plunge in Q2; Europe Down," which reviews bond fund assets in other countries, and the profile, "Rothweiler & Cameron on New UBS Ultra Short Income," which interviews UBS Asset Management's David Rothweiler and Tom Cameron. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund yields inched up in September while returns were mixed. We excerpt from the latest issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, and ask us about our 3rd annual Bond Fund Symposium, which will take place March 25-26, 2019 in Philadelphia.)
The lead BFI story says, "The Investment Company Institute released its 'Worldwide Regulated Open-Fund Assets and Flows Second Quarter 2018' late last month, and the most recent data collection on mutual funds in other countries shows that global bond fund assets fell $293.8 billion, or -2.8%, to $10.254 trillion in Q2'18. The declines were led by bond funds domiciled in Luxembourg, Ireland, Brazil, and Germany. Worldwide bond fund assets, which broke $10 trillion in Q4'17, have increased by $477.7 billion, or 4.9%, the past 12 months."
It continues, "Over 12 months, the U.S., Luxembourg, and Ireland showed the largest increases in bond fund assets. Germany, France, and the U.K. also showed big gains. France, The Netherlands, Canada, and Switzerland saw declines in Q2, while The Netherlands, Korea, and India had asset losers over the past year."
The piece adds, "According to Crane Data's analysis of ICI's 'Worldwide' data, the U.S. remained the largest bond fund market in Q2'18 with $4.702 trillion, or 45.9% of the total. U.S. bond fund assets increased by $46.0 billion in Q2'18 (1.0%) and increased by $314.7B (7.2%) in the 12 months through July 31, 2018. Luxembourg remained in second place among countries overall. Luxembourg saw assets decrease $91.5 billion (down -6.1%) in Q2 to $1.419 trillion (13.8% of worldwide). Luxembourg assets increased $58.7 billion (4.3%) over 12 months."
Our UBS "profile" says, "This month, Bond Fund Intelligence speaks with UBS Asset Management's David Rothweiler, US Fixed Income Portfolio Manager, and Thomas Cameron, Executive Director on the Global Liquidity Management team, about the recent launch of the UBS Ultra Short Income Fund. The fund, the latest entry in the growing category of Conservative Ultra-Short Bond Funds, has grown to over $1 billion in just over 4 months since its launch. Our Q&A follows."
BFI says, "Tell us about your history. Rothweiler responds, "UBS has a history of managing a wide range of global fixed income assets, and our domestic money fund complex goes back four decades to 1978. We've been running short duration SMAs about as long, and presently, our short duration strategies have a significant presence globally at the firm. I've been in fixed income for over 20 years, and I've been part of the liquidity management team at UBS Asset Management for almost 15 years. In that time, I've traded and managed a wide range of fixed income assets including intermediate accounts, 2a-7 funds, and ultrashort strategies." Cameron adds, "This January, I will celebrate 18 years at UBS. I've been fortunate to work with Dave and Rob Sabatino and his PM team the entire time."
BFI also comments, "Tell us about Ultra Short Income." Rothweiler responds, "UBS Asset Management has a broad range of fixed income products, and over the years we have experienced steady demand in our ultrashort duration separate account strategy. Recently we have seen demand coming from both ends of the curve. Clients with stable cash have sought additional yield vs MMFs without going too far out the curve. From the long end, we have seen demand from clients seeking to shorten duration and reduce principal risk as we enter a period of expected rising rates. With the Fed steadily raising the overnight rate, Treasury and credit curves have continued to flatten out and investors are finding the Ultra Short Income Fund's current yield attractive given it is not that far off from a 10-year Treasury." (Watch for more excerpts from this article later this month, or see the latest issue of BFI.)
Our Bond Fund News includes the brief, "Yields Inch Up; Returns Mixed in Sept." It explains, "Bond fund yields inched higher in the past month and returns were lower for all but Short-Term, High Yield and Global. The BFI Total Index averaged a 1-month return of -0.15% and the 12-month gain was 0.31%. The BFI 100 returned -0.21% in September and 0.17% over 1 year. The BFI Conservative Ultra-Short Index returned 0.12% over 1 month and 1.73% over 1-year; the BFI Ultra-Short Index averaged 0.17% in Sept. and 1.35% over 12 mos. Our BFI Short-Term Index returned 0.03% and 0.51%, and our BFI Intm-Term Index returned -0.47% and -0.82% for the 1-mo and year. BFI's Long-Term Index returned -0.54% in Sept. and -1.04% for 1yr; BFI's High Yield Index returned 0.44% in Sept. and 2.55% over 1-yr."
Another brief, entitled, "CNBC Says 'Short-term bond funds stage a comeback,'" explains, "After years of neglect as investors chased higher returns elsewhere or simply left money parked in cash, short-term bond funds are increasingly gaining attention from those looking for a safe investment with some return."
A third News brief, "Morningstar on PIMCO Short-Term," tells readers, "In 'This Terrific Ultrashort Bond Fund Leaves No Stone Unturned,' they explain, 'PIMCO Short-Term's wide-ranging strategy makes full use of the team's global fixed-income expertise. While its approach comes with risk, the fund's skilled manager never loses sight of its modest goals -- protecting capital chief among them.... Jerome Schneider has called the shots here since 2011.'"
Finally, a sidebar entitled, "Is the Bond Party Over?" explains, "While September wasn't bad, it seems as if bond funds could see their first month of big losses and steep outflows in years this October. Though markets have stabilized, we'll see if losses resume and outflows follow in the coming weeks.... The Financial Times released an article entitled 'Biggest bond ETF suffers record withdrawals,' which tells us, 'The biggest exchange-traded bond fund has suffered a record one-day withdrawal, after the global fixed-income market saw more than $900bn evaporate in last week's Treasury-led bond rout.'"
Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary" looks back at the financial crisis and what has changed in the decade since. Jeff Weaver, et. al., write "'Surveying [what's left of] the landscape,' That's how we titled the overview section of our September monthly commentary published 10 years ago. September 2008 was a seminal moment in the money markets. Following months of stresses in various sectors of the financial markets, the crisis hit home with a vengeance when Lehman Brothers declared bankruptcy on Monday, September 15, 2008. In its wake, a run began on money market funds, culminating with the Reserve Primary Fund, the nation's first and oldest money market fund, breaking its one-dollar net asset value (NAV), becoming only the second to do so since the Community Bankers money market fund in 1994. What began as a credit crisis quickly transformed into a crisis of liquidity and confidence, with markets seizing up and issuers unable to roll their maturities."
They explain, "By month-end, we noted that: '[t]he financial landscape ... was barely recognizable after the bankruptcy of Lehman Brothers; the rescue of AIG; government aid to Fannie Mae and Freddie Mac; sales of Merrill Lynch to Bank of America and Washington Mutual to JPMorgan; and the reformation of Morgan Stanley and Goldman Sachs as bankholding companies.... The Federal Reserve, along with other central banks, actively deployed a veritable cornucopia of acronyms in an effort to inject liquidity into the system and shore up investor confidence.'"
Wells says, "While we suspected it would take some time for the markets to stabilize and heal, in retrospect we did not really expect the process would last as long as it did. The global financial crisis, as it is sometimes called, ushered in an era of regulatory reform affecting issuers and investors alike. In response, the U.S. Securities and Exchange Commission (SEC) amended the rule governing money market funds twice -- the first in 2010 and the second in 2014 (with an implementation date of 2016). These amendments fundamentally altered the structure of money market funds; at the same time, regulatory efforts affecting issuers led to changes in the composition of investable assets. The end result is that the landscape as we knew it is markedly different today."
On the government sector, they tell us, "Although it seems odd to suggest it, at the most basic level the U.S. government money markets function in much the same way as they did prior to the financial crisis. They continue to provide a forum for investors seeking short-dated, historically stable investments to transact with the U.S. government (and its agencies), which need to borrow to finance their operations. In addition, the money markets facilitate the government's longer-term financing by providing a way for broker/dealers and other investors to finance their purchases of U.S. Treasury securities in the repurchase agreement (repo) market. That said, while the basics remain the same, many of the market's particular features have changed at least a fair amount."
