News Archives: July, 2023
Federated Hermes, the 6th largest manager of money funds, reported Q2'23 earnings Thursday night and hosted its latest earnings conference call on Friday morning. President & CEO J. Christopher Donahue comments in their press release, "In the second quarter, Federated Hermes benefited from a breadth of investment offerings and robust client relationships, as record assets under management were again driven by money market asset increases from the prior quarter." The release says, "Money market assets were a record $509.0 billion at June 30, 2023, up $69.3 billion or 16% from $439.7 billion at June 30, 2022 and up $3.2 billion or 1% from $505.8 billion at March 31, 2023. Money market fund assets were a record $364.0 billion at June 30, 2023, up $66.0 billion or 22% from $298.0 billion at June 30, 2022 and up $6.7 billion or 2% from $357.3 billion at March 31, 2023." (See the Seeking Alpha earnings call transcription here.) (Note: Click here to see the replay of our recent Money Fund Wisdom Demo & Training, and register soon and make hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh.)
On the call, Donahue says, "We reached record highs for money market fund assets of $364 billion and total money market assets of $509 billion. The second quarter presented a challenging environment for managing money market strategies as the debt ceiling prices significantly impacted short-term debt markets. Despite this challenge, money market strategies continue to benefit from favorable market conditions for cash as an asset class, higher yields, elevated liquidity levels in the financial system and favorable yields compared to bank deposits. As short-term interest rates peak, we expect market conditions for money market strategies will be favorable compared to both direct markets and bank deposit rates."
He continues, "Looking at flows in money funds in the second quarter, we saw good activity from products geared to the retail customers of financial intermediaries. Institutional product flows were challenged by the aforementioned debt crisis direct security yields and the regular June corporate tax period."
Donahue explains, "Now the SEC, as you know, recently adopted new rules for money market funds. We continue to study these rules to assess their impact. We were pleased to see that swing pricing was not included and that the ability to use a reverse distribution mechanism was included as an option [in the] remote possibility that negative yields were to occur. We were also pleased that the SEC agreed with our recommendation to remove temporary redemption gates and the link between weekly liquidity asset thresholds and liquidity fees, which we believe created an incentive for investors to redeem sooner in periods of market stress and prevented the manager from using as much liquidity as was available."
But he says, "The inclusion of mandatory redemption fees subject to certain conditions in institutional prime and muni funds presents a challenge for fund advisers and investors. We have approximately $11 billion in third-party institutional assets in institutional prime and muni funds that we believe could shift to alternative products that we offer, including our private prime fund and government money market funds. It's worth noting that institutional prime and muni funds already have fluctuating net asset values and that there is an exception or a carve-out for so-called de minimis impact based on the hypothetical selling of a strip of securities that may occur on the rare days when we have a 5% redemption trigger."
Donahue adds, "We will be talking with our institutional clients over the coming months on this topic. We believe that these investors will continue to use the institutional prime and muni funds, at least into late next year, when the new rules take effect. Our estimate of money market mutual fund market share, including sub-advised funds, was 7.2% at the end of the second quarter down from 7.4% at the end of the first quarter."
Asked about flows, Money market CIO Debbie Cunningham comments, "From the money market side of the equation, much of the growth that we have seen so far has come from the retail side of the market <b:>`_. And that's simply because, compared to bank deposit rates where they were for a lot of the zero rate environment, money market funds are now paying much more attractive market rate of return. For institutional buyers, however, they have the ability generally to be able to be in direct markets specifically, so buying direct commercial paper, buying direct CDs."
She tells us, "As the market [rates] have increased, they have been purchasing direct market securities such as those in order to pick up ... higher yield more quickly <b:>`_. Money market funds operate with a lag, maybe 25 to 30 days, depending upon what our weighted average maturities are. Once markets peak or plateau in this case, and ... even more so when they start to go down the other side, the opposite occurs for the institutional investor -- they come into those funds that actually lag the market and therefore, stay at that higher rate for a longer period of time."
Cunningham comments, "So it comes from two different sources. The retail side, as money is coming off of zero, and very attractive versus bank deposits. Then once rates plateau and start to go down even marginally, it comes from the institutional side ... these are generally cash managers' cash management flows. [This] doesn't include what Chris was talking about, those flows that ultimately may make their way back to the longer side of the fixed income markets or even the equity markets for that matter."
Asked about the new higher liquidity requirements, she answers, "So going from 10% in overnight and 30% in weekly liquid assets ... in the current rule, to 25% in daily and 50% [weekly] ... in the new rules, the only funds that will be impacted would be the Prime funds. [T]he municipal funds are exempt from any kind of daily liquid asset requirements, so it's only weekly liquid assets that would impact them. And from both a municipal and a government standpoint, they operate well in excess of those either 25% or 50% requirements for dailies and weekly.... It will have a basis point impact in ... prime retail and prime institutional, but they should still be able to maintain their competitive spread over the government sector."
Finally, when asked about consolidation, Donahue responds, "It depends on how the money got in there and who controls the money at the moment of redemption. So there are 50, maybe 60 listed money market fund players. The top 25 have all the assets, the top 20 are the only ones who really compete for the big assets. And it all depends on how that fits into your regular business. We have a sales force that goes around and calls on all the players in the money market fund business to ... be a warm and loving home should they decide to change their mind on doing this. And it's episodic. There was no avalanche after the last go-round of SEC regulation. I don't expect an avalanche out of this one. But periodically, CFOs, CEOs and managers decide that the time has come to what we've set to get out of it, and that's what we're looking for."
Cunningham adds, "I think what drives it [recent share gains] is that if you look at other money fund providers, that have a larger retail presence than we do that, and that retail sector being the largest growth sector, disadvantages us to some degree during an environment when retail is growing more than institutional. We do expect that to even itself out as rates increase only in a minor way going forward, plateau and then ultimately start going in slow fashion back down again. We do expect that to influence then the institutional side of flows in a much larger way where we play a larger role in that market."
The Investment Company Institute's latest "Money Market Fund Assets" report shows MMF assets jumping back to record levels after declining for 3 weeks in a row. ICI's asset series is now poised to break $5.5 trillion and is up $666.4 billion, or 13.8%, over the past 22 weeks. ICI shows assets up by $752 billion, or 15.9%, year-to-date in 2023, with Institutional MMFs up $396 billion, or 13.0% and Retail MMFs up $356 billion, or 21.2%. Over the past 52 weeks, money fund assets have risen $897 billion, or 19.5%, with Retail MMFs rising by $557 billion (37.7%) and Inst MMFs rising by $340 billion (10.9%). (Note: Click here to see the replay of our recent Money Fund Wisdom Demo & Training, and register soon and make hotel reservations ASAP for our European Money Fund Symposium, which is Sept. 25-26, 2024 in Edinburgh, Scotland.)
Their weekly release says, "Total money market fund assets increased by $28.35 billion to $5.49 trillion for the week ended Wednesday, July 26, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $26.87 billion and prime funds increased by $3.46 billion. Tax-exempt money market funds decreased by $1.98 billion." ICI's stats show Institutional MMFs jumping $24.3 billion and Retail MMFs rising $4.0 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.522 trillion (82.4% of all money funds), while Total Prime MMFs were $821.8 billion (15.6%). Tax Exempt MMFs totaled $111.2 billion (2.0%).
ICI explains, "Assets of retail money market funds increased by $4.01 billion to $2.03 trillion. Among retail funds, government money market fund assets increased by $1.17 billion to $1.35 trillion, prime money market fund assets increased by $4.69 billion to $578.79 billion, and tax-exempt fund assets decreased by $1.85 billion to $100.62 billion." Retail assets account for over a third of total assets, or 37.1%, and Government Retail assets make up 66.6% of all Retail MMFs.
They add, "Assets of institutional money market funds increased by $24.34 billion to $3.45 trillion. Among institutional funds, government money market fund assets increased by $25.70 billion to $3.17 trillion, prime money market fund assets decreased by $1.23 billion to $274.71 billion, and tax-exempt fund assets decreased by $135 million to $10.57 billion." Institutional assets accounted for 62.9% of all MMF assets, with Government Institutional assets making up 91.7% of all Institutional MMF totals. (According to Crane Data's separate Money Fund Intelligence Daily series, money fund assets have risen by $51.0 billion in July through 7/26 to $5.897 trillion. Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're over $400 billion lower than Crane's asset series.)
