News Archives: October, 2020
Money market fund assets fell yet again in the latest week, their twelfth decline in a row and 20th decline over the past 23 weeks. Assets have fallen $441 billion since May 20, when they were at a record $4.789 trillion. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $7.38 billion to $4.35 trillion for the week ended Wednesday, October 28.... Among taxable money market funds, government funds decreased by $10.21 billion and prime funds increased by $2.38 billion. Tax-exempt money market funds increased by $451 million." ICI's stats show Institutional MMFs falling $7.6 billion and Retail MMFs increasing $251 million. Total Government MMF assets, including Treasury funds, were $3.639 trillion (83.7% of all money funds), while Total Prime MMFs were $597.2 billion (13.7%). Tax Exempt MMFs totaled $112.5 billion (2.6%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data.)
ICI shows money fund assets up a still massive $716 billion, or 19.7%, year-to-date in 2020, with Inst MMFs up $555 billion (24.5%) and Retail MMFs up $162 billion (11.8%). Over the past 52 weeks, ICI's money fund asset series has increased by $835 billion, or 24.7%, with Retail MMFs rising by $192 billion (14.9%) and Inst MMFs rising by $644 billion (30.8%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets are down $56.7 billion in October (as of 10/28) to $4.721 trillion.)
They explain, "Assets of retail money market funds increased by $251 million to $1.53 trillion. Among retail funds, government money market fund assets increased by $3.04 billion to $1.13 trillion, prime money market fund assets decreased by $2.36 billion to $299.19 billion, and tax-exempt fund assets decreased by $430 million to $101.03 billion." Retail assets account for just over a third of total assets, or 35.2%, and Government Retail assets make up 73.9% of all Retail MMFs.
ICI adds, "Assets of institutional money market funds decreased by $7.63 billion to $2.82 trillion. Among institutional funds, government money market fund assets decreased by $13.25 billion to $2.51 trillion, prime money market fund assets increased by $4.75 billion to $298.04 billion, and tax-exempt fund assets increased by $882 million to $11.47 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 at the end of August, accounted for 64.8% of all MMF assets, with Government Institutional assets making up 89.0% of all Institutional MMF totals.
The ICI also released its monthly "Trends in Mutual Fund Investing" and its "Month-End Portfolio Holdings of Taxable Money Funds" for September 2020 yesterday. The former report shows that money fund assets decreased by $118.4 billion to $4.404 trillion in September, after decreasing 56.7 billion in August, $55.4 billion in July and $133.5 billion in June. Assets increased $31.8 billion in May, $399.4 billion in April and $690.6 in March. For the 12 months through Sept. 30, 2020, money fund assets have increased by a stunning $963.2 billion, or 28.0%.
ICI's monthly "Trends" release states, "The combined assets of the nation's mutual funds decreased by $542.80 billion, or 2.4 percent, to $22.15 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.... Bond funds had an inflow of $36.97 billion in September, compared with an inflow of $69.81 billion in August.... Money market funds had an outflow of $118.56 billion in September, compared with an outflow of $56.80 billion in August. In September funds offered primarily to institutions had an outflow of $114.09 billion and funds offered primarily to individuals had an outflow of $4.48 billion."
ICI's latest statistics show that both Taxable MMFs and Tax Exempt MMFs lost assets last month. Taxable MMFs decreased by $111.5 billion in September to $4.291 trillion. Tax-Exempt MMFs decreased $6.9 billion to $113.4 billion. Taxable MMF assets increased year-over-year by $983.7 trillion (29.7%), while Tax-Exempt funds fell by $20.5 billion over the past year (-15.3%). Bond fund assets increased by $30.2 billion in August (0.6%) to $4.966 trillion; they've risen by $388.7 billion (8.5%) over the past year.
Money funds represent 19.9% of all mutual fund assets (unchanged from the previous month), while bond funds account for 22.4%, according to ICI. The total number of money market funds was 350, down two from the month prior and down from 367 a year ago. Taxable money funds numbered 272 funds, and tax-exempt money funds numbered 78 funds.
ICI's "Month-End Portfolio Holdings" confirms a modest increase in Repo and Notes, and drops in all other sectors last month. Treasury holdings in Taxable money funds remain in first place among composition segments since surpassing Repo in April. Treasury holdings decreased by $5.7 billion, or -0.2%, to $2.276 trillion, or 53.0% of holdings. Treasury securities have increased by $1.330 trillion, or 140.8%, over the past 12 months. (See our October 13 News, "October MF Portfolio Holdings: CP, CDs, TDs Fall; Treasury, Repo Flat.")
Repurchase Agreements were in second place among composition segments; they increased by $5.2 billion, or 0.5%, to $998.7 billion, or 23.3% of holdings. Repo holdings have dropped $174.4 billion, or -14.9%, over the past year. U.S. Government Agency securities were the third largest segment; they decreased $45.4 billion, or -6.1%, to $700.0 trillion, or 16.3% of holdings. Agency holdings have risen by $4.6 billion, or 0.7%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they decreased by $32.5 billion, or -15.3%, to $180.3 billion (4.2% of assets). CDs held by money funds shrunk by $78.2 billion, or -30.3%, over 12 months. Commercial Paper remained in fifth place, down $15.1 million, or -8.0%, to $172.6 billion (4.0% of assets). CP has decreased by $64.4 billion, or -27.2%, over one year. Other holdings increased to $442 million (0.8% of assets), while Notes (including Corporate and Bank) were down to $996 million (0.01% of assets).
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 137.5 million to 39.823 million, while the Number of Funds was unchanged at 272. Over the past 12 months, the number of accounts rose by 3.845 million and the number of funds decreased by 14. The Average Maturity of Portfolios was 45 days, up two from August. Over the past 12 months, WAMs of Taxable money have increased by 12.
On Tuesday, we hosted our latest virtual event, "Crane's Money Fund Symposium Online," which featured a series of presentations and discussions on money market mutual fund topics. The Keynote speech, entitled, "Covid's Impact on Money Markets," was given by Investment Company Institute President & CEO Paul Schott Stevens, and included a preview of an upcoming "Report of the COVID-19 Market Impact Working Group on Money Markets." We quote from Stevens' comments below. (Watch for more coverage next week and in our November MFI, and thanks again to our attendees, excellent speakers and sponsors! If you missed it, the recording is available here or via Crane Data's Webinar page. Finally, register for our next two events, European Money Fund Symposium Online, Nov. 19, 2020, 10am-12pmET, and Money Fund Wisdom Demo & Training, Dec. 16, 1-2pmET.)
Stevens tells the MFS Online virtual audience, "Thank you, Pete, for that introduction and for the opportunity to join you all here today. This conference, virtual though it is, is just another example of the invaluable service that Crane Data and you Pete personally provide to the fund industry and to cash managers everywhere. You always bring great knowledge and deep insights into the issues surrounding money market funds, and my colleagues and I at the Investment Company Institute benefit enormously from our relationship with you and your company. I thank you most sincerely for your contributions and for your friendship."
He explains, "As you've alluded to, this conference is one of my last public events as President and CEO of ICI. In January, I announced my retirement effective at year end.... It's been 16 1/2 years in this role. Earlier this month, the institute's board unanimously elected a new president and CEO Eric Pan, who will take the reins on November 9th. He is a veteran capital markets regulator who for nine years directed international regulatory policy, first at the Securities and Exchange Commission and then at the Commodities Futures Trading Commission. He's got a long record as a brilliant academic focusing on financial regulation and corporate governance. Those of you who know Eric or know of him should be keenly aware of his intellect, his deep knowledge and the global perspective that he brings to the issues. I think in Eric, the board of the ICI has identified a strong leader to maintain and advance the institute's proud traditions of advocacy and representation of the industry based on solid data and solid analysis. And I'm pleased to be leaving ICI in such capable hands."
Stevens says, "I spent nearly half of my working life at ICI. Before I leave, I have one last assignment directing the completion of a comprehensive report on the market turmoil triggered by the Covid-19 pandemic and the economic restrictions that governments imposed in response. We are focusing especially on the experiences of regulated funds in that episode. We are currently publishing that report as a series of research papers, and the next paper we publish will look at money market funds, which landed back in the headlines in March because institutional prime funds had outflows, and because the Federal Reserve created a Money Market Mutual Fund Liquidity Facility to add liquidity to the markets and restore the flow of credit to the economy."
He continues, "I'll describe our report to you in detail in a few minutes, but let me give you three quick findings. First, contrary to what you might read in the papers, money market funds were not the trigger for the market turmoil. Second, the SEC's reforms of 2010 and 2014 resulted in a much more resilient money market fund sector. Institutional prime money market funds, for example, saw considerably smaller dollar outflows, were substantially more liquid, saw much smaller reductions in their holdings of commercial paper, and made less use of Federal Reserve liquidity facilities during the Covid-19 crisis than during the global financial crisis. But despite that, and this is my third key finding one of the principal 2014 reforms actually made money market funds more fragile. We will offer clear evidence that a fund's board's option to impose liquidity fees and gates at the 30 percent weekly liquidity threshold added to the stresses on prime institutional money market funds. Our members tell us that many institutional investors interpreted this board option as a requirement to restrict redemptions when liquidity reached that level. So, the standard of 30 percent weekly liquid assets became a new hair trigger, creating the potential for destabilizing feedback that the 2014 reforms were intended to avoid. So those are the three top line messages. But let me take a step back now for context."
Stevens comments, "Since the global financial crisis of 2007 to 2009, the regulated fund industry has been keenly interested in ways to make funds of all types more stable and resilient. Funds, of course, are major participants in the capital markets. Even more important, they are the vehicles that hundreds of millions of investors trust to help them realize their most cherished financial goals. In both of those roles funds recognize that they have an overwhelming interest in participating in a financial system that is robust, yet resilient to market stresses. That means, in short, that we support effective regulation. We support market structures and rules that allow investors to take reasonable risks in pursuit of commensurate returns because risk taking supports entrepreneurship, innovation, opportunity and economic growth. Given our stake in this debate, it should come as no surprise that ICI has written more than 30 comment letters, published more than 15 research reports and white papers and given more than a dozen speeches on topics around financial stability over the past decade or so. And those don't even include much of the work we devoted to money market funds during debates over the 2010 and 2014 reforms. What we have sought with all this advocacy, research and analysis is a reasoned debate based on data and a clear understanding of the facts; the kind of debate that's clearly desirable, but often hard to achieve either in Washington or in multinational policy circles."
He states, "The Covid-19 market crisis of last spring has brought the issue of financial stability back into the spotlight. Given that the turmoil started in short term credit markets, it should come as no surprise that money market funds are again a major topic. The New York Times foreshadowed the arguments to come on March 19th when it ran a story headlined, 'Why We Are Once Again Rescuing a 'Safe' Investment.' And so, the fund industry led by the ICI, is once again engaging in the financial stability debate. With our new papers we're bringing to bear the detailed data, the depth of industry knowledge and the sophisticated economic and legal analysis that you would expect from ICI."
Stevens asks, "So, what have we found? To begin with, we've learned that the models and mindsets formed by the global financial crisis, mindsets that we hear reflected in the statements of many regulators, academics and journalists do not apply to the current situation. The Covid-19 crisis was different from the global financial crisis. Then we had a credit crisis that started in the financial system and spread to the real economy. This year we had a global health crisis that hit the real economy through the actions taken to try to contain the virus and then spilled into the financial system. Those differences tell us that any policy response to the Covid-19 market turmoil must be tailored to the actual events of 2020. This crisis was not a replay of 2007 to 2009, and recycled remedies will not fit."
He continues, "We also find that the market turmoil of March was triggered by a massive rush to gain liquidity -- the 'dash for cash' by businesses and investors of all types. The demand for cash was so great that the Treasury market, usually deemed the safest of safe havens in a financial storm, was severely dislocated. From March 9th to March 18th Treasuries faced so much selling pressure that the yield on 10-year Treasury notes posted its second largest increase in 30 years."
Stevens also tells us, "The turmoil then spread to other fixed income markets, commercial paper, corporate bonds and municipal debt. Investors and companies sought to defend themselves against the falling and dislocated markets and from the economic shutdown. So, they moved to the quality and liquidity of government money market funds, which became a liquidity vehicle of choice for all types of investors. Investors seeking to preserve or bolster their liquidity poured $834 billion dollars into government money market funds in March. More than 40% of those dollars came from outside the mutual fund sector."
He continues, "By contrast, prime money market funds had outflows. Those flows were much smaller, $139 billion dollars in March, than the inflows to government funds. They were also far smaller than the outflows during the global financial crisis. Reflecting in large part, the shift in assets away from prime funds due to the SEC's 2014 reforms. Simply put, money market fund investors were far less exposed to commercial credit risk in this crisis than they were in the financial crisis."
Stevens explains, "Now, as this turmoil was unfolding, of course, the Federal Reserve stepped in, taking bold actions to inject large amounts of liquidity into the locked markets. One of those actions was creation of the Money Market Mutual Fund Liquidity Facility or MMFL. Our data show that the markets quickly became less volatile after the Fed's action, though many dislocations persisted for weeks."
He adds, "That's what happened. So, what does it mean? Well, let me focus on two questions that I think will be key to the policy debates to come and to the future of money market funds as a critical financing and cash management vehicle. First, did money market funds trigger or accelerate the turmoil that struck and nearly shut down the fixed income markets in March? And secondly, did the Federal Reserve have to 'bail out' money market funds or 'bail them out again'? as many critics would emphasize. Well, I've already given you our answer to the first question -- and that's an emphatic no. In our papers, we reconstruct the events of March in detail, the timing and sequence of these events is critical to understanding the causal factors of the crisis. The data show that market dislocations were deep and widespread well before investors started to move away from prime money market funds."
Stevens explains, "Let me give you two pieces of evidence. From February 24 to March 11 the spread between interbank lending rates and overnight index rates set by central banks known as the FRA-OIS spread more than quadrupled from 13 to 54 basis points. That is a widely recognized measure of stress in credit markets. Over that same period, prime money market funds had net outflows totaling just $11 billion. Another indicator -- we ran an analysis of thousands of news articles that appeared in March covering the Covid-19 market turmoil. We found heavy coverage linking the Treasury markets to Covid-19 throughout early March. Mentions of money market funds, however, were few until a sharp spike on March 19th, the day after the Fed announced the MMLF. In other words, there wasn't enough activity around money market funds to draw the financial press's attention until the Federal Reserve's actions."
He also says, "There is more evidence in our paper, and I would urge you to read it when it appears soon. But we're quite comfortable in saying that money market funds did not drive this financial crisis. But did those funds need a rescue? That's certainly been the suggestion in the press and in some official statements. Well, the answer to that is simple: the Federal Reserve stepped in to rescue the financial system and the broader economy. The MMLF is a tool designed to help restore liquidity to restart the flow of credit to the economy. The New York Fed's Liberty Street Economics blog said, quote, 'By helping prime and muni money market funds meet demands for redemptions and by reducing outflows from the industry, the facility not only improves overall market functioning, but also supports the provision of credit to the real economy.' It's important to note that the MMLF is just one of eight facilities that the Fed created in addition to numerous other measures. When usage of the MMLF was at its peak on April 8th, that facility accounted for only 2.7% of the expansion of the Fed's balance sheet. By June 3rd, when the expansion of the Fed's balance sheet peaked, the MMLF was less than 1% of the total. In other words, the MMLF was dwarfed by other Fed actions."
Stevens adds, "More broadly, I would argue that the Federal Reserve was doing its job when it stepped up to rescue the economy. The Federal Reserve was created to provide liquidity to the financial system in times of extraordinary shocks, and the Covid-19 pandemic was extraordinary indeed. As New York Fed President John Williams has said, 'The events of the past year have demonstrated the critical role central banks can and must play in extraordinary times when markets stress and dysfunction threaten to spill over into the economy.' The Fed's actions were timely, creative, flexible, but most of all, necessary. Critics viewing this episode in hindsight as a bailout need to adjust their perspective."
Finally, he tells the MFS Online audience, "It's been a great pleasure to share with you and the participants today some of our findings and analysis on the experiences of money market funds in the Covid-19 crisis. ICI is dedicated to the preservation of money market funds as vital vehicles for short term finance, for cash management and for investment. And so, I can pledge to you that we'll continue to bring our data, our industry experience and our economic and legal analysis to bear to ensure that any debates over these funds are informed and productive."
S&P Global Ratings published an update entitled, "U.S. Domestic 'AAAm' Money Market Fund Trends (Third-Quarter 2020)," which explains, "After strong inflows during the second quarter, U.S. money market funds (MMFs) lost steam in the third quarter as the uncertainty of the COVID-19 pandemic continued. Although market conditions have markedly improved since March, the third quarter saw multiple fund closures, declining yields, and a renewed market focus on regulatory liquidity metrics. Assets under management (AUM) for rated government and prime funds plateaued over the summer, ending the quarter at $3.1 trillion." (Thanks to those who attended Crane's Money Fund Symposium Online yesterday! See the replay here, and watch for coverage of the sessions in coming days and in our November Money Fund Intelligence.)
The piece continues, "Government MMFs saw outflows of 6.3%, in part because of investors reversing course from their 'flight to quality' during the first half of the year, by moving toward other liquidity or ultrashort products in search of higher yield. Notably, some of the industry's largest MMF managers took action to liquidate their prime MMFs, alongside new announcements of converting their existing prime funds into government strategies. With some balances in government funds moving back to higher-yielding prime funds, prime AUM saw modest net growth of 0.5%."
S&P comments, "We observed further consolidation in the tax-exempt space amid closures of state-specific municipal money market funds, which invest in short-dated instruments issued by state and local governments. Managers of these funds have cited a lack of investment supply and weak demand for these products, which have been squeezed in the current low rate environment."
They add, "As MMFs' higher-yielding assets purchased before the Fed's March rate cut matured during the third quarter, yields continued to deteriorate. Seven-day net yields declined to 0.03% for government funds and 0.13% for prime funds. Net 30-day yields dropped to 0.03% for government funds and 0.14% for prime funds. Given the Fed's current forward guidance, rates are likely to remain positive, but near zero for the foreseeable future."
S&P Global also published, "European 'AAAm' Money Market Fund Trends (Third-Quarter 2020)," which tells us, "In the third quarter of 2020, rated European-domiciled MMFs' net assets continued to grow, and it appears that only the end of quarter outflows saw sterling funds have a negative quarter, albeit down 2%. That said, in August 2020, sterling-denominated funds reached an all-time asset high of £250.6 billion, well above the £32 billion recorded in January 2006, when we launched our quarterly statistics publication. The same can be said for U.S.-dollar funds, which recorded new asset highs of $524 billion in August but finished the third quarter at $504 billion."
Finally, they comment, "With the dramatic actions the Federal Reserve and Bank of England took during March to offset the effects of COVID-19, it is no surprise to see a marked decline in the seven-day yields of U.S. dollar and sterling-denominated funds. Generally, MMFs' returns lag the actions of central banks because of their maturity profiles, but operating in a post-regulatory era and MMFs holding more short-dated assets, the lag is not as great as it once was."