Wells' latest update comments, "The backbone of the money markets is the U.S. Treasury bill (T-bill), the rates on which are the starting point for everything else. Ten years ago, there were $1.5 trillion in T-bills outstanding, as the amount issued was in the process of roughly doubling during the heat of the crisis as the government funded its various rescue programs. Today, there are just over $2.2 trillion outstanding, with much of that increase having taken place in the past two years."
It tells us, "Some of the consequences of the crisis took a while to arrive. Money market fund reform was riding in the back of the reform family's van asking, 'are we there yet?' seemingly forever. Finally, eight years after the crisis erupted, the final round of money market fund reform took effect in 2016, with one result being the wholesale transfer of assets from the prime and municipal spaces into government money market funds. Although higher T-bill balances boosted supply, the increased demand due to the growth of government and Treasury money market funds from around $1.2 trillion at the beginning of 2016 to over $2.2 trillion today represents probably the single biggest impact on the government money markets from the crisis. For comparison, before the crisis, in mid-2007 those funds' assets totaled about $450 billion."
Regarding the prime sector, Wells states, "There are many factors that led to the global financial crisis, and where you sat likely influenced what you felt was the overriding cause. Among those advanced, either individually or in some combination, are: Consumers over-levered their homes; Investment banks packaged these loans and sold them as short-term securities; Banks financed illiquid loans in the unsecured markets; Ratings agencies rated the securities AAA; Banks used repos to increase leverage and improve profit margins; and, Shadow banking systems operated outside regulatory frameworks. These are only a few of the commonly reported causes and there are undoubtedly far more. The bottom line is the financial crisis highlighted how interconnected the financial markets are and how a credit event like the bankruptcy of Lehman Brothers morphed into a liquidity event that shook all financial markets and shaped regulatory reform for the next decade."
The monthly outlook adds, "The structure, size, and stability of prime funds has changed dramatically since the financial crisis. Prime money market funds had always been categorized as cash for reporting purposes and carried a stable Net Asset Value (NAV). Prior to the financial crisis, the portfolio characteristics of prime funds varied greatly by fund family as the SEC guidelines offered only a generic framework within which to manage funds.... Prime money market funds were not required to publicly disclose portfolio holdings outside of semi-annual reports and only reported a shadow NAV twice per year to the SEC. There were no requirements to perform stress tests or to conduct a know-your-customer review to better manage shareholder and market risk."
It also says, "The 2010 amendment to Rule 2a-7 -- the rule governing money market funds -- addressed many of the pressing issues resulting from the credit crisis. The reform made wide-sweeping, industry-changing requirements that were aimed at addressing the portfolio construction and risk management processes for money market funds and changed the management of such funds. It required money market funds to maintain specific daily and weekly liquidity targets to ensure adequate coverage for possible redemptions. In order to shorten credit exposures and reduce portfolio risks, the SEC reduced the maximum allowable WAM to 60 days and introduced the WAL, limiting it to 120 days."
Wells explains, "While market participants largely considered these measures successful in addressing some of the issues leading to the 2008 financial crisis, the SEC felt they had not gone far enough. In 2014, they amended Rule 2a-7 again to require certain money market funds to trade at a four-digit NAV and to take specific action in the event their liquidity was impaired. These additional reforms were put in place to remove the stable NAV for institutional nongovernment funds and to reduce the incentives for a run on money market funds if a credit issue occurred. While prior to these reforms money market funds always had the ability to halt or delay redemptions in case of a negative event, now a specific trigger and decision tree around it was introduced for these funds. The SEC also gave funds the option to impose a redemption fee instead of gating a fund during a crisis. Shareholders reviewed this new rule and decided to transfer roughly $1 trillion from prime money market funds to government money market funds, which still offered a stable NAV and did not have a fees or gates requirement."
They add, "The decision for investors to switch strategies from prime to government and adopt a wait-and-see outlook was fairly easy at the time. With the Fed's extremely accommodative monetary policy maintaining debt markets in a zero rate environment, the incremental yield differential between the two types of funds was minimal. But, as the FOMC began removing accommodation, the yield differential between government and prime money market funds widened and the four-digit NAV volatility remained muted, leading potential shareholders to begin reexamining the prime product."
Finally, they tell us, "Investors reexamining this product are realizing the changes from the 2010 reform have made a material difference in the construction of prime money market fund portfolios. The added liquidity requirements and maturity restrictions have had a beneficial impact on dampening NAV volatility even as the FOMC continues to raise rates, as well as in the face of widening credit spreads in March resulting from additional T-bill supply and possible repatriation of offshore assets. In addition, the transparency of holdings provides a daily view of the portfolio construction process and allows shareholders to assess the risks in the portfolios."
Crane Data released its October Money Fund Portfolio Holdings Wednesday, and our most recent collection of taxable money market securities, with data as of Sept. 30, 2018, shows decreases in Treasuries and Agencies, but increases in Repo, CP and CDs. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) decreased by $13.3 billion to $2.924 trillion last month, after decreasing by $24.1 billion in August, increasing by $90.0 billion in July, and decreasing by $53.8 billion in June. Repo continued to be the largest portfolio segment, followed by Treasury securities, then Agencies. CP remained fourth ahead of CDs, 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 to see our latest Portfolio Holdings reports.)
Among taxable money funds, Repurchase Agreements (repo) rose $16.0 billion (1.7%) to $965.6 billion, or 33.0% of holdings, after falling $11.3 billion in August and rising $8.0 billion in July. Treasury securities fell $29.6 billion (-3.5%) to $807.9 billion, or 27.6% of holdings, after rising $22.1 billion in August and rising $42.4 billion in July. Government Agency Debt fell by $11.5 billion (-1.8%) to $638.7 billion, or 21.8% of all holdings, after falling $24.9 billion in August and rising by $0.9 billion in July. Repo, Treasuries and Agencies total $2.412 trillion, representing a massive 82.5% of all taxable holdings.
Money funds' holdings of CP, CDs, and Other (mainly Time Deposits) holding all inched higher in September. Commercial Paper (CP) was up $6.1 billion (2.6%) to $239.4 billion, or 8.2% of holdings, after falling $3.2 billion in August and rising $22.5 billion in July. Certificates of Deposits (CDs) rose by $3.6 billion (2.1%) to $177.4 billion, or 6.1% of taxable assets (after falling $7.6 billion in August and rising $12.0 billion in July). Other holdings, primarily Time Deposits, rose by $1.6 billion (1.9%) to $86.0 billion, or 2.9% of holdings. VRDNs rose by $0.5B (5.7%) to $8.5 billion, or 0.3% of assets. (Note: This total is VRDNs for taxable funds only. We will publish Tax Exempt MMF holdings separately later today.)
Prime money fund assets tracked by Crane Data jumped to $722 billion (up from $711 billion last month), or 24.7% (up from 24.2%) of taxable money fund total taxable holdings of $2.923 trillion. Among Prime money funds, CDs represent almost a quarter of holdings at 24.6% (up from 24.4% a month ago), while Commercial Paper accounted for 33.1% (up from 32.8%). The CP totals are comprised of: Financial Company CP, which makes up 20.8% of total holdings, Asset-Backed CP, which accounts for 6.6%, and Non-Financial Company CP, which makes up 5.7%. Prime funds also hold 5.4% in US Govt Agency/ Debt, 8.0% in US Treasury Debt, 7.2% in US Treasury Repo, 1.2% in Other Instruments, 9.0% in Non-Negotiable Time Deposits, 5.2% in Other Repo, 5.9% in US Government Agency Repo, and 0.9% in VRDNs.
