Note that the August issue of Money Fund Intelligence and July 31 performance data was published Friday morning.
Moody's Investors Service recently published a report entitled "Are Insurers and Investment Managers on the Road to Recovery? The Special Comment from Moody's Insurance contains a section on "Managed Investments: Money Market Funds", which discusses the recovery and outlook for the money fund sector.
Moody's writes, "The credit picture for Constant Net Asset Value money funds (or 'CNAV money funds') has stabilized considerably from the dark days of September 2008 after the Reserve Primary Fund failure. We currently view the stability in CNAV money market-fund credit quality to be well-grounded. However, recent improvements in the CNAV fund credit picture could be reversed by further deterioration in the credit ratings of large U.S. and European banks and/or a significant increase in net investor outflows."
They continue, "We see very few near-term signs in the market that could trigger a fall-back to September 2008 lows. However, for improvements in the liquidity and credit picture of CNAV money market funds to become well-established, CNAV funds will have to show that they can operate smoothly in a world without governmental liquidity and insurance programs. Given this, we believe CNAV funds will slowly be weaned off government programs to effect a very smooth transition."
But the comment adds, "In a low-interest-rate environment, however, some managers are extending the weighted average maturity of their portfolios to generate yields in excess of their management fees. This tactic exposes their funds to heightened liquidity and market risk, but it should not affect their overall credit risk substantially. These managers have typically handled such a situation by investing in longer-dated time deposits issued by systemically important banks or government securities."
"The decline in usage of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) and the Commercial Paper Funding Facility (CPFF), which are two of the main U.S. governmental liquidity programs, is a positive sign of some improvement in money market conditions. However, the Federal Reserve's decision to extend these programs through February 1, 2010 signals that conditions remained stressed."
Finally, Moody's says, "We do not envision that AUM run-off would be of a magnitude that would jeopardize recent improvements in CNAV money-fund credit quality. This view is based on our belief that CNAV funds have positioned their portfolios well over the past six months for elevated redemption scenarios.... Additionally, in the U.S., we also do not expect that the expiration of the U.S. Treasury's Temporary Guarantee Program for Money Market Mutual Funds (it is likely to expire on September 19th) will trigger a rush of redemptions in U.S. CNAV money funds."