ICI also released its latest monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds" for June 2023 on Thursday. The monthly Trends shows money fund totals rising $30.6 billion in June to a record $5.450 trillion (after increases in May and April). Prior to this, the March jump (a $371.0 billion increase) was the third largest monthly increase ever and the largest in history if you exclude 2 coronavirus lockdown panic months in March and April 2020. Bond fund assets also increased, rising $20.5 billion to $4.635 trillion.
MMFs have increased by $909.2 billion, or 20.0%, over the past 12 months. Money funds' June asset increase follows gains of $172.7 billion in May, $8.4 billion in April, $371.0 billion in March, $60.0 billion in February, $31.5 billion in January, $105.3 billion in December, $63.4 billion in November, $36.8 billion in October and $4.2 billion in Sept. MMFs decreased $6.4 billion in August, but they increased $34.3 billion in July. Money fund assets surpassed bond fund assets in September 2022 for the first time since 2010 and they continued to hold a sizeable lead last month. (The bond fund totals don't include bond ETFs, which total $1.377 trillion as of 6/30, according to ICI.)
ICI's monthly release states, "The combined assets of the nation's mutual funds decreased by $20.40 billion, or 0.1%, to $23.52 trillion in May, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $12.82 billion in June, compared with an inflow of $415 million in May.... Money market funds had an inflow of $16.20 billion in June, compared with an inflow of $160.98 billion in May. In June funds offered primarily to institutions had an outflow of $11.00 billion and funds offered primarily to individuals had an inflow of $27.20 billion."
The Institute's latest statistics show that Taxable MMFs and Tax Exempt MMFs were both higher last month. Taxable MMFs increased by $27.4 billion in June to $5.335 trillion. Tax-Exempt MMFs increased $3.1 billion to $115.5 billion. Taxable MMF assets increased year-over-year by $896.9 billion (20.2%), and Tax-Exempt funds rose by $12.2 billion over the past year (11.8%). Bond fund assets increased by $20.5 billion (after decreasing $38.2 billion in May) to $4.635 trillion; they've decreased by $159.6 billion (-3.3%) over the past year.
Money funds represent 22.4% of all mutual fund assets (down 0.6% from the previous month), while bond funds account for 19.1%, according to ICI. The total number of money market funds was 280, unchanged from the prior month and down from 300 a year ago. Taxable money funds numbered 232 funds, and tax-exempt money funds numbered 48 funds.
ICI's "Month-End Portfolio Holdings" confirm a drop in Repo and a jump in Treasuries last month. Repurchase Agreements remained the largest composition segment in June but decreased $146.7 billion, or -4.6%, to $3.009 trillion, or 56.4% of holdings. Repo holdings have increased $627.6 billion, or 26.4%, over the past year. (See our July 13 News, "July Portfolio Holdings: Treasuries Skyrocket; Repo, Agencies, TDs Fall.")
Treasury holdings in Taxable money funds increased last month; they remain the second largest composition segment. Treasury holdings increased $331.5 billion, or 38.9%, to $1.184 trillion, or 22.2% of holdings. Treasury securities have decreased by $200.7 billion, or -14.5%, over the past 12 months. U.S. Government Agency securities were the third largest segment; they decreased $113.1 billion, or -14.4%, to $672.6 billion, or 12.6% of holdings. Agency holdings have increased by $306.6 billion, or 83.8%, over the past 12 months.
Certificates of Deposit (CDs) remained in fourth place; they decreased by $27.5 billion, or -10.5%, to $235.3 billion (4.4% of assets). CDs held by money funds rose by $81.1 billion, or 52.6%, over 12 months. Commercial Paper remained in fifth place, down $595 million, or -0.3%, to $181.9 billion (3.4% of assets). CP increased $63.3 billion, or 53.4%, over one year. Other holdings decreased to $41.0 billion (0.8% of assets), while Notes (including Corporate and Bank) increased to $11.2 billion (0.2% of assets).
The Number of Accounts Outstanding in ICI's series for taxable money funds increased to 59.289 million, while the Number of Funds was unchanged at 232. Over the past 12 months, the number of accounts rose by 1.381 million and the number of funds decreased by 9. The Average Maturity of Portfolios was 24 days, up 3 from May. Over the past 12 months, WAMs of Taxable money have decreased by 2.
EFAMA, the European Fund and Asset Management Association and the trade group for European mutual funds, recently published its annual "Fact Book," which includes a wealth of statistics on European funds and a section on European money market funds. A press release entitled, "EFAMA's latest Fact Book shows sustainable funds and ETFs bucked the outflow trend in 2022," tells us, "EFAMA ... published its 2023 industry Fact Book, which provides an in-depth analysis of trends in the European fund industry, with an emphasis on what happened in 2022. It also includes an extensive overview of the regulatory developments across 28 European countries as well as a series of info-boxes addressing important regulatory issues EFAMA is actively working on." See the full EFAMA 2023 Fact Book here. (Note: Please join us too for our European Money Fund Symposium, which is Sept. 25-26, 2023 in Edinburgh, U.K. Registrations are being accepted and our discounted hotel rate expires August 18.) (Note too: Money fund assets broke above $5.9 trillion for the first time ever on Tuesday, according to Crane Data's MFI Daily. Assets rose $24.0 billion on 7/25 to a record $5.909 trillion. Month-to-date, assets have risen by $63.3 billion.)
EFAMA Director General Tanguy van de Werve comments, "Despite a very challenging economic, financial and geopolitical environment, 2022 saw a resilient demand for sustainable funds, continued decline in average fund costs and maintained retail investors' confidence. This is an encouraging message for the asset management industry. Looking ahead, EFAMA will continue advocating for the best possible regulatory framework for UCITS and AIFs -- including ELTIFs -- as this will ultimately benefit investors and help them reach their financial goals."
The section on "UCITS money market funds," explains, "Net assets of MMFs ended the year at EUR 1.5 trillion. MMFs attracted net inflows over the full year (EUR 28 billion), but demand was volatile over the course of the year. The early months registered net outflows as investors were expecting imminent rate hikes. October 2022 on the other hand, accounted for the largest-ever monthly net inflows (EUR 124 billion). These exceptional net inflows, mainly into Sterling MMFs, were driven by UK pension funds using liability-driven investment (LDI) strategies, which experienced margin calls during the gilt market turmoil."
It continues, "Net asset growth of MMFs amounted to around 3% in 2022, similar to 2021. Compared to long-term UCITS, MMF asset growth reflects net sales rather more closely, as the valuation of the short-term instruments that MMFs mainly invest in varies little over time. Exchange rate effects can, however, have an impact on MMF asset growth."
EFAMA states, "In general, interest rate changes have an impact on the demand for MMFs. MMFs mainly invest in very short-term debt, often with a maturity of less than one month. Hence when interest rates rise, the yield on MMFs also tends to increase, making them more attractive to investors. However, the demand for MMFs is also influenced by other factors, in particular investor sentiment and the use of MMFs as a 'safe-haven' investment in times of crisis. This was clearly demonstrated in 2020, when the uncertainty and volatility caused by the COVID-19 pandemic led to a sharp rise in demand for MMFs."
They write, "Breaking down the net assets of MMF UCITS by fund size, we can see that the MMF market is highly concentrated. Some 70% of total MMF net assets are invested in funds larger than EUR 10 billion, a further 26% are in funds between EUR 1 billion and EUR 10 billion. Only 4% is invested in MMFs between 100 million and EUR 1 billion, while the proportion of MMFs smaller than EUR 100 million is negligible (0.2%)."
EFAMA's Fact Book continues, "Net sales of MMF UCITS by type of SFDR fund show that all 2022 net inflows were concentrated in Article 8 funds (EUR 70 billion). Compared to long-term UCITS, Article 9 funds had almost no net inflows, but this is because there are almost no Article 9 MMFs."
It adds, "The MMF market is heavily concentrated in three domiciles. Ireland holds the largest market share of UCITS MMF net assets (45%), followed by Luxembourg (27%) and France (22%). Combined, they represent 94% of the European total at end 2022."
Discussing "Types of MMFs," EFAMA says, "The EU Money Market Fund Regulation (MMFR) was adopted in 2016 and came into full effect in January 2019. The MMFR distinguishes between three main categories of money market funds: Public Debt Constant Asset Value (PDCNAV) MMFs; Low Volatility Net Asset Value (LVNAV) MMFs; Variable Net Asset Value (VNAV) MMFs. Aside from these categories, the MMFR also distinguishes between Short-term and Standard MMFs. Short-term MMFs are required to adhere to tighter investment rules than Standard MMFs. All three types may be categorised as Short-term MMFs: Public Debt CNAV, LVNAV and Short-term VNAV. Standard MMFs must be variably priced, therefore making all Standard MMFs VNAV funds."