Government money fund portfolios totaled $1.520 trillion (52.0% of all MMF assets), down from $1.544 trillion in August, while Treasury money fund assets totaled another $682 billion (23.2%), the same as the prior month. Government money fund portfolios were made up of 39.5% US Govt Agency Debt, 21.3% US Government Agency Repo, 18.5% US Treasury debt, and 20.5% in US Treasury Repo. Treasury money funds were comprised of 68.9% US Treasury debt, 31.1% in US Treasury Repo, and 0.1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.202 trillion, or 75.3% of all taxable money fund assets.
European-affiliated holdings fell $95.5 billion in Sept. to $573.7 billion among all taxable funds (and including repos); their share of holdings fell to 19.6% from 22.8% the previous month. Eurozone-affiliated holdings fell $54.6 billion to $367.1 billion in September; they account for 12.6% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $3.7 billion to $262.8 billion (9.0% of the total). Americas related holdings rose $0.8 billion to $2.085 trillion and now represent 71.3% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (up $18.5 billion, or 3.3%, to $574.5 billion, or 19.7% of assets); US Government Agency Repurchase Agreements (down $5.7 billion, or -1.6%, to $353.1 billion, or 12.1% of total holdings), and Other Repurchase Agreements (up $3.2 billion from last month to $38.0 billion, or 1.3% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $5.4 billion to $150.3 billion, or 5.1% of assets), Asset Backed Commercial Paper (up $1.5 billion to $47.7 billion, or 1.6%), and Non-Financial Company Commercial Paper (down $0.8 billion to $41.4 billion, or 1.4%).
The 20 largest Issuers to taxable money market funds as of Sept. 30, 2018, include: the US Treasury ($807.9 billion, or 27.6%), Federal Home Loan Bank ($508.8B, 17.4%), BNP Paribas ($150.2B, 5.1%), RBC ($99.1B, 3.4%), Fixed Income Clearing Co ($81.0B, 2.8%), Federal Farm Credit Bank ($74.3B, 2.5%), Wells Fargo ($61.3B, 2.1%), Mitsubishi UFJ Financial Group Inc ($51.5B, 1.8%), JP Morgan ($50.9B, 1.7%), Barclays ($48.7B, 1.7%), HSBC ($47.1B, 1.6%), Sumitomo Mitsui Banking Co ($46.4B, 1.6%), Nomura ($45.1B, 1.5%), Federal Reserve Bank of New York ($44.7B, 1.5%), Bank of Montreal ($40.3B, 1.4%), Bank of America ($39.2B, 1.3%), Toronto-Dominion Bank ($35.3B, 1.2%), Federal Home Loan Mortgage Co ($33.8B, 1.2%), ING Bank ($32.0B, 1.1%),and Canadian Imperial Bank of Commerce ($30.8B, 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: BNP Paribas ($136.4B, 14.1%), Fixed Income Clearing Co ($81.0B, 8.4%), RBC ($78.5B, 8.1%), Wells Fargo ($51.3B, 5.3%), Nomura ($45.1B, 4.7%), Federal Reserve Bank of New York ($44.7B, 4.6%), Barclays PLC ($41.3B, 4.3%), JP Morgan ($39.8B, 4.1%), HSBC ($39.3B, 4.1%), and Mitsubishi UFJ Financial Group Inc ($35.7B, 3.7%). Fed Repo positions among MMFs on 9/30/18 include: Fidelity Cash Central Fund ($18.3B), Fidelity Sec Lending Cash Central ($7.9B), JP Morgan US Govt ($4.0B), Franklin IFT US Govt MM ($3.4B), BlackRock Cash Treas ($2.7B), Dreyfus Tr&Ag Cash Mgmt ($2.4B), Fidelity Inv MM: Treasury Port ($1.2B), State Street Inst Trs Plus ($0.9B), First American Govt Oblg ($0.7B), and Dreyfus Inst Pref Govt ($0.6B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Toronto-Dominion Bank ($24.6B, 5.8%), RBC ($20.6B, 4.8%), Mizuho Corporate Bank Ltd ($16.0B, 3.8%), Mitsubishi UFJ Financial Group Inc. ($15.8B, 3.7%), Canadian Imperial Bank of Commerce ($15.7B, 3.7%), Bank of Montreal ($14.7B, 3.4%), Sumitomo Mitsui Banking Co ($14.3B, 3.4%), BNP Paribas ($13.9B, 3.2%), Bank of Nova Scotia ($12.9B, 3.0%), and Credit Agricole ($11.9B, 2.8%).
The 10 largest CD issuers include: Bank of Montreal ($14.4B, 8.1%), RBC ($11.9B, 6.7%), Mitsubishi UFJ Financial Group Inc ($10.4B, 5.9%), Mizuho Corporate Bank Ltd ($9.9B, 5.6%), Wells Fargo ($9.9B, 5.6%), Sumitomo Mitsui Banking Co ($9.7B, 5.4%), Svenska Handelsbanken ($8.6B, 4.9%), Sumitomo Mitsui Trust Bank ($8.6B, 4.8%), Nordea Bank ($8.0B, 4.5%), and Toronto-Dominion Bank ($7.6B, 4.3%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Toronto-Dominion Bank ($15.4B, 7.7%), JPMorgan ($11.0B, 5.5%), Canadian Imperial Bank of Commerce ($7.9B, 4.0%), RBC ($7.8B, 3.9%), UBS AG ($7.3B, 3.7%), Bank of Nova Scotia ($6.6B, 3.3%), Toyota ($6.0B, 3.0%), ING Bank ($5.6B, 2.8%), Bank Nederlandse Gemeenten ($5.2B, 2.6%), and Mitsubishi UFJ Financial Group Inc ($5.2B, 2.6%).
The largest increases among Issuers include: Fixed Income Clearing Co (up $43.5B to $81.0B), RBC (up $12.6B to $99.1B), BNP Paribas (up $10.4B to $150.2B), Bank of Montreal (up $7.2B to $40.3B), Goldman Sachs (up $5.6B to $18.5B), Sumitomo Mitsui Banking Co (up $5.5B to $46.4B), Nomura (up $3.9B to $45.1B), Canadian Imperial Bank of Commerce (up $3.8B to $30.8B), DNB ASA (up $3.8B to $12.0B), Bank of Nova Scotia (up $3.5B to $30.6B), and Toronto-Dominion Bank (up $2.9B to $35.3B).
The largest decreases among Issuers of money market securities (including Repo) in Sept. were shown by: Credit Agricole (down $32.3B to $26.7B), US Treasury (down $29.6B to $807.9B), Barclays PLC (down $21.2B to $48.7B), Societe Generale (down $13.3B to $27.3B), Federal Home Loan Bank (down $11.7B to $508.8B), Mizuho Corporate Bank Ltd (down $10.5B to $24.5B), Natixis (down $9.4B to $30.3B), ING Bank (down $7.8B to $32.0B), and Deutsche Bank AG (down $5.3B to $15.7B).
The United States remained the largest segment of country-affiliations; it represents 62.7% of holdings, or $1.833 trillion. Canada (8.6%, $250.6B) took the No. 2 spot and France (8.5%, $248.6B) took No. 3. Japan (7.2%, $211.7B) stayed in fourth place, while the United Kingdom (4.5%, $131.2B) remained in fifth place. The Netherlands (1.9%, $55.4B) stayed ahead of Germany (1.9%, $55.1B), while Sweden (1.4%, $40.9B) remained in 8th place. Australia (1.2%, $35.0B) was back ahead of Switzerland (0.7%, $20.6B) in 9th and 10th place. (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 Sept. 30, 2018, Taxable money funds held 32.8% (down from 33.6%) of their assets in securities maturing Overnight, and another 16.6% maturing in 2-7 days (up from 14.1% last month). Thus, 49.5% in total matures in 1-7 days. Another 20.5% matures in 8-30 days, while 10.8% matures in 31-60 days. Note that over three-quarters, or 80.8% of securities, mature in 60 days or less (down slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 8.4% of taxable securities, while 9.7% matures in 91-180 days, and just 1.2% matures beyond 181 days.