Fitch Ratings also published, "U.S. Money Market Funds: October 2020." They comment, "Total taxable money market fund (MMF) assets decreased by $55 billion from Sept. 17, 2020 to Oct. 16, 2020, according to iMoneyNet data. Prime assets decreased by $136 billion and government funds increased by $80 billion during this period. This is partly due to the conversion of the $126 billion Vanguard Prime Money Market Fund from a prime fund to a government money market fund on Sept. 29, 2020."
The update adds, "Low MMF yields continued into October with net yields decreasing from 0.02% and 0.07% to 0.01% and 0.04% for institutional government funds and institutional prime funds, respectively, from Sept. 17, 2020 to Oct. 16, 2020, according to iMoneyNet data. Yields are likely to remain near zero for a prolonged period as the Federal Open Market Committee indicated at their meeting on Sept. 16, 2020."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of October 23) includes Holdings information from 93 money funds (up 27 from a week ago), which represent $2.586 trillion (up from $1.831 trillion) of the $4.772 trillion (54.2%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website. For our latest monthly Holdings, see our October 13 News, "October MF Portfolio Holdings: CP, CDs, TDs Fall; Treasury, Repo Flat.")
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.373 trillion (up from $949.9 billion a week ago), or 53.1%, Repurchase Agreements (Repo) totaling $598.1 billion (up from $443.8 billion a week ago), or 23.1% and Government Agency securities totaling $338.7 billion (up from $263.2 billion), or 13.1%. Commercial Paper (CP) totaled $97.1 billion (up from $60.7 billion), or 3.8%, and Certificates of Deposit (CDs) totaled $77.5 billion (up from $58.1 billion), or 3.0%. The Other category accounted for $62.4 billion or 2.4%, while VRDNs accounted for $39.9 billion, or 1.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.373 trillion (53.1% of total holdings), Federal Home Loan Bank with $177.1B (6.8%), BNP Paribas with $81.9B (3.2%), Fixed Income Clearing Corp with $75.8B (2.9%), Federal Farm Credit Bank with $63.6B (2.5%), Federal National Mortgage Association with $58.1B (2.2%), RBC with $46.7B (1.8%), JP Morgan with $40.7B (1.6%), Federal Home Loan Mortgage Corp with $37.6B (1.5%) and Credit Agricole with $35.8B (1.4%).
The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt MM ($170.2 billion), Goldman Sachs FS Govt ($168.4B), Wells Fargo Govt MM ($158.7B), Fidelity Inv MM: Govt Port ($152.3B), BlackRock Lq FedFund ($150.4B), Federated Hermes Govt Obl ($123.3B), BlackRock Lq T-Fund ($99.7B), JP Morgan 100% US Treas MMkt ($99.1B), Morgan Stanley Inst Liq Govt ($90.6B) and Dreyfus Govt Cash Mgmt ($84.5B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
This month, BFI profiles Yoana Koleva, Managing Director at Lord Abbett and Portfolio Manager of Lord Abbett Ultra Short Fund. The Jersey City-based manager runs the largest Ultra-Short Bond Fund and second largest Short-Term Bond Fund and ranks 12th overall in our bond fund family rankings. Koleva discusses the firm's history, the fund's strategies and a number of other topics in the ultra-short space. Our Q&A follows. (Note: The following is reprinted from the October issue of our Bond Fund Intelligence, which was published on Oct. 15. Contact us at info@cranedata.com to request the full issue or to subscribe. Also, please join us for Crane's Money Fund Symposium Online, which will be held Tuesday, October 27 from 1-4pm ET.)
BFI: Give us a little history. Koleva: Lord Abbett was actually founded back in 1929, so we've been around for a very long time. Within the short duration space, we also have a very long history and a pretty significant presence. Our Short Duration Income Fund was launched in early 2008. We invest in short-term, credit-oriented securities and the goal is to generate strong, consistent returns with low volatility. We have a multi-sector approach where we invest in investment grade, high yield corporate securities, CMBS and ABS, and the way we add value is through sector rotation and security selection. Currently, the short duration strategy has over $60 billion in assets.
Given our experience and our success in short duration, in 2016 we decided to launch our Ultra Short Bond product. If you recall, 2016 was the year when we had a major change in the regulatory landscape driven by the Money Market Reform. We believe that created an opportunity for a new product. You saw significant outflows from the Prime money market space as gates and floating NAVs were introduced. Prime money markets dropped by nearly $1 trillion driven by investor outflows and fund conversions into government money market funds. For the investor that focuses on principal preservation and return above Treasuries there were really very limited opportunities. We saw that market dynamic and identified it as an opportunity for the ultra short space. We currently manage over $20 billion in assets in the space, so it's been a huge success.
In terms of my background, I have been with Lord Abbett since 2011. I initially started as a credit research analyst focusing on financials. I was an analyst for about four years, and in 2015, I moved over to the portfolio management team as our AUM was growing and our portfolio management team was expanding. I was part of the Ultra Short strategy launch in 2016, and in 2018 I assumed the role of lead portfolio manager. Prior to joining Lord Abbett, I was actually on the sell side. I was at Morgan Stanley and was a bank analyst there.
If you look at the performance, especially of Short Duration, it has been very strong over the past 10 years. We haven't had a negative return year in the last decade and have consistently delivered positive returns. We believe that there is an anomaly in short duration credit – short duration securities are overlooked by investors and over time they generate better risk-adjusted returns. The average duration of the short duration portfolio is two years and as such you have a lot of visibility in what the credit profile for a company might look like over the next two years. And given also the short duration of these assets, you have limited volatility. A two-year bond isn't going to exhibit the same type of volatility that you might see with a 10-year or a 30-year bond. So, our view is that the front end of the curve has been in a way neglected by investors, and on a risk-adjusted basis that's actually where you get superior returns.
BFI: Tell us about the team. Koleva: We have 65 investment professionals within taxable fixed income and we all work together and collaborate to identify investment opportunities. We have a team-based approach, there is no star portfolio manager that makes one or two key decisions. It's all about each team identifying market inefficiencies and opportunities within their space. There are three parts to the team: you have the portfolio management team, the credit research analyst team, and the trading team. Within portfolio management, we are all divided based on our areas of expertise. I am part of the corporate portfolio management team. We have an ABS team, a CMBS team, a rates team, and a leveraged credit team, and we are tasked with identifying opportunities within our area of expertise.
The second leg to the stool, so to speak, is the credit research analyst team. We have over 20 analysts covering all the major sectors. We have a centralized approach to credit research. Each analyst is a sector expert and covers all the credits that would be in their sector across the credit spectrum. For example, an energy analyst would cover all companies, ranging from single-A, at the higher end of the quality spectrum, all the way to triple-Cs. That gives them a very holistic view of their space, which is very helpful, especially with crossover credits, such as rising stars or fallen angels.
The third leg of the stool is the trading team. The traders work very closely with the portfolio managers and credit analysts. They know what the portfolio management team and the credit analysts views are, and they help us identify opportunities that we can invest in.
BFI: What are your major priorities? Koleva: With Ultra Short, the goal of the strategy is to generate excess return over Treasuries while maintaining at the same time limited downside volatility. The ultra short strategy is managed by the same team that manages the rest of the credit focused funds. Thus, we can leverage the expertise that we have across the team. Currently, we believe corporate credit provides an attractive opportunity and we have a rigorous process to identify the securities that can generate superior risk adjusted returns.
BFI: How is the fund positioned? Koleva: For Ultra Short specifically, the asset classes that we invest in are: commercial paper, asset-backed securities and fixed and floating rate corporate notes. To take a step back, when you think about what the key risks for strategies like ultra short are, I would bucket them into three categories: liquidity risk, credit risk and interest rate risk. The different sectors that we invest in are designed to address those risks.
If you think about liquidity risk, the way we address this is by investing in commercial paper. The commercial paper provides a natural liquidity for the fund, as it is staggered and is very short term. The commercial paper part of the portfolio ranges at about 20 to 30% of the fund. There’s a natural liquidity that comes from that commercial paper maturing.
The second risk we talk about is credit risk. The way we mitigate that is by investing in very high-quality assets. Think about our ABS book, it's triple-A. The corporate bonds are investment grade with a big focus on single-A rated securities. The overall average rating of the fund is A-plus. We're talking about very high-quality assets.
The third component to risk is interest rate risk. The way we protect against interest rate risk is by investing in floating rate products. So, depending on our view of whether we are in a rising or lower rate environment, we can dial up and down our exposure to floating rate notes. Those are the main asset classes that we invest in.
Where our expertise and value comes in is identifying relative value across the different asset classes to determine where the best opportunities are, and doing the sector rotation that I talked about. We could be overweight any of the four asset classes we invest in, depending on what our view of relative value is within that sector. Our ability to identify inefficiencies and relative value across the different sectors is one of the main ways we add value.
BFI: Talk about your investors. Koleva: It's blend of both retail and institutional. We have had a very strong history and a very strong presence within the retail space. So, I would say we are more retail-oriented. But we have seen strong growth within the institutional space as well, especially over the past couple of years, within the short duration and ultra short strategies.
BFI: What's your outlook? Koleva: We are constructive on the short credit space. We expect rates to stay at near zero for an extended period. In that type of environment, if you are interested in earning excess yield over Treasuries and you are concerned about principal protection at the same time, you don't have many choices. Money markets are yielding near zero. At the same time, the absolute level of yield is very low. If inflation picks up, taking duration risk puts you in a vulnerable position. So I think the ultra short and short duration funds are very well positioned. Also, I think the ultra short space is a good alternative if you want to preserve optionality in case we have another bout of volatility similar to what we had in March. If you have a more defensive view, and you’re waiting for a better opportunity to enter the market, having exposure to ultra short near term is a good alternative.
The Association for Financial Professionals, which represents corporate treasurers and major investors in institutional money funds, began its "AFP2020 Virtual Experience" last week. (See our Oct. 8 Link of the Day, "AFP2020 to Feature ICD, More Cash.") So far, there have been just a handful of sessions discussing cash investments, including one entitled, "Aligning Investment Strategy with Your Company's Operations." This panel, led by Sebastian Ramos of ICD, featured Kim Kelly-Lippert of American Honda, Ryan Seghesio of California ISO and Tom Wolfe of MGM Resorts. We excerpt from this presentation below. (Note: As a reminder, register here for our next virtual event, Crane's Money Fund Symposium Online, which will be held on Tuesday, October 27 from 1-4pm ET, and for our "European Money Fund Symposium Online," which will be Nov. 19 from 10am-12pmET.)
Kelly-Lippert says, "Pre-covid, we were big proponents of the prime funds.... In addition to the prime funds, we utilize government money market funds, bank deposits, euro time deposits, and then for some additional yield pickup we occasionally took advantage of a very selective [group of] asset-backed securities. But the majority of our liquidity was available overnight. We redeem the funds out of our money market funds for our daily obligations."
Wolfe tells us, "At MGM Resorts, we see bank balances decline in advance of big events like New Year's Eve, March Madness or Memorial Day weekend, as our properties stock up on physical cash at the property level. Then after big events, excess cash is deposited and our bank balances increase.... Considering all of our portfolios combined, we've [held] over $5 billion of cash investments.... We invest in both government and prime money market funds, bank deposits and occasionally time deposits. Our experience has been that the foreign banks tend to pay the highest interest."
Seghesio comments, "We actually have very predictable cash flows. It makes the investment strategy a little easier.... Customers have to post collateral to trade in our markets [and] we have a large number of sub accounts for the customer collateral. We take that collateral, we spread it equally amongst four government money market funds. This was our strategy that we chose to do during money market reform, to move this into government funds, mainly because we felt that the economic conditions that could cause prime funds to have problems.... So, this is a government only investment strategy."
He continues, "Moving over to [our] corporate cash. As I said, with the predictable cash flows that happen for us on a weekly basis, it's made our investment strategy a little bit easier.... We segment our cash [into] operating cash, reserve cash and strategic cash. In our case, operating cash was really just if we need to kind of keep overnight liquid, to handle the surprises during the week. We use prime money funds for that. Reserve cash is cash that we really know there's a known need for it in the future, but we don't need to keep it as liquid as an overnight money market fund. We worked with ICD and use the ultra-short funds for this purpose."
Ramos adds, "We are seeing a number of clients start to look a little bit further out on the curve and take advantage for that more strategic cash, in particular, a longer duration product than the traditional money market. Just to give a brief bit of background on ICD ... we have about 400 active clients that are spread across 65 industries and with entities located in 43 countries [with] approximately about $210 billion right now running through the platform. And our average client balance is around $500 million or just there above. So, what that does is it gives us a pretty good view of what's going on in the marketplace overall, particularly in the corporate marketplace."
He states, "And as most of you probably saw and did yourselves, we saw a lot of our clients get very, very liquid. A lot of them were raising cash, drawing down on credit lines and effectively creating liquidity in their overall cash portfolios, particularly in and around March when there was a lot of uncertainty.... We did see across our client base in the early period of March, a move out of prime funds and ... significant increases in the government money markets.... But we've seen over time ... investments come back to the prime space, and not just back to where they were pre-covid levels, but [higher]."
MGM Resorts' Wolfe also says, "Well, when you go from significant cash flow generation to major cash burn in a matter of days, liquidity becomes the number one priority.... We didn't really start extending our time deposits out until we could see that yields were coming down precipitously.... Over the summer, I probably would have said that we would extend tenor and also take on a bit more credit risk. But now I think the prudent course of action is to just set expectations really low -- your interest income is going to be rather negligible for quite a while."
He explains, "I'll admit, seeing prime fund NAVs tank in March made me nervous, not so much because I was worried about the underlying credits, at least in the near term, but more so because I didn't want to have to deal with gates as the panic spread if I needed the cash in a hurry. I think that that's probably what a lot of you were feeling. So, while I didn't pull my investments [from] prime funds, I didn't add to my existing positions even when I had a bunch more cash from drawing down on our revolvers. But as soon as the Fed stepped in to calm the money markets, we ramped up our prime fund positions -- and we caught some of the NAV recovery. Overall, I still feel good about prime funds structurally. But as I mentioned earlier, the money market funds space is just not exciting at all right now from the yield perspective."
Wolfe adds, "In terms of other allocation changes. We are more heavily weighted to bank deposits right now because rates are better there. But also because it's a way to solidify the relationship with banks and our facility that have stepped up and supported us in our time of crisis. We were completely shut down with essentially zero revenue for about two months earlier this year. Our last two properties to reopen have done so in the last month."
Kelly-Lippert tells the AFP panel, "Early in the crisis we had a planned ... payment, and with the uncertainty we felt it prudent to mitigate the risk and make full redemptions out of our prime funds. Any excess cash at that point was moved into government funds or bank deposits. Then for the first time since the money market fund transition in 2017, we exited the prime funds space. With the decision and the pressure felt around the redemptions in March, we wanted to quantify how much we actually gained over that 3-year period by staying in the prime funds.... The analysis confirmed that we earned a net positive of just a little over $8 million remaining in those prime funds. And that was from the transition to the floating NAV to the beginning of the covid crisis."
She says, "We also fully utilize the portal and honestly would not trade money market funds without using a trading portal. We use the platform to easily trade all the funds in one place, and we are able to review all the metrics each day. Through the crisis, these metrics were imperative to help us make the decisions that we did make.... The portal is also integrated into our Treasury workstation and this creates fast and easy uploads of the information. We also heavily use the information provided on the portal for data reporting and analytics. We review the detailed portfolio holdings information [and] aggregate this information with our direct holdings to show exposure, diversification, and risk. We take an even deeper dive each month into the portfolio holdings by using the reporting information from ICD and we add credit perspectives from a credit research partner that we have. And then from this data we continue to provide a monthly investment report to our management that is quite detailed."
When asked about prime MMFs viability during the Q&A, Wolfe responds, "No, I'm not concerned about their long-term viability. I think the spread between government and prime funds right now is concerning and a challenge, but I think that the fund companies can manage through it. Assets in those funds may come down quite a bit and you may see some fund participants exit. I think we've seen some of that already. But this is not a normal environment. When we get back to a normal environment ... however long that may be, there will be a place for prime money market funds."
Seghesio comments, "Well, I agree. I mean, I think you have to make a decision at your firm on assessing the risks. And as I mentioned in our two different investment strategies, one of those strategies we didn't feel like we could be in prime funds. But the other one, we're very comfortable being in prime funds. We know the risks, and we're willing to take the risks. That may be different for each company."
Finally, when asked if California ISO uses SMAs, Seghesio adds, "No, we did not and have not. Mainly the reason was the size of our portfolio. We just didn't feel like we could get enough. We didn't want to just have one separately managed account; we'd want to have multiple accounts. And we didn't feel like we had a large enough portfolio to do that. So, we chose the funds strategy ... which has paid off again very well for us. The duration has been a good ally when rates fall, and using [funds] gave us that liquidity if we needed it. We don't go into these funds with the intent of pulling out money early, but ... if there's an emergency, some sort of unplanned event, we're able to get out."
J.P. Morgan Securities published a brief entitled, "What if prime MMFs went away? Implications of further MMF reforms." They write, "Prospects of additional reforms for the US money fund industry sharply intensified over the past month. Most prominently, Fed Vice Chair of Supervision Quarles spoke on three separate occasions, highlighting the role MMFs played in exacerbating some of the strains the short-term funding markets experienced in March. There was also a virtual SEC roundtable that discussed the interconnectedness and risk in US credit markets, emphasizing similar vulnerabilities they found in MMFs earlier this year. Comments made by Deputy Secretary of Treasury Muzinich and Dalia Blass, the director of the SEC Division of Investment Management ... also suggested on the need for further MMF reforms." (See our Crane Data News, "BlackRock's Novick, AMF's Cazenave Talk Runs, Regs at SEC Roundtable (10/20)," "SEC Covid Shock Study: Frozen CP Market, MMFs & Short-Term Funding (10/14)," "SEC's Blass on Push for More MMF Reforms; Vanguard Liquidating PA, NJ (9/28)" and "Fed's Quarles Examining Vulnerabilities (10/19).")
The piece continues, "Not surprisingly, the series of remarks have raised numerous questions from market participants on just what potential impact MMF reforms could have on the short-term funding markets and whether we could see more sponsors exit this business. Already, three fund sponsors have decided to shutter some of their prime funds: in the case of Northern Trust and Fidelity, they closed their prime institutional funds, while Vanguard closed its prime retail fund. Together, they held about $140bn."
JPM writes, "At this point, it's still too early to know what kind of reforms might emerge. A long-running criticism of MMFs is that they have deposit-like shares subject to daily redemptions, backed by less liquid assets. A rule requiring prime funds to hold some form of capital and/or significantly higher liquidity buffers would ensure that prime funds would become even more bank-like, though of course the risk profile of a prime fund differs dramatically from that of a bank. Alternatively, regulators may pursue a lighter regulatory approach and amend/enhance current liquidity requirements."