It tells us, "PDCNAV and LVNAV MMFs use amortised cost accounting -- provided certain conditions are met -- to value all of their assets and maintain a net asset value (NAV), or value of a share of the fund, at €1/£1/$1. Public Debt CNAV MMFs must invest a minimum of 99.5% of their assets in public debt. Units/shares in an LVNAV MMF can be purchased or redeemed at a constant price, as long as the value of the assets in the fund does not deviate by more than 0.2% from par. VNAV MMFs refer to funds that use mark-to-market accounting to value some of their assets. The NAV of these funds will vary with the changing value of the assets and -- in the case of an accumulating fund -- by the amount of income received."
The Fact Book continues, "LVNAV have been growing steadily in recent years, with their market share rising from 44% of the MMF market to 48% at end 2022. Net assets of VNAV increased strongly in 2020, but decreased in 2021 as outflows that year were mainly concentrated in that segment of the MMF market. VNAV net assets in 2022 stayed roughly at the same level. PDCNAV accounted for about 8.8% of MMF net assets at end 2022, a slight increase compared on the 2019 share (7.6%)."
It adds, "Investors in 2022 had a clear preference for short-term MMFs as these funds in the three major currencies (EUR, GBP and USD) attracted net inflows. Standard MMFs, however, registered negative or flat net sales over the year. The stricter investment rules for short-term MMFs, combined with higher short-term interest rates, clearly marked them out as a 'safe haven' investment or as an interesting alternative to cash during a turbulent 2022."
On "Currency breakdown," EFAMA says, "MMFs net assets can be broken down by base currency. Three main base currencies accounted for 99.5% of UCITS net assets at end 2022. EUR was the leader with 41% of net assets, followed by USD (35%) and GBP (23%). The share of EUR-dominated MMFs has been falling gradually, from 50% in 2012 to 42% in 2018. Consequently, the market shares of USD- and GBP-denominated MMFs have risen over the same period, edged up by generally higher interest rates in those currencies. In recent years, market shares of MMFs by base currency have tended to remain more stable."
Finally, discussing "Regional breakdown," they write, "An overview of the 2022 holdings of MMFs by geographical region shows that 40% of the short-term paper held by UCITS MMFs was issued in Europe. The US accounted for 31% and Asia-Pacific for 12%." Talking about "Country breakdown," they add, "After the US and Asia-Pacific, short-term securities issued in France made up 23% of the MMF assets at end 2022. Canada (17%), Australia (8%) and the UK (6%) complete the top five. Comparing the asset breakdown by base currency and issuing country shows that MMFs with a USD or GDP base currency invested a substantial proportion of their assets in securities issued in a non-base currency country. Often, countries such as Canada or Australia (and companies based there) issue short-term debt in a major currency to attract more international investors. MMFs can also invest in non-base currency-denominated debt and then hedge the currency exposure. The MMFR does require all non-base currency exposures to be fully hedged."
It's been just 2 weeks since the SEC passed its latest "Money Market Fund Reforms." (See the release, "SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers," and see our News coverage.) While we'd been excerpting from the rules themselves and quoting SEC Commissioners, a number of money fund managers and others have been publishing summaries and commentary. We cite a number of these below. The first, Allspring's "Amendments to Rules Governing Money Market Funds," explains, "On July 12, 2023, the Securities and Exchange Commission (SEC) approved amendments to Rule 2a-7 of the Investment Company Act of 1940, which governs money market funds (MMFs). The amendments are designed to improve the resilience and transparency of MMFs. The amended rule includes the following changes: Increased portfolio minimum liquidity requirements; Removal of temporary redemption gates and the link between portfolio liquidity and liquidity fees; New liquidity fee framework; Measures to address potential negative interest rate environment." (Note: Please join us for our July 27 at 2pm Eastern for a free "Money Fund Wisdom Demo & Training" session, where we'll review Crane Data's product suite with a focus on our MFI Daily asset series. We'll also comment on the data disclosure changes pending from the SEC's recent Money Market Fund Reforms.)
Federated Hermes writes in, "An altered landscape for money funds," "Nearly a decade after the SEC implemented a set of new regulations for money market funds, it voted for a raft of new amendments.... The final tally of the commissioners was 3-2 in favor. In Federated Hermes' opinion, the money fund industry could use the same numbers when assessing the amendments themselves: a 3-2 win/loss record."
They explain, "Federated Hermes appreciates that the SEC meaningfully took into account our and the industry's feedback on the proposals, which included referencing our comments many times in the final document. Because that tome is no less than 424 pages, we will be diligently examining it and may have further comments when a thorough review is concluded. But at first blush, we'd call the result largely good news for this broad asset class that we believe is critically important to the financial, investment and business communities."
The piece tells us, "The biggest positive was what didn't show up in the SEC staff recommendations: swing pricing. There's little question this mechanism would have had grave implications for the viability of some of the popular liquidity products. Unfortunately, the SEC enacted another method to combat what some commissioners view as a first mover problem.... We applaud the regulator for essentially retracting one of the most egregious of the 2014 reforms by removing redemption gates and the link between the weekly liquid asset threshold and potential fees."
It adds, "The new regulations require institutional prime and institutional tax-exempt money market funds 'to impose mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund's liquidity costs are de minimis.' Just because this is less onerous than swing pricing would have been doesn't mean it might not be harmful to investors, even if made with the best intentions of protecting shareholders when large redemptions happen. This may impose large costs on the industry and simply replaces the weekly liquid assets trigger with a net redemptions trigger."
Northern Trust Asset Management distributed a "Summary of Final Rule for U.S. Money Market Funds," which states, "As a result of the volatility that occurred during the financial crisis in March of 2020 due to the COVID-19 pandemic, the Securities and Exchange Commission has been working on amendments to Rule 2a-7 for money market funds (MMFs) since December 2021. This was due to the significant stress placed in institutional prime and tax-exempt MMFs since the last round of regulatory reforms in 2016. The Commission provided a comment period from February 8 to April 11, 2022. The final rules were announced and adopted [7/12], July 12, 2023, and are intended to provide increased transparency and 'resilience' to MMFs."
They list the "New Rules/Amendments: Increase of the Minimum Daily and Weekly Liquidity Requirements (DLA/WLA): Currently, the minimum daily liquidity requirement is at least 10% and the weekly liquidity requirement is at least 30%. The new rule calls for at least 25% and 50%, respectively.... Liquidity Fee Requirement: The Commission removed the tie to WLA and liquidity fees as stated above and is now requiring mandatory liquidity fees for funds seeing more than 5% net outflows, unless a fund's transactions cost are considered to de minimus (de minimus is considered less than 1 basis point). This applies to institutional prime and tax-exempt funds. Retail and government funds are not required to implement these fees."
Northern adds, "In the event of a negative interest rate environment, retail and institutional government funds will be required to convert from a stable net asset value (NAV) to a floating NAV or reduce the number of shares outstanding in order to maintain a stable NAV; The final rule for Form N-MFP requires money market funds to report only the type of beneficial or record owner who owns 5% or more of the shares outstanding in the relevant class and not be required to supply client name, just the type of investor.... The final rule is effective 60 days after it is published in the Federal Register (which should be imminent). Once effective, the funds will be expected to comply within the following dates; Reporting Amendments: June 11, 2024; Other amendments, including DLA/WLA, Discretionary Liquidity Fees and Mandatory Liquidity Fee: 12 months."
Dreyfus also recently hosted a webinar entitled, "Enhancing Resilience: Understanding Money Market Fund Reform, which featured John Tobin, Frank Gutierrez and Christine Algozzini. Tobin says, "The first question really is when we think about reform is, 'How would we grade it?' Overall, I would say `the outcome was better than expected ... from an industry standpoint. I think the two big wins were: one, the SEC did not move forward with swing pricing.... I think the other win in this reform was RDM, the Reverse Distribution Mechanism ... an option that the industry fought hard for [that] effectively allowed stable NAVs to remain a stable NAV even in a negative rate environment.... But ... the new rules are not without significant challenges, especially for prime money market funds."