Money fund yields moved higher again in the latest week, as they began to digest the Federal Reserve's latest short-term interest rate hike. The Federal funds target rate was raised 1/4-point to a range of 2.00-2.25% on Sept. 28, the Fed's 8th 1/4-point hike since Dec. 2015 and 3rd hike of 2018. Our Crane 100 Money Fund Index is now at 1.95%, up 7 basis points from a week ago (and from 9/30) and up from 1.12% at the start of 2018 and from 0.43% at the start of 2017. Brokerage sweep rates and bank deposit rates also continue to inch higher. We review recent yields below, and also quote from a pair of Wall Street Journal articles on savings and bank deposits. (Note: We apologize, but we're missing some funds in our Form N-MFP data files that haven't yet been updated on the SEC's website. They should be updated and revised soon though, and our 9/30 Money Fund Portfolio Holdings reports will be sent out on Wednesday.)
Our broad Crane Money Fund Average, a simple average of 779 taxable money market mutual funds, currently yields 1.77%, up from 1.69% on 9/30/18, and up from 0.92% on Dec. 31, 2017 and up from 0.26% on Dec. 31, 2016. Prime Institutional MFs yield 1.95% on average, while Government Inst MFs yield 1.87%, a spread of a mere 8 basis points. (Treasury Inst MFs yield 1.83% as of Oct. 8.) Prime Retail MFs yield 1.82% vs. 1.52% for Govt Retail MFs (a much more generous spread of 30 bps). Tax Exempt MFs average a 7-day yield of 1.08% currently. (See our Money Fund Intelligence Daily for the latest yields and averages.)
The top-yielding money funds currently are paying annualized rates of 2.25% and higher. Internal (not available to outside investors) funds Fidelity Money Market Central Fund (FID03) and BlackRock Cash Inst MMF SL (BRC01) are yielding 2.37 and 2.33%, respectively, while DWS ESG Liquidity Cap (ESIXX) yields 2.30%, Morgan Stanley Inst Liq Prime Inst (MPFXX) yields 2.26%, and (the internal) Vanguard Market Liquidity Fund (VAN01) yields 2.26%. Goldman Sachs FS MM Inst (FSMXX) is yielding 2.26%, Dreyfus Cash Mgmt Institutional (DICXX) yields 2.25%, Federated Inst MM Mgmt IS (MMPXX) yields 2.25% and Wells Fargo Cash Inv Select (WFQXX) yields 2.25%. Yields should continue higher in coming days as the rest of the Fed's recent move gets passed through.
As we've mentioned in recent weeks and months, brokerage sweep rates continue to inch higher too. Our latest Brokerage Sweep Intelligence shows that rates among the $1 trillion in FDIC-insured cash held at brokerages moved higher in the latest week, rising to 0.25% (for accounts of $100K-$249K) from 0.24% the week prior, up from 0.11% at the start of the year, and up from 0.07% a year ago. Several brokerages, including Ameriprise, Raymond James, and TD Ameritrade, increased rates on selected sweep tiers in the latest week. (Let us know if you'd like to see a copy of our most recent Brokerage Sweep Intelligence report.)
In related news, this weekend's Wall Street Journal featured an article entitled, "How to Find Decent Yields on Savings." They write, "If you haven't checked in a while, yields on savings accounts at the big money-center banks have barely budged since the financial crisis -- still generally below 0.2%. But many investors may wrongly assume there are no better yields to be had in safe and liquid fixed-income products. There are."
The piece explains, "There are three ways to realize higher yields on liquid accounts that one should always maintain to pay bills, meet unexpected expenses and store profits swept out of the market. One is to set up savings accounts at smaller local banks; a second is funding online savings accounts at solid financial institutions; and the third is allocating cash into money-market mutual funds."
Oddly, the piece adds, "Before the financial crisis, money-market mutual funds typically paid more than savings accounts. But with the adoption of stricter rules on money markets, including repricing of shares below their par value (typically $1) if the prices of underlying investments decline, such money-markets products have become less visible. But they still exist."
Finally, the Journal also wrote "Banks Brace for the Downside of Higher Rates," which tells us, "Banks have enjoyed a profit boost from rising interest rates over the past couple of years. But now those higher rates could turn into a drag. Higher rates enable banks to charge more on loans. But they also can hit the banks' mortgage businesses, since the higher interest payments could make some consumers think twice about buying a home or refinancing. What's more, rising rates are forcing banks to start paying some depositors more."
This article comments, "As rates keep rising, banks are also finding they may need to start ramping up what they pay savers. Banks tend to try to keep deposit rates low for as long as customers will tolerate it, and so far many customers have been accommodating. The average rate on a money-market deposit account, a widespread type of savings account, was 0.10% right before the Fed started raising rates, according to Bankrate.com. The average rate is now at 0.20%, even though the Fed has raised rates 2 percentage points since December 2015."
It adds, "But smaller banks and online-only institutions have been raising their rates, a move that some analysts believe may put even more pressure on larger banks to pay up. And banks have been more willing to raise deposit rates for customers with large accounts or who are more likely to take their business elsewhere, such as business clients or wealth-management customers."
Crane Data's latest Money Fund Market Share rankings show assets were lower for the majority of U.S. money fund complexes in September, but big gains in a handful of complexes pushed the overall totals positive. Money fund assets rose by $1.6 billion, or 0.1%, last month to $3.071 trillion, and assets have risen by $63.3 billion, or 2.1%, over the past 3 months. They have increased by $127.7 billion, or 4.3%, over the past 12 months through Sept. 30, 2018. The biggest increases among the 25 largest managers last month were seen by JP Morgan, Vanguard, Northern, Fidelity, and Morgan Stanley, who increased assets by $10.5 billion, $5.7B, $3.5B, $2.8B, and $1.7B, respectively. We review the latest market share totals below, and we also look at money fund yields in September.
Declines in assets among the largest complexes in September were seen by Dreyfus, whose MMFs fell by $6.8 billion, or –4.0%, Wells Fargo, whose MMFs fell by $6.1 billion, or -5.4%, DWS, whose MMFs fell by $3.6 billion, or -12.5%, BlackRock, whose MMFs fell by $2.4 billion, or -0.8%, and Invesco, whose MMFs fell by $1.9 billion, or -3.2%. Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. The combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.
Over the past year through Sept. 30, 2018, Fidelity (up $48.0B, or 8.6%), Vanguard (up $35.9B, or 12.6%), JP Morgan (up $33.3B, or 13.5%), Goldman Sachs (up $28.8B, or 16.9%), BlackRock (up $14.4B, or 5.3%), Federated (up $11.2B, or 5.8%), and Northern (up $8.1B, or 8.0%) were the largest gainers. These complexes were followed by First American (up $6.2B, or 12.5%), Wells Fargo (up $5.4B, or 5.3%), DWS (up $2.5B, or 11.1%), and PGIM (up $1.5B, or 9.4%).
Fidelity, JP Morgan, Vanguard, Federated, Northern, and UBS had the largest money fund asset increases over the past 3 months, rising by $21.9B, $17.6B, $16.6B, $11.9B, $10.1B, and $7.7B respectively. The biggest decliners over 3 months include: Morgan Stanley (down $12.9B, or -11.2%), SSgA (down $7.9B, or -8.1%), BlackRock (down $5.9B, or -2.0%), Schwab (down $5.7B, or -4.3%), and Invesco (down $4.4B, or -7.1%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $608.7 billion, or 19.8% of all assets. It was up $2.8 billion in September, up $21.9 billion over 3 mos., and up $48.0B over 12 months. Vanguard ranked second with $319.7 billion, or 10.4% market share (up $5.7B, up $16.6B, and up $35.9B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock was third with $288.2 billion, or 9.4% market share (down $2.4B, down $5.9B, and up $14.4B). JP Morgan ranked fourth with $279.9 billion, or 9.1% of assets (up $10.5B, up $17.6B, and up $33.3B for the past 1-month, 3-mos. and 12-mos., while Federated remains at fifth with $204.2 billion, or 6.6% of assets (up $690M, up $11.8B, and up $11.2B).