They tell us, "One of the panelists (from BlackRock) at the SEC roundtable for example suggested decoupling the 30% weekly liquidity assets requirements from the board decision to impose fees and/or gates. This is often cited as one of the reasons why a 'run' on MMFs occurred in March, as shareholders rapidly redeemed in fear of that bright line being crossed and their cash being locked up.... Another suggestion was implementing some sort of countercyclical liquidity that could deal with what we saw in March."
The article explains, "Whatever the path regulators pursue, it's worth noting that all of this will take time and money to implement. The 2014 MMF reforms, for example, took at least two years for the SEC to finalize the rulemaking and then another two years before it went into effect. Arguably, the timeline could be shortened if the outcome of the US elections brings about a government that is focused on reforming the industry. If such an outcome were to occur, we suspect this is another factor sponsors would have to consider when deciding whether to maintain or shutter their prime funds."
Authors Alex Roever, Teresa Ho and Ryan Lessing summarize, "In light of all this, we think there are 3 main takeaways for the short-term markets: Prime funds face an uphill battle; Short-term funding will remain available for banks and corporates; and Market liquidity risk is much bigger than the prime MMFs."
They tell us, "We suspect some sponsors are currently re-evaluating the value proposition of having prime funds in their suite of cash management offerings. If our assessment of the industry is right, we believe smaller prime providers and those that are more retail focused will be more vulnerable to consolidation and changes.... This is particularly true for fund families that already have decent size businesses running government money funds, bank deposits, and/or other credit cash management vehicles. Why expose the firm to liquidity risks, credit risks, regulatory risks, and perhaps more importantly, reputational risks when other similar alternatives are available that bear less risks and potentially could offer higher fees/earnings? ... On the other hand, we believe large prime providers (in AUM and as a percentage of their MMF business) and those that are more focused on institutional clients will try to hang on."
Finally, a section subtitled, "Funding will remain available for banks and corporates," explains, "Second, the CP/CD funding markets will evolve and survive, with the ability to continue to provide financing to Yankee banks, US banks, and corporates. Prime funds are not the sole providers of credit in the money markets. In fact, since 2007, prime MMF's ownership share of the CP market has declined from 38% in 2007 to 22% today.... The decline was in part driven by 2016 MMF reforms, which prompted over $1tn of cash to exit prime MMFs. But perhaps more notably, the decline seems to have been driven by a significant increase in CP participation among corporations, from 4% to 23% over the same time period.... There are other participants in the CP market too: 'other financial businesses', which we believe includes securities lenders and hedge funds, mutual funds which we suspect are focused on the ultra-short or short-term part of the curve, pension and retirement funds and state and local governments, as well as others.... Even if prime funds shrink, we think this leaves the door open for other credit liquidity investors to step in and absorb some of that lost capacity, just like they did in 4Q16 when MMF reform took hold."
It adds, "Perhaps more importantly, if more sponsors do decide to exit prime, we believe this money will be re-directed to government MMFs on one end and to ultrashort/short-term bond funds/SMAs on the other, assuming it does not flow to the remaining prime providers. Over the past decade, institutional liquidity has had to evolve to better reflect the balance of liquidity and yield. This is in large part due to the MMF reforms in 2016 which fundamentally changed prime funds' value as a cash management vehicle. As a result, corporates have found a need to better segment their cash. More often than not, this means balancing the use of government MMFs for liquidity and ultra-short/short-term bond funds, which we use as a proxy for SMAs, for yield."
In other news, money market fund assets fell yet again in the latest week, their eleventh decline in a row and 19th decline over the past 21 weeks. Assets have fallen $433 billion since May 20, when they were at a record $4.789 trillion. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $7.59 billion to $4.36 trillion for the week ended Wednesday, October 21.... Among taxable money market funds, government funds decreased by $2.53 billion and prime funds decreased by $3.73 billion. Tax-exempt money market funds decreased by $1.32 billion." ICI's stats show Institutional MMFs falling $10.2 billion and Retail MMFs increasing $2.6 billion. Total Government MMF assets, including Treasury funds, were $3.649 trillion (83.8% of all money funds), while Total Prime MMFs were $594.8 billion (13.6%). Tax Exempt MMFs totaled $112.0 billion (2.6%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data.)
ICI shows money fund assets up a still massive $724 billion, or 19.9%, year-to-date in 2020, with Inst MMFs up $562 billion (24.9%) and Retail MMFs up $161 billion (11.8%). Over the past 52 weeks, ICI's money fund asset series has increased by $870 billion, or 25.7%, with Retail MMFs rising by $194 billion (15.0%) and Inst MMFs rising by $676 billion (32.3%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets are down $52.0 billion in October (as of 10/21) to $4.726 trillion.)
They explain, "Assets of retail money market funds increased by $2.58 billion to $1.53 trillion. Among retail funds, government money market fund assets increased by $5.23 billion to $1.13 trillion, prime money market fund assets decreased by $1.83 billion to $301.55 billion, and tax-exempt fund assets decreased by $820 million to $101.46 billion." Retail assets account for just over a third of total assets, or 35.2%, and Government Retail assets make up 73.7% of all Retail MMFs.
ICI adds, "Assets of institutional money market funds decreased by $10.17 billion to $2.82 trillion. Among institutional funds, government money market fund assets decreased by $7.76 billion to $2.52 trillion, prime money market fund assets decreased by $1.90 billion to $293.29 billion, and tax-exempt fund assets decreased by $503 million to $10.59 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 at the end of August, accounted for 64.8% of all MMF assets, with Government Institutional assets making up 89.2% of all Institutional MMF totals.
U.K. publisher Euromoney hosted a webinar earlier this week entitled, "Money Markets into 2021: The Fed vs money markets," which was sponsored by Calastone. The session featured J.P. Morgan Asset Management's Paul Przybylski, Fitch Ratings' Alastair Sewell, T. Rowe Price's Doug Spratley and Calastone's Ed Lopez, and reviewed the impact of the coronavirus crisis on European and U.S. money market funds. Lopez says, "I think from my perspective, what we saw this year was the acceleration of automation plans. Everyone was looking to automate and build efficiencies around the investment process, but particularly with the volatility in this space and the movements that happened dating back to March. The plans to automate have really accelerated in the space … whether it's the use of portals or tighter integration, it's really just trying to eliminate the manual process."
Sewell comments, "The challenging combination of outflows and severe secondary market illiquidity combined caused an almost perfect storm for money market funds.... With where we are now, now that volatility has passed, funds are looking at an era of ultra low and possibly negative rates. So, the key question for the money fund community is, 'How long that conservative positioning is going to remain and to what extent funds are they going to start pushing out to try and gain a little bit of incremental yield in this low to negative environment?'"
He also states, "Corporates ... pulling their money out of money market funds ... to shore up cash buffers or whatever was needed ... led to a very big outflow from the prime, or the LVNAV as they call them in Europe, money market funds, with money being moved into Treasury or government money market funds.... [There was] a very pronounced divergence of flows out of prime and into government funds. But that stress was acute and it was mainly driven by corporate investors who needed that money for another purpose, or needed incrementally greater safety on that money in the wake of the covid outbreak."
Przybylski adds, "I think what we saw is that at times of uncertainty money market fund investors redeem in order to shore up liquidity. I mean, money market funds in general, from an investor standpoint, are very much a herd mentality driven product. [I]f one moves, they all begin to move. And given the fact of the uncertainty around the markets in March ... this wasn't a liquidity event specifically related to money market funds. However, it was an event across all asset classes."
On the March Madness, Spratley tells us, "We had our event; the event is over. The event actually was really based on a 30% rule that was being tested at the time because of the quickness in which the covid pressure hit.... If you could have just fast-forwarded a week in the last event, you probably wouldn't have needed a program. It's just a case of all people fleeing for the exit at the same time.... People have built up their buffers again. `Institutions have already moved to a more liquid posture for themselves, the corporates are sitting on more cash, they've raised their money.... I do not look at liquidity as an issue now, nor going into year-end, nor in the future. It was a one-off event and it's done."
Fitch's Sewell explains, "As a credit analyst I'm trained to see the downside in all cases. I wouldn't go so far as to say that the danger is over. [W]hen we look at the funds, the outflows in March in prime ... they were severe, and liquidity was pressing. But ... assets are flowing back into funds, funds have restored or increased their weekly liquidity buckets and they are conservatively positioned. That being said, we here in the U.K., we are well into a second wave of the pandemic. It remains uncertain how severe the impacts will be on the real economy and what's going to happen as we progress through the rest of the year…. So, the credit analyst in me tells me to look for risks, and there are certainly an abundance of risks remaining on the horizon."
He also states, "The last point that I'll make on this is we are coming up to the end of the year as well. And there is an element to seasonality in money market funds. So, you tend to see outflows at month, quarter and year end periods, and then inflows at the beginning of the next period. This interestingly was one of the issues in March, the covid event broke when you would be anticipating a seasonal outflow from money market funds.... So, there are still plenty of risks throughout. I would take a more conservative view, but the funds are certainly more conservatively positioned."
When asked about negative rates, Przybylski responds, "It's a conversation we're having a lot with our clients today.... We do see it as a low [probability].... However, we always are put in to be prepared versus not. We have the experience, obviously running Euro negative yielding products, so we have the systems and the know-how. However, to apply to the U.S. market we'll have to live with a new structure.... [For] the U.S. market ... the answer is it could be a floating government fund ... or it could be a fund or government fund with an RDM mechanism if it's approved by the SEC and the regulators here. [T]hose conversations are obviously ongoing for us with our regulators. `But I do see value in an RDM structure where a client does have amortized cost and intraday liquidity, whereas, if they're in the floating product, the liquidity obviously would be limited to the NAV's strikes per day."
Spratley comments, "I agree with Paul, the market really shouldn't go this way. It would need a Fed to push rates lower and to get rid of some of its core programs like the Fed RRP at zero. Similarly, it would need the Treasury to get rid of their new issue auction, low bid or low rate being at zero. You can't have a Treasury security issued through zero. Those are structural issues. And those really need the Fed and Treasury making a conscious effort to say, 'We have to go negative here.' ... Everything they've said up to this point is really contrary to that, in that it's not part of their toolkit, it's not one of their plans. But yes, we too are planning for the worst and hope for the best."
When asked about transparency, Lopez says, "As far as real time information around trading and positions and cash settlement, etc., we're absolutely seeing that the counterparties involved are able to provide that in a more real time basis.... It's still out there. There are still some manual processes out there that we have to deal with ... but it's becoming less because of the demands of the investor. [On the] question of transparency on underlying holdings, there's still work to be done.... There's information that is available. The funds provide them at a certain frequency, in a certain format, etc. There are some consolidators out there, but it's not as real time as it needs to be."
On potential regulatory changes, Przybylski tells us, "I think obviously with what happened in March, regulators are going to take a look at the money market fund sector, along with other sectors in the global markets. We do have a level of expectation that at some point there will be a further review of the credit space and the rules governing that, both across the U.S. and European markets. I think regulation is in order at some point down the road. Whether that's in 2021, probably not. But somewhere in the next five years, we should expect a change.... Broadly speaking, from a structure perspective of the products, I think they are just as sound as they have been, if not even more, because they're running a lot more with higher liquidity."
As far as clients, Spratley says, "It sounds basic, but essentially, they have to look forward to one basis point returns for the foreseeable future. That's a daunting ask of them to say, 'Do you want to sit in an asset class that can't beat inflation for a very long period of time?' With the Fed's flexible inflation targeting ... it really puts a very unknown and very long-time frame on this low rate environment. So that's the challenge for us to provide value, essentially, and for the investor to want to be there. I agree with Paul, the assets will go out and they're going to find another home.... Everybody's going to promote a solutions product, and to the points we made earlier today about taking some non-operational cash and putting that in a strategic place."
Sewell adds, "Regulators from around the world have made overt statements about potential changes to money market fund regulation, or at least re-reviewing the money market fund regulations. So that is something which is very clearly on the agenda and could have significant ramifications for short term markets. Then the second point I'd make ... is that we remain in a volatile and challenging time. We have the U.S. election in a matter of days, we have Brexit, we have to continue to fight with covid-19. So significant uncertainty and significant risks remain in the market. And that combination of regulation and operating environment risks will make the situation challenging for money market fund providers."
Finally, Spratley says of the Fed support programs, "I think with covid, without a vaccine, without a very defined outcome of this, I don’t think that December expiration of any of the programs will go away. I think that’s going to get pushed out until we have something…. Although you could say that, obviously, if you get into the later stages of the covid … we don’t need these programs as much if you get rid of some of the risks of some of the unknowns from both an issuer side and an investor side. So, I think it'll be with us probably unutilized, but it'll be with us as an option just to ensure some stability in the market."
The Securities and Exchange Commission's latest monthly "Money Market Fund Statistics" summary shows that total money fund assets dropped by $117.8 billion in September to $4.863 trillion, the fourth decrease in a row but just the fifth over the past 25 months. (Month-to-date in October through 10/19, assets have decreased by $50.9 billion according to our MFI Daily.) The SEC shows that Prime MMFs dropped by $145.6 billion in September to $992.8 billion (reflecting the reclassification of Vanguard Prime MMF), while Govt & Treasury funds rose by $35.3 billion to $3.749 trillion. Tax Exempt funds decreased $7.5 billion to $121.1 billion. Yields were mixed in September with Prime and Govt & Treasury yields falling while Tax Exempt yields increased. 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. (Note: As a reminder, we'll be hosting Crane's Money Fund Symposium Online on Tuesday, Oct. 27 from 1-4pmET. To register, click here.)
September's overall asset decrease follows declines of $57.0 billion in August, $66.4 billion in July, $127.3 billion in June, and increases of $31.0 billion May, $461.6 billion in April and $704.8 billion in March. This followed an increase of $17.3 billion in February, a decrease of $4.3 billion in January, and increases of $37.2 billion in December and $45.6 billion in November. Over the 12 months through 9/30/20, total MMF assets have increased by an incredible $1.013 trillion, or 26.3%, according to the SEC's series. (Note that the SEC's series includes a number of internal money funds not tracked by ICI, though Crane Data includes most of these in its collections.)
The SEC's stats show that of the $4.863 trillion in assets, $992.8 billion was in Prime funds, down $145.6 billion in September. This follows a decrease of $7.1 billion in August, and increases of $16.4 billion in July, $21.3 billion in June, $50.6 billion in May and $105.2 billion in April. Prime funds saw decreases of $124.5 billion in March and $13.9 billion in February, an increase of $28.1 billion in January, a decrease of $26.5 billion in December and an increase of $20.2 billion in November. Prime funds represented 20.4% of total assets at the end of September. They've decreased by $70.3 billion, or -6.6%, over the past 12 months.
Government & Treasury funds totaled $3.749 trillion, or 77.1% of assets. They rose $35.3 billion in September after falling $49.3 billion in August, $42.6 billion in July, plummeting $145.1 billion in June, falling $18.6 billion in May, and skyrocketing $347.3 billion in April and $838.3 billion in March. Government & Treasury funds increased $32.0 billion in February, they fell $31.4 billion in January, and rose $64.7 billion in December and $24.2 billion in November. Govt & Treasury MMFs are up a staggering $1.102 trillion over 12 months, or 41.6%. Tax Exempt Funds decreased $7.5 billion to $121.1 billion, or 2.5% of all assets. The number of money funds was 352 in September, down five from the previous month, and down 17 funds from a year earlier.
Yields for Taxable MMFs were down across the board in September. Steady declines over the past 18 months follow 25 months of straight increases. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on September 30 was 0.20%, down 2 basis points from the previous month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 0.24%, down a basis point. Gross yields were 0.17% for Government Funds, down 2 bps from last month. Gross yields for Treasury Funds were down 3 bps at 0.17%. Gross Yields for Muni Institutional MMFs were up 5 bps to 0.17% in September. Gross Yields for Muni Retail funds were up a basis point at 0.23% in September.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 0.13%, down 2 bps from the previous month and down 2.05% since 9/30/19. The Average Net Yield for Prime Retail Funds was 0.04%, down 2 bps from the previous month and down 2.01% since 9/30/19. Net yields were 0.02% for Government Funds, down a basis point from last month. Net yields for Treasury Funds decreased 2 basis point to 0.01%. Net Yields for Muni Institutional MMFs were up from 0.04% in August to 0.07%. Net Yields for Muni Retail funds were up a basis point at 0.04% in September. (Note: These averages are asset-weighted.)
WALs and WAMs were mixed in September. The average Weighted Average Life, or WAL, was 58.5 days (down 0.7 days from last month) for Prime Institutional funds, and 56.8 days for Prime Retail funds (down 9.7 days). Government fund WALs averaged 100.9 days (up 1.2 days) while Treasury fund WALs averaged 101.2 days (up 4.1 days). Muni Institutional fund WALs were 18.4 days (up 2.9 days), and Muni Retail MMF WALs averaged 34.4 days (down 1.2 days).
The Weighted Average Maturity, or WAM, was 40.1 days (up 0.1 days from the previous month) for Prime Institutional funds, 49.2 days (up 1.5 days from the previous month) for Prime Retail funds, 43.0 days (up 3.1 days) for Government funds, and 48.4 days (up 1.7 days) for Treasury funds. Muni Inst WAMs were up 2.7 days to 17.6 days, while Muni Retail WAMs decreased 0.9 days to 32.9 days.
Total Daily Liquid Assets for Prime Institutional funds were 53.1% in September (up 1.9% from the previous month), and DLA for Prime Retail funds was 42.0% (down 4.3% from previous month) as a percent of total assets. The average DLA was 64.5% for Govt MMFs and 95.9% for Treasury MMFs. Total Weekly Liquid Assets was 65.6% (up 2.8% from the previous month) for Prime Institutional MMFs, and 51.0% (down 7.6% from the previous month) for Prime Retail funds. Average WLA was 79.1% for Govt MMFs and 99.3% for Treasury MMFs.
In the SEC's "Prime Holdings of Bank-Related Securities by Country table for September 2020," the largest entries included: Canada with $102.0 billion, Japan with $90.8 billion, France with $75.6 billion, the U.S. with $71.9B, the U.K. with $43.1B, the Netherlands with 37.2B, Germany with $34.4B, Aust/NZ with $19.6B and Switzerland with $18.5B. The biggest gainers among the "Prime MMF Holdings by Country" were the Netherlands (up $6.2 billion), the U.K. (up $0.7B) and Switzerland (up $0.2B). The biggest decreases were: Canada (down $17.0B), Germany (down $11.0B), France (down $10.4B), Japan (down $4.1B), Aust/NZ (down $2.1B) and the U.S. (down $0.1B).
The SEC's "Prime Holdings of Bank-Related Securities by Major Region" table shows Europe had $98.4B (down $6.7B from last month), the Eurozone subset had $153.1B (down $17.9B). The Americas had $174.5 billion (down $17.2B), while Asia Pacific had $123.2B (down $7.5B).