Law firm Morgan Lewis published, "SEC Adopts Further Money Market Fund Reforms." They write, "The US Securities and Exchange Commission (Commission) adopted amendments to the rule governing money market funds on July 12, 2023 in an attempt to address concerns about institutional prime and institutional tax-exempt (i.e., municipal) money market funds, which experienced large outflows during the COVID-related market turbulence in March 2020 that contributed to stress on short-term funding markets.... In a departure from the proposed amendments (Proposed Rule), [2] the Commission did not adopt a controversial provision that would have required institutional prime and institutional tax-exempt money market funds to implement swing pricing during periods of net redemptions (under swing pricing, a fund would be required to adjust its current NAV by a swing factor reflecting spread costs, transaction costs, and under certain circumstances, market impact costs).... In the Final Rule, the Commission replaced swing pricing with a mandatory liquidity fee framework that incorporates certain elements of the swing pricing proposal -- and may, much like swing pricing, raise implementation challenges for funds."
Finally, a posting entitled, "ICD Views to SEC Supported in New Money Market Fund Rules," states, "The removal of swing pricing in amendments to money market fund rules adopted by the U.S. Securities Exchange Commission (SEC) last week is a reprieve for institutional investors who use prime money market funds to earn higher returns on their cash investments, says ICD, provider of an independent technology portal for corporate treasurers investing in money market funds and other short-term instruments."
ICD CEO Tory Hazard comments, "We're relieved that the SEC voted to eliminate the burden of swing pricing on institutional investors.... Had those rules been adopted, prime funds might have ceased to exist. This not only would have taken away a higher yielding, safe and liquid cash investment option for institutional investors, but it would have diminished a source of funding for corporations as prime funds account for a significant percentage of the total commercial paper market."
Additional updates include: SSGA's "Key SEC Money Market Fund Reforms" and Western Asset's "Changes Arrive for Money Market Funds, Once Again." See also: the full SEC Money Market Fund Reforms, the SEC's MMF Reforms press release, their "Fact Sheet," and the Commissioner's Statements for more information.
The Securities and Exchange Commission's latest monthly "Money Market Fund Statistics" summary shows that total money fund assets increased by $19.6 billion in June to a record high of $5.930 trillion. Assets at May month-end broke $5.9 trillion for the first time ever peaking above their previous $5.9 trillion May 2023 record. The SEC shows that Prime MMFs increased by $11.0 billion in June to $1.211 trillion, Govt & Treasury funds increased $4.9 billion to $4.597 trillion and Tax Exempt funds increased $3.7 billion to $122.3 billion. Taxable yields jumped again in June after surging in May. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review their latest numbers below. (Month-to-date in June through 7/21, total MMF assets have increased by $30.1 billion to $5.876 trillion, according to our separate MFI Daily series.) (Note: Register for our July 27 at 2pm Eastern for a "Money Fund Wisdom Demo & Training" session, where we'll review Crane Data's product suite with a focus on our MFI Daily asset series. We'll also comment on the data disclosure changes pending from the SEC's recent Money Market Fund Reforms.)
June's overall asset increase follows an increase of $156.6 billion in May, $49.9 billion in April, $364.4 billion in March, $52.1 billion in February, $53.2 billion in January, $54.8 billion in December, $48.5 billion in November and $35.6 billion in October. Assets decreased $9.4 billion in September, but MMFs increased $3.5 billion in August, $57.4 billion in July and $26.6 billion in June. They decreased $19.7 billion in May and $63.3 billion in April. Over the 12 months through 6/30/23, total MMF assets have increased by $886.2 billion, or 17.6%, according to the SEC's series.
The SEC's stats show that of the $5.930 trillion in assets, $1.211 trillion was in Prime funds, up $11.0 billion in June. Prime assets were up $13.7 billion in May, $36.0 billion in April, down $22.2 billion in March, up $35.4 billion in February, $86.2 billion in January, $10.5 billion in December, $28.0 billion in November, $36.6 billion in October, $15.8 billion in September, $43.5 billion in August, $56.6 billion in July and $8.5 billion in June. Prime funds represented 20.4% of total assets at the end of June. They've increased by $351.1 billion, or 40.8%, over the past 12 months. (Note that the SEC's series includes a number of internal money funds not tracked by ICI, though Crane Data includes most of these assets in its collections.)
Government & Treasury funds totaled $4.597 trillion, or 77.5% of assets. They increased $4.9 billion in June, $137.4 billion in May, $19.3 billion in April, $387.9 billion in March, $16.1 billion in February, decreased $33.2 billion in January and increased $41.3 billion in December and $23.1 billion in November. Govt MMFs decreased $12.8 billion in October, $20.8 billion in September and $47.1 billion in August. They increased $8.2 billion in July and $14.4 billion in June. Govt & Treasury MMFs are up $524.3 billion over 12 months, or 12.9%. Tax Exempt Funds increased $3.7 billion to $122.3 billion, or 2.1% of all assets. The number of money funds was 293 in June, unchanged from the previous month and down 14 funds from a year earlier.
Yields for Taxable and Tax Exempt MMFs moved higher yet again in June. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on June 30 was 5.22%, up 4 bps from the prior month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 5.28%, up 3 bps from the previous month. Gross yields were 5.16% for Government Funds, up 1 basis point from last month. Gross yields for Treasury Funds were up 8 bps at 5.17%. Gross Yields for Tax Exempt Institutional MMFs were up 52 basis points to 4.06% in June. Gross Yields for Tax Exempt Retail funds were up 49 bps to 3.91%.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 5.16%, up 4 bps from the previous month and up 372 basis points from 6/30/22. The Average Net Yield for Prime Retail Funds was 5.01%, up 2 bps from the previous month, and up 368 bps since 6/30/22. Net yields were 4.93% for Government Funds, up 1 bp from last month. Net yields for Treasury Funds were up 8 bps from the previous month at 4.95%. Net Yields for Tax Exempt Institutional MMFs were up 52 bps from May to 3.94%. Net Yields for Tax Exempt Retail funds were up 50 bps at 3.67% in June. (Note: These averages are asset-weighted.)
WALs and WAMs were mostly up in June. The average Weighted Average Life, or WAL, was 46.9 days (up 2.0 days) for Prime Institutional funds, and 39.7 days for Prime Retail funds (up 1.4 days). Government fund WALs averaged 67.5 days (up 1.5 days) while Treasury fund WALs averaged 56.6 days (up 0.4 days). Tax Exempt Institutional fund WALs were 10.4 days (up 0.1 days), and Tax Exempt Retail MMF WALs averaged 21.2 days (up 4.4 days).
The Weighted Average Maturity, or WAM, was 23.0 days (up 2.7 days from the previous month) for Prime Institutional funds, 21.6 days (up 4.3 days from the previous month) for Prime Retail funds, 24.4 days (up 3.8 days from previous month) for Government funds, and 23.1 days (up 1.3 days from previous month) for Treasury funds. Tax Exempt Inst WAMs were down 0.4 days to 9.9 days, while Tax Exempt Retail WAMs were up 4.5 days from previous month at 20.3 days.
Total Daily Liquid Assets for Prime Institutional funds were 51.4% in June (down 0.8% from the previous month), and DLA for Prime Retail funds was 45.2% (down 3.2% from previous month) as a percent of total assets. The average DLA was 71.0% for Govt MMFs and 97.8% for Treasury MMFs. Total Weekly Liquid Assets was 67.5% (up 2.1% from the previous month) for Prime Institutional MMFs, and 61.4% (down 1.9% from the previous month) for Prime Retail funds. Average WLA was 82.0% for Govt MMFs and 99.2% for Treasury MMFs.
In the SEC's "Prime Holdings of Bank-Related Securities by Country table for June 2023," the largest entries included: Canada with $130.4 billion, the U.S. with $116.9B, Japan with $95.6 billion, France with $82.1 billion, the Netherlands with $41.6B, the U.K. with $41.4B, Germany with $25.8B, Aust/NZ with $25.6B and Switzerland with $7.1B. The gainers among the "Prime MMF Holdings by Country" included: Canada (up $14.7B), the U.S. (up $7.4B), Japan (up $4.5B), Aust/NZ (up $2.6B), Switzerland (up $1.7B) and the U.K. (up $1.0B). Decreases were shown by: Germany (down $14.7B), France (down $9.8B) and Netherlands (down $3.7B).
The SEC's "Prime Holdings of Bank-Related Securities by Region" table shows The Americas had $247.4 billion (up $22.2B), while Eurozone had $162.9B (down $37.5B). Asia Pacific subset had $140.0B (down $0.6B), while Europe (non-Eurozone) had $98.6B (down $2.4B from last month).
