The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Oct. 31, 2015) yesterday, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. Last week, JP Morgan Securities' also released its latest "Prime Money Market Fund Holdings Update, November 2015," which reviews holdings, as well as a trend toward shortening WAMs in advance of the Fed raising rates. (See too our Dec. 10 News, "Dec. Portfolio Holdings: Treasuries Skyrocket; Repo, CD, CP Decline.") We review these, and also quote from a Credit Suisse research piece, "Flying Blind", which discusses money fund and bank deposit flows, fee waivers and the Fed's RRP facility.
ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 30.1% as of November 30, up from 27.7% on October 30. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 24.9% (vs. 24.0% last month) and "Other treasury securities," which added 5.3% (up from 3.6% last month). Prime funds' Weekly liquid assets totaled 42.3% (vs. 41.3% last month), which was made up of "All securities maturing within 5 days" (34.1% vs. 34.8% in October), Other treasury securities (5.2% vs. 3.6% in October), and Other agency securities (3.0% vs. 2.9% a month ago).
The report says, Government Money Market Funds' Daily liquid assets totaled 64.4% as of November 30 vs. 62.3% in October. All securities maturing within 1 day totaled 25.2% vs. 29.0% last month. Other treasury securities added 39.2% (vs. 33.3% in October). Weekly liquid assets totaled 80.7% (vs. 78.6%), which was comprised of All securities maturing within 5 days (35.4% vs. 38.9%), Other treasury securities (37.1% vs. 32.6%), and Other agency securities (8.1% vs. 7.1%).
ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 46.1% in the Americas (vs. 45.2% last month), 18.5% in Asia Pacific (vs. 18.3%), 35.2% in Europe (vs. 36.4%), and 0.2% in Other and Supranational (vs. 0.2% last month). Government Money Market Funds held 86.5% in the Americas (vs. 84.2% last month), 0.8% in Asia Pacific (vs. 0.8%), 12.6% in Europe (vs. 15.0%), and 0.0% in Supranational (vs. 0.0%).
The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 33 days as of November 30, down from 35 days last month. WALs were at 65 days, down from 69 days last month. Government MMFs' WAMs was at 38 days, down from 40 days last month, while Government fund WALs was at 85 days, down from 89 days. ICI's release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data, which many fund sponsors provide directly to the Institute. ICI's data report for June covers funds holding 94 percent of taxable money market fund assets." (Note: ICI publishes aggregates but doesn't publish individual fund holdings.)
JP Morgan Securities' Short Duration Strategy team comments on Prime to Govie conversions in its latest "MMF Prime Holdings" update, "To date, the majority of prime to government fund conversions have already taken place.... In total, close to $200bn has been converted. So far, the conversion process has been fairly orderly, and has not directly impacted the short-term credit and rates markets. Currently, only $50bn is left for conversion, spread over the duration of 2016. We are inclined to think that the majority of conversion announcements have already been made. Accordingly, the next phase of the exodus from prime funds will likely come via investor outflows throughout next year. We estimate that an additional $400bn in AuM could eventually migrate away from prime funds and into government MMFs."
They add, "Since converting funds are still technically categorized as "prime" up until their respective conversion dates, total prime AuMs dropped significantly around the beginning of December as several funds officially switched their categories from prime to government status <b:>`_. Conversely, aggregate government fund AuM increased. As of the end of November, prime fund assets now total $1,280bn, down $163bn month-over-month, due to the final conversions that have taken place. Government AuMs totaled $1,178bn, up $164bn month-over-month. YTD, we have still not experienced any sizable investor outflows driven by MMF reform."
On Portfolio Holdings, they tell us, "Prime MMF holdings of bank debt decreased by $55bn month-over-month. In an otherwise normal month not affected by quarter-end technicals, the drop in prime fund bank holdings was driven almost entirely by fund conversions, as converting funds replaced bank holdings with government product. Most reductions were concentrated in CDs and time deposits, primarily for French, Norwegian, and Japanese banks. Aside from bank holdings, allocations to agencies and Fed RRP also decreased as a result of final fund conversions. Prior to their conversion dates, most funds were already heavily invested in government-eligible product. No longer classified as prime funds, the government holdings of these funds are no longer accounted for in the prime universe."
On WAMs, they continue, "During the course of November, money market funds shortened maturities in front of the December FOMC meeting. Prime funds shortened WAMs by 4 days to 30 days, while government funds shortened maturities by 3 days to 36 days. Furthermore, year-over-year, funds now hold more paper in the 0-60d maturity bucket. Looking forward, we expect funds to remain short as the possibility of additional Fed hikes and MMF reform come into play during early 2016."
In other news, Credit Suisse Research Analysts Zoltan Pozsar and James Sweeney write about money fund flows in the wake of the Fed action in a piece entitled, "Flying Blind." They explain, "For the first time in nearly a decade, the FOMC has raised interest rates. Now comes the hard part: interpreting the sequence of events that will follow.... Money funds are getting ready to bid away hundreds of billions in non-operating deposits from banks and invest those funds in reverse repos at the Fed. The more generous these funds are in passing on the first hike, the more deposits they will lure away from banks and the greater the usage of the RRP facility."
Credit Suisse writes, "Now that the Fed chose to uncap the RRP facility, the single most important factor that will determine the uptake will be how aggressive money funds will be in passing on the first rate hike. Counterparty caps are a pain, but large flows should wash them away.... If money funds are stingy (i.e., they hold on to the first hike through higher fees) money does not move. If banks don't pass on higher rates to wholesale depositors, and neither do money funds, money has no incentive to move. However, if money funds are generous and pass on the bulk of the first hike, money will have an incentive to move. How will money funds behave? The consensus assumption is that money funds, after seven years at the zero bound can't wait to get their margins back up to their historical average. As such, the thinking goes money funds will use the first hike to increase their fees, passing on little to end investors."
Finally, they add, "We disagree for two reasons. First, if money funds chose to go down this path with their retail funds, they will only make it easier for banks to attract business away (for the reasons discussed above). Second, it also makes little sense for money funds to behave like this with their institutional funds. If one thinks of the Fed's RRP facility as an all you can eat buffet of 'safe assets' that would help money funds get a large volume of new assets at a fixed price for every new dollar of AuM they manage to bring in as they lure non-operating deposits away from banks, it would make no sense to show up with a full stomach (i.e. raising returns on existing AuM by raising fees) and a lot more sense to show up hungry (i.e. raising returns primarily by increasing one's AuM and less by raising fees)."