The "Prime MMF Aggregate Product Exposures" chart shows that of the $999.0 billion in Prime MMF Portfolios as of September 30, $455.2B (45.6%) was in Government & Treasury securities (direct and repo) (down from $542.5B), $212.1B (21.2%) was in CDs and Time Deposits (down from $249.0B), $143.4B (14.4%) was in Financial Company CP (down from $157.8B), $134.9B (13.5%) was held in Non-Financial CP and Other securities (down from $144.1B), and $53.4B (5.3%) was in ABCP (down from $56.2B).
The SEC's "Government and Treasury Funds Bank Repo Counterparties by Country" table shows the U.S. with $172.5 billion, Canada with $132.8 billion, France with $189.5 billion, the U.K. with $81.3 billion, Germany with $22.8 billion, Japan with $120.7 billion and Other with $41.3 billion. All MMF Repo with the Federal Reserve rose by $0.8 billion in September to $0.8 billion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs 7.2%, Prime Retail MMFs with 3.2%, Muni Inst MMFs with 3.4%, Muni Retail MMFs 7.0%, Govt MMFs with 14.8% and Treasury MMFs with 14.3%.
Last week, the SEC hosted a "Roundtable on Interconnectedness and Risk in U.S. Credit Markets," which followed the publication of its "U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock," a report that examined the chaos in financial markets that accompanies the mid-March sudden shutdown of the world economy. (See our Oct. 14 News, "SEC Covid Shock Study: Frozen CP Market, MMFs & Short-Term Funding.") Today, we excerpt from some of the sessions which mentioned money market funds and short-term funding markets. (Please join us for next week's Money Fund Symposium Online, which takes place Oct. 27, 2020, from 1-4pmET and features a keynote from ICI's Paul Stevens and a series of discussions about potential future regulatory changes.)
During the SEC's Roundtable, Barbara Novick, Vice Chairman of BlackRock, commented, "I think you summarized it well in the paper. This was the perfect storm for a market making. Virtually everyone made a dash for cash at exactly the same time, individuals and institutions. You have two primary suppliers of liquidity. One is banks and the other is the proprietary trading firms; each of these faced different issues. On the bank side, the regulatory requirements for liquidity and capital gave them a dilemma. They had to preserve capital to be able to meet contractual obligations like lines of credit and revolvers. And they deemed anything that was not contractual essentially an optional activity, totally sensible."
She continued, "The regulatory guidance they received, while it was good, encouraged them to use their buffers. [But] it also has liquidity and other implications down the road on stress testing and capital. So, without a balance sheet neutral program, the banks wouldn't take advantage of that guidance to use their buffers, which of course led them to step back. That's half the problem. Likewise, on the proprietary trading firm side, they experienced concerns with the quality of data and their algorithms. And they basically turned them off and stepped back from market making. So, I think as we look forward, we really need to look at both of those as well as the market structure."
Novick explained, "I think what's unusual in this crisis is the banks had a cash buffer or liquidity buffer, and money market funds did, too. But the way the regulations work, neither one was able to use those buffers. So, I would vote for a good look at the regulations around both banks and money market funds and how to be able to use those buffers on countercyclical basis.... Let me start by stating the obvious, everyone values liquidity in a period of uncertainty. And any solution we think about has to take that as a given, because, yes, people will run again for cash if there is a period of uncertainty of this magnitude."
She also told the webinar, "Turning to money market funds, after the Great Financial Crisis, they went through a series of reforms regarding both the portfolio and the structure themselves. Some of those turned out to be very good. For example, building up a fairly high buffer of liquidity, having maturity and credit criteria, things like that. However, the 30% test was also tied to a fund board meeting where the board would meet to consider whether or not to put down gates or impose a redemption fee. And this coupling actually turned out to create tremendous uncertainty. You could see any firm that got close to that 30%, a lot of pressure, almost like it was the new 'break the buck.'"
Novick added, "So, we would recommend two things. One is decouple that 30%. Yes, require a 30% weekly liquidity, but don't have it tied to any kind of board meeting or specific decision. And second, put out some more specific guidance on encouraging the use of the buffer in that countercyclical way. The bottom line is, 'What's the point of a 30 percent buffer if you can't actually use it?'"
Finally, she said about consolidation, "The last part is the other firms and decisions to exit the industry. And I think you have to look at the business model of each firm. For example, some firms focus on institutional investors, some focus on retail investors. Some use the money market funds as a sweep for their brokerage. And the elements of each business model are going to drive any individual firm's decision. I wouldn't read too much into it in a general sense, but [think it is] much more idiosyncratic to those firms."
In a later session, Natasha Cazenave, Deputy Head of the Policy of France's AMF (Autorite des Marches Financiers), stated, "If we look back at what we experienced in February and March, clearly the short term credit market is an area where we saw severe stress, and money market funds are an important component of that market. As we said also earlier, in the U.S. as investors were trying to react to this spike in uncertainty, investors were running for cash.... It translated into very strong redemptions from Prime money market funds [and] there was a very large amount of inflows into government money market funds, about $800 billion, in the month of March, as is very nicely described in your report.
She explained, "In Europe, we actually saw similar moves. Investors were faced with the same kind of uncertainty and they also were all running for cash. So in the European framework, we also saw very significant redemptions out of the equivalent of prime money market funds. So in the E.U., they are low volatility NAV or floating NAV funds. And those funds really experience extremely severe stress. So it's best to give you an example. We [French MMFs] had assets under management of Euro 360 billion at the onset of the crisis. And these funds experienced redemptions that reduce AUM by 46 billion in just two weeks. And that is about the same magnitude as what we had experienced in 2008, 2009, although in a much shorter period of time."
Cazenave told the panel, "But now, since then, gradually the essence of the mongered have increased and we've now reached pre-crisis levels again. But still, the stress was very significant. And if we look at other European ... jurisdictions or money market domiciles, Ireland and Luxembourg, they also saw very significant outflows from the usually dollar denominated but also sterling denominated funds [in their] low volatility NAV funds, a special category here in the EU. But they also saw material inflows into public debt [MMFs].... You have to understand in the EU we have three categories of funds. We have a floating NAV funds, low volatility funds and public funds, and they can be in any currency."
She continued, "It's largely also an institutional investor market, which is slightly different from the US market. And at the same time, like in the U.S., secondary money market liquidity actually froze for a few days. The dealers were no longer either able or willing to back the short term debt securities and provide liquidity into the market. So that's also a big area of concern that we have to be looking at. This strain only eased up aggressively after the ECB meets the short term debt eligible to its purchase program. So actually, for us, the way we see this market is we consider March as a real life stress test."
Cazenave also said, "As was mentioned earlier, there have been very significant reforms in this segment of the market, post the global financial crisis, with the objective of strengthening the resilience of money market funds. Still for the second time in only in the decade there had to be intervention. So here's an area where certainly we consider that there will have to be some thinking going forward. I just wanted to point out that there's work underway internationally within IOSCO and the objective is we need to provide an in-depth analysis of what happened based on the available data and give a clear picture. We're looking at flows. We're looking at holdings. We're looking at different fund structures and building on that. The regulatory community will have to identify any outstanding fragilities, and this report will be published in the coming weeks."
She explained, "From a European perspective ... for us, it will be really important to factor in those differences in fund structures and currencies and regulation because we've seen different kinds of triggers or effects depending on fund structures. [W]e believe that the sequence of events raises a number of questions we'll have to address, particularly the one around precisely credit markets, so the ecosystem, how these markets function and how the interaction between money market funds and the functioning of the market should work. And also ... we have to reinforce the system with international standards and international forums. And we've seen issues. So this is maybe an area also that will have to be looked at more closely going forward."
Cazenave added, "So to sum up, money market funds are very important, critical vehicles, highly interconnected. And with other parts of the financial system inherently systemic by nature.... And so, again, it will be really important that we collectively draw the lessons of what happened [and] make sure we give diagnosis to provide the proper responses going forward."
Finally, the U.S. Treasury's Brett McIntosh commented, "Natasha identified ... a number of favorable actions that have been taken since the 2008 financial crisis. I think we can't underestimate the extent to which the 2010 and 2014 reforms made real progress here, and yet it's very clear that those reforms, in light of the turmoil of March, may not be enough. The question is whether we've exchanged one psychological barrier for another. Obviously, when you set a bright line rule, it hasn't tendency to encourage wrong behavior."
He finished, "So the question here is obviously in this case, policymakers were able to avert a run. But are there ways to enhance liquidity in this space without a bright line or in a way that draws a line without creating some sort of first mover advantage? I thought there have been a number of interesting suggestions on that today. It's something we need to discuss. I don't want to prejudge where we end up on that question, but there are complicated issues here that I think got a lot of smart thinking needs to go into it." (Again, see also the FT's "EU sets sights on money market fund reform".)
As we mentioned in our Oct. 15 Link of the Day, the Investment Company Institute published "The Impact of COVID-19 on Economies and Financial Markets. Last week, we quoted from the press release, "ICI: Pandemic and Economic Shutdown Drove Financial Turmoil in March," but today we excerpt from the full report. The ICI writes "The Report of the COVID-19 Market Impact Working Group is being issued under the auspices of the Investment Company Institute's COVID-19 Market Impact Working Group. This group of senior industry executives is examining the causes of the 2020 market turmoil and the experiences of regulated funds. The report is intended to provide a sound, data-based foundation for any future regulatory discussions or other responses that could affect regulated funds and their investors. The report was written by a team from ICI's Research, Law, Industry Operations, and ICI Global groups." Among the "Forthcoming Publications of the Report of the COVID-19 Market Impact Working Group," is one named, "The Experience of US Money Market Funds." (See also the FT's "EU sets sights on money market fund reform".)
ICI's Introduction tells us, "The key to understanding financial market developments in early 2020, and in turn to understanding flows to RICs, is to recognize that the COVID-19 pandemic is first and foremost a public health crisis. Governments sought to contain the spread ... through massive, mandated social distancing that effectively shut down a large portion of economies across the globe.... In the aftermath of the COVID-19 crisis, policymakers will no doubt consider whether and how to bolster the financial sector's resilience to massive shocks. But solutions must be relevant to the problems they seek to address. Reforms relevant to the global financial crisis -- which stemmed from a credit crisis caused by the collapse of a housing market bubble -- may or may not be appropriate for a financial crisis that stems from a global pandemic."
Discussing the "Reaction of Money and Bond Markets," ICI explains, "The early effects of the COVID-19 health crisis, and of shuttering parts of the economy, were reflected most dramatically in the bond and short-term credit markets in March. These markets came under severe stress, which resulted in widespread dislocations, beginning in the Treasury market -- normally a safe haven in times of market stress. These pressures migrated to mortgage backed securities (MBS) and short-term funding markets, and finally spilled over into the other credit markets (commercial paper, investment grade bonds, municipal securities, securitized debt, and high-yield bonds)."
They continue, "The impetus for these stresses was a tremendous demand for liquidity -- cash -- in the face of uncertainty about how devastating the virus would be and how the economy would fare. Short- and long-term credit markets froze. Sellers seeking liquidity found it difficult, if not impossible, to find buyers in any reasonable size for even very high-quality credits. At root, these developments were a reaction to the pandemic and the strains that social distancing and government mandates put on the real economy. Market observers correctly note that these strains were amplified by varied and complex interactions and factors in the financial markets. This section reviews factors that are especially germane to the experiences of RICs in March."
The report states, "As the COVID-19 crisis progressed, questions naturally arose about whether businesses, households, and municipalities would be able to pay their bills. Commonly, during financial or economic crises, investors seek to counterbalance uncertainty by flocking to 'cash.' Businesses, households, and municipalities are more likely to pay their bills if they have a reservoir of cash. In March, therefore, 'cash was king.' Normally, Treasury securities -- even longer-dated ones -- would be considered safe investments from a credit perspective, and investors generally are more willing to hold them during a crisis. But longer-dated Treasuries are not cash; their value will fluctuate with changes in interest rates. When interest rates on longer-dated Treasuries rose in early to mid-March, the value of these Treasury securities fell, which may have prompted selling by some market participants looking to lock in profits."
Then the "Crisis Spread to Short-Term Credit Markets," says the publication, commenting, "Dislocations in the Treasury market spread to the interbank lending, commercial paper, wholesale deposits, and short-term municipal debt markets. Once again, the fundamental reason was the virus and the fear and uncertainty it created. As noted earlier, when investors are fearful, they flock to cash. In normal times, high-quality investments -- consisting of short-term Treasury and agency debt, commercial paper, and other instruments with a maturity of less than 90 to 360 days, in addition to some overnight holdings—are often considered to be sufficient to maintain appropriate levels of liquidity. During March, however, investors' perceptions of what constituted liquid investments were far narrower: only true 'cash' -- securities that mature overnight, or perhaps within seven days -- was acceptable. This posed additional challenges for borrowers in terms of 'rollover risk,' especially in the commercial paper market."
ICI tells us, "The commercial paper market is an important source of short-term credit for a range of financial and nonfinancial businesses. Commercial paper is generally very high quality and can either be unsecured or, in the case of asset-backed commercial paper (ABCP), secured with other debt such as credit card receivables or auto loans. At year-end 2019, commercial paper outstanding in the United States totaled a little more than $1 trillion.... The ... four main issuers of commercial paper [include] Nonfinancial firms [and] Financial firms such as banks, especially foreign banks doing business in the United States.... Financial issuers also may issue commercial paper to fund auto, credit card, or home-equity lending to US consumers. A range of entities purchase commercial paper.... Nonfinancial corporations are the largest single holders at $246 billion (24 percent). Money market funds hold $237 billion (23 percent), and other open-end funds (mutual funds and ETFs) hold $103 billion (10 percent). Thus, RICs (money market funds, mutual funds, and ETFs) in total account for about one-third of the market. Other large holders include foreign entities (rest of the world, $130 billion, 12 percent), and other financial businesses ($101 billion, 10 percent). Municipalities (state and local governments) and state and local retirement plans hold a combined $128 billion (12 percent)."
The report comments, "As in other fixed-income markets, intense pressures arose in the commercial paper market in March.... Dislocations in the Treasury market seem to have spilled over into the commercial paper market.... Concerns about investors' willingness to buy newly issued commercial paper added to pressures in the commercial paper market. Most commercial paper is of very short maturity, typically 90 days or less. When these short-term loans mature, issuers often replace, or roll over, the maturing paper with newly issued commercial paper. This generally works well in normal times. During periods of stress, however, if there are no buyers for newly issued commercial paper, the issuer may have to tap bank lines of credit, issue term corporate bonds -- which have higher interest expense than commercial paper -- or even sell assets in order to have an appropriate level of cash on hand."
It adds, "Market participants' concerns were evident in March. Discussions with ICI members indicate that RICs holding commercial paper maturing in more than seven days could not find buyers for that paper, even if the issuers were of the highest quality. At the same time, issuers could only roll over overnight or perhaps seven-day commercial paper, adding to the mounting pressure in the commercial paper market. In such circumstances, it would not be surprising for investors (including RICs) to demand higher yields on longer-dated commercial paper.... In addition, ICI member firms believe that banks' needs to preserve their own cash may have contributed to difficulties in the commercial paper market.... Banks' actions are understandable, given the stresses they faced, notably the need to preserve cash to support draws on credit lines. But difficulties in the commercial paper market in March reflected complex interactions and interconnections in the financial system, rather than the actions of any particular group of market participants."
ICI also writes, "Like the commercial paper market, dislocations occurred in the market for short-term municipal debt.... Dealers' holdings of VRDNs, like their increased inventories of Treasury securities, may have added additional market stress. When an investor puts back a VRDN to a bank, or its dealer subsidiary, the bank may seek to resell the VRDN to another investor. If it cannot find a buyer, it will take the VRDN into its inventory. Federal Reserve data indicate that primary dealers took large amounts of VRDNs onto their balance sheets in mid-March as investors exercised demand features."
The report also explains, "Recognizing that further measures were necessary to provide liquidity to the short-term credit markets, on March 18 the Federal Reserve established the Money Market Mutual Fund Lending Facility (MMLF). This facility, which began operating on March 23, would lend to banks that acquired US Treasury and agency securities and highly rated commercial paper from money market funds, including those that banks purchased beginning on March 18.... The terms of the MMLF were flexible, increasing the chances that the facility would strongly supplement the PDCF and CPFF.... Additionally, on March 19, the Federal Reserve provided relief from certain regulatory capital requirements to banks that borrowed under the MMLF, indicating that the Federal Reserve recognized that bank capital standards were indeed restricting the flow of credit."
Finally, the ICI writes, "The Federal Reserve's actions were timely, creative, flexible, and necessary. The probability was high that had the Federal Reserve (with the support of Congress and backing from the US Treasury) not undertaken these actions, the financial markets, and thus, the economy would have collapsed. In recent remarks, Federal Reserve Bank of New York President and CEO John C. Williams underscored this very point [saying], 'Despite our best efforts, we should not fool ourselves that we can design a system that is bulletproof against every circumstance. The events of the past year have demonstrated the critical role central banks can and must play in extraordinary times when market stress and dysfunction threaten to spill over into the economy. No private institution has the ability to provide liquidity at the speed or scale that the Federal Reserve and other central banks have this year. [T]he Federal Reserve System was originally created to ensure the stability of the financial system. That role is as relevant today as it was 107 years ago and will continue to be in the future.' Under the circumstances -- namely the widespread dash to cash sparked by concerns about the economy and the vast uncertainty about how events would progress -- the Federal Reserve (in conjunction with other major central banks) was the only entity capable of providing the necessary liquidity."
Crane Data's latest MFI International shows that assets in European or "offshore" money market mutual funds moved lower again over the past month. They broke above the $1.0 trillion for the first time ever three months ago, hitting a record $1.056 trillion in August. These U.S.-style funds, domiciled in Ireland or Luxemburg and denominated in US Dollars, Pound Sterling and Euros, decreased by $11.5 billion over the last 30 days (when translated into dollars); they're up by $160.7 billion (18.3%) year-to-date. Offshore US Dollar money funds, which broke over $500 billion in January, are down $11.9 billion over the last 30 days but up $52.2 billion YTD to $546.6 billion. Euro funds are up E8.1 billion over the past month, and YTD they're up E42.2 billion to E140.9 billion. GBP money funds have fallen by L6.9 billion over 30 days, but are up by L21.4 billion YTD to L246.3B. U.S. Dollar (USD) money funds (192) account for over half (52.7%) of the "European" money fund total, while Euro (EUR) money funds (94) make up 15.1% and Pound Sterling (GBP) funds (122) total 28.8%. We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers Thursday), below. (See also Bloomberg's "Fed Signs Prime Money Market Funds Might Need Stiffer Rules", which quotes the Federal Reserve's Randy Quarles who briefly mentioned MMFs in a speech yesterday.)