The "Prime MMF Aggregate Product Exposures" chart shows that of the $1.201 trillion in Prime MMF Portfolios as of June 30, $579.8B (48.3%) was in Government & Treasury securities (direct and repo) (up from $544.0B), $269.7B (22.5%) was in CDs and Time Deposits (down from $297.3B), $164.2B (13.7%) was in Financial Company CP (down from $170.2B), $132.8B (11.1%) was held in Non-Financial CP and Other securities (up from $129.9B), and $54.0B (4.5%) was in ABCP (up from $47.6B).
The SEC's "Government and Treasury Funds Bank Repo Counterparties by Country" table shows the U.S. with $292.6 billion, Canada with $145.1 billion, France with $119.5 billion, the U.K. with $81.6 billion, Germany with $19.7 billion, Japan with $112.9 billion and Other with $42.7 billion. All MMF Repo with the Federal Reserve was down $138.0 billion in June to $1.906 trillion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs 6.9%, Prime Retail MMFs with 3.7%, Tax Exempt Inst MMFs with 0.9%, Tax Exempt Retail MMFs with 2.9%, Govt MMFs with 13.5% and Treasury MMFs with 8.1%.
We continue quoting from and analyzing the SEC's 424-page "Money Market Fund Reforms," which were published a week and a half ago. Today, we excerpt from the new "Liquidity Fee Requirement," which starts with the sub-section, "Determination to Adopt a Liquidity Fee Requirement." They write, "After considering comments, we are adopting a mandatory liquidity fee framework for institutional prime and institutional tax-exempt funds instead of the proposed swing pricing requirement. We believe the mandatory liquidity fee will reduce operational burdens associated with swing pricing while still achieving many of the benefits we were seeking with swing pricing by allocating liquidity costs to redeeming investors in stressed periods. In addition, we are adopting a discretionary liquidity fee for all non-government money market funds so that liquidity fees are an available tool for such funds to manage redemption pressures when the mandatory fee does not apply." (See the MMF Reforms press release here and the Fact Sheet here.) (Note: Register for our July 27 at 2pm Eastern for a "Money Fund Wisdom Demo & Training" session, where we'll review Crane Data's product suite with a focus on our MFI Daily asset series. We'll also comment on the data disclosure changes pending from the SEC's recent Money Market Fund Reforms.)
The new rule continues, "Whether the fee is mandatory or discretionary, we are, as proposed, removing from rule 2a-7 the tie between liquidity fees and a fund's weekly liquid asset levels to avoid predictable triggers that may incentivize investors to preemptively redeem to avoid incurring fees. This liquidity fee framework, independent of a predictable threshold for its application, achieves the intended benefits of the current liquidity fee regime by allocating liquidity costs to redeeming shareholders in times of stress while, in contrast to the current rule, avoiding incentives for preemptive redemptions associated with weekly liquid asset triggers. An approach solely based on liquidity fees, as opposed to gates, does not present the same concerns about incentivizing redemptions that exist under current rule 2a-7. As discussed, money market fund investors seemingly have been more concerned about the possibility of redemption gates than the possibility of liquidity fees. This change is designed to increase the resilience of money market funds."
It says, "The Commission proposed a swing pricing requirement under which an institutional prime or institutional tax-exempt fund would downwardly adjust its current NAV per share by a swing factor when a fund has net redemptions. The swing factor adjustment would reflect spread and transaction costs and, if net redemptions exceeded 4% of the fund's net assets, then the swing factor would also include market impact costs. The Commission also proposed to remove the liquidity fee provision in rule 2a-7, which conditions the use of liquidity fees upon declines in fund liquidity below identified, predictable thresholds, and to specify that money market funds could instead impose liquidity fees under rule 22c-2 at their discretion."
The SEC writes, "Many commenters expressed broad concerns about the swing pricing proposal and its potential effect on institutional money market funds and investors. Several commenters stated that the proposed swing pricing requirement was incompatible with how money market funds operate and manage liquidity, which may limit the utility of these funds as cash management vehicles. For instance, commenters expressed concern that swing pricing may inhibit a fund's ability to offer features such as same-day settlement and multiple NAV strikes per day due to concerns that swing pricing would delay a fund's ability to determine its NAV.... In addition, some commenters indicated that the operational costs of the proposed swing pricing requirement could cause some sponsors to eliminate their institutional prime and institutional tax-exempt money market funds, particularly smaller funds, and reduce money market fund assets. In light of these considerations, some commenters suggested that swing pricing is not an appropriate tool for money market funds and stated that a liquidity fee framework would be better suited to the structure and characteristics of money market funds, if the Commission determines that an anti-dilution tool is necessary for these funds."
They then state, "Many commenters stated that liquidity fees were preferable to swing pricing. Many of these commenters stated that liquidity fees would be easier for money market funds to implement. For instance, some commenters suggested that funds would be able to build on their existing experience with liquidity fees under current rules. Similarly, some commenters raised the concern that swing pricing is ill-suited for money market funds given the general lack of experience with swing pricing in the money market fund industry."
The rule continues, "Several commenters stated that a liquidity fee framework would provide benefits to investors relative to swing pricing. Some of these commenters suggested that a liquidity fee would be less confusing and more transparent with respect to the liquidity costs redeeming investors incur because investors are more familiar with the concept of liquidity fees (which exist in the current rule) and because the size of the swing factor is not readily observable in the fund's share price. Some commenters suggested that a liquidity fee would be a more direct way to pass along liquidity costs and, unlike swing pricing, would do so without providing a discount to subscribing investors or adding volatility to the fund's NAV.... Further, one commenter indicated that a liquidity fee framework could better preserve same-day liquidity for investors than swing pricing because liquidity fees are already operationally feasible for many money market funds and present fewer implementation challenges."
It states, "After considering these comments, we are adopting a liquidity fee framework to better allocate liquidity costs to redeeming investors. The proposed swing pricing requirement was designed to address potential shareholder dilution and the potential for a first-mover advantage for institutional funds. While we continue to believe these goals are important, we are persuaded by commenters that these same goals are better achieved through a liquidity fee mechanism, particularly given that current rule 2a-7 includes a liquidity fee framework that funds are accustomed to and can build upon."
The SEC explains, "The mandatory liquidity fee framework we are adopting is designed to address concerns with the prior liquidity fee framework -- namely the incentives for preemptive redemptions associated with predictable weekly liquid asset triggers. At the same time it continues to seek to ensure that the costs stemming from redemptions in stressed market conditions are more fairly allocated to redeeming investors. Specifically, institutional prime and institutional tax-exempt money market funds will be subject to a mandatory liquidity fee when net redemptions exceed 5% of net assets. Funds will not be required to impose this fee, however, when liquidity costs are less than one basis point, which we anticipate will often be the case under normal market conditions. As discussed in more detail throughout this section, the mandatory liquidity fee we are adopting will broadly address the concerns commenters raised about the swing pricing proposal while still generally achieving the goals we sought in that proposal. Separately, similar to the statements in the proposal that money market funds can impose discretionary liquidity fees under rule 22c-2, amended rule 2a-7 will provide a discretionary liquidity fee tool to all non-government money market funds, which a fund will use if its board (or the board's delegate, in accordance with board-approved guidelines) determines that such fee is in the best interests of the fund."
They say, "The mandatory liquidity fee approach that we are adopting will require redeeming investors to pay the cost of depleting a fund's liquidity, particularly under stressed market conditions and when net redemptions are sizeable. As discussed in the proposal, trading activity and other changes in portfolio holdings associated with meeting redemptions may impose costs, including trading costs and costs of depleting a fund's daily or weekly liquid assets. These costs, which currently are borne by the remaining investors in the fund, can dilute the interests of non-redeeming shareholders and create incentives for shareholders to redeem quickly to avoid losses, particularly in times of market stress. If shareholder redemptions are motivated by this first-mover advantage, they can lead to increasing outflows, and as the level of outflows from a fund increases, the incentive for remaining shareholders to redeem may also increase. Regardless of the motive for investor redemptions, there can be significant, unfair adverse consequences to remaining investors in a fund in these circumstances, including material dilution of remaining investors' interests in the fund. The mandatory liquidity fee mechanism is designed to reduce the potential for such dilution."