Goldman Sachs also remained in sixth place with $198.9 billion, or 6.5% of assets (down $885M, up $6.0B, and up $28.8B), while Dreyfus held seventh place with $164.6 billion, or 5.4% (down $6.8B, down $2.4B, and down $16.3B). Schwab ($126.6B, or 4.1%) was in eighth place (down $1.8, down $5.7B and down $30.3B), followed by Northern in ninth place ($109.5B, or 3.6%, up $3.5B, up $10.1B, and up $8.1B) and Wells Fargo in tenth place ($106.4B, or 3.5%, down $6.1B, down $463M, and up $5.4B).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Morgan Stanley ($102.4B, or 3.3%), SSgA ($82.3B, or 2.7%), Invesco ($57.8B, or 1.9%), First American ($56.3B, or 1.8%), UBS ($53.7B, or 1.7%), T Rowe Price ($35.8B, or 1.2%), DWS ($24.9B, or 0.8%), Franklin ($24.0B, or 0.8%), Western ($22.9B, or 0.7%), and DFA ($22.9, or 0.7%). Crane Data currently tracks 68 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 moved ahead of BlackRock and Vanguard, Goldman moves ahead of Federated, Northern moves ahead of Schwab, and Morgan Stanley moves up to 8th place. Our Global Money Fund Manager Rankings include the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products.
The largest Global money market fund families include: Fidelity ($618.1 billion), J.P. Morgan ($433.8B), BlackRock ($422.9B), Vanguard ($319.7B), and Goldman Sachs ($302.9B). Federated ($212.5B) was sixth and Dreyfus/BNY Mellon ($189.5B) was in seventh, followed by Morgan Stanley ($138.1B), Northern ($135.7B), and Schwab ($126.6B), 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 October issue of our Money Fund Intelligence and MFI XLS, with data as of 9/30/18, shows that yields were up again in September across all of our taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 779), was up 7 bps to 1.69% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 4 bps to 1.63%. The MFA's Gross 7-Day Yield increased 7 bps to 2.13%, while the Gross 30-Day Yield rose 4 bps to 2.08%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.88% (up 9 bps) and an average 30-Day Yield of 1.83% (up 5 bps). The Crane 100 shows a Gross 7-Day Yield of 2.16% (up 9 bps), and a Gross 30-Day Yield of 2.11% (up 5 bps). For the 12 month return through 9/30/18, our Crane MF Average returned 1.19% and our Crane 100 returned 1.37%. The total number of funds, including taxable and tax-exempt, was up 9 funds to 979. There are currently 779 taxable and 200 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 1.89% (up 7 bps) as of Sept. 30, while the Crane Govt Inst Index was 1.77% (up 7 bps) and the Treasury Inst Index was 1.77% (up 8 bps). Thus, the spread between Prime funds and Treasury funds is 12 basis points, down 1 bps from last month, while the spread between Prime funds and Govt funds is also 12 basis points, the same as last month. The Crane Prime Retail Index yielded 1.74% (up 7 bps), while the Govt Retail Index yielded 1.43% (up 7 bps) and the Treasury Retail Index was 1.51% (up 9 bps). The Crane Tax Exempt MF Index yield dipped slightly in September to 1.06% (down 1 bps).
Gross 7-Day Yields for these indexes in September were: Prime Inst 2.28% (up 7 bps), Govt Inst 2.07% (up 8 bps), Treasury Inst 2.09% (up 9 bps), Prime Retail 2.27% (up 7 bps), Govt Retail 2.05% (up 6 bps), and Treasury Retail 2.10% (up 9 bps). The Crane Tax Exempt Index decreased 1 basis point to 1.57%. The Crane 100 MF Index returned on average 0.15% over 1-month, 0.44% over 3-months, 1.12% YTD, 1.37% over the past 1-year, 0.74% over 3-years (annualized), 0.47% over 5-years, and 0.36% over 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The October issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Friday morning, features the articles: "Prime MFs Clawing Back Two Years After Reform's 'Big Sort'," which looks at how Prime assets have fared of late; "Highlights from European MFS: Irish Funds' Rooney," which quotes a recent presentation from Irish Funds' Pat Rooney; and, "China, Ireland Still Dominate Global Money Fund Ranks," which reviews the latest statistics on money fund markets outside the U.S. We've also updated our Money Fund Wisdom database with Sept. 30 statistics, and 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 October Money Fund Portfolio Holdings are scheduled to ship on Wednesday, October 10, and our Oct. Bond Fund Intelligence is scheduled to go out Monday, October 15.
MFI's "Prime MFs Clawing Back" article says, "Two years after the SEC's Money Fund Reforms triggered a $1.1 trillion shift out of Prime money market funds and into Govt, Prime assets continue to extend a slow and steady recovery. While assets dipped in the latest month (Sept.), Prime MMFs are up $170 billion, or 30.3%, since hitting their low of $562 billion on 10/31/16."
It continues, "Year-to-date through Aug. 31, the SEC shows Prime MMF assets up $66 billion, or 10.0%, to $733 billion, and up $91 billion, or 14.2%, over 12 months. Govt MMF assets are down $49 billion, or -2.1%, YTD and up just $62 billion, or 2.8% over 12 months."
Our "EMFS Highlights" excerpt reads, "Crane Data hosted its 6th annual European Money Fund Symposium two weeks ago in London, and European Money Market Fund Reforms took center stage. Below, we highlight from one the sessions, 'Irish & European Fund Issues' featuring Pat Rooney, Senior Regulatory Affairs Manager at Irish Funds. He presented a number of statistics on money funds domiciled in Ireland, the largest segment of the European money fund industry, and gave an Irish take on the new regulations and the fate of the RDM, reverse distribution mechanism."
Rooney says, "Firstly, the MMF industry in Ireland is one of very significant scale.... We're talking about E490 billion in terms of assets ... the largest domicile by quite some margin in Europe, followed by France and Luxembourg. There has been significant growth ... in the past 5 years dating back to 2013, with 77% growth since then. So it is a very strong and growing industry in Ireland."
He continues, "The number of funds stands at 115 today; that is down slightly from 122 in 2012. So while the assets have been growing, there has been a slight amount of consolidation in the industry. This is an industry of scale.... We have quite a few big players with very big funds, so there is a lot of concentration. But also there is also still broad diversity, too. We've counted 48 MMF managers ... from 11 countries."
Rooney tells us, "Predominantly the managers in funds of scale are coming from the U.S., the U.K. and Germany. This industry accounts for 20% of our [overall fund] assets. So it is an industry that is vital to Irish Funds and one that we have fought vigorously to defend throughout the MMF reform, which hasn't been easy, in order to ensure that this is a sector that can continue to thrive." (Watch for more Rooney and European Money Fund Symposium excerpts in coming weeks, or see the latest issue of MFI for the full article.)
MFI's "China, Ireland" piece says, "The Investment Company Institute's 'Worldwide Regulated Open-Fund Assets and Flows, Second Quarter 2018' shows that money fund assets globally fell by $135.6 billion, or -2.2%, in Q2'18, led by big drops in Chinese and French money funds. Money funds in the U.S. and India rose substantially. MMF assets worldwide have increased by $632.8 billion, or 11.9%, the past 12 months."
ICI's release says, "On a US dollar denominated basis, ... bond fund assets decreased by 2.9 percent to $10.25 trillion in the second quarter ..., while money market fund assets decreased by 2.3% globally to $5.96 trillion."
