The Wall Street Journal writes "Companies Look for Returns on Cash Piles as Interest Rates Rise," which tells us that, "As U.S. interest rates go up, money-market funds have been quicker to adjust than bank accounts, giving companies an incentive to shift their cash into those funds for higher returns. Companies accumulated record levels of cash during the pandemic and parked large amounts in bank accounts, where it usually generated little to no return. Low interest rates meant there was little reason to shift into money-market funds, a form of mutual fund that invests in short-term debt securities including Treasury bills and commercial paper." (Note: Start making plans soon and make your hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 27-28 in Paris, France!)

It explains, "But that is changing as the U.S. Federal Reserve is aggressively raising interest rates to fight elevated inflation. The central bank on Wednesday increased its federal-funds rate for the fourth time this year, by 0.75 percentage point, bringing its benchmark rate range to 2.25% to 2.50%. Amid the rate-rise campaign, yields on money-market funds doubled in June to an average of 1.23% and climbed further to a weekly average of 1.36% as of Monday, according to Crane Data, which tracks money funds. Banks, however, have been slow to boost yields, as they still hold large amounts of cash and aren't looking to attract more."

The Journal piece continues, "Money-market fund assets have increased in recent weeks after declining earlier in the year as companies withdrew cash to pay the Internal Revenue Service and settle other dues. Through Monday, $5.018 trillion was sitting in money-market funds, up $30 billion from the end of June and up $58.3 billion since May 31, Crane Data said."

They quote J.P. Morgan Asset Management's Christopher Tufts, "I have a lot of client conversations about this.... Getting yield above zero has made the product attractive to clients, especially given the volatility in the broader market." It says, "Treasurers consider money-market funds nearly as safe as cash and value the fact that invested amounts remain highly liquid and accessible. Many companies use these funds to park their cash overnight or for a few days, with others going out several months, said Peter Crane, president of Crane Data."

The CFO Journal update states, "Banks have been slow to pass on higher interest rates to corporate clients, as financial institutions continue to have too much cash sitting idle, said Priya Misra, head of global rates strategy at TD Securities.... 'A money-market fund will pass on rate rises more in line with the Fed, so there is more of an incentive to move assets,' she said."

It adds, "Companies also will follow potential changes from the Securities and Exchange Commission, which has been looking into a potential overhaul of money-market funds. The regulator is considering introducing so-called swing pricing, which would result in funds charging redemption-like fees in cases of significant outflows. An announcement is expected later this year."

In other news, the SEC recently released its latest quarterly "Private Funds Statistics" report, which summarizes Form PF reporting and includes some data on "Liquidity Funds," or pools which are similar to but not money market funds. The publication shows overall Liquidity fund assets were higher in the latest reported quarter (Q4'21) to $313 billion (up from $302 billion in Q3'21 and down from $322 billion in Q4'20).

The SEC's "Introduction" tells us, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from First Calendar Quarter 2020 through Fourth Calendar Quarter 2021 as reported by Form PF filers." (Note: Crane Data believes the largest portion of these liquidity fund assets are securities lending reinvestment pools.)

The tables in the SEC's "Private Funds Statistics: Fourth Calendar Quarter 2021," with the most recent data available, show 79 Liquidity Funds (most of which are "Section 3 Liquidity Funds," which are Liquidity Funds from advisers with over $1 billion total in cash), up 2 from last quarter and up 7 from a year ago. (There are 56 Section 3 Liquidity Funds out of the 79 Liquidity Funds.) The SEC receives Form PF reports from 39 Liquidity Fund advisers (24 of which are Section 3 Liquidity Fund advisers), up 2 from last quarter and from a year ago.

The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $313 billion, up $11 billion from Q3'21 and down $9 billion from a year ago (Q4'20). Of this total, $311 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $318 billion, up $8 billion from Q3'21 and down $8 billion from a year ago (Q4'20). Of this total, $316 billion in is Section 3 (large manager) Liquidity Funds.

A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $96 billion is held by Other (31.0%), $60 billion is held by Unknown Non-U.S. Investors (19.2%), $57 billion is held by Private Funds (18.5%), $23 billion is held by SEC-Registered Investment Companies (7.5%), $7 billion in held by Pension Plans (2.3%), $9 billion is held by Insurance Companies (2.8%), $4 billion is held by Non-Profits (1.2%) and $1 billion is held by State/Muni Govt. Pension Plans (0.3%).

The tables also show that 68.9% of Section 3 Liquidity Funds have a liquidation period of one day, $291 billion of these funds may suspend redemptions, and $260 billion of these funds may have gates. WAMs average a short 42 days (47 days when weighted by assets), WALs are 58 days (60 days when asset-weighted), and 7-Day Gross Yields average 0.20% (0.10% asset-weighted). Daily Liquid Assets average about 50% (42% asset-weighted) while Weekly Liquid Assets average about 61% (58% asset-weighted).

Overall, these portfolios appear shorter with a heavier Treasury exposure than money market funds in general; almost half of them (41.1%) are fully compliant with Rule 2a-7. When calculating NAVs, 75.0% are "Stable" and 25.0% are "Floating." For more, see our Jan. 27 News, "SEC Proposes Amendments to Form PF Large Liquidity Fund Reporting," and see the SEC's proposal "Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews."

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