Money market funds are preparing for a surge of cash from extendible notes and some vestiges of SIV-related debt set to mature over the next month. Since the credit crisis started last August with the extensions of Broadhollow, Luminent and Ottimo Funding, portfolios have become steadily more conservative. But a nice-sized portion of some fund's assets have been waiting out these extensions and the longer-maturities of MTNs (medium-term notes) and other 1-year securities. So the new looming problem, one which money funds are likely happy to have considering the past year's turmoil, is supply.
In this week's Financial Week, Megan Johnston writes an article entitled, "Maturing paper could hit money fund yields." She says, "The one-year anniversary of the credit crunch has some ominous overtones for money market mutual funds, with extendible notes and paper issued by some corporations and structured investment vehicles maturing at the same time that cash continues to pour into money-market funds.
J.P. Morgan Securities' Alex Roever and Cie-Jai Brown have been pointing out for weeks, "[M]oney market funds will see substantial cash inflows as they redeem extendible notes put back to issuers at the beginning of the credit crisis." JPM estimates that tens of billions in "x-notes" will mature over the next seven weeks. They add, "We think some of this new cash will be reinvested in corporate floaters." Last week, Roever added, "While we maintain that much of the forthcoming refinancing of maturing x-notes and other debt will take place in the money markets, we caution investors that all of these issuers will not be treated as equals."
FW also cites Moody's latest "Portfolio Management Activities of Large Prime Institutional Money Market Funds" study, saying, "Already, money funds have been whittling risky investments out of their portfolios. Asset-backed securities, including those backed by collateralized debt obligations and mortgages, dropped to 1.1% of assets at the 15 largest prime institutional money-market funds as of the end of last year, from 2.9% a year earlier." It adds, "Extendible asset-backed commercial paper and extendible notes were 1.7% and 3.1%, respectively, of portfolio assets as of December; that's down from 6.3% and 10.2%, respectively, a year earlier."