Also, MFI includes a sidebar, "ESMA Seeks Feedback on European MF Stress Testing," which says "A statement posted Friday and entitled, 'ESMA consults on stress testing rules for money market funds,' tells us, 'The European Securities and Markets Authority (ESMA) has today opened a public consultation on how European money market funds (MMFs) should conduct their internal stress testing."
Our October MFI XLS, with Sept. 30, 2018, data, shows total assets inched up by $1.6 billion in September to $3.072 trillion, after increasing $29.2 billion in August, increasing $36.3 billion in July, and decreasing $49.9 billion in June. Our broad Crane Money Fund Average 7-Day Yield rose 8 bps to 1.69% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was also up 8 bps to 1.88% (its highest level since Oct. 2008).
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA rose 7 bps to 2.13% and the Crane 100 rose to 2.16%. Charged Expenses averaged 0.44% (unchanged) and 0.28% (unchanged), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 30 and 31 days, respectively (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Fidelity Investments distributed a recent "Viewpoint" to investors entitled, "Seek more from your cash amid higher rates." Subtitled, "Money markets and CDs may offer more income, and risk, than savings accounts," the piece tells us, "If you do have money in cash, you should consider your options. Interest rates have moved up significantly for some types of investments in recent years, but the average savings account still pays barely any interest. While rates are still low, choosing a higher-yielding home for some of your cash could make a meaningful difference. If you have $50,000 in cash for the next 3 years, the difference between the average savings account, and some higher-yielding options could be thousands of dollars." We review their update, and we also quote from a Bloomberg article on GE CP and review our latest Weekly Portfolio Holdings data below.
Fidelity comments, "Before you move your cash to find the highest yield -- meaning the amount of income relative to the amount invested, be sure to consider the tradeoffs that come with these other options. For instance, CDs and bonds might come with less liquidity, meaning you have to wait for a set period of time, accept the price a buyer is willing to pay to get your cash, or pay a fee that could impact your expected return. Finding an appropriate choice depends on your situation."
They add, "If you have cash, it may well be worth considering some options beyond a savings account. Unlike risky stocks, longer-dated bonds, or other income producing investments, money markets, CDs, and short-duration bonds and bond funds all offer a mix of yield, risk, and access that could make them an alternative for some situations. The key is to look at your situation, feelings about risk, timeline, and goals, and find an option that works for you."
In other news, Bloomberg writes "GE Downgrade Hits Company in a Debt Market It Once Ruled," which says, "A ratings downgrade this week may hit General Electric Co. in one particular bond market: short-term debt. That's where the manufacturing giant lost its near-top credit ratings on Tuesday. Without those ratings, at least some investors in IOU's known as commercial paper won't be willing to invest in GE's debt anymore."
The article explains, "GE relies on commercial paper to help fund its daily operations, and it used to be one of the biggest issuers of the debt. The manufacturer had on average around $16.6 billion of the debt outstanding during the second quarter. At the end of June, it had about $115.6 billion of total debt, of which about $6 billion was commercial paper, according to company filings."
Bloomberg says, "With fewer funds interested in buying at current ratings, GE will probably have to pay higher rates to sell its commercial paper, said Peter Crane, president of Crane Data, which tracks money market funds. 'They'll still be able to find buyers, but at a cost of course,' Crane said. On Monday, it cost 2.25 percent for a top-tier corporation to borrow for 90 days, according to U.S. Federal Reserve data. Companies the next tier down, where one ratings firm has GE, paid 2.56 percent."
Crane Data's August 31 Money Fund Portfolio Holdings collection shows money funds holding just $1.4 billion in General Electric Commercial Paper. Twelve money funds from seven managers, almost all retail or internal money funds, shows holdings. (Note: Our 9/30 Portfolio Holdings will be out next Wednesday, Oct. 10.)
Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday, which tracks a shifting subset of our monthly Portfolio Holdings collection. The latest cut, with data as of Sept. 28, includes Holdings information from 63 money funds (down from 86 on Sept. 21), representing $1.290 trillion (down from $1.533 trillion) of the $2.937 (43.9%) in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our Sept. 13 News, "September MF Portfolio Holdings: Treasuries Up; Agency, Repo Down.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $471.8 billion (down from $551.4 billion on Sept. 21), or 36.6% of holdings, Treasury debt totaling $401.6 billion (up from $469.2 billion) or 31.1%, and Government Agency securities totaling $251.7 billion (down from $300.5 billion), or 19.5%. Commercial Paper (CP) totaled $54.9 billion (down from $71.3 billion), or 4.3%, and Certificates of Deposit (CDs) totaled $49.0 billion (down from $57.8 billion), or 3.8%. VRDNs accounted for $33.6 billion, or 2.6% and a total of $27.4 billion or 2.1% was listed in the Other category (primarily Time Deposits).
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $401.6 billion (31.1% of total holdings), Federal Home Loan Bank with $200.7B (15.6%), BNP Paribas with $76.7 billion (5.9%), RBC with $39.1B (3.0%), Fixed Income Clearing Co with $37.7B (2.9%), Federal Farm Credit Bank with $36.0B (2.8%), Nomura with $26.8B (2.1%), Wells Fargo with $24.3B (1.9%), HSBC with $22.7B (1.8%), and Mitsubishi UFJ Financial Group Inc with $20.8B (1.7%).
The Ten Largest Funds tracked in our latest Weekly Holdings update include: JP Morgan US Govt ($142.8B), Fidelity Inv MM: Govt Port ($109.6B), Goldman Sachs FS Govt ($101.3B), BlackRock Lq FedFund ($83.7B), Wells Fargo Govt MMkt ($69.4B), BlackRock Lq T-Fund ($63.7B), Dreyfus Govt Cash Mgmt ($58.4B), Goldman Sachs FS Trs Instruments ($56.7B), Morgan Stanley Inst Liq Govt ($53.0B), and JP Morgan Prime MM ($42.3B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Crane Data is preparing for its "basic training" conference, Money Fund University, following the conclusion of our European Money Fund Symposium 2 weeks ago in London (and our Money Fund Symposium this past June in Pittsburgh). Our 9th annual MFU will be hosted at the Stamford Marriot Hotel in Stamford, Conn., January 17-18, 2019. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event also focuses on hot topics like money market fund regulations, money fund alternatives, offshore markets, and other recent industry trends. Our educational conference features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers. (See the preliminary agenda here or e-mail us to request the latest brochure. Also, watch for coverage of our recent European Money Fund Symposium in the next MFI newsletter, which ships Friday.)
Money Fund University offers a 2-day crash course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, and money market instruments such as commercial paper, CDs and repo. We also cover portfolio construction and credit analysis. At our Stamford event in January, we will also take a look at newly implemented European money market fund regulations and we'll also include a mini "Bond Fund University" segment on ultra-short bond funds and money fund alternatives.
The morning of Day One of the 2019 MFU agenda includes: History & Current State of Money Market Mutual Funds with Peter Crane, President & Publisher of Crane Data; The Federal Reserve & Money Markets with Mark Cabana, MD of Bank of America Merrill Lynch; Interest Rate Basics & Money Fund Math with Phil Giles, Adjunct Professor at Columbia University; and, Ratings, Monitoring & Performance with Greg Fayvilevich, Director of Fitch Ratings and Michael Masih, Associate Director at Standard & Poor's Global Ratings Services.
Day One's afternoon agenda includes: Instruments of the Money Markets Intro with Teresa Ho, Vice President of J.P. Morgan Securities; Repurchase Agreements with Ho and Tyler Williams, Associate at J.P. Morgan Securities; Treasuries & Govt Agencies with Sue Hill, Senior Portfolio Manager at Federated Investors and Matt Lachance, Director of Money Market Trading with TD Securities; Tax-Exempt Securities & VRDNs with John Vetter, Municipal Structured Analyst at Fidelity Investments; Commercial Paper & ABCP with Rob Crowe, Director with Citi Global Markets; CDs, TDs & Bank Debt with Vanessa McMichael, Vice President at Wells Fargo Securities; and, Credit Analysis & Portfolio Management with Adam Ackermann, Executive Director at JP Morgan AM.
