Wells Fargo Advantage Funds' monthly "Portfolio Manager Commentary" writes, "Even as supply and demand conditions in the taxable money markets have stabilized, supply concerns are surfacing elsewhere. In the municipal money markets, there is the potential for a decline in supply stemming from regulations that are being imposed on banks, while in the government markets there is some concern that supply may be curtailed by the Federal Reserve's second round of quantitative easing. The President's Working Group on Financial Markets further stirred the already murky regulatory cauldron with the release of its report on 'Money Market Fund Reform Options.' And in the face of a persistently low interest-rate environment, some money market funds are seeking higher yields by extending the terms of their investments. While this may temporarily boost their funds' appeal, we contend that a shorter and more liquid portfolio structure is a more prudent choice as we navigate these turbulent waters." The piece explains, "The dwindling supply of eligible investments for taxable money funds has been a theme we've discussed here repeatedly. The combined forces of a sluggish economy, the deleveraging of the financials sector, the ability of issuers to obtain longer-term financing at record-low rates and spreads, and a general shift away from wholesale funding sources have driven short-term borrowing and, therefore, the supply side of the money markets, lower month after month. Especially hard hit has been the asset-backed commercial paper sector.... Of particular note is the degree to which the contraction in overall supply has been cushioned by 2a-7 eligible U.S. Treasury securities. Throughout 2007, both money fund assets and the supply of eligible investments grew in tandem; in early 2008, the growth of both money fund assets and the supply of investments flattened. In the fall of 2008, supply and demand began to take divergent paths, with money fund assets beginning to grow again while the supply of eligible investments plummeted. By year-end 2008, the amount of eligible investments in the market -- excluding U.S. Treasuries -- was over $1 trillion less than it was at the beginning of 2007, while demand for these investments, as evidenced by money fund assets, was nearly $1.5 trillion higher. And while MMF assets began to contract in early 2009, the pace of the supply decline was even more rapid. For now at least, both supply and demand seem to have stabilized."
