Fitch Ratings released its "2020 Outlook: Global Money Market Funds" recently, which tells us, "Fitch Ratings expects the combination of relatively higher yields versus bank deposits and potential continued market volatility to support steady demand for US money market funds (MMFs) in 2020. While the pace of growth may be slower in 2020, cash will likely continue to flow into the sector despite the Fed’s reversal in monetary policy. Fitch anticipates stable conditions for European MMFs in 2020. Attention to liquidity risk management will increase in 2020, when reporting on ESMA's stress test guidelines takes effect."
The Outlook continues, "Fitch expects an overall stable environment for Chinese MMFs in 2020. However, growth may come under pressure in the near term due to negative real yields, tight regulation and competition from wealth management products (WMPs). Several troubled small regional commercial banks required external support in 2019; however, these issues did not affect rated funds, which invest only with the highest-rated Chinese banks. Nonetheless, these events warrant increased investor monitoring of funds' portfolio allocations."
It explains, "Fitch forecasts broad stability in its global MMF ratings in 2020 supported by high quality, diversified investments, appropriate liquidity relative to investor composition, proactive risk management by MMF managers and continued adherence to updated regulatory frameworks. In the event of a more severe market dislocation, MMF flows could be more volatile, with a spike in inflows if MMFs are perceived to be a safe haven or a spike in outflows if MMFs hold underlying assets perceived to be at risk. Ratings would be sensitive to sustained, severe outflows, although this risk is mitigated by rated funds' conservative credit and market risk positioning and high liquidity levels."
Discussing "U.S. Money Market Funds," they state, "Fitch expects a continued re-allocation of MMF assets towards prime funds in 2020, due to the yield differential with government funds and other cash products, net asset value (NAV) stability and fund managers' growing track record managing liquidity post-reform. As of October 31, 2019, prime money fund assets were USD1.1 trillion, up by 49% year over year and up by 122% since reforms first went into effect in October 2016. Both institutional and retail money funds have experienced inflows since the beginning of 2019. Given the backdrop of slowing global growth and trade policy uncertainty, Fitch expects the trend into US money funds to continue."
Fitch writes, "While money fund yields declined slightly after the Fed cut interest rates three times throughout 2019, the average net yield for prime funds at October 31, 2019 was 1.62%, which is still 1.46 percentage points above the 0.16% average rate paid on money market deposit accounts by banks as of the same date. Investor sensitivity to the yield differential among cash products could create challenges for MMF managers, particularly as liquidity levels have declined. Average weekly liquidity for prime institutional and retail funds was 47% and 41%, respectively, as of October 31, 2019, compared to 46% across both categories, as of October 31, 2018, and 72% and 51%, respectively, as of October 31, 2016."
The Outlook comments, "The US market is showing increasing interest in ESG in the money market space, with the launch of new funds and the conversion of existing funds. However, movement into these products continues to be slow. We have found fund managers primarily perform their own ESG research while incorporating data from third parties, and fully integrate ESG factors into their normal credit screening process. We expect more fund managers to incorporate ESG into their products as existing ESG funds attract more assets. ESG screening has been a neutral factor in Fitch's ratings of MMFs."
It tells us, "Repurchase agreements (repos) continue to dominate MMF portfolios, representing 32% of all outstanding money market securities as of October 31, 2019. Participation in the repo services offered by the Fixed Income Clearing Corp has continued to grow since 2017 when MMFs first began investing in the product, increasing 124% between October 2018 and October 2019 and up significantly since October 2017 when repo balances with the FICC were only USD12 billion. Fitch expects utilization of sponsored repo to continue to increase throughout 2020, especially considering that the number of sponsoring entities is likely to expand. Fitch-rated MMFs maintain limited exposure to any one repo counterparty."
Looking at "European Money Market Funds," they write, "Fitch views the weekly liquidity levels of rated MMFs as sufficiently high with around 50% weekly liquidity on average as of end-September 2019. Investor and fund attention to liquidity risk management will increase in 2020 when reporting on ESMA's stress test guidelines take effect. ESMA published stress test guidelines on liquidity, redemption levels, credit risk, interest rates and exchanges rates in July 2019."
The Outlook continues, "Fitch views a material disruption to money funds post a disruptive 'no-deal' Brexit as unlikely. Most funds have been granted approval via applying for temporary permissions regime, while seeking full UK authorisation, to temporarily continue operating and marketing in the UK if the passporting regime falls away abruptly. Average exposure to UK entities across Fitch-rated prime sterling MMFs increased to 17% at end-September 2019 from 13% at end-August 2018, with government securities and certificate of deposits as the most popular security types."
It adds, "Fitch views the upcoming review of the 2017 MMF regulation as a key uncertainty facing the low volatility NAV (LVNAV) segment (approximately USD0.67 trillion as of end September 2019). The five-year review due by 21 July 2022 under Article 46 in MMF Regulation will focus on LVNAV and public debt CNAV MMFs. The European Commission will assess the viability of LVNAV MMFs as an alternative to non-EU public debt CNAV MMFs, as well as the feasibility of establishing an 8% EU public debt quota for public debt CNAV MMFs. The scope of the review has created a degree of uncertainty for the future of LVNAV and public debt CNAV MMFs, and the outcome will directly affect the industry landscape in the short-term MMF domain. As of end-September 2019, 57% of European MMF AUM is under the scope of the five-year review, with VNAV (both short-term and standard) MMFs representing the remaining 43%."
Finally, Fitch reviews "Chinese Money Market Funds," explaining, "Fitch expects the growth of Chinese MMFs to come under pressure in the short- to medium-term as a result of negative real yields, tight regulatory requirements, and competition from certain WMPs provided by banks. Total assets in Chinese MMFs declined to CNY7.1 trillion (USD1.0 trillion) by September 2019 from a peak of CNY8.9 trillion (USD1.3 trillion) in 2H18."
They add, "The Chinese MMF market has become more diversified as ... the country's largest MMF, Yu'E Bao, reduced size and assets flow[ed] into other funds. This redistribution means the sector is now more comparable to the US and Europe in terms of top-five fund concentration, although Yu'E Bao continues to hold a disproportionately large share of the total Chinese MMFs' AUM. Recent stress at small regional banks in China, including the coupon skip of Jinzhou Bank and the state takeover of Baoshang Bank, highlights the credit vulnerability of these entities, and by extension, Chinese MMFs which invest in them."
In related news, a separate Fitch press release," tells us, "Fitch Ratings has assigned Morgan Stanley Liquidity Funds - US Dollar Treasury Liquidity Money Market Fund a 'AAAmmf' rating. The rating of the fund reflects its sustained overall high credit quality; its low exposure to interest rate and spread risks; and its daily and weekly liquid assets being consistent with the fund's shareholder profile and concentration. The rating also reflects the adequate capabilities and resources of Morgan Stanley Investment Management (MSIM) as investment manager.... The fund is a sub-fund of Morgan Stanley Liquidity Funds, a Luxembourg-domiciled Société d'Investissement à Capital Variable (SICAV), registered and authorised by the Luxembourg Commission de Surveillance du Secteur Financier as an undertaking for collective investment in transferable securities fund. The fund is classified as short-term public debt constant net asset value fund under the European money market fund regulation. As of end-October 2019, the fund's total assets under management stood at USD6.46 billion."