Day Two's agenda includes: Money Fund Regulations: 2a-7 Basics & History with Brenden Carroll, Partner at Dechert LLP, and Jamie Gershknow, Associate with Stradley Ronon; European MMF Reforms & Offshore Funds with John Hunt, Partner at Sullivan & Worcester LLP and Barry Harbison, Liquidity Product Specialist with HSBC Global AM; Ultra-Short Bond Funds & SMAs with James McNerny, MD & Portfolio Manager at JPMAM; and, Money Fund Data & Wisdom Demo/Training with Peter Crane. The conference ends with its annual MFU "Graduation" ceremony (where diplomas are given to attendees).
New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "cash" investing should benefit from our comprehensive program. Even experienced professionals may enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane's Money Fund University is just $500, exhibit space is $2,000, and sponsorship opportunities are $3K (Bronze), $4K (Silver), and $5K (Gold). A block of rooms has been reserved at the Stamford Marriot Hotel.
We'd like to thank our past and pending MFU sponsors -- Dreyfus/BNY Mellon CIS, J.P. Morgan Asset Management, Fitch Ratings, TD Securities, S&P Global Ratings, Dechert LLP, Fidelity, Federated, First American Funds/US Bank, and J.M. Lummis -- for their support, and we look forward to seeing you in Stamford in January. E-mail Pete Crane (pete@cranedata.com) for the latest brochure or visit www.moneyfunduniversity.com to register or for more details.
Crane Data is also preparing the preliminary agendas for its next Bond Fund Symposium (March 25-26, 2019, at the Loews Philadelphia Hotel), and our "big show," Money Fund Symposium, which will be held June 24-26, 2019, at the Renaissance Boston. Finally, next year's European Money Fund Symposium will be held Sept. 23-24, 2019, in Dublin, Ireland at the Dublin Hilton. Watch for details on these shows in coming weeks and months.
In other news, money market mutual fund distributors and corporate cash managers are also making preparations for AFP 2018, the Association for Financial Professionals' huge annual gathering of corporate treasurers and cash managers, which takes place next month in Chicago, Nov. 4-6. AFP is the largest gathering of corporate treasurers in the country, attracting over 5,000 treasury management professionals, as well as a number of large banks and institutional money fund managers.
This year, sessions involving money funds and cash investing include: "Mind the (Yield) Gap: Corporate Cash Strategies for Rising Rate Environments," featuring Anthony Hancox of Garmin International, Jerry Klein and Richard Saperstein of Treasury Partners; "Keep Calm and Carry On: How Corporations are Preparing for European Money Market Fund Reform," with Timothy Kolenda from AbbVie Inc, Guillermo Gualino of Agilent Technologies, and Sara Flour and Reyer Kooy from DWS; and, "The Search for Yield, High Quality and Downside Protection for Corporate Cash Portfolios," with Brandon Hillstead from Autodesk, Linda Ruiz-Zaiko from Bridgebay Financial, and Peter Kaplan from Merganser Capital Management.
AFP also includes the "cash" segments: "Disruption: Distraction or Opportunity? A Look at Today's Liquidity Environment," featuring Matthew Skurbe of Blackstone and Dave Fishman of Goldman Sachs; "The Commercial Paper Market from the Buyer and Issuer Point of View," with Randy Webb of Applied Materials, Benjamin Campbell of Capital Advisors Group, Matthew Frye of Carnegie Mellon University, and Nicholas Ro of Toyota Financial Services; and "Repositioning for Rising Rates," featuring Ruiz-Zaiko, Jack Yue of KLA-Tencor Corporation, and Jim Palmer of U.S. Bancorp Asset Management. We hope to see you in Chicago in November!
Charles Schwab Investment Management has filed to liquidate another Prime MMFs, Schwab Cash Reserves, as it continues to shift brokerage sweep assets from money market funds to bank deposit options. A Prospectus Supplement for Schwab Cash Reserves tells us, "At a meeting held on September 25, 2018, the Board of Trustees of The Charles Schwab Family of Funds (the Trust) approved the liquidation of, and the related Plan of Liquidation for, the Fund." We review the filing, the story by ignites, entitled, "Schwab Cutting Sweep Money Fund Options," and the latest from our Brokerage Sweep Intelligence, below.
Schwab's filing explains, "In accordance with the Plan of Liquidation, the Fund will redeem all of its outstanding shares on or about April 10, 2019 (the Liquidation Date), and distribute the proceeds to the Fund's shareholders in amounts equal to each shareholder's proportionate interest in the net assets of the Fund after the Fund has paid or provided for all of its charges, taxes, expenses and liabilities. It is expected that this distribution will be at a $1.00 net asset value per share. Additionally, the Fund anticipates making a distribution of any net income and realized capital gains of the Fund prior to or on the Liquidation Date, which may be taxable to Fund shareholders."
It states, "As the Fund approaches the Liquidation Date, the Fund will wind up its business and affairs, and will cease investing its assets in accordance with its stated investment strategies. On or before the Liquidation Date, all portfolio holdings of the Fund will be converted to cash or cash equivalents. As a result, the Fund will not be able to achieve its investment objective and will deviate from its investment strategies during the period as it approaches the Liquidation Date."
Schwab adds, "The Fund's investment adviser will bear all expenses associated with the liquidation other than transaction costs associated with winding down the Fund’s portfolio and effective February 15, 2019 through the Liquidation Date, the Fund's investment adviser will waive the Fund's management fees. The liquidation is not expected to be a taxable event for the Fund."
The ignites piece, "Exit That Way: Schwab Cutting Sweep Money Fund Options to One," states, "In the latest stage of Schwab's effort to steer brokerage sweep assets away from money funds, the firm is showing more investors in such products the door. The firm plans to liquidate its $7.7 billion Cash Reserves fund in April, according to a recent regulatory filing.... The San Francisco–based shop also plans to eliminate the sweep share classes of six other money funds, a separate regulatory filing shows."
It tell us, "When these changes take effect next spring, Schwab brokerage customers will be left with one money fund option: the sweep share class of its $22.3 billion Schwab Government Money Fund. Schwab is far from alone in forcefully nudging clients out of sweep money funds and into bank products, which tend to be more lucrative for brokerages and are FDIC insured. Merrill Lynch last month stopped sweeping customer cash into money market funds in favor of deposits at affiliated banks.... Morgan Stanley also has taken steps in the past year to limit the customer assets being swept into money funds."
They add, "Brokerages have been 'relentlessly' tweaking the rates they pay on bank sweep accounts for different tiers of clients because they're trying to strike a delicate balance between making money off of brokerage clients and 'appeasing people' who know that rates on cash are no longer negligible, says Pete Crane, president and CEO of Crane Data. 'Brokerage revenue streams are under siege,' says ... Crane. '[S]weep accounts are one of the last vestiges that haven't been dragged into the fee wars,' he says. But Main Street investors may start paying closer attention to this area."
Crane Data's latest Brokerage Sweep Intelligence shows that rates among the $1 trillion in FDIC-insured cash held at brokerages moved higher in the latest week, rising to 0.24% (for accounts of $100K-$249K) from 0.22% the week prior, up from 0.11% at the start of the year, and up from 0.07% a year ago.
Several brokerages, including Ameriprise, Fidelity, and Schwab, increased rates on selected sweep tiers in the latest week. Fidelity raised sweep rates to 0.31% (from 0.25%) for accounts less than $100K to 0.66% (from 0.53%) for accounts at $100K and higher. Schwab bumped up rates to 0.30% (from 0.22%) for all tiers under $1 million and to 0.60% (from 0.52%) at $1 million or higher on its Bank Sweep. We expect sweep rates to continue inching higher in coming weeks, pulled higher by money fund yields which will soon approach 2.0% on average. (Let us know if you'd like to see a copy of our most recent Brokerage Sweep Intelligence report.)
