The Federal Reserve Bank of New York posted a new brief recently on its "Liberty Street Economics" blog. Entitled, "The Transmission of Monetary Policy and the Sophistication of Money Market Fund Investors, it examines Fed rate moves and their impact on money market fund yields. Authors Marco Cipriani, Jeff Gortmaker, and Gabriele La Spada comment, "In December 2015, the Federal Reserve tightened monetary policy for the first time in almost ten years and, over the following three years, it raised interest rates eight more times, increasing the target range for the federal funds rate from 0-25 basis points (bps) to 225-250 bps. To what extent are changes in the fed funds rate transmitted to cash investors, and are there differences in the pass-through between retail and institutional investors? In this post, we describe the impact of recent rate increases on the yield paid by money market funds (MMFs) to their investors and show that the impact varies depending on investors' sophistication."
The article states, "The chart below shows the net yield (the yield that MMF investors receive, net of the fees paid to the MMF) paid by the two main types of MMFs -- prime (red lines) and government (blue lines) -- to two different types of investors -- institutional (solid lines) and retail (dashed lines); the gray area represents the Federal Reserve target range for federal funds loans. All the yields increased with the Federal Reserve target range; moreover, as the target range moved away from the zero lower bound, the gap between rates paid by prime funds and government funds widened, with the latter generally below the target range. A gap also emerged between the rates paid to institutional versus retail investors, with institutional investors generally receiving a higher yield."
It explains, "To quantify the extent of the monetary policy pass-through to MMF investors, we computed the average increase in MMF yields in the month following each rate hike as a fraction of the increase in the rate paid to lenders at the overnight reverse repurchase facility (ON RRP).... On average, across all nine hikes, funds for institutional investors had the highest pass-through (63 percent for prime funds and 53 percent for government funds), while the pass-through was lower for retail investors (51 percent for prime funds and 42 percent for government funds). The difference between the one-month pass-through by institutional and retail funds was highest after the first rate hike: Whereas the one-month pass-through to institutional investors was 70 percent for prime funds and 34 percent for government funds, the one-month pass-through to retail investors was 45 percent for prime funds and just 1 percent for government funds."
The blog post continues, "To characterize the speed of adjustment of MMF yields to increases in the ON RRP rate, we show the number of days needed for the pass-through to exceed 50 percent after a rate increase.... On average, across the nine rate hikes, the number of days for the pass-through to reach 50 percent is higher for retail than for institutional funds, in both government and prime funds. The difference between institutional and retail funds was very high after the first rate hike but has been diminishing over time."
Finally, the piece states, "A possible explanation for the difference in the pass-through for institutional and retail MMFs is the lower financial sophistication of retail investors. This factor may have been especially material when the Federal Reserve changed its monetary policy stance after a long period of extremely low interest rates. As investors became more familiar with the new policy environment and investment opportunities, the pass-through for retail investors approached that of institutional investors. Such differences in transmission of monetary policy to different segments of the economy are key to understanding both the effectiveness of monetary policy implementation and its distributional effects."
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be published Wednesday, Sept. 11, and we'll be writing our normal monthly update on the August 31 data for Thursday's News. But we also generate a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings, and we posted these to the website Tuesday morning. (We continue to merge the two series, and the N-MFP version is now available via Holding file listings to Money Fund Wisdom subscribers.)
Our new N-MFP summary, with data as of Aug. 31, 2019, includes holdings information from 1,195 money funds (2 fewer than last month), representing assets of just under $3.8 trillion -- $3.798 trillion (up from $3.703 trillion). We review the latest N-MFP data below.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds totaling $1,308 billion (up from $1,288 billion), or 34.4% of all assets. Treasury holdings total $916.7 billion (up from $825.3 billion), or 24.1%, and Government Agency securities totaled $723.6 billion (down from $732.9 billion), or 19.1%.
Commercial paper (CP) totals $338.0 billion (down from $352.8 billion), or 8.9%, and Certificates of Deposit (CDs) total $262.0 billion (up from $257.9 billion), or 6.9%. The Other category (primarily Time Deposits) totals $151.1 billion (up from $145.2 billion), or 4.0%, and VDRNs account for $99.2 billion (down from $101.2 billion last month), or 2.6%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $213.6 billion, or 5.6%, in Financial Company Commercial Paper; $62.6 billion or 1.6%, in Asset Backed Commercial Paper; and, $61.8 billion, or 1.6%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($823.6B, or 21.7%, U.S. Govt Agency Repo ($437.7B, or 11.5%) and Other Repo ($46.5B, or 1.2%).
The N-MFP Holdings summary for the 214 Prime Money Market Funds shows: CP holdings of $332.3 billion (down from $347.4 billion), or 31.3%; CD holdings of $257.9 billion (down from $258.0 billion), or 24.8%; Repo holdings of $262.0 billion (up from $205.2 billion), or 24.7%; Other (primarily Time Deposits) holdings of $104.3 billion (up from $93.2 billion), or 9.8%; Treasury holdings of $86.1 billion (up from $69.8 billion), or 8.1%; Government Agency holdings of $66.8 billion (up from $62.3 billion), or 6.3%; and VRDN holdings of $5.7 billion (the same as the previous month), or 0.5%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $213.6 billion (down from $216.6 billion), or 20.1% in Financial Company Commercial Paper; $62.6 billion (up from $62.5 billion) or, 5.9% in Asset Backed Commercial Paper; and $56.1 billion (down from $68.3 billion), or 5.3% in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($87.2 billion, or 8.2%), U.S. Govt Agency Repo ($70.0 billion, or 6.6%), and Other Repo ($46.5 billion, or 4.4%).