Offshore USD MMFs yield 0.06% (7-Day) on average (as of 10/14/20), down from 1.59% on 12/31/19 and 2.29% at the end of 2018. EUR MMFs yield -0.61% on average, compared to -0.59% at year-end 2019 and -0.49% on 12/31/18. Meanwhile, GBP MMFs yielded 0.02%, down from 0.64% as of 12/31/19 and 0.64% at the end of 2018. (See our latest MFI International for more on the "offshore" money fund marketplace. Note that these funds are only available to qualified, non-U.S. investors.)
Crane's October MFII Portfolio Holdings, with data as of 9/30/20, show that European-domiciled US Dollar MMFs, on average, consist of 24.0% in Commercial Paper (CP), 15.5% in Certificates of Deposit (CDs), 18.2% in Repo, 31.5% in Treasury securities, 9.4% in Other securities (primarily Time Deposits) and 1.5% in Government Agency securities. USD funds have on average 31.7% of their portfolios maturing Overnight, 8.8% maturing in 2-7 Days, 15.5% maturing in 8-30 Days, 13.8% maturing in 31-60 Days, 9.2% maturing in 61-90 Days, 17.4% maturing in 91-180 Days and 3.7% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (42.2%), France (12.4%), Japan (7.9%), Canada (6.8%), Germany (5.5%), the U.K. (4.8%), the Netherlands (4.7%), Sweden (4.0%), Switzerland (2.1%), Australia (1.7%), Norway (1.6%), Belgium (1.5%), Abu Dhabi (1.2%) and Singapore (1.0%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $180.9 billion (31.5% of total assets), Fixed Income Clearing Corp with $22.7B (4.0%), BNP Paribas with $20.2B (3.5%), Barclays PLC with $14.9B (2.6%), Mitsubishi UFJ Financial Group Inc with $14.7B (2.6%), Societe Generale with $11.1B (1.9%), JP Morgan with $10.6B (1.9%), Credit Agricole with $10.6B (1.8%), Sumitomo Mitsui Banking Corp with $10.5B (1.8%) and RBC with $10.2B (1.8%).
Euro MMFs tracked by Crane Data contain, on average 43.6% in CP, 16.2% in CDs, 20.6% in Other (primarily Time Deposits), 14.6% in Repo, 3.9% in Treasuries and 1.1% in Agency securities. EUR funds have on average 30.0% of their portfolios maturing Overnight, 11.2% maturing in 2-7 Days, 14.8% maturing in 8-30 Days, 11.5% maturing in 31-60 Days, 10.8% maturing in 61-90 Days, 18.0% maturing in 91-180 Days and 3.7% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (34.3%), Japan (10.5%), the U.S. (9.8%), Germany (9.8%), Sweden (5.6%), Belgium (4.1%), Canada (3.8%), the Netherlands (3.8%), the U.K. (3.6%), Switzerland (3.6%), Austria (2.4%), China (1.5%) and Qatar (1.3%).
The 10 Largest Issuers to "offshore" EUR money funds include: Republic of France with E7.8B (6.1%), BNP Paribas with E7.5B (5.8%), BPCE SA with E6.8B (5.3%), Credit Agricole with E4.9B (3.8%), DZ Bank AG with E4.7B (3.7%), Agence Central de Organismes de Securite Sociale with E4.7B (3.7%), Citi with E4.7B (3.6%), Societe Generale with E4.0B (3.1%), Zurich Cantonal Bank with E3.8B (3.0%) and Sumitomo Mitsui Banking Corp with E3.8B (3.0%).
The GBP funds tracked by MFI International contain, on average (as of 9/30/20): 32.4% in CDs, 21.1% in CP, 21.8% in Other (Time Deposits), 20.5% in Repo, 3.6% in Treasury and 0.5% in Agency. Sterling funds have on average 34.9% of their portfolios maturing Overnight, 12.6% maturing in 2-7 Days, 9.3% maturing in 8-30 Days, 12.6% maturing in 31-60 Days, 7.6% maturing in 61-90 Days, 17.8% maturing in 91-180 Days and 5.3% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (21.7%), the U.K. (20.9%), Japan (13.6%), Canada (9.1%), the U.S. (5.5%), the Netherlands (5.0%), Sweden (4.7%), Germany (4.7%), Abu Dhabi (2.5%), Australia (2.2%) and Spain (2.1%).
The 10 Largest Issuers to "offshore" GBP money funds include: the UK Treasury with L22.1B (10.8%), BNP Paribas with L12.1B (6.0%), Agence Central de Organismes de Securite Sociale with L9.3B (4.6%), BPCE SA with L8.1B (4.0%), Barclays PLC with L8.0B (3.9%), RBC with L7.8B (3.9%), Mitsubishi UFJ Financial Group Inc with L7.7B (3.8%), Sumitomo Mitsui Banking Corp with L7.5B (3.7%), Credit Agricole with L7.0B (3.4%) and Nordea Bank with L6.7B (3.3%).
In related news, ICI also released its latest monthly "Money Market Fund Holdings" summary yesterday, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (For more, see our October 13 News, "October MF Portfolio Holdings: CP, CDs, TDs Fall; Treasury, Repo Flat.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in September, prime money market funds held 37.9 percent of their portfolios in daily liquid assets and 49.9 percent in weekly liquid assets, while government money market funds held 74.1 percent of their portfolios in daily liquid assets and 84.1 percent in weekly liquid assets." Prime DLA decreased from 40.8% in August, and Prime WLA decreased from 53.0%. Govt MMFs' DLA decreased from 74.3% in July and Govt WLA increased from 84.0% the previous month.
ICI explains, "At the end of September, prime funds had a weighted average maturity (WAM) of 46 days and a weighted average life (WAL) of 60 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 45 days and a WAL of 101 days." Prime WAMs were unchanged from the previous month and WALs were down six days from the previous month. Govt WAMs were up three days in September, WALs were also up two days in the previous month.
Discussing "Holdings By Region of Issuer," the release tells us, "Prime money market funds' holdings attributable to the Americas declined from $418.42 billion in August to $290.65 billion in September. Government money market funds' holdings attributable to the Americas rose from $3,239.43 billion in August to $3,320.00 billion in September." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $290.6 billion, or 48.0%; Asia and Pacific at $95.6 billion, or 15.8%; Europe at $212.6 billion, or 35.1%; and, Other (including Supranational) at $6.8 billion, or 1.1%. The Government Money Market Funds by Region of Issuer table shows Americas at $3,320.0 trillion, or 88.3%; Asia and Pacific at $112.8 billion, or 3.0%; Europe at $310.5 billion, 8.3%, and Other (Including Supranational) at $17.7 billion, or 0.5%."
The October issue of our Bond Fund Intelligence, which was sent to subscribers Thursday morning, features the lead story, "Worldwide Bond Funds Jump $820B in Q2'20 to $11.6 Trillion," which discusses the latest jump in bond fund assets globally, and "Lord Abbett Rules in Short-Term Bond Kingdom," which interviews Portfolio Manager and MD Yoana Koleva. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund yields were higher and returns were lower in September. We excerpt from the new issue below. (Contact us if you'd like to see our Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
Our Worldwide piece reads, "Bond fund assets worldwide skyrocketed by $816.9 billion in Q2'20 to $11.6 trillion, driven higher by increases in the U.S., Luxembourg and Ireland. Brazil was the only major country showing a decrease in the latest quarter. We review the ICI's 'Worldwide Open-End Fund Assets and Flows, Second Quarter 2020' release and statistics below."
ICI says, "Worldwide regulated open-end fund assets increased 12.4% to $53.87 trillion at the end of the second quarter of 2020.... The Investment Company Institute compiles worldwide regulated open-end fund statistics on behalf of the International Investment Funds Association (IIFA).... On a US dollar-denominated basis ... bond fund assets rose by 7.5% to $11.63 trillion in the second quarter. Balanced/mixed fund assets increased by 10.7% to $6.48 trillion.... Money market fund assets rose by 6.1% to $8.16 trillion."
Our latest Fund Profile says, "This month, BFI profiles Yoana Koleva, Managing Director at Lord Abbett and Portfolio Manager of Lord Abbett Ultra Short Fund. The Jersey City-based manager runs the largest Ultra-Short Bond Fund and second largest Short-Term Bond Fund and ranks 12th overall in our bond fund family rankings. Koleva discusses the firm's history, the fund's strategies and a number of other topics in the ultra-short space. Our Q&A follows."
BFI says, "Give us a little history." Koleva responds, "Lord Abbett was actually founded back in 1929, so we've been around for a very long time. Within the short duration space, we also have a very long history and a pretty significant presence. Our Short Duration Income Fund was launched in early 2008. We invest in short-term, credit-oriented securities and the goal is to generate strong, consistent returns with low volatility. We have a multi-sector approach where we invest in investment grade, high yield corporate securities, CMBS and ABS, and the way we add value is through sector rotation and security selection. Currently, the short duration strategy has over $60 billion in assets."
She continues, "Given our experience and our success in short duration, in 2016 we decided to launch our Ultra Short Bond product. If you recall, 2016 was the year when we had a major change in the regulatory landscape driven by the Money Market Reform. We believe that created an opportunity for a new product. You saw significant outflows from the Prime money market space as gates and floating NAVs were introduced. Prime money markets dropped by nearly $1 trillion driven by investor outflows and fund conversions into government money market funds. For the investor that focuses on principal preservation and return above Treasuries there were really very limited opportunities. We saw that market dynamic and identified it as an opportunity for the ultra short space. We currently manage over $20 billion in assets in the space, so it's been a huge success."
Our Bond Fund News includes the brief, "Yields Up, Returns Dip in September," which explains, "Bond fund yields inched higher while returns were mostly lower last month. Our BFI Total Index returned -0.12% over 1-month and 3.83% over 12 months. The BFI 100 fell 0.10% in Sept. but rose 4.80% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.05% over 1-mo and 1.75% over 1-yr; Ultra-Shorts averaged 0.10% in Sept. and 1.78% over 12 mos. Short-Term returned -0.02% and 3.33%, and Intm-Term fell 0.04% last month and 6.14% over 1-year. BFI's Long-Term Index fell by 0.17% in Sept. but rose 7.94% for 1-year. Our High Yield Index fell 0.57% last month and is up just 1.54% over 1-year."
In another News brief, we quote the Economic Times', "Bonds Suck in $26B, Pricing in US Democrats Win," which says, "Bond funds have seen the second-largest weekly inflows ever of $25.9 billion, BofA said on Friday, as the market continues to price in a Democrats victory.... Riskier high yield bond funds attracted $5 billion in the week to Oct. 7, the highest in 11 weeks, while government bond funds sucked in $3.8 billion, the largest inflows in 14 weeks."
A third News update tells readers, "The SEC Published, 'U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic Shock' (and hosted a Roundtable Oct. 14). It says, 'Though many observers have been concerned about the ability of bond funds to access liquidity to meet redemption requests during periods of market stress, these concerns did not materialize during the market turmoil in March. Commission staff estimate that bond mutual funds experienced $255 billion of net outflows during March 2020, with another $21 billion in outflows from bond ETFs.' ICI also published, 'The Impact of COVID-19 on Economies and Financial Markets.'"
BFI also features a sidebar entitled, "Barron's on Best Bond Funds." Their article, 'The Best Bond Funds for Uncertain Times.' explains, 'The drastic changes in the fixed-income market in recent months -- largely driven by the Federal Reserve's signaling that interest rates will stay near zero until 2023 ... -- necessitates a reassessment of bond portfolios.... With CDs and money markets paying nothing, income investors tend to gravitate toward short- or ultrashort-term bond funds. But many of these have taken on credit risk to bolster their yields, so they took bigger losses at the height of the crisis than most investors would expect from their 'safe' investment bucket, says Morningstar analyst Garrett Heine.'"
Finally, a brief entitled, "BF Inflows Slow, Then Jump," explains, "Bond funds continue to see strong inflows and asset gains, but they paused briefly in late September. ICI's 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' says, 'Bond funds had estimated inflows of $25.02 billion for the week, compared to estimated inflows of $4.40 billion during the previous week [and $5.04B the prior week]. Taxable bond funds saw estimated inflows of $22.54 billion, and municipal bond funds had estimated inflows of $2.48 billion.' Over the past 5 weeks, bond funds and bond ETFs have seen inflows of $63.3 billion.'"
As we mentioned in our October Money Fund Intelligence and originally learned from Stadley Ronon Counsel Jamie Gershkow, the U.S. Securities and Exchange Commission's Division of Economic and Risk Analysis recently released a study entitled, "U.S. Credit Markets Interconnectedness and the Effects of the COVID-19 Economic Shock." It explains, "March 2020 also saw strains in the almost $1 trillion CP market, as investors stopped rolling (or reinvesting proceeds from maturing securities) to preserve cash. In the normal course, secondary trading volume in CP and CD markets is limited as most investors purchase and hold these short-dated instruments to maturity. However, in March 2020, as some market participants, including money market mutual funds (MMFs; 21% of the CP market) and others, may have sought secondary trading, they experienced a 'frozen market.' As a practical matter, both secondary trading and new issuances halted for a period. Dealers (including issuing dealers) faced one-sided trading flows and were experiencing their own liquidity pressures and intermediation limits, including those discussed above." (Note: The SEC will host a "Roundtable On Interconnectedness And Risk In U.S. Credit Markets" on Wednesday, October 14 from 1-5pm ET.)
The DERA study continues, "In another illustration of the interconnectedness among the capital markets and the banking system, issuers who found the CP/CD market frozen turned to other sources of borrowings to meet near-term needs and, perhaps more so, as a matter of shoring up their cash balances to mitigate risk. These other sources of credit included bank revolvers and corporate lines of credit. Borrowers drew down over $275 billion in revolvers in 2020Q1. We believe the Federal Reserve's prompt action in the CP market and establishment of USD swap lines with a number of central banks mitigated the potential adverse effects of these interconnections, including a more general draw on liquidity from banks, which in turn could put further pressure on intermediation and other banking system activities important to orderly market functioning."
On the role of "Money Market Mutual Funds," they write, "MMFs are key participants in the STFM (short-term funding markets). MMFs' assets under management (AUM) grew by $705 billion in March and by $462 billion in April to $5.2 trillion, or an increase of 29% from the end of February. Government funds benefited with net inflows of $1.2 trillion, and they ended April with $4 trillion in AUM. Assets in prime institutional and retail MMFs increased by $105 billion in April after declining by $125 billion in March to $1.1 trillion, roughly $20 billion below their February level. In March 2020, prime MMFs, especially those offered externally to institutional investors, experienced substantial outflows. Over the two-week period from March 11 to 24, net redemptions from publicly-offered prime institutional funds totaled 30 percent of the funds' assets (about $100 billion). These outflows likely contributed to stress in the CP/CD markets. These outflows caused weekly liquid assets (WLAs) in prime institutional MMFs to decline, and some funds' WLAs (which must be disclosed publicly each day) approached or fell below the 30 percent minimum threshold required by SEC rules. Staff outreach to market participants indicate that prime fund outflows accelerated as WLAs fell close to 30 percent. The Federal Reserve's announcements of liquidity facilities, including the Money Market Mutual Fund Liquidity Facility (MMLF), helped to restore market liquidity and improve market sentiment within days."
Regarding the Repo Market, the report tells us, "The approximately $4 trillion repo market provides secured, short-term, marked-to-market funding against various forms of securities collateral. The collateral from several short- and long-term funding markets and participants connects the repo market to the rest of the financial system. The repo market is a critical source of liquidity and, accordingly, essential to the ongoing operations of various market participants, including market makers in virtually all sectors of the capital markets. A repo contract in essence offers an interest-bearing cash loan against securities collateral, but the contract can also be structured to borrow securities.... [B]roker-dealers (many of the larger ones being bank affiliates), MMFs, hedge funds, mREITs, and the Federal Reserve are the primary participants in the repo market. The MMFs are the main investors of cash (i.e., the lenders) into the repo market. Recipients of repo financing (i.e., the borrowers) include hedge funds that pledge many different securities and mREITs that mainly pledge MBS securities in repo transactions. Broker-dealers intermediate virtually all repo transactions."
The SEC states, "The repo market provides a quintessential example of the myriad interconnections among banks, brokers, and other market participants and the functioning and performance of capital markets.... Dealers use the repo market to finance their Treasury auction purchases. U.S. Treasuries also provide an efficient means of supporting short-term borrowings. Treasuries serve as collateral in nearly half of all repo transactions, and agency MBS in approximately one third of such transactions. The remainder of the collateral in this market (approximately one-fifth) consists of equities, corporate bonds, and non-agency MBS. MMFs' portfolio holding disclosures are another valuable source of information about the composition of repo collateral. Historically, close to 70% of collateral accepted by MMFs consists of Treasury securities.... Dealers in their intermediation role participate on both sides of the market and account for approximately 40% of the borrowing and 33% of the lending. MMFs account for another 24% of investments (i.e., lending) in the repo market, followed by other smaller participants such as banks, government agencies, and hedge funds."
In a segment on "Money Market Mutual Funds," they comment, "With about $5 trillion of assets as of June, 2020, MMFs are an important participant within the STFM. Companies invest their excess cash in MMFs, financial institutions manage their liquidity demands such as margin call and redemptions through MMFs and many households invest their savings in MMFs. MMFs can be identified as government MMFs (approximately $3.8 trillion in net assets as of June 2020), prime MMFs (approximately $1.2 trillion), and tax-exempt MMFs (approximately $137 billion).... Prime MMFs that cater to natural persons are known as prime retail MMFs and had around $455 billion in net assets in June 2020, while prime MMFs offered to other investors, known as prime institutional MMFs, had $707 billion. Furthermore, some prime institutional money market funds are not offered publicly. Typically, these funds disclose in their filings and public communications that their shares are not intended to be offered to the public. Prime institutional money market funds not providing such disclosures are considered to be offered to the public. Through their participation in the STFM, MMFs serve an important financial and economic function for both retail and institutional investors and for the capital markets. For example, MMFs invest about $250 billion in CP, $950 billion in repos, and $540 billion in short-term securities issued by Federal Home Loan Banks (FHLB). About 21% of outstanding CP is purchased by MMFs."
On "March 2020 Events and Stress in Prime MMFs," the SEC writes, "Amid escalating concerns about the impact of the COVID-19 economic shock and increased demand for liquidity, prime and tax-exempt MMFs experienced heavy redemptions beginning in the second week of March 2020. The scale of the outflows was the most substantial among prime institutional MMFs that are publicly offered. Over the two-week period from March 11 to 24, net redemptions from publicly-offered prime institutional funds totaled 30 percent (about $100 billion) of the funds' assets. The outflows from prime institutional MMFs that are not publicly offered were much smaller, around $17 billion or 6 percent of assets. These non-public prime funds had smaller outflows than their public counterparts, likely because the former do not have the same vulnerabilities as funds that are offered publicly to unaffiliated institutional investors. For prime retail MMFs, outflows as a share of assets in March 2020 totaled $33 billion, or 7 percent of assets."