The Reforms continue, "After considering comments, we continue to believe that in periods of market stress, when liquidity in underlying short-term funding markets is scarce and costly, redeeming investors should bear liquidity costs associated with sizeable redemption activity. While we recognize that a fund may not incur immediate costs to meet those redemptions if the fund can satisfy redemptions using daily liquid assets, the fund is likely to face costs to rebalance the liquidity of its portfolio over time. Moreover, if redemptions are large and ongoing, there is an increased likelihood that the fund will need to sell less liquid assets to satisfy redemptions, which involves greater costs. Thus, there is a timing misalignment between an investor's redemption activity and when the fund, and its remaining shareholders, incur liquidity costs. The liquidity fee requirement we are adopting is designed to protect remaining shareholders from dilution under these circumstances and to more fairly allocate costs so that redeeming shareholders bear the costs of removing liquidity from the fund when liquidity in underlying short-term funding markets is costly."
The SEC then states, "We understand that future stress periods may not look exactly the same as March 2020, and, as some commenters suggested, in future periods funds may feel more comfortable drawing on available liquidity to meet redemptions because we are removing the tie between liquidity thresholds and fees and gates. Funds also may begin future stressed periods with higher levels of daily and weekly liquid assets than in March 2020, although at that time some funds had liquidity above the minimums we are adopting. However, it is also possible that future stress periods will be longer or otherwise more severe than March 2020, that future stress events will have no Federal intervention to alleviate those stresses, or that a particular fund or group of funds will come under stress due to factors idiosyncratic to the fund(s). It is important for funds to be able to manage through various types of stress events and not to rely solely on liquidity buffers to manage stress. As discussed below and in the Proposing Release, while liquidity minimums are an important tool for managing redemptions, our analysis suggests that some funds would run out of liquidity if faced with the redemptions rates experienced in March 2020. Thus, we do not agree with commenters who suggested that amendments to enhance money market fund liquidity, and the useability of that liquidity, would be sufficient on their own, without an available anti-dilution tool."
The section concludes, "As discussed, we are adopting a mandatory liquidity fee framework in lieu of the proposed swing pricing requirement. Table 1 (see pages 42-45) below compares the key elements of the current rule's default liquidity fee, the proposed swing pricing requirement, and the mandatory liquidity fee provision we are adopting. In addition, Table 2 below compares the key elements of the current rule's discretionary liquidity fee, the redemption fee approach contemplated by the proposal, and the discretionary liquidity fee provision we are adopting. We discuss these aspects of the final rule and how they relate to comments on the proposal in the following sections."
The European Commission published "Report from the Commission to the European Parliament and the Council "on the adequacy of Regulation (EU) 2017/1131 of the European Parliament and of the Council on money market funds from a prudential and economic point of view." Its Intro says, "Regulation (EU) 2017/1131 on money market funds (the MMF Regulation) was proposed in the aftermath of the global financial crisis, which exposed certain weaknesses of financial markets and their regulatory regimes around the globe. Since entering into application in January 2019, this Regulation has significantly strengthened the regulatory regime for MMFs in the EU, following recommendations by the Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO) and the European Systemic Risk Board (ESRB) The new regulatory framework was put to the test by the market stress related to the COVID-19 pandemic. The impact of this stress on MMFs differed across jurisdictions due to differences in the structures of MMF markets (e.g the predominant types of MMFs, investor profiles, and underlying investments) and residual differences in the regulatory framework for MMFs."
The report continues, "Major central banks such as the European Central Bank (ECB) and the US Federal Reserve took various measures to mitigate the effects, including outright purchases of commercial papers on the primary and secondary markets, providing lending for banks to buy assets from MMFs (Federal Reserve), and extending the eligible collateral for refinancing operations to unsecured banks bonds (ECB). These interventions improved liquidity and confidence in short-term debt markets, which also contributed to a reduction in the pace of redemptions from MMFs. Although there were substantial outflows from certain types of MMFs in March 2020 and other market stress periods, no EU MMFs were required to trigger redemption fees or gates or to suspend redemptions."
The Commission writes, "Following the COVID-19 market stress, global and European prudential authorities started to work on policy proposals to increase the resilience of MMFs. In particular, the FSB, the ESRB and the European Securities Markets Authority (ESMA) proposed various reforms to ensure MMFs do not amplify liquidity shocks in times of stress. One of these proposals is to remove the possibility for Low volatily net asset value MMFs (LVNAVs) to use amortised cost accounting. However, this could reduce the effectiveness of MMFs as liquidity management alternatives to bank deposits, and limit the cash-management options of corporates."
Discussing the "Legal basis for the report, they tell us, "This report is prepared in accordance with Article 46(1) of the MMF Regulation, which requires the Commission to assess the functioning of the MMF Regulation based on an analysis of the current rules from a prudential and economic point of view, and following consultations with ESMA and, where appropriate, the ESRB, and in accordance with Article 6(2) which specifies the conditions this report needs take into consideration. This article also requires the Commission to assess whether changes are to be made to the regime for public debt constant net asset value MMFs (CNAVs) and LVNAVs."
On the "Methodology and consultation process," the Commission states, "This report draws on a number of studies carried out by European and international bodies. Both the FSB report and ESMA opinion benefitted from stakeholder feedback. The latter reports as well as the ESRB recommendations contain extensive sets of data and evidence from supervisory authorities. The ECB has published an assessment of the effectiveness of the EU's regulatory framework from a financial stability perspective, based on the behaviour of MMFs during the COVID-19 crisis. Academic papers have further informed this report."
They comment, "From 12 April to 20 May 2022, the Commission conducted a stakeholder consultation to collect stakeholders' views about the functioning of the MMF Regulation. A total of 48 respondents submitted a contribution. More than two thirds of respondents indicated that the MMF Regulation has been effective in delivering on its key objectives in terms of ensuring liquidity, increasing investor protection, preventing the risk of contagion, and improving transparency, supervision, and the financial stability of the single market. These respondents consider that the MMF Regulation has contributed to the integration of capital markets and made MMFs more resilient, in particular through its rules on credit quality and asset composition."
The report adds, "Feedback received from stakeholders also indicates the importance of ensuring consistency of the rules at EU level and of strengthening supervision. In addition, cross-border investors also appreciate that the MMF Regulation gives them the possibility to conduct cash management globally through a standard process from both an accounting and a risk management point of view."
The EC explains, "Before the introduction of the MMF Regulation, the majority of MMFs in the EU operated under the rules of the UCITS Directive, its implementing acts and guidelines, as well as industry codes of conduct. France, Ireland and Luxembourg are the major domiciles of EU MMFs. Luxembourg and Ireland developed a MMF sector with CNAV in foreign currencies targeted at institutional investors from outside the EU."
They continue, "The MMF Regulation introduced a dedicated and significantly more developed regulatory regime for MMFs in the EU. In particular, it aimed to address credit and liquidity risk challenges experienced by MMFs during the 2008 crisis. By harmonising the essential product features that constituted a MMF, the framework also established a uniform level of investor protection through rules on liquidity and liquidity risk management, including liquidity buffers, assets in which MMFs can invest, diversification, valuation and internal credit quality assessment. It also enhanced transparency towards investors and supervision, including via comprehensive reporting to the National competent authorities (NCAs)."
The EC states, "In addition, the MMF Regulation explicitly bans 'external support' to avoid the risk of contagion between the MMF sector and the rest of the financial sector. The 'Know-Your-Customer' policy obliges managers of all types of MMFs to anticipate the effect of concurrent redemptions by several investors. All managers have to adjust the actual level of liquidity to the specific cash needs of their customers at any time of their accounting cycles."
It tells us, "The MMF Regulation created a new type of MMF, the LVNAV, to replace CNAVs invested in non-public debt. Similarly to public debt CNAVs, LVNAVs are allowed to use amortised cost accounting to offer a stable redemption price, but only as long as the value of the underlying assets does not deviate by more than 20 basis points from the market value of the fund's net assets. The two values are published daily. If the deviation exceeds 20 basis points, the LVNAV fund has to switch from a constant NAV to a variable NAV."
The EC paper concludes, "This report delivers on the legal mandate under Article 46(1) and 46(2) of the MMF Regulation for the Commission to submit a report to the European Parliament and to the Council, reviewing the adequacy of the MMF Regulation from a prudential and economic point of view. The report shows that the MMF Regulation successfully passed the test of liquidity stress experienced by MMFs during the COVID-19 related market turmoil of March 2020, the recent interest rate increases, and related financial asset re-pricing. No EU-based MMF had to introduce redemption fees or gates or to suspend redemptions during these stress events. Similarly, EU MMFs focused on GBP assets withstood the redemption pressure linked to the September 2022 gilt market stress."
