Below, we briefly quote from another Money Fund Symposium session, "Corporate Investment and Issuance Issues," which featured Treasury Strategies' Tony Carfang and the AFP's Tom Hunt. Carfang discussed the pending House bill to turn back the floating NAV (see our May 24 News, "Stable NAV Bill Re-​Introduced in House; Amortized Cost for Inst Funds?"), while Hunt gave a preview of the upcoming AFP Liquidity Survey (which will be released next week). We also quote from Federated's latest monthly, and a Wells update on repo below. (Note again: Crane Data subscribers and conference attendees may access the recordings, Powerpoints and final binder via our "Money Fund Symposium 2017 Download Center.)
Carfang tells us, "As we talked to our clients the jury is still out on whether or not these instruments [prime MMFs] have a future at least from stand point of corporate treasurers. There are two bills in Congress to get rid of the fluctuating asset value and the liquidity fees ... Senate bill 1117 and House bill 2319. Both bills [have bipartisan sponsors], in the Senate 2 Republicans and ... in the House ... there's some movement."
He adds, "Testifying ... on these bills, it was interesting [that] both Democrats and Republicans agreed that ... no one expected $1.2 trillion dollars to leave prime and tax-exempt funds. Everybody agreed that this was not the intended outcome.... The $1.2 trillion dollars that left and went into government funds, more than a third of that was recycled back into the housing industry. Which the regulators thought was like the cause of the problem in the first place."
Hunt comments, "What I'd like to show you today is some of those highlights from our pending [AFP Liquidity] survey that officially comes out on July 12. This is our eleventh year that we've been doing this, and we are happy to say that State Street is the underwriter for this and helps make it possible.... One of the things that we ... asked now that money fund reform is here [is] 'What are your plans to come back to [prime]?' I think what this slide shows is there's a lot of opportunity still."
He continues, "Certainly, 41% [of respondents] would say, 'Yes, we're definitely not coming back to prime.' Really the focus of our survey is on operating cash.... But the way I see it is [that] there's opportunity, because ... the spread between prime and [other investments is] significant. It can [attract] 20% ... so that wasn't even contemplated before. Then 18% say prime funds would be more attractive if the gates and fees were removed.... As investors, the corporate side that definitely moved into governments are now taking another look."
Hunt adds, "I think [also that] ultrashort bond funds might have some opportunity.... [Another] thing that we did measure in [the latest survey] was the ETFs.... Certainly, there's a market that's interested in those, and understanding how those are impacted from an accounting standpoint. Then the larger players would stay with those doing direct repo or repo transactions. So I think the gap has widened from going into separately matched accounts and has brought different opportunities. But looking at this chart from an investment manager's standpoint, there's going to be some good conversations ahead in months to come."
In other news, Federated Investors writes in its latest "Month in Cash: The waiting game," "With three Fed rate hikes in six months and U.S. money market reforms almost nine months behind us, the money markets in many ways are starting to approach normalcy. Daily prime fund net yields are back above 1%, with government and tax-free fund yields not lagging by much. This rise is likely to continue over the course of this year and next as the conversation on monetary policy isn't whether more rate increases are coming, only how many and how fast."
Global Money Markets CIO Deborah Cunningham explains, "But the prime money markets still find themselves to some extent playing a waiting game. While fund assets industrywide are up about $30 billion year-to-date, a significant increase on a relative basis, on an absolute basis, they're still well short of their pre-reform levels. Fund rates continue to move up with each Fed increase while bank rates remain sticky, giving prime funds a widening yield advantage."
She tells us, "We know there's plenty of supply out there. At its industry conference in June, Crane Data estimated there currently is $9 trillion of short-term deposits in the marketplace. We would expect some of that to eventually work its way over to prime funds. The holdup, from what our clients are telling us, is the 'herd mentality' among institutions. Until one makes the move, no one is making the move to shift significant sums back into prime funds, which for the most part are the same instruments where they once parked their cash. Indeed, as we noted last month, new floating net asset values (NAV) on prime and tax-free funds are hovering very close to the industry's historical $1 NAV standard to the thousandth decimal place."
Federated adds, "As far as the money markets are concerned, one plus to the [Fed's] balance sheet-reduction plan is the bulk of reissuance in the marketplace likely will come in the form of Treasury bills. That's the path of least resistance for the Fed, in part because there is so much government supply -- capacity, if you will. This should have a favorable, i.e., upward impact, on short-term yields, which is where we are focused. For now, we are holding the average weighted maturity (WAM) range at 30 to 40 days for government money funds and 35 to 45 days for prime money funds. If we do buy anything longer-dated—12-to 13-month maturities -- it tends to be in floating-rate securities."
Finally, Wells Fargo Securities' "Daily Short Stuff" by Garret Sloan comments, "Quarter-end has come and gone and the dynamic last Friday was one of very strong demand at the Fed RRP. A total of 79 issuers tapped the facility for $398 billion in volume. That is up from the previous day's auction of $269 billion and the June average volume of $192 billion. Relative to previous quarter-ends, volume was also quite elevated."
He explains, "The $398 billion in total activity represented the fourth-highest volume on record, and the second-highest non-year-end volume, coming in slightly behind the $412 billion we saw on September 30, 2016, just prior to final money market fund reform implementation. The high quarter-end volume likely resulted from a sharp pull back by foreign repo counterparties that are more attuned to the vagaries of calendar-based balance-sheet adjustments."
Finally, Wells adds, "The European banks have been the most dramatic in their pullback from the repo markets at specific calendar-driven dates, and this quarter-end appears to be no different. We will know more once we obtain portfolio information from portfolio holdings data, but anecdotal evidence suggests that the European banks were especially parsimonious this quarter-end, and we believe this may be a sign of things to come."