They continue, "Government MMFs had record inflows of $838 billion in March and an additional $347 billion in April. The assets in government MMFs grew to about $4 trillion by the end of April 2020 compared to about $3 trillion at the end of 2019.... As prime MMFs experienced heavy redemptions, their weekly liquid assets (WLAs) dropped notably, and some funds' WLAs (which must be disclosed publicly each day) approached or fell below the 30 percent minimum threshold required by SEC rules. When a fund's WLA falls below 30 percent, it can impose fees or gates on redemptions. Market participants reported concerns that imposition of a fee or a gate by one fund could spark widespread redemptions from others. Preliminary research indicates that prime fund outflows accelerated as WLAs fell close to 30 percent."
The study explains, "Staff understand that at least four factors contributed to rapid outflows from the prime MMFs in March 2020. First, the sudden economic shutdown due to COVID-19 reduced revenues for most industrial and service organizations of all sizes. In response, many firms might have sought to bolster their liquidity position by withdrawing from the prime MMFs. Second, increased economic uncertainty and greater market volatility in March 2020 lowered asset valuations. This may have adversely affected the marked-to-market valuation of swap and other derivative positions of certain investors who had cash in MMFs that they needed to withdraw and post as additional collateral positions. Third, in an environment of great uncertainty, many investors might have converted their assets sensitive to liquidity and credit risk into safer, more highly rated government debt, including government MMFs. Finally, some investors may have feared that if they were not the first to exit their fund, then in the event the fund breached the 30% WLA limit, there was a risk that they could be subject to restrictions on withdrawals known as 'gates.' This anticipatory, risk-mitigating perspective potentially further accelerated redemptions."
It continues, "Conditions in short-term funding markets deteriorated rapidly in the second week of March. Spreads for money market instruments widened sharply, and new issuance of CP and CDs declined markedly and shifted to short tenors. Spreads to OIS for AA-rated nonfinancial CP reached new historical highs, while spreads for AA-rated financial CP and A2/P2-rated nonfinancial CP widened to the highest levels seen since the 2008 GFC. Stress among prime MMFs likely contributed to these problems, as funds reduced their holdings of CP and CDs. In addition, MMFs with WLAs close to 30 percent were likely reluctant to purchase assets with maturities of more than 7 days that would not qualify as WLA."
The report adds, "Outflows from MMFs abated fairly quickly after the Federal Reserve's announcement of the MMLF on March 18 and market conditions began to improve after the launch of the MMLF. The share of CP issuance with overnight maturity began falling on March 24, and spreads to OIS for most types of term CP began falling a few days later. The March 2020 stress in the prime MMFs brought the economics of prime MMFs into question because investors expect immediate liquidity, which is more difficult to deliver in periods of heightened uncertainty that often increase the demand for simultaneous redemptions. This dynamic -- which was present under different circumstances in the GFC of 2008 -- might have contributed to certain managers' recent decisions to close some of their prime institutional MMFs."
The SEC concludes, "In summary, the events related to the COVID-19 economic shock led to a decline in business activity worldwide and spurred the demand for cash and safe assets. This affected MMFs as investors drew on their cash balances to address their emerging funding needs and as they moved their other investments into the safe, liquid government MMFs. The effects included a significant net inflow into government MMFs and meaningful outflows from prime MMFs, which abated when the Federal Reserve established liquidity facilities for the assets in which MMFs invest." (See also, Cadwaladar's "SEC Reports on U.S. Credit Market Performance in Light of COVID-19 Pandemic".)
Crane Data released its October Money Fund Portfolio Holdings Friday, and our most recent collection, with data as of September 30, 2020, shows a decrease in every category except VRDNs last month. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) decreased by $94.3 billion to $4.772 trillion last month, after decreasing $12.7 billion in August, $83.1 billion in July and $159.1 billion in June. Money market securities increased $31.6 billion in May, and a staggering $529.4 billion in April and $725.6 billion in March. Treasury securities remained the largest portfolio segment, followed by Repo, 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, Treasury securities decreased by $6.3 billion (-0.25%) to $2.461 trillion, or 51.6% of holdings, after increasing $3.1 billion in August, decreasing $79.9 billion in July and increasing $60.8 billion in June. Repurchase Agreements (repo) decreased by $6.7 billion (-64%) to $1.041 trillion, or 21.8% of holdings, after increasing $60.8 billion in August, increasing $40.0 billion in July, and decreasing $124.3 billion in June. Government Agency Debt decreased by $28.1 billion (-3.5%) to $768.4 billion, or 16.1% of holdings, after decreasing $37.6 billion in August, $45.1 billion in July and $65.2 billion in June. Repo, Treasuries and Agencies totaled $4.271 trillion, representing a massive 89.5% of all taxable holdings.
Money funds' holdings of CP, CDs and Other (mainly Time Deposits) fell in September, breaking below the $500 billion level for the first time since December 2018, while VDRNs saw assets increase. Commercial Paper (CP) decreased $11.6 billion (-4.8%) to $231.9 billion, or 4.9% of holdings, after decreasing $32.5 billion in August, $10.7 billion in July and $6.5 billion in June. Certificates of Deposit (CDs) fell by $20.8 billion (-11.8%) to $156.1 billion, or 3.3% of taxable assets, after decreasing $19.0 billion in August, $12.3 billion in July and $9.1 billion in June. Other holdings, primarily Time Deposits, decreased $21.0 billion (-18.2%) to $94.6 billion, or 2.0% of holdings, after increasing $15.3 billion in August, $22.3 billion in July and decreasing by $13.7 billion in June. VRDNs increased to $94.6 billion, or 0.4% of assets, from $19.1 billion the previous month. (Note: This total is VRDNs for taxable funds only. We will publish Tax Exempt MMF holdings separately late Tuesday.)
Prime money fund assets tracked by Crane Data dropped $149.0 billion to $987.0 billion, or 20.7% of taxable money funds' $4.772 trillion total. Among Prime money funds, CDs represent 15.8% (up from 15.6% a month ago), while Commercial Paper accounted for 23.5% (up from 21.4%). The CP totals are comprised of: Financial Company CP, which makes up 14.3% of total holdings, Asset-Backed CP, which accounts for 5.3%, and Non-Financial Company CP, which makes up 3.9%. Prime funds also hold 6.4% in US Govt Agency Debt, 27.5% in US Treasury Debt, 5.0% in US Treasury Repo, 0.6% in Other Instruments, 5.6% in Non-Negotiable Time Deposits, 4.9% in Other Repo, 6.4% in US Government Agency Repo and 1.0% in VRDNs.
Government money fund portfolios totaled $2.616 trillion (54.8% of all MMF assets), up $111.0 billion from $2.505 trillion in August, while Treasury money fund assets totaled another $1.170 trillion (24.5%), down from $1.226 trillion the prior month. Government money fund portfolios were made up of 27.0% US Govt Agency Debt, 11.7% US Government Agency Repo, 46.1% US Treasury debt, 14.9% in US Treasury Repo, 0.2% in VRDNs and 0.1% in Investment Company . Treasury money funds were comprised of 84.1% US Treasury Debt and 15.8% in US Treasury Repo. Government and Treasury funds combined now total $3.786 trillion, or 79.3% of all taxable money fund assets.
European-affiliated holdings (including repo) decreased by $33.5 billion in September to $626.4 billion; their share of holdings fell to 13.1% from last month's 13.6%. Eurozone-affiliated holdings fell to $430.0 billion from last month's $456.7 billion; they account for 9.0% of overall taxable money fund holdings. Asia & Pacific related holdings decreased $21.1 billion to $227.0 billion (4.8% of the total). Americas related holdings fell $37.0 billion to $3.915 trillion and now represent 82.0% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (up $29.9 billion, or 5.0%, to $623.4 billion, or 13.1% of assets); US Government Agency Repurchase Agreements (down $22,9 billion, or -5.8%, to $369.4 billion, or 7.7% of total holdings), and Other Repurchase Agreements (down $13.7 billion, or -22.2%, from last month to $48.0 billion, or 1.0% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $2.0 billion to $141.5 billion, or 3.0% of assets), Asset Backed Commercial Paper (down $3.2 billion to $52.3 billion, or 1.1%), and Non-Financial Company Commercial Paper (down $6.4 billion to $38.2 billion, or 0.8%).
The 20 largest Issuers to taxable money market funds as of Sept. 30, 2020, include: the US Treasury ($2,477.9 billion, or 51.9%), Federal Home Loan Bank ($460.7B, 9.7%), Fixed Income Clearing Co ($144.9B, 3.0%), BNP Paribas ($132.9B, 2.8%), Federal National Mortgage Association ($113.7B, 2.4%), Federal Farm Credit Bank ($98.3B, 2.1%), RBC ($96.7B, 2.0%), JP Morgan ($92.7B, 1.9%), Federal Home Loan Mortgage Co ($74.7B, 1.6%), Barclays ($64.0B, 1.3%), Mitsubishi UFJ Financial Group Inc ($62.3B, 1.3%), Credit Agricole ($50.5B, 1.1%), Citi ($47.9B, 1.0%), Sumitomo Mitsui Banking Co ($47.0B, 1.0%), Societe Generale ($42.3B, 0.9%), Toronto-Dominion Bank ($39.5B, 0.8%), Bank of Montreal ($37.5B, 0.8%), Bank of America ($37.5B, 0.8%), HSBC ($31.9B, 0.7%) and Canadian Imperial Bank of Commerce ($28.5B, 0.6%).
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: Fixed Income Clearing Co ($144.8B, 13.9%), BNP Paribas ($120.8B, 11.6%), JP Morgan ($83.1B, 8.0%), RBC ($78.8B, 7.6%), Barclays ($46.6B, 4.5%), Credit Agricole ($42.6B, 4.1%), Mitsubishi UFJ Financial Group ($42.4B, 4.1%), Citi ($39.4B, 3.8%), Bank of America ($35.5B, 3.4%) and Societe Generale ($32.9B, 3.2%).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Toronto-Dominion Bank ($23.7B, 5.6%), Mitsubishi UFJ Financial Group ($19.9B, 4.7%), RBC ($17.9B, 4.2%), Barclays ($17.4B, 4.1%), Mizuho Corporate Bank Ltd ($17.3B, 4.1%), Sumitomo Mitsui Trust Bank ($16.3B, 3.9%), Credit Suisse ($12.2B, 2.9%), Canadian Imperial Bank of Commerce ($12.0B, 2.8%) and BNP Paribas ($12.0B, 2.8%).
The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($14.2B, 9.1%), Mitsubishi UFJ Financial Group Inc ($14.1B, 9.0%), Sumitomo Mitsui Trust Bank ($10.2B, 6.6%), Bank of Montreal ($10.2B, 6.5%), Mizuho Corporate Bank Ltd ($9.5B, 6.1%), Canadian Imperial Bank of Commerce ($7.7B, 4.9%), Toronto-Dominion Bank ($7.2B, 4.6%), Credit Suisse ($7.1B, 4.5%), Svenska Handelsbanken ($5.9B, 3.7%) and Credit Mutuel ($5.2B, 3.3%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Toronto-Dominion Bank ($16.2B, 8.0%), RBC ($10.3B, 5.1%), JP Morgan ($9.6B, 4.8%), Societe Generale ($8.3B, 4.1%), Citi ($7.6B, 3.8%), BNP Paribas ($7.5B, 3.7%), BPCE SA ($7.0B, 3.5%), NRW.Bank ($6.6B, 3.3%), Sumitomo Mitsui Trust Bank ($6.1B, 3.0%) and Toyota ($5.3B, 2.6%).
The largest increases among Issuers include: Fixed Income Clearing Corp (up $31.7B to $144.9B), US Treasury (up $10.4B to $2,477.9B), Barclays PLC (up $4.3B to $64.0B), BNP Paribas (up $3.7B to $132.9B), HSBC (up $3.4B to $31.9B), ABN Amro Bank (up $2.9B to $17.4B), Deutsche Bank AG (up $1.7B to $19.0B), JP Morgan (up $1.5B to $92.7B), Rabobank (up $1.4B to $9.8B) and Natixis (up $1.0B to $25.5B).
The largest decreases among Issuers of money market securities (including Repo) in September were shown by: the Federal Home Loan Bank (down $30.7B to $460.7B), Credit Agricole (down $22.5B to $50.5B), Federal Home Loan Mortgage Corp (down $9.6B to $74.7B), Mizuho Corporate Bank Ltd (down $8.2B to $26.7B), DNB ASA (down $7.9B to $8.1B), Bank of Nova Scotia (down $6.4B to $20.2B), Citi (down $5.9B to $47.9B), RBC (down $5.8B to $96.7B), Mitsubishi UFJ Financial Group Inc (down $5.6B to $62.3B) and Canadian Imperial Bank of Commerce (down $4.2B to $28.5B).
The United States remained the largest segment of country-affiliations; it represents 77.1% of holdings, or $3.679 trillion. France (5.8%, $276.0B) was number two, and Canada (4.9%, $235.3B) was third. Japan (4.5%, $216.3B) occupied fourth place. The United Kingdom (2.6%, $125.5B) remained in fifth place. The Netherlands (1.3%, $59.7B) was in sixth place, followed by Germany (1.2%, $58.1B), Sweden (0.7%, $31.1B), Switzerland (0.6%, $30.0B) and Australia (0.6%, $26.2B). (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 September 30, 2020, Taxable money funds held 35.7% (down from 36.0%) of their assets in securities maturing Overnight, and another 9.5% maturing in 2-7 days (up from 6.9% last month). Thus, 45.2% in total matures in 1-7 days. Another 14.3% matures in 8-30 days, while 13.0% matures in 31-60 days. Note that close to three-quarters, or 72.5% 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 9.6% of taxable securities, while 15.8% matures in 91-180 days, and just 2.2% matures beyond 181 days.
Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be sent out Friday, and we'll be writing our normal monthly update on the September 30 data for Tuesday's News. But we also published a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Thursday. (We continue to merge the two series, and the N-MFP version is now available via Holding file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of Sept. 30, 2020, includes holdings information from 1,066 money funds (down 5 from last month), representing assets of $4.941 trillion (down $102 billion). Prime MMFs now total $999.0 billion, or 20.2% of the total, down from $1.149 trillion a month ago. We review the new N-MFP data below, and we also review ICI's latest money fund asset totals.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Treasury holdings totaled $2.494 trillion (up from $2.486 trillion), or a massive 50.5% of all holdings. Repurchase Agreement (Repo) holdings in money market funds totaled $1.050 trillion (up from $1.042 trillion), or 21.2% of all assets, and Government Agency securities totaled $768.3 billion (down from $812.4 billion), or 15.6%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $4.312 trillion, or a stunning 87.3% of all holdings.
Commercial paper (CP) totals $240.5 billion (down from $265.8 billion), or 4.9% of all holdings, and Certificates of Deposit (CDs) total $156.9 billion (down from $177.6 billion), 3.2%. The Other category (primarily Time Deposits) totals $138.1 billion (down from $161.0 billion), or 2.8%, and VRDNs account for $93.0 billion (down from $98.8 billion last month), or 1.9% of money fund securities.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $143.4 billion, or 2.9%, in Financial Company Commercial Paper; $52.5 billion or 1.1%, in Asset Backed Commercial Paper; and, $44.6 billion, or 0.9%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($616.8B, or 12.5%), U.S. Govt Agency Repo ($384.9B, or 7.8%) and Other Repo ($48.0B, or 1.0%).
The N-MFP Holdings summary for the 208 Prime Money Market Funds shows: Treasury holdings of $276.5 billion (down from $329.0 billion), or 27.7%; CP holdings of $235.0 billion (down from $260.0 billion), or 23.5%; Repo holdings of $161.3 billion (up from $158.7 billion), or 16.1%; CD holdings of $156.8 billion (down from $177.6 billion), or 15.7%; Other (primarily Time Deposits) holdings of $92.9 billion (down from $109.9 billion), or 9.3%; Government Agency holdings of $65.4 billion (down from $102.9 billion), or 6.5% and VRDN holdings of $11.2 billion (down from $11.3 billion), or 1.1%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $143.4 billion (down from $157.8 billion), or 14.4%, in Financial Company Commercial Paper; $52.5 billion (down from $55.6 billion), or 5.3%, in Asset Backed Commercial Paper; and $39.1 billion (down from $46.6 billion), or 3.9%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($50.5 billion, or 5.1%), U.S. Govt Agency Repo ($62.8 billion, or 6.3%), and Other Repo ($48.0 billion, or 4.8%).
In other news, money market fund assets fell again in the latest week, their ninth decline in a row and 17th decline over the past 20 weeks. Assets have fallen by $193.1 billion since August 5 and $407.1 billion since May 20, when assets were at a record $4.789 trillion. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $21.64 billion to $4.38 trillion for the week ended Wednesday, October 7.... Among taxable money market funds, government funds decreased by $24.93 billion and prime funds increased by $2.65 billion. Tax-exempt money market funds increased by $640 million." ICI's stats show Institutional MMFs falling $24.9 billion and Retail MMFs increasing $3.3 billion. Total Government MMF assets, including Treasury funds, were $3.665 trillion (83.6% of all money funds), while Total Prime MMFs were $603.5 billion (13.8%). Tax Exempt MMFs totaled $114.1 billion (2.6%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data.)
ICI shows money fund assets up a still massive $750 billion, or 20.7%, year-to-date in 2020, with Inst MMFs up $592 billion (26.2%) and Retail MMFs up $158 billion (11.5%). Over the past 52 weeks, ICI's money fund asset series has increased by $913 billion, or 26.3%, with Retail MMFs rising by $205 billion (15.5%) and Inst MMFs rising by $708 billion (33.0%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets are down $21.5 billion in October (as of 10/7) to $4.756 trillion.)
They explain, "Assets of retail money market funds increased by $3.28 billion to $1.53 trillion. Among retail funds, government money market fund assets increased by $4.19 billion to $1.12 trillion, prime money market fund assets decreased by $868 million to $304.61 billion, and tax-exempt fund assets decreased by $46 million to $102.97 billion." Retail assets account for just over a third of total assets, or 34.9%, and Government Retail assets make up 73.3% of all Retail MMFs.
ICI adds, "Assets of institutional money market funds decreased by $24.92 billion to $2.85 trillion. Among institutional funds, government money market fund assets decreased by $29.12 billion to $2.54 trillion, prime money market fund assets increased by $3.52 billion to $298.89 billion, and tax-exempt fund assets increased by $687 million to $11.09 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 at the end of August, accounted for 65.1% of all MMF assets, with Government Institutional assets making up 89.1% of all Institutional MMF totals.
As a reminder, last week we saw a huge $124 billion drop in Prime MMF assets, which was attributable to the conversion of the massive Vanguard Prime Money Market Fund. The fund was renamed Vanguard Cash Reserves Federal Money Market and switched to a Government money fund. Prime MMF assets had been at $725 billion, according to ICI's series before the conversion. (Crane Data's MFI Daily switched the fund's category from Prime Retail to Government Retail on Tuesday Sept. 29. See our August 28 News, "Vanguard Prime Money Market Fund Going Government; ICI's July Trends.")