It says, "These experiences indicate that the the safeguards in the MMF Regulation have been working as intended. This includes the safeguards that were conceived to allow stable NAV MMFs (CNAVs and LVNAVs) to continue using, under certain conditions, the amortized cost method without creating systemic risks and harming investors. By introducing a dedicated regime, the MMF Regulation has significantly strengthened the regulatory framework for MMFs in the EU, which had before been subject to different rules. However, after 5 years of application of the MMF Regulation, this report identifies shortcomings which should be further assessed. In particular, the results of the stakeholder consultation and the recent market developments show that there could be scope to further increase the resilience of EU MMFs, notably by decoupling the potential activation of liquidity management tools from regulatory liquidity thresholds."
The paper adds, "In addition, this report highlights structural problems that are external to MMFs, and therefore also to the MMF Regulation, including those linked to the underlying short-term markets. These structural problems would merit a further assessment, and are also currently the subject of a more in-depth analysis at the level of FSB. Finally, EU MMFs will benefit from the ongoing review of the AIFM and UCITS Directives, which aims to introduce new harmonised rules to increase the availability of LMTs for open-ended funds. This new LMT framework will further strengthen the resilience of EU MMF's liquidity management in cases of stress."
A number of asset managers, brokerages and banks reported second-quarter over the past week, and the glimpses of money fund and bank deposit trends so far show that the massive "cash sorting" and shift into money funds from bank deposits continued but slowed. Charles Schwab CFO Peter Crawford states, "While navigating significant near-term headwinds, we generated second quarter revenues of $4.7 billion, down 9% on a year-over-year basis. This top-line result was driven primarily by a temporary increase in the utilization of supplemental funding to facilitate client cash allocation decisions during the current rising rate cycle. Net interest revenue declined 10% from the prior year to $2.3 billion as the incorporation of higher cost liabilities brought our net interest margin down by 32 basis points sequentially to 1.87%. While anticipated client cash realignment, along with net equity buying during June, pushed cash levels lower, we observed a continued and substantial deceleration in the daily pace of cash outflows versus prior months. The continuation of this trend through the end of the quarter further strengthens our conviction that this realignment activity will inflect before the end of 2023, unlocking growth in client cash held on the balance sheet."
A "Supplement" to Schwab's Q2'23 earnings release, entitled, "The Charles Schwab Corporation Supplemental Monthly Client Metrics for June 2023 shows Bank Deposits totaling $102.7 billion as of June 2023, vs. $155.6 billion a year ago, a decline of $52.9 billion (-34.0%). Total Money Market Funds were listed at $395.6 billion as of June 2023 vs. $168.5 billion a year earlier, a jump of $227.1 billion (135%).
Morgan Stanley also reported earnings. Their Q2'23 conference call featured CFO Sharon Yeshaya commenting, "Net interest income of $2.2 billion was virtually flat versus the prior quarter. The impact of lower sweep balances and higher funding costs were offset by higher rates. Looking towards the rest of the year, we do not expect NII to expand. Results will be a function of our deposit mix and the trajectory of various rates."
Asked about the composition of the shift from sweeps, she answers, "In terms of the shift in terms of moving out of sweeps into savings or seeing savings products, we still have over 80% of our actual deposit base is coming from our own client base. What's interesting in terms of the movement of sweeps, which might be your question, I'm not sure I'm totally answering it, ... is that we began to see some of those sweeps not just -- remember, we used to see them move into money markets or other cash alternatives -- in June, we began to see some of those dollars actually move into markets, so various assets. We hadn't seen that trend since January. So that just shows that some of the clients are actually also deploying excess cash or cash equivalents actually into the marketplace as well."
On BlackRock's latest earnings release and earnings call, CFO Martin Small tells us, "[C]ash management net inflows of $23 billion in the second quarter were led by U.S. government money market funds. We're actively working with clients on their liquidity management strategy, providing technology, market, and operational insights, and, of course, a full range of cash management capabilities. Looking ahead, we see significant opportunity to grow our market share and consolidate our position with clients as they choose to do more with BlackRock. We're the only asset manager delivering platform as a service."
Asked about pending reallocations to bond funds awaiting the Fed to pause, President Rob Kapito responds, "The two answers are yes and yes. And that is because, currently, yields are back. But I think, in general, most people think that yields are going to continue to rise. So, they are preparing for what I would call a generational change in the fixed income market because you can actually earn attractive yields without taking much duration or credit risk.... We are well positioned for that, both with our $3.4 trillion fixed income and cash platform. So, to give you some numbers, 80% of all fixed income is now yielding over 4%."
He continues, "This is a pretty remarkable shift in our history. We're calling this a once-in-a-generation opportunity. There is finally income to be earned in the fixed income market, and we are expecting a resurgence in demand. Now, you touched on something very important, the cash market. This is not the last stop for that cash. And there are trillions now, I think the number is around $7 trillion [sic], in money market accounts. That is ready when people feel that rates have peaked to flood the fixed income market, and we need to position ourselves to capture that. How do you do that? `One is by product and the other is by performance."
When asked about the new Money Market Fund Reforms, Kapito says, "We're supportive of any efforts to improve the resiliency and transparency of U.S. money market funds, but nongovernment institutional money market funds, which were really the main focus of the rules, are a very small part of our cash business. Ours is U.S. government funds and separate accounts, that's really the bulk of our assets. And, of course, we have a diverse set of cash offerings, including money market funds and separate accounts, [and] ETFs [with a] short-duration strategy."
He adds, "So, we're going to work together with our clients as they consider the best tools for their liquidity management, and we will continue to review the regulatory rules to see what impact that could have on our business, which I think is quite limited. But remember, in asset allocation, when there's money in motion, it moves to cash, it moves to longer-term assets, it's something you must have as a liquidity tool to do all the things that clients need to do."
Finally, Kapito states, "And since we're going to be, I think, a beneficiary of the long-term assets, going after corporations and treasury management and other institutions for their cash, [that] puts us in the game in a much better way than if they're just coming into our products from the outside.... So, we're very optimistic, and we will continue to really build our sales force to continue to be a leader in the cash management business, knowing that it's also going to lead to other opportunities for us."
Goldman Sachs and Dreyfus are slightly tweaking and streamlining their money fund lineups, announcing a handful of liquidations, according to recent SEC filings. A Prospectus Supplement for the Goldman Sachs Money Markets Funds explains, "At a meeting of the Board of Trustees of Goldman Sachs Trust held on June 13-14, 2023, the Trustees approved, on behalf of the Funds, the termination of the Resource, Premier, Select, Capital, Cash Management and Service Share Classes of the following Funds: Financial Square Money Market Fund - Resource, Capital, Cash Management, Premier; Financial Square Prime Obligations Fund - Resource, Cash Management, Premier, Service; Financial Square Treasury Instruments Fund - Resource Financial Square Treasury Solutions Fund - Resource; Financial Square Federal Instruments Fund - Premier, Select; Investor Money Market Fund - Resource; and Investor Tax-Exempt Money Market Fund - Resource." (Note: Please join us on July 27 at 2pm Eastern for a "Money Fund Wisdom Demo & Training" session, where we'll review Crane Data's product suite and database query system with a focus on our MFI Daily asset series. We'll also comment on the data disclosure changes pending from the SEC's recent Money Market Fund Reforms.)
The filing adds, "Effective immediately, in anticipation of the Termination, the Terminated Share Classes of the Funds will no longer be sold to new investors or existing shareholders (except through reinvested dividends) or be eligible for exchanges from other Goldman Sachs Funds. In addition, effective immediately, the Terminated Share Classes of the Funds will be closed to all new accounts. The Termination is expected to occur on or about July 14, 2023 or on such later date as the officers of the Trust determine."
A separate filing for Dreyfus Institutional Preferred Money Market Funds - Dreyfus Institutional Preferred Government Plus Money Market Fund states, "Effective as of the close of business on July 6, 2023, SL Shares of Dreyfus Institutional Preferred Government Plus Money Market Fund have been terminated, and all references to the Fund's SL shares in the Statement of Additional Information are hereby removed." For more on recent fund liquidations (of which there have been very few), see Crane Data's May 22 Link of the Day, "Cavanal Hill Liquidates $71M U.S. Treasury Service Class, Added to Fed RRP List," our Jan. 5 LOTD, "Harbor Money Market Fund Liquidates," our Sept. 19, 2022 News, "SSGA to Liquidate State Street ESG Liquid Reserves," and our July 7, 2022 News, "DWS Liquidating Govt Cash Mgmt Fund.")
