Fitch Ratings' latest "U.S. Money Fund Reform Dashboard" discusses recent asset flows, market NAVs, liquidity levels and yields. They write, "While the mass exodus from prime institutional money market funds has slowed in the week following the reform implementation date of Oct. 14, asset outflows continue, with prime institutional assets under management declining $3 billion in the week between Oct. 14 and Oct. 21, 2016. Government institutional funds' assets increased by $21 billion in the same period, reaching a total of approximately $1.6 trillion. Since Oct. 27, 2015, prime institutional money funds have lost approximately $861 billion in assets, and all prime money funds have lost $1.1 trillion (due to a combination of fund conversions and investor outflows)."
The Fitch update explains, "Of 30 prime institutional funds reviewed as of Oct. 21, 2016, one fund reported a shadow net asset value (NAV) below $1.00, compared with no funds as of Oct. 7, 2016. Some of the cash that left may return to prime funds, but this will be a function of the relative yield differential between prime and government funds as well as investors adapting to the new features of prime funds. Alternative liquidity products are also expected to garner inflows."
The piece tells us, "Facing uncertain flows as managers and investors adjust to the new fees and gates paradigm, fund managers have built substantial weekly liquidity buffers. As of Oct. 21, 2016, prime institutional funds' weekly liquidity averaged 80%, up from 52% on June 30. None of the 28 funds reviewed showed liquidity below 50%. However, as asset flows have stabilized, fund managers are beginning to revert back to more normal portfolio management by extending maturities. This has caused prime institutional funds' average weekly liquidity to fall 7% from a peak of 87% on Oct. 7, 2016, a week ahead of reform."
It adds, "Liquidity will likely remain a long-term focus, and Fitch expects prime funds to maintain a buffer above the 30% weekly liquidity threshold in order to assuage investor concerns with the liquidity fees and gates features that kicked in Oct. 14."
Finally, Fitch writes on "Yields," "The spread between net yields on prime institutional funds and government institutional funds declined for several months following a peak of 0.17% in May, as outflows and liquid asset requirements forced prime fund managers to maintain short maturities. Following reform, as market dynamics have stabilized and investors grow more comfortable with the new operating environment, prime fund managers have begun to extend maturities in their portfolios in order to take advantage of wider credit spreads offered by borrowers. Consequently, the spread between institutional prime and government funds increased to 0.18% as of Oct 21, 2016."
Note: Crane Data's most recent Money Fund Intelligence Daily shows that Prime MMF assets declined by $133.7 billion in October to $379.7 billion, while Government MMFs rose by $126.1 billion. Over the past 7 days (through 10/31), Prime MMFs fell by just $5.6 billion while Govt MMFs rose by $16.4 billion. Of the 132 Prime Inst MMFs tracked by Crane Data, we show just one with an NAV below $1.0000, and this fund isn't a "live" fund and is in the process of liquidation. The latest WLA (weekly liquid assets) average for Prime Institutional Money Market Funds stands at 72.2%, down from 80.9% on Oct. 14. Finally, Prime Inst MMF yields, on average, stand at 29 bps, up one bps on the week.
In other news, Citi writes about the recent decline in Tax Exempt yields, which have skyrocketed over the past 2-3 months. They comment, "SIFMA dropped by 11bp last week thus richening for 3 weeks in a row after the sustained rise since June 2016. Thus, our optimism over lower SIFMA resets was not misplaced though it was predicated on a moderation of tax-exempt money fund outflows. For now, it seems like tax-exempt fund flows have witnessed some sort of an inflexion point. Despite the drop in SIFMA, in our view, VRDNs remain attractive for crossover investors, especially relative to their WAM, which is only 7 days for weekly reset VRDN."
Our MFI Daily shows the average Tax Exempt MMF yielding 0.21%, down from 0.26% a week earlier. Tax Exempt MMF assets totaled $127.3 billion, down $175 million on the week and $1.3 billion in October.
Finally, the website ETF.com wrote a piece entitled, "When Cash Is King, These ETFs Benefit." It tells us, "Investors have been piling into cash, with portfolio allocations now at 15-year highs at nearly 6%, according to the Wall Street Journal. That data point could help explain why ETFs that behave like money-market proxies, offering cash-like exposure, are so hot this year. What's interesting is that the reason investors are running to cash -- at least according to Russ Koesterich, head of asset allocation at BlackRock -- has nothing to do with demand for safety."
ETF.com explains, "Instead, Koesterich says that investors are looking for ways to diversify equity risk, and the historical diversifier of choice -- bonds -- is increasingly correlated to equity, and should become more so as monetary policy evolves and rate hikes take place.... In that environment, "cash is once again king," as he puts it, as the "only major asset class available to hedge equity risk."
The article continues, "In the ETF space, there's no question that demand and performance of ETFs viewed as money market proxies are strong this year. Consider these three funds (below) as a sampling of this segment, and their year-to-date performance -- a clear uptrend: PIMCO Enhanced Short Maturity Active ETF (MINT), Guggenheim Enhanced Short Duration ETF (GSY), and FlexShares Ready Access Variable Income Fund (RAVI)."
Finally, it adds, "The performance has gone hand in hand with net creations. MINT has now gathered more than $1.02 billion in fresh net assets in 2016, while GSY has taken in almost $300 million and RAVI $11.3 million in inflows.... Beyond demand for cash, another important driver of demand for these ETFs is regulatory change to money market mutual funds stemming from the 2008 credit crisis.... Anticipation of higher interest rates is another important driver here, as investors look to shorten duration ahead of what many expect will be a rate hike in December."