Crane Data's latest Money Fund Market Share rankings show assets were down for most of the largest U.S. money fund complexes in September. Money market fund assets decreased $121.0 billion, or -2.5%, last month to $4.794 trillion. Assets have fallen by $237.8 billion, or -4.6%, over the past 3 months, but they've increased by $919.7 billion, or 24.3%, over the past 12 months through Sept. 30, 2020. The biggest increases among the 25 largest managers last month were seen by BlackRock, First American, Wells Fargo and DWS, which grew assets by $14.1 billion, $8.6B, $5.1B and $3.9B, respectively. The largest declines in assets in September were seen by Goldman Sachs, SSGA, Federated Hermes, JP Morgan and Fidelity, which decreased by $53.3 billion, $21.4B, $15.2B, $14.8B and $14.8B, respectively. 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. We review the latest market share totals below, and we also look at money fund yields in September.
Over the past year through Sept. 30, 2020, Fidelity (up $122.6B, or 16.3%), BlackRock (up $100.7B, or 31.1%), Wells Fargo (up $95.9B, or 74.5%), JP Morgan (up $95.1B, or 28.8%), Goldman Sachs (up $91.6B, or 43.1%), Vanguard (up $85.5B, or 21.7%) and Morgan Stanley (up $75.5B, or 63.9%) were the largest gainers. These complexes were followed by Northern (up $58.2B, or 46.8%), First American (up $37.8B, or 51.5%) and Dreyfus/BNY Mellon (up $34.7B, or 20.8%). Wells Fargo, First American, BlackRock, DWS and HSBC had the largest money fund asset increases over the past 3 months, rising by $19.4B, $19.4B, $18.9B, $7.1 B and $5.5B, respectively. The largest decliners over 3 months included: Goldman Sachs (down $90.6B, or -21.9%), Fidelity (down $44.4B, or -4.6%), SSGA (down $41.6B, or -24.0%), JP Morgan (down $27.1B, or -5.5%) and Schwab (down $B, or -9.9%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $897.7 billion, or 18.7% of all assets. Fidelity was down $14.8 billion in September, down $44.4 billion over 3 mos., but up $122.6B over 12 months. Vanguard ranked second with $486.1 billion, or 10.1% market share (down $1.5B, down $12.2B and up $85.5B for the past 1-month, 3-mos. and 12-mos., respectively). JP Morgan was third with $436.7 billion, or 9.1% market share (down $14.8B, down $27.1B and up $95.1B). BlackRock ranked fourth with $432.4 billion, or 9.0% of assets (up $14.1B, up $18.9B and up $100.7B for the past 1-month, 3-mos. and 12-mos.), while Federated Hermes took fifth place with $362.1 billion, or 7.6% of assets (down $15.2B, down $17.7B and up $62.5B).
Goldman Sachs was in sixth place with $312.1 billion, or 6.5% of assets (down $53.3 billion, down $90.6B and up $91.6B), while Wells Fargo was in seventh place with $222.4 billion, or 4.6% (up $5.1B, up $19.4B and up $95.9B). Morgan Stanley ($200.6B, or 4.2%) was in eighth place (up $2.7B, down $8.1B and up $75.5B), followed by Dreyfus/BNY Mellon ($197.7B, or 4.1%, down $3.8B, down $7.4B and up $34.7B). Schwab was in 10th place ($187.7B, or 3.9%; down $6.6B, down $21.3B and down $4.6B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Northern ($181.6B, or 3.8%), American Funds ($156.0B, or 3.3%), SSGA ($120.2B, or 2.5%), First American ($110.6B, or 2.3%), UBS ($71.0B, or 1.5%), Invesco ($70.3B, or 1.5%), HSBC ($41.7B, or 0.9%), T Rowe Price ($40.9B, or 0.9%), DWS ($34.9B, or 0.7%) and Western ($32.4B, or 0.7%). Crane Data currently tracks 67 U.S. MMF managers, the same 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 appear as Fidelity, JP Morgan, BlackRock, Vanguard, Goldman Sachs, Federated Hermes, Morgan Stanley, Wells Fargo, Dreyfus/BNY Mellon and Northern. 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 ($908.3 billion), J.P. Morgan ($653.8B), BlackRock ($632.1B), Vanguard ($486.1B) and Goldman Sachs ($442.5B). Federated Hermes ($372.9B) was sixth, Morgan Stanley ($252.6B) was in seventh, followed by Wells Fargo ($223.4B), Dreyfus/BNY Mellon ($218.4B) and Northern ($207.6B) which round out the top 10. These totals include "offshore" U.S. Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into U.S. dollar totals.
The September issue of our Money Fund Intelligence and MFI XLS, with data as of 9/30/20, shows that yields were largely unchanged in September for almost all of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 741), was flat at 0.03% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield decreased by 1 bps to 0.03%. The MFA's Gross 7-Day Yield was unchanged at 0.21%, while the Gross 30-Day Yield fell 1 bps 0.21%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.04% (down 1 bps) and an average 30-Day Yield that decreased by 1 bps to 0.04%. The Crane 100 shows a Gross 7-Day Yield of 0.21% (down 1 bps), and a Gross 30-Day Yield of 0.22% (down 1 bps). Our Prime Institutional MF Index (7-day) yielded 0.07 (down by 1 bps) as of September 30, while the Crane Govt Inst Index was 0.02% (unch) and the Treasury Inst Index was 0.02% (unch). Thus, the spread between Prime funds and Treasury funds is 5 basis points, while the spread between Prime funds and Govt funds is 5 basis point. The Crane Prime Retail Index yielded 0.03% (down 1 bps), while the Govt Retail Index was 0.02% (unchanged) and the Treasury Retail Index was 0.01% (unchanged from the month prior). The Crane Tax Exempt MF Index yield dropped in September to 0.02% (unch).
Gross 7-Day Yields for these indexes in September were: Prime Inst 0.27% (down 1 bps), Govt Inst 0.18% (unchanged) Treasury Inst 0.18% (unchanged), Prime Retail 0.28% (down 1 bps), Govt Retail 0.17% (unch.) and Treasury Retail 0.19% (unch. from the previous month). The Crane Tax Exempt Index was unchanged at 0.19%. The Crane 100 MF Index returned on average 0.00% over 1-month, 0.01% over 3-months, 0.36% YTD, 0.78% over the past 1-year, 1.45% over 3-years (annualized), 1.02% over 5-years, and 0.52% over 10-years.
The total number of funds, including taxable and tax-exempt, was up three at 924. There are currently 741 taxable funds, up three from the previous month, and 183 tax-exempt money funds (unchanged from last month). (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 Wednesday morning, features the articles: "MMFs Turn 50 But Zero Yields, Reform Talks Dim Celebration," which discusses the birth and present challenges of money market funds; "Bond Funds: Junker, Roever, Walczak on Ultra-Shorts," which quotes from our recent Bond Fund Webinar; and, "Tax Exempt Money Fund Liquidations Hit State Funds," which discusses the consolidation gripping Municipal MMFs. We've also updated our Money Fund Wisdom database with September 30 statistics, and sent out our MFI XLS spreadsheet Wednesday 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 Friday, October 9, and our October Bond Fund Intelligence is scheduled to go out Thursday, October 15.
MFI's "MMFs Turn 50" article says, "Money market mutual funds should be celebrating their 50th birthday this month, but the party is somewhat muted given the myriad challenges they now face. Reserve Primary Fund, which famously 'broke the buck' in 2008, became the first money fund when it launched in October 1970. But Reserve is in the news again as regulators and others discuss yet more potential regulatory changes."
It continues, "Of course, turmoil, regulatory change and dramatic moves in interest rates are nothing new to money funds. While their first decade and a half was marked by oil price shocks, inflation and rates approaching 20%, their most recent decade-plus has been one of zero yields and dramatic market events. Both periods saw a series of regulatory changes, marked by Rule 2a-7's official birth in 1983, and the Money Fund Reforms of 2010 and 2014 (put into effect in 2016). In the interim, MMFs experienced huge growth along with other types of mutual funds in the '80's, '90's and '00's."
Our latest "Profile" reads, "Late last month, Crane Data hosted its latest online event, Bond Fund Webinar: Ultra-Shorts and Alt-Cash. The hour-long session, led by Peter Crane, featured a panel including J.P. Morgan Asset Management's Cecilia Junker, UBS Asset Management's David Walczak and J.P. Morgan Securities' Alex Roever. The discussion involved ultra-short bond fund and separately managed account investment strategies, the latest on flows and assets, and the search for yield in the current zero yield environment. (Click here to hear the Bond Fund Webinar replay, and register here for our next virtual event, Money Fund Symposium Online, which will be held on Tuesday, October 27 from 1-4pm ET.)"
Crane comments, "You saw $1.2 trillion move into money funds but $350 billion has moved out over the last few months. Some of that money is starting to seek alternatives, to seek higher yields. Bank deposits have [also] had a huge cash buildup as well, [so] there's a tremendous amount of cash.... A big chunk of that is, as we’ve seen in the past, yield sensitive and should start moving into ultra shorts and other options as it scrambles for yield."
He explains, "Bond funds have had just tremendous inflows.... Inflows into ultra-shorts have been strong, but the big money in bond funds is out in the Core, the Intermediate, the High-Yield. Looking at the segments ... Conservative Ultra-Shorts and Ultra-Shorts are about $100 billion each. Combined ... you're talking about $200 billion dollars. When you look at the Short-Term space, it's double that, $400, maybe $500 billion depending on who's counting. And then Intermediate is double that again. The Conservative and Ultra-Short spaces have been growing rapidly, they're up 20% ... and ETFs are up 30%."
The "Tax Exempt MFs" article tells readers, "Consolidation continues to grip the money fund space, particularly Tax Exempt MMFs. Today's Wall Street Journal covers the topic in its piece, 'Coronavirus Pandemic Hastens the Demise of at-Risk Municipal Money Funds.' They say, 'In September, Vanguard Group told investors it would shutter New Jersey and Pennsylvania-focused funds. Bank of New York Mellon's Dreyfus liquidated one state-specific fund last month and in August, Federated Hermes said it would wind four down in February.'"
The piece continues, "The Prospectus Supplement for the $1.8 billion Vanguard Pennsylvania Municipal Money Market Fund and the $1.2 billion Vanguard New Jersey Municipal Money Market Fund tells us, 'On Sept. 24, 2020, the board ... of the Vanguard Pennsylvania Municipal Money Market Fund and the Vanguard New Jersey Municipal Money Market Fund approved a proposal to liquidate and dissolve the Funds on or about November 24, 2020.... In anticipation of the liquidation ..., the Funds will be closed to new investors at the start of business on Sept. 25, 2020.'"
The latest MFI also includes the News brief, "BlackRock to Launch 'Social' Mischler Shares." The release, "Mischler Financial and BlackRock to Partner to Provide Dedicated Cash Management Share Class," announces the 'partnership with Mischler Financial Group, a leading disabled veteran-owned broker dealer' for shares of FedFund and LEAF. It says, "Increasingly, we believe clients are looking to maximize their social impact and partner with minority, women and disabled-veteran broker dealers."
A second News piece titled, "Money Fund Assets Slide Again, Huge Shift from Prime to Govt Occurs," says, "Assets fell again in the latest month, declining $121.2 billion to $4.797 trillion. Prime assets plunged as Vanguard's huge Prime MMF converted to a Govt Retail fund (and renamed Cash Reserves Federal MM). (See our Aug. 28 News, "Vanguard Prime MMF Going Govt.")
Our October MFI XLS, with September 30 data, shows total assets dropped by $121.2 billion in September to $4.797 trillion, after decreasing $42.3 billion in August, $44.2 billion in July, and $113.0 billion in June. Assets increased $31.6 billion in May, $417.9 billion in April and $688.1 billion in March. Our broad Crane Money Fund Average 7-Day Yield remained at 0.03% during the month, our Crane 100 Money Fund Index (the 100 largest taxable funds) also remained unchanged at 0.04%.
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA was down three bps to 0.21% while the Crane 100 fell two bps to 0.21%. Charged Expenses averaged 0.18% (down from 0.21% last month) and 0.17% (down from 0.19% the previous month), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 40 (up one day) and 44 days (up two days) respectively. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The SEC recently released its quarterly "Private Funds Statistics" report, which summarizes Form PF reporting and includes some data on "Liquidity Funds." The publication shows overall Liquidity fund assets were down in the latest reported quarter (Q4'19) to $578 billion (down from $588 billion in Q3'19). The SEC's "Introduction" tells us, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from First Calendar Quarter 2018 through Fourth Calendar Quarter 2019 as reported by Form PF filers." Note: Crane Data believes many of these liquidity funds are securities lending reinvestment pools and other short-term investment funds.
The tables in the SEC's "Private Funds Statistics: Fourth Calendar Quarter 2019," the most recent data available, show 108 Liquidity Funds (including "Section 3 Liquidity Funds," which are Liquidity Funds from advisers with over $1 billion total in cash), down 6 from the last quarter and down 11 from a year ago. (There are 65 Liquidity Funds and 43 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 36 Liquidity Fund advisers and 22 Section 3 Liquidity Fund advisers, or 58 advisers in total, down two from last quarter (down five from a year ago).
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $578 billion, down $10 billion from Q3'19 but up $5 billion from a year ago (Q4'18). Of this total, $292 billion is in normal Liquidity Funds while $286 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $583 billion, down $10 billion from Q3'19 and down $6 billion from a year ago (Q4'18). Of this total, $294 billion is in normal Liquidity Funds while $289 billion is in Section 3 (large manager) Liquidity Funds.
A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $62 billion is held by Private Funds (21.6%), $63 billion is held by Unknown Non-U.S. Investors (21.9%), $74 billion is held by Other (25.8%), $14 billion is held by SEC-Registered Investment Companies (4.8%), $8 billion is held by Insurance Companies (2.8%) and $4 billion is held by Non-U.S. Individuals (1.3%).
The tables also show that 73.6% of Section 3 Liquidity Funds have a liquidation period of one day, $273 billion of these funds may suspend redemptions, and $241 billion of these funds may have gates (out of a total of $514 billion). WAMs average a short 26 days (40 days when weighted by assets), WALs are 59 days (79 days when asset-weighted), and 7-Day Gross Yields average 1.5% (1.7% asset-weighted). Daily Liquid Assets average about 50% (40% asset-weighted) while Weekly Liquid Assets average about 61% (52% asset-weighted). Overall, these portfolios appear shorter with a much heavier Treasury exposure than money market funds in general; almost half of them (48.8%) are fully compliant with Rule 2a-7.
In other news, Federated Hermes' Deborah Cunningham urges a broader view of the money fund business in her latest piece, "Viewing the forest." She writes, "It's time for some perspective about the money markets. The historic upheaval in our health and the economy has driven the financial sphere to an almost absurd speed. On occasion the deliberate pace of liquidity products has moved in double time. This new course of business has most of the industry stressing out whenever a new issue arises. Of course, diligence is paramount. But looking up to survey the landscape also is warranted."
Cunningham continues, "Lately it seems many in the financial industry have forgotten we are in a global pandemic, instead viewing troubling events as the acceleration of trends perceived before the coronavirus arrived. A few moves within the money markets, such as some fund closures or shifts, have caused concern about the entire space. But it is natural that the seismic shock would lead some firms to make decisions they hadn't considered pre-Covid. The real story is how money funds showed their mettle in the dark days of March and that they have served investors well ever since."
She tells readers, "For all the worry about the prime space, industry assets are only down slightly over 6% this year. A sizable portion of the outflows stem from typical activities, such as investors moving excess cash they put on the sidelines for riskier bets or businesses withdrawing money for operations. Without prime funds, corporations and banks would have to find other funding sources, likely at a higher cost, and investors enjoy the attractive yields relative to deposit products. Prime will remain a player."
Cunningham adds, "Government product yields should rise when Congress passes a stimulus package (which it will eventually) and when the pandemic's conclusion reverses the massive flight to safety. And the industry reorganization in the municipal market is related to the changes in the tax code, which is always subject to political winds. Yields here are elevated, and supply will not be an issue -- not when many states likely will increase issuance even if they receive more federal aid. The point is, short-term conclusions and long-term speculation are suspect at the moment.... Clearly I am an advocate for the money market industry, and Federated Hermes is a leader in liquidity management. But everyone brings their own bias, and taking a step back to see the bigger picture is something all should do."
Finally, money market fund yields continue to bottom out just above zero -- our flagship Crane 100 inched down one bps in the last week to 0.03%. The Crane 100 Money Fund Index fell below the 1.0% level in mid-March and below the 0.5% level in late March. It is down from 1.46% at the start of the year and down from 2.23% at the beginning of 2019. Over two-thirds of all money funds and over a third of MMF assets have since landed on the zero yield floor, though many continue to show some yield.
According to our Money Fund Intelligence Daily, as of Friday, 10/2, 606 funds (out of 849 total) yield 0.00% or 0.01% with assets of $2.318 trillion, or 48.9% of the total. There are 193 funds yielding between 0.02% and 0.10%, totaling $1.835 trillion, or 38.7% of assets; 47 funds yielded between 0.11% and 0.25% with $502.5 billion, or 10.6% of assets; only 3 funds yielded between 0.26% and 0.50% with $83.1 billion in assets. No funds yield over funds yield over 0.30%.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 670), shows a 7-day yield of 0.03%, unchanged in the week through Friday, 10/2. The Crane Money Fund Average is down 44 bps from 0.47% at the beginning of April. Prime Inst MFs were flat at 0.07% in the latest week and Government Inst MFs were flat at 0.02%. Treasury Inst MFs were unchanged at 0.02%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.01% (unchanged in the last week), and Prime Retail MFs yield 0.03% (unchanged), Tax-exempt MF 7-day yields were also unchanged at 0.02%. (Let us know if you'd like to see our latest MFI Daily.)
Our Crane Brokerage Sweep Index, which hit the zero floor six months ago, remains at 0.01%. The latest Brokerage Sweep Intelligence, with data as of October 2, showed its first change in the last six months. RW Baird raised rates by a basis point across the board; their 100K tier now offers a rate of 0.02%. All other major brokerages offer rates of 0.01% for balances of $100K. No brokerage sweep rates or money fund yields have gone negative to date, but this could become a distinct possibility in coming weeks or months. Crane's Brokerage Sweep Index has been flat for the last 24 weeks at 0.01% (for balances of $100K). Ameriprise, E*Trade, Fidelity, Merrill Lynch, Morgan Stanley, Raymond James, Schwab, TD Ameritrade, UBS and Wells Fargo all currently have rates of 0.01% for balances at the $100K tier level (and almost every other tier too).