For more on brokerage sweeps, see these Crane Data News stories: More Insured Brokerage Sweeps Blowback: ignites, BlackRock Comment (8/21/18), Journal's Zweig Targets Sweeps (Again); Schneider Video on Front End (8/6/18), NY Post on Schwab Sweep Letter(9/11/18), Schwab Changes Brokerage Cash Sweep, Adds Bank, Cuts Money Funds (2/16/18), Schwab Liquidating MMF, Shifting to FDIC; Brokerage Sweep Rates Jump (1/4/18), Wells Bumps Up Brokerage Sweep Rates, Raises FDIC Insurance Coverage (10/12/17), Signs of Life in FDIC Brokerage Sweeps; StoneCastle on Sweep Platforms (5/9/17), Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes (8/15/16), and UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund (6/29/16).
In other news, Investment News writes, "Cash comes into focus as interest rates continue ascent. Subtitled, "Yields on money market funds, short-term CDs and other cash accounts have risen as the Fed continues to raise interest rates, and this has big implications for advisers," it says, "Cash, an asset class that's been in the doldrums for the better part of a decade, is beginning to show signs of life."
They explain, "The Federal Reserve cut its benchmark interest rate to near zero a decade ago in an effort to stoke the American economy in the midst of the financial crisis. A byproduct of that strategy was a severe drop in yields on cash and cash-equivalent accounts, such as bank savings accounts, money market mutual funds and short-term certificates of deposit. But the yield on cash is inching up from rock-bottom rates as the Fed reverses course. Financial advisers are taking notice and monitoring opportunities for higher client returns."
The article continues, "Money market fund returns help demonstrate the pain clients in cash accounts have felt for years. Prime and government money funds were yielding 4.47% and 3.58%, respectively, at the end of 2007, according to the Investment Company Institute. Two years later, those yields had plunged to 0.04% and 0.01%. However, money market rates began inching up noticeably in 2016. Prime funds now yield 1.78% and government funds 1.54%, according to ICI [sic]."
It adds, "The story is similar for other instruments, such as certificates of deposit. Yields on one-year CDs, which bottomed out at 0.22% five years ago, average 0.77% now, according to Bankrate.com data, but some institutions are offering returns as high as 2.5%. The yield on money market deposit accounts, a type of federally insured bank account, have more than doubled -- albeit to the still-meager yield of 0.20%, according to Bankrate.com."
The Investment Company Institute released its "Worldwide Regulated Open-Fund Assets and Flows, Second Quarter 2018" Friday. The most recent data collection on mutual funds in other countries (as well as the U.S.) shows that money fund assets globally fell by $135.6 billion, or -2.2%, in Q2'18, led by big drops in Chinese and French money funds. Money funds in the US and India rose substantially. MMF assets worldwide have increased by $632.8 billion, or 11.9%, the past 12 months. We review the latest Worldwide Money Market Fund totals, below. (Watch for more on money funds outside the U.S. in our upcoming Money Fund Intelligence newsletter, and watch for coverage of Worldwide Bond Fund totals in the next issue of Bond Fund Intelligence.)
ICI's release says, "Worldwide regulated open-end fund assets decreased 1.2 percent to $49.39 trillion at the end of the second quarter of 2018, excluding funds of funds. Worldwide net cash inflow to all funds was $194 billion in the second quarter, compared with $584 billion of net inflows in the first quarter of 2018. The Investment Company Institute compiles worldwide open-end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations. The collection for the second quarter of 2018 contains statistics from 47 jurisdictions."
On the data series' conversion into U.S. dollars, it explains, "The growth rate of total regulated open-end fund assets reported in US dollars was decreased by US dollar appreciation over the second quarter of 2018. For example, on a US dollar–denominated basis, fund assets in Europe decreased by 2.8 percent in the second quarter, compared with an increase of 2.7 percent on a euro-denominated basis."
ICI continues, "On a US dollar–denominated basis, equity fund assets increased by 0.7 percent to $22.10 trillion at the end of the second quarter of 2018. Bond fund assets decreased by 2.9 percent to $10.25 trillion in the second quarter. Balanced/mixed fund assets decreased by 3.8 percent to $6.26 trillion in the second quarter, while money market fund assets decreased by 2.3 percent globally to $5.96 trillion."
The release writes, "At the end of the second quarter of 2018, 45 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 21 percent and the asset share of balanced/mixed funds was 13 percent. Money market fund assets represented 12 percent of the worldwide total."
It adds, "Net sales of regulated open-end funds worldwide were $194 billion in the second quarter of 2018.... Globally, bond funds posted an inflow of $71 billion in the second quarter of 2018, after recording an inflow of $147 billion in the first quarter.... Money market funds worldwide experienced an inflow of $36 billion in the second quarter of 2018 after registering an inflow of $14 billion in the first quarter of 2018."
According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. maintained its position as the largest money fund market in Q2'18 with $2.821 trillion, or 47.3% of all global MMF assets. U.S. MMF assets increased by $27.6 billion (1.0%) in Q2'18 and increased by $187.1B (7.1%) in the 12 months through June 30, 2018. China remained in second place among countries overall, though assets declined sharply in the latest quarter. China saw assets decrease $73.9 billion (-6.0%) in Q2 to $1.165 trillion (19.5% of worldwide assets). But over the 12 months through June 30, 2018, Chinese MMF assets have risen by $412.3 billion, or 54.8%.
Ireland remained third among these country rankings, ending Q2 with $568.9 billion (9.5% of worldwide assets). Dublin-based MMFs were down $21.8B for the quarter, or -3.7%, but up $29.8B, or 5.5%, over the last 12 months. France remained in fourth place with $405.6 billion (6.8% of worldwide assets). Assets here decreased $39.7 billion, or -8.9%, in Q2, but were up $5.7 billion, or 1.4%, over one year. Luxembourg was in fifth place with $357.2B, or 6.0% of the total, down $20.0 billion in Q2 (-5.3%) and down $13.4B (-3.6%) over 12 months.
Japan remained in sixth place with $107.1 billion (1.8%); assets there dropped $1.0 billion (-0.9%) in Q2 and $4.8 billion (-4.3%) over 12 months. Korea, the 7th ranked country, saw MMF assets fall $5.2 billion, or -5.2%, in Q2 to $95.1 billion (1.6% of the world's total MMF assets); they fell $1.9 billion (-1.9%) for the year. Brazil remained in 8th place, as assets decreased $6.8 billion, or -8.4%, to $74.7 billion (1.3% of total assets) in Q2. They have decreased $6.9 billion (-8.4%) over the previous 12 months.
ICI's statistics show India in 9th place with $66.9B, or 1.1% of total, up $15.3B (29.6%) in Q2 and up $13.5B (25.2%) for the year. Mexico was in 10th place, decreasing $2.5 billion, or -4.3%, to $56.1 billion (0.9% of total assets) in Q2 and decreasing $311 million (-0.6%) over the previous 12 months. (Note that ICI's data no longer includes money fund figures for Australia. Australia's MMF assets, which had been one of the largest markets in the world, were mysteriously shifted into the "Other" category several years ago.)
The United Kingdom ($29.5B, down $206M and up $4.1B over the quarter and year, respectively) still ranks ahead of Chinese Tapei ($24.2B, down $4.6B and down $3.4B). Chile ($23.9B, down $1.6B and up $2.3B) moved ahead of South Africa ($22.2B, down $3.9B and down $913M), and both remain ahead of Switzerland ($22.4B, down $661M and down $1.4B). These countries ranked 11th through 15th, respectively. Sweden, Canada, Poland, Norway and Germany round out the 20 largest countries with money market mutual funds.
Note that Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. Contact us if you'd like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data, or if you'd like to see our MFI International product.