A week and a half ago, Crane Data hosted its latest online event, Bond Fund Webinar: Ultra-Shorts and Alt-Cash. The hour-long session, led by Peter Crane, featured a panel including J.P. Morgan Asset Management's Cecilia Junker, UBS Asset Management's David Walczak and J.P. Morgan Securities' Alex Roever. The discussion involved ultra-short bond fund and separately managed account investment strategies, the latest on flows and asset movements, and the search for yield in the current zero yield environment. (Click here to hear the Bond Fund Webinar replay, and register here for our next virtual event, Crane's Money Fund Symposium Online, which will be held on Tuesday, October 27 from 1-4pm ET.)
Crane comments, "You saw $1.2 trillion move into money funds but $350 billion has moved out over the last few months. Some of that money is starting to seek alternatives, to seek higher yields. Bank deposits have [also] had a huge cash buildup as well, [so] there's a tremendous amount of cash.... A big chunk of that is, as we've seen in the past, yield sensitive and should start moving into ultra shorts and other options as it scrambles for yield."
He explains, "Bond funds have had just tremendous inflows.... Inflows into ultra-shorts have been strong, but the big money in bond funds is out in the Core, in the Intermediate, in the High-Yield. Looking at the segments ... Conservative Ultra-Shorts and Ultra-Shorts are about $100 billion each. Looking at them combined ... you're talking about $200 billion dollars. When you look at the Short-Term space, it's double that, $400, maybe $500 billion depending on who's counting. And then Intermediate is double that again. The Conservative and Ultra-Short spaces have been growing rapidly, they're up 20% ... and ETFs are up 30%."
When asked about CP, Roever says, "There's a pretty wide blend of investors who have not only stayed in the commercial paper/CD markets now, but also, have for some time.... Money funds have been coming down.... One of the things I would say about both the bank issuers and ... nonbank issuers, is I think their need to access the CP market is muted somewhat.... Part of that was deposits increasing because lines were being drawn. But deposits have remained relatively high at the larger banks. So, the banks feel pretty well funded right now.... If you go further out the curve into the corporate space ... there's record corporate issuance right now [but] not in the front end of the curve."
Junker tells us, "Our J.P. Morgan ultra-short product, called Managed Reserves, just hit a new milestone of $100 billion in assets. But ... the bulk of that, $65 billion, is in separately managed accounts. So that's got a wide range and a diverse client base. We also actually have commingled vehicles as well. We have $35 billion of that actually in commingled vehicles both onshore and offshore. That includes our $16 billion Managed Income Fund, which is U.S. mutual fund, and our $14 billion actively managed ETF which is JPST.... We offer these products globally, and we offer them in different currencies. But the bulk of those assets are in US dollars."
Walczak states, "At UBS, we view ultra-short and even short duration from some portfolios, as part of our overall liquidity management program. So that would also encompass our money market funds as well. [W]e've definitely seen growth over the past couple of years.... We launched an ultra-short mutual fund in May of 2018 and just crossed the $3 billion mark. Notably, since the drawdown in March, we've seen assets up about 50%. So, I think that's a pretty good stat.... I think it reflects the fact that people are definitely comfortable with the asset class, but also ... looking to gain some additional yield above and beyond money market funds."
He adds, "We also are pretty heavily engaged in separately managed accounts. We recently rolled out an offering within our wealth management franchise that's gaining some traction as well. We have had a presence for the past several years, but we launched a new product at a different fee tier. I think overall we're looking to ensure that we have the products that our clients and investors want in this low interest rate environment. In terms of what an ultra-short portfolio looks like ... we approach it from a very conservative stance. We want our investors to feel comfortable that we're looking to minimize principal volatility as much as possible, while looking to earn additional return over money market funds."
Junker also tells the webinar, "One of the things [driving] the growth in our funds, we actually fill that gap ... where money funds are not investing.... Traditionally, it was 13 months. Anything beyond 13 months, we could let that roll down.... Obviously, after Money Fund Reform, they shortened their WAMs.... We just see it as an opportunity. We have the flexibility, and a lot of our ultra-shorts have the flexibility [in their] guidelines. Not only can we do Tier-1 paper [and] Tier-2 paper, we can go out the curve as far as three, and in the case of our ETF out to five years. So, we really have a lot of flexibility and that gives us the ability to take advantage of any dislocations that we see."
She adds, "So, if you do see a step back from money funds, you would actually see someone like ourselves be able to step in. And we're able to take advantage of steep curves if you do see that.... Particularly as you came out of this last crisis in March, money funds were very, very short ... not really understanding where their flows would be. As far as our fund stabilizing, we realized, hey, listen, anything that's just right out of their reach would be a good opportunity. So that was our low hanging fruit when we first started adding risk, you know, pretty aggressively come April when our funds stabilized."
When asked what he's buying, Walczak responds, "We have seen not only yields collapse, but also spreads as well. It definitely is a challenging time to be investing just given our available alternatives. With that being said, we do see some pockets of opportunity, one of which is in secured credit. We have increased the amount of asset-backed exposure in our ultra-short portfolios.... We've seen a lot of this paper trade pretty comparable to even corporate credits.... It's a great way ... to add yield into the portfolio, but also, to boost the overall credit profile.... A lot of the asset-backed names that we buy are triple-A rated. There is some double-A exposure in there as well."
He also comments, "On the Tier-2 side, we definitely have seen more limited supply in recent weeks and months.... Corporates are looking to term out their debt [and have] less need to necessarily fund themselves very short. But we are still engaged in the space ... and view it as a good way to pick up additional yield, but not go too far out on the yield curve [or] take a lot of duration risk. So, it continues to be an attractive portion of the commercial paper market for us."
Roever tells us, "What happened in March hit every market out there. I mean, the Treasury market was having liquidity issues, pretty significant ones, where essentially the dealers said, 'We're having trouble intermediating the flow of investors, including from foreign central banks who were liquidating Treasury portfolios.' And, other folks who were trying to sell credit exposures, and other folks who were trying to sell mortgage exposures. There's only so much balance sheet to go around. So essentially, we came to a point before the Fed intervened where balance sheets were very clogged and there just really wasn't much room to go."
Finally, Junker says, "Negative rates are not good for anybody. They're not good for our clients, not good for our products. But I would say negative rates in the U.S. are not our base case. We think the Fed has a lot of levers to pull before they would do that. But we're always thinking ahead. And as you mentioned, if you think back to the last zero interest rate policy period, we did not have to waive fees on our credit funds and on our ultra short funds. We don't expect that. I think we bottomed out at about 35 or mid-to-low 30s [bps] as far as yield in our ultra short. We don't really expect that we're going to have to waive fees there."
She adds, "Obviously, with Government funds that's another story. If you look right now, Governments, I think they're like two to three basis points net yield right now. So that's going to be something that you're going to think about, and it's probably going to happen sooner than later. There will be waivers there.... The other thing I would just add is, Europe has had negative yields for quite some time, right? And we have a global business. So, we do have a playbook, if we go there. It just really is not our base case, and it's really not our expectation that we will need to waive fees in our ultra short product."
Money market fund assets dipped again in the latest week, but the small movement masked a massive shift from Prime to Government assets as Vanguard's huge Prime fund was reclassified. It was money funds' eighth decline in a row and 16th decline over the past 19 weeks. Assets are at their lowest level since April 1. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $10.34 billion to $4.40 trillion for the week ended Wednesday, September 30, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $115.30 billion and prime funds decreased by $124.26 billion. Tax-exempt money market funds decreased by $1.38 billion." ICI's stats show Institutional MMFs falling $11.5 billion and Retail MMFs increasing $1.2 billion. Total Government MMF assets, including Treasury funds, were $3.690 trillion (83.8% of all money funds), while Total Prime MMFs were $600.9 billion (13.6%). Tax Exempt MMFs totaled $113.4 billion (2.6%).
ICI shows money fund assets up a still massive $772 billion, or 21.3%, year-to-date in 2020, with Inst MMFs up $617 billion (27.3%) and Retail MMFs up $155 billion (11.3%). Over the past 52 weeks, ICI's money fund asset series has increased by $941 billion, or 27.8%, with Retail MMFs rising by $207 billion (16.1%) and Inst MMFs rising by $734 billion (35.1%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets are down $132.0 billion in September (as of 9/30) to $4.778 trillion.)
They explain, "Assets of retail money market funds increased by $1.16 billion to $1.52 trillion. Among retail funds, government money market fund assets increased by $124.39 billion to $1.12 trillion, prime money market fund assets decreased by $122.32 billion to $305.49 billion, and tax-exempt fund assets decreased by $915 million to $103.02 billion." Retail assets account for just over a third of total assets, or 34.6%, and Government Retail assets make up 73.2% of all Retail MMFs.
ICI adds, "Assets of institutional money market funds decreased by $11.50 billion to $2.88 trillion. Among institutional funds, government money market fund assets decreased by $9.10 billion to $2.57 trillion, prime money market fund assets decreased by $1.94 billion to $295.37 billion, and tax-exempt fund assets decreased by $467 million to $10.41 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 last month, accounted for 65.3% of all MMF assets, with Government Institutional assets making up 89.4% of all Institutional MMF totals.
We assume the $124 billion drop in Prime MMF assets this week is attributable to the conversion of the massive Vanguard Prime Money Market Fund. It was renamed Vanguard Cash Reserves Federal Money Market and switched to a Government money fund earlier this week. (Crane Data's MFI Daily switched the fund's category from Prime Retail to Government Retail on Tuesday Sept. 29. See our August 28 News, "Vanguard Prime Money Market Fund Going Government; ICI's July Trends.")
In other news, the first issue of the new blog "Confluence Connect" features a section entitled, "ESMA Money Market Fund Regulation: The Strategic Opportunities that Lie Beneath." It tells us, "The deadlines are fast approaching for the European Securities and Markets Authority's (ESMA) obligatory stress testing by Money Market Funds (MMFs) across a number of criteria. ESMA's stress testing requirements represent a step change in reporting protocols and will present both challenges and opportunities for managers of MMFs. In this article, we will take a closer look at the current state of play and outline some frameworks and structures for ensuring that compliance with the stress testing requirements is not unduly stressful for those responsible for their implementation."
Fund data reporting firm Confluence continues, "The Article 37 MMF reporting template can be broken down into 6 main fields, each requiring disclosures related to a particular topic. Some of the key information required is as follows: MMF type and characteristics: Information such as the name, domicile, inception date, base currency, and share classes of the MMF. Portfolio indicators: Details about the fund's portfolio liquidity profile, cumulative returns and performance of the most representative share class. Stress tests: Five types of stress tests are required quarterly. Results of stress tests and the proposed action plan (where applicable) must be provided."
The article explains, "The shocks related to Credit Spreads aim to stress the market value of money market instruments in the portfolio under deteriorating credit environment. The granularity of the stress tests considers the nature of the issuer, which includes the sector, geographical locations and credit quality. For Government Bonds, the changes to the government spreads take into account the term structure of the credit exposure. As with interest rates, this is defined up to 2. In addition, the shocks are broken down by country. For Corporate Bonds, the shocks to corporate issuers have been defined on the basis of issuer sector and rating. The shocks are parallel across the term structure."
They add, "The exposure of money market funds is expected to be stressed to reflect the full cross currency exposure. Two scenarios have been defined to address both the appreciation and depreciation of the EUR against the USD. In each case, 30+ currencies participate in the stress testing, covering the most relevant markets for European MMFs. All other currencies are assumed to be held flat against the USD."
Confluence also discusses liquidity stress testing, writing, "With respect to Article 28(1)(a) of the MMF Regulation, a stress test has been introduced to estimate the impact on the MMF in the event of reduced liquidity. For each relevant security, the discount factors should be applied to the bid prices used for the valuation of the fund at the time of the reporting to derive an adjusted bid price. Taking the nature of the investments into account, the methodology is based on the definition of a haircut to the instrument valuation. Such haircuts are defined by ESMA as part of the stress testing definitions and provide a consistent and comparable framework for the assessment."
They also tell us, "The weekly liquidity stress test aims to assess the amount of assets in the Fund that can be liquidated within the week, taking into account predefined haircuts. In addition, reporting for atypical money market instrument holdings (i.e. derivatives, repos, asset-backed securitization) will introduce a further layer of complexity than typical money market instruments will involve and as such will warrant particularly careful attention."
Confluence also covered the topic in a previous piece, "Key questions to consider ahead of ESMA Article 37 MMF Reporting," which says, "Article 37 MMF Reporting includes new requirements on transparency, valuations and investment policy, and obliges each MMF to have in place sound risk management, identifying stress testing, liquidation stresses and reverse liquidity analysis as core components of such oversight.... By requiring holdings-level disclosure with security classification, liquidity, and maturity information, ESMA is maximizing the information to be made available to national competent authorities to detect, monitor, and respond to risks in the MMF market. Different MMF types are only supposed to invest in certain asset types, and this reporting helps ensure compliance with ESMA's mandates."
We've been covering the recent flurry of discussions over potential additional money fund regulations all week. (See yesterday's "ICI's Stevens Says Reviewing Crisis and Money Markets; August Trends" and Monday's "SEC's Blass on Push for More MMF Reforms; Vanguard Liquidating PA, NJ.") But we didn't have space yesterday to discuss everything, so today we quote from several sources mentioned yesterday -- The Wall Street Journal's "Money-Market Fund Rules Likely Fall Short, Policy Makers Say," Reuters' "Money market turmoil in March shows past reforms may be insufficient," and U.S. Department of the Treasury's Deputy Secretary Justin Muzinich remarks at the 2020 U.S. Treasury Market Conference.
Muzinich explains, "Finally, going forward policymakers should also reflect on the outflows from certain types of money market mutual funds. There are three categories of money market mutual funds: government, prime, and tax exempt. All offer daily liquidity and investors view them as cash-like instruments, but prime and tax-exempt funds often invest in assets that do not have cash-like liquidity. In normal times, money funds can easily manage the flow of redemptions by keeping some assets in liquid investments. However, large-scale redemptions, perhaps sparked by concerns in other markets like commercial paper, can cause investors to perceive a 'first-mover advantage' and race to redeem before a fund's liquidity resources are overwhelmed. This can quickly spread instability from troubled funds to the rest of the money fund industry and the broader financial system."
He says, "To be sure, developments since the 2008 financial crisis reflect important progress. When the Reserve Primary Fund 'broke the buck' in 2008, a stampede of prime fund investors sought to withdraw funds quickly while their funds still priced at $1, starting a run that only abated when Treasury established a money fund guarantee program. The SEC's 2010 and 2014 reforms made critical progress on several fronts, including floating NAVs of institutional prime and tax-exempt funds (out to four decimal place) and requiring all money market mutual funds to hold at least 30% of their assets in instruments that are liquid within a week. When a fund drops below the 30% threshold, its board may decide whether to gate or impose fees on redemptions."
Muzinich continues, "However, the events of this past March show that those reforms may not be enough. For example, one might ask whether we have exchanged one psychological bright line for another. While the 2008 episode centered on 'breaking the buck', in 2020 market participants worried that a fund dipping below the 30% weekly liquid assets threshold could similarly accelerate fund redemptions."
He concludes, "Whether the bright line is stable NAV or a 30% liquidity test, we need to remember that bright lines have the potential to cause investors to redeem before the line is crossed, creating run dynamics. While policymakers were able to avert a run, it is worth asking whether there are ways to enhance the liquidity resources available to funds without using a bright line test or whether there are ways to draw a line without creating a first-mover advantage."
Yesterday's Journal piece explains, "A pair of top U.S. policy makers said Tuesday that rules to make money-market mutual funds less susceptible to runs likely need to be improved after a bout of turmoil in March that prompted the Federal Reserve to intervene. 'There's no doubt that we need to re-examine the reforms of the last time,' Securities and Exchange Commission Chairman Jay Clayton said on a virtual panel Tuesday. He was referring to a 2014 attempt by the SEC to address the causes of an exodus from money markets that contributed to the last financial crisis."
It continues, "In practice, money-market mutual funds are important enough to the plumbing of the U.S. financial system that the federal government has stepped in to backstop them twice in the past 12 years. That, some say, risks creating an implicit guarantee for a class of investment products that taxpayers shouldn't have to bail out. All told, money-market funds, including tax-exempt funds and those that invest in government securities, hold about $4.4 trillion, according to the Investment Company Institute."
The WSJ adds, "In the midst of pressure from the mutual-fund industry, the SEC declined to adopt a proposal that would have required money-market funds to hold a capital buffer to absorb day-to-day fluctuations in the value of their assets. Instead, it allowed them to charge a small redemption fee if the share of their assets that are either cash equivalents or mature within five business days falls below 30% of their overall portfolio. It also allowed them to suspend redemptions by investors while below that threshold. The result was that, in March, as in 2008, investors who were quick to redeem their shares at the first sign of market distress could expect to avoid losses, while those who waited could suffer."
Finally, the Reuters' article tells us, "Turmoil in money market mutual funds sparked by the coronavirus pandemic shows that decade-old reforms to the $4.4 trillion industry may not be enough to avert major outflows during a future crisis, Deputy U.S. Treasury Secretary Justin Muzinich said on Tuesday."
It quotes, "Peter Crane, founder of money fund research company Crane Data, said the remarks add to expectations new rules will be created for money funds, sometimes seen as rivals by more closely-regulated banks. 'Certainly from the looks of it new money fund regulations might be coming,' Crane said." (See also "NY Fed Blog Defends Liquidity Programs; Fitch: LGIPs Jump; Weekly PH," "JPMAM's Gatch on MMF Reforms," and our August Money Fund Intelligence article, "Bank Regulators Getting Jump on Future Reg Changes.")
In other news, a press release entitled, "J.P. Morgan Asset Management Partners with SAP to Enhance Morgan Money Liquidity Platform," tells us, "J.P. Morgan Asset Management ... announced a new partnership with SAP Software Solution Partner Program. Leveraging SAP's Cloud Platform, the firm's liquidity management platform, Morgan Money, is now available to SAP customers through SAP Treasury Management, a solution within the SAP Intelligent Enterprise offering customers real-time cash visibility and allowing them to improve liquidity and lower risk."
JPM's Paul Przybylski comments, "This is a significant partnership that harnesses the scale and expertise of two industry leaders in J.P. Morgan Asset Management and SAP to expand the reach and performance of our Morgan Money liquidity management platform.... The agreement will enable SAP's substantial Treasury Management customer base to directly access Morgan Money, delivering a real-time dashboard to invest, a single access point for operations, and enhanced risk management controls."
Falk Rieker of SAP America says, "Corporate treasurers are looking for a streamlined customer experience. J.P. Morgan Asset Management's SAP partnership is a great example how we enable our customers to consume innovative financial solutions and services." Finally, the release adds, "J.P Morgan Asset Management's institutional liquidity management platform, Morgan Money, is a multi-currency, open architecture trading and risk management system. The platform, launched in 2019, is designed to deliver a seamless customer experience, centered on operational efficiency, end-to-end system integration, and effective controls to allow customers to invest when, where and how they want — securely."