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of July 14) includes Holdings information from 62 money funds (up 2 from two weeks ago), which totals $2.554 trillion (up from $2.491 trillion) of the $5.841 trillion in total money fund assets (or 43.7%) tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here.)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.361 trillion (down from $1.384 trillion two weeks ago), or 53.3%; Treasuries totaling $748.9 billion (up from $694.1 billion two weeks ago), or 29.3%, and Government Agency securities totaling $226.3 billion (down from $229.6 billion), or 8.9%. Commercial Paper (CP) totaled $61.6 billion (down from two weeks ago at $67.7 billion), or 2.4%. Certificates of Deposit (CDs) totaled $62.6 billion (up from $60.1 billion two weeks ago), or 2.5%. The Other category accounted for $53.6 billion or 2.1%, while VRDNs accounted for $39.6 billion, or 1.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $748.9 billion (29.3% of total holdings), the Federal Reserve Bank of New York with $711.9 billion (27.9%), Fixed Income Clearing Corp with $169.6B (6.6%), Federal Home Loan Bank with $165.7B (6.5%), Federal Farm Credit Bank with $51.1B (2.0%), JP Morgan with $41.8B (1.6%), RBC with $39.2B (1.5%), Barclays PLC with $37.5B (1.5%), Goldman Sachs with $36.0B (1.4%) and BNP Paribas with $33.4B (1.3%).
The Ten Largest Funds tracked in our latest Weekly include: Goldman Sachs FS Govt ($267.8B), JPMorgan US Govt MM ($255.9B), Fidelity Inv MM: Govt Port ($175.1B), Morgan Stanley Inst Liq Govt ($163.1B), JPMorgan 100% US Treas MMkt ($152.6B), Dreyfus Govt Cash Mgmt ($105.7B), Allspring Govt MM ($105.2B), Fidelity Inv MM: MM Port ($104.2B), Invesco Govt & Agency ($96.7B) and State Street Inst US Govt ($96.2B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Finally, ICI also released its latest monthly "Money Market Fund Holdings" summary, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. This release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in June, prime money market funds held 43.1 percent of their portfolios in daily liquid assets and 58.8 percent in weekly liquid assets, while government money market funds held 81.8 percent of their portfolios in daily liquid assets and 88.0 percent in weekly liquid assets." Prime DLA was down from 47.1% in May, and Prime WLA was down from 61.5%. Govt MMFs' DLA was up from 78.0% and Govt WLA increased from 84.6% the previous month.
ICI explains, "At the end of June, prime funds had a weighted average maturity (WAM) of 24 days and a weighted average life (WAL) of 48 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 24 days and a WAL of 64 days." Prime WAMs were 5 days longer and WALs were 2 days longer from the previous month. Govt WAMs were 3 days longer and WALs were 1 day longer from May.
Regarding Holdings by Region of Issuer, the release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $403.71 billion in May to $451.64 billion in June. Government money market funds’ holdings attributable to the Americas rose from $4,114.34 billion in May to $4,151.36 billion in June."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $451.6 billion, or 55.5%; Asia and Pacific at $124.1 billion, or 15.2%; Europe at $229.8 billion, or 28.2%; and, Other (including Supranational) at $8.9 billion, or 1.2%. The Government Money Market Funds by Region of Issuer table shows Americas at $4.151 trillion, or 92.0%; Asia and Pacific at $103.6 billion, or 2.3%; Europe at $245.1 billion, 5.4%, and Other (Including Supranational) at $11.5 billion, or 0.3%.
Crane Data's latest Money Fund Intelligence International shows that assets in European or "offshore" money market mutual funds rose over the past 30 days to $1.067 trillion. USD and GBP MMFs fell, while EUR MMFs rose. While up somewhat year-to-date, European MMF assets remain well below their record high of $1.101 trillion set in mid-December 2021. These U.S.-style money funds, domiciled in Ireland or Luxembourg but denominated in US Dollars, Pound Sterling and Euros, increased by $11.3 billion over the 30 days through 7/14. The totals are up $37.0 billion (3.6%) year-to-date. (Note that currency moves in the U.S. dollar cause Euro and Sterling totals to shift when they're translated back into totals in U.S. dollars. See our latest MFI International for more on the "offshore" money fund marketplace. Note that these funds are only available to qualified, non-U.S. investors.)
Offshore US Dollar money funds decreased $4.9 billion over the last 30 days but are up $21.6 billion YTD to $571.1 billion. Euro funds increased E9.9 billion over the past month. YTD, they're up E10.0 billion to E190.4 billion. GBP money funds decreased L5.1 billion over 30 days; they are down by L35.3 billion YTD to L228.1B. U.S. Dollar (USD) money funds (200) account for over half (53.5%) of the "European" money fund total, while Euro (EUR) money funds (110) make up 19.5% and Pound Sterling (GBP) funds (133) total 27.0%. We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers Monday), below.
Offshore USD MMFs yield 5.04% (7-Day) on average (as of 7/14/23), up from 5.01% a month earlier. Yields averaged 4.20% on 12/30/22, 0.03% on 12/31/21, 0.05% on 12/31/20, 1.59% on 12/31/19 and 2.29% on 12/31/18. EUR MMFs finally left negative yield territory in the second half of 2022; they're yielding 3.35% on average, up from 3.10% a month ago and up from 1.48% on 12/30/22, -0.80% on 12/31/21, -0.71% at year-end 2020, -0.59% at year-end 2019 and -0.49% at year-end 2018. Meanwhile, GBP MMFs yielded 4.78%, up 39 bps from a month ago, and up from 3.17% on 12/30/22. Sterling yields were 0.01% on 12/31/21, 0.00% on 12/31/20, 0.64% on 12/31/19 and 0.64% on 12/31/18.
Crane's May MFI International Portfolio Holdings, with data as of 6/30/23, show that European-domiciled US Dollar MMFs, on average, consist of 22% in Commercial Paper (CP), 16% in Certificates of Deposit (CDs), 35% in Repo, 13% in Treasury securities, 12% in Other securities (primarily Time Deposits) and 2% in Government Agency securities. USD funds have on average 58.0% of their portfolios maturing Overnight, 6.8% maturing in 2-7 Days, 8.7% maturing in 8-30 Days, 7.5% maturing in 31-60 Days, 5.0% maturing in 61-90 Days, 8.4% maturing in 91-180 Days and 5.6% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (37.2%), France (13.8%), Canada (11.1%), Japan (9.9%), Sweden (5.0%), the U.K. (4.9%), the Netherlands (3.4%), Australia (2.7%), Germany (2.5%) and Belgium (1.3%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $80.3 billion (13.0% of total assets), Fixed Income Clearing Corp with $39.2B (6.4%), Federal Reserve Bank of New York with $26.8B (4.3%), BNP Paribas with $26.0B (4.2%), Citi with $20.1B (3.3%), RBC with $20.1B (3.3%), Sumitomo Mitsui Banking Corp with $18.7B (3.0%), Bank of America with $15.7B (2.5%), Barclays with $15.2B (2.5%) and Credit Agricole with $14.5B (2.4%).
Euro MMFs tracked by Crane Data contain, on average 44% in CP, 21% in CDs, 25% in Other (primarily Time Deposits), 10% in Repo, 0% in Treasuries and 0% in Agency securities. EUR funds have on average 45.8% of their portfolios maturing Overnight, 8.4% maturing in 2-7 Days, 13.3% maturing in 8-30 Days, 12.8% maturing in 31-60 Days, 6.4% maturing in 61-90 Days, 7.8% maturing in 91-180 Days and 5.6% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (32.5%), Japan (13.0%), Germany (8.1%), the U.S. (7.8%), Canada (6.1%), Sweden (5.6%), the U.K. (5.2%), Austria (4.4%), Belgium (3.9%) and the Netherlands (3.7%).
The 10 Largest Issuers to "offshore" EUR money funds include: Republic of France with E10.6B (5.8%), Credit Agricole with E9.0B (4.9%), BNP Paribas with E8.9B (4.8%), Credit Mutuel with E8.5B (4.6%), Landesbank Baden-Wurttemberg with E7.2B (3.9%), Erste Group Bank AG with E6.7B (3.7%), Societe Generale with E6.6B (3.6%), Mitsubishi UFJ Financial Group with E6.2B (3.4%), Sumitomo Mitsui Banking Corp with E5.7B (3.1%) and BPCE SA with E5.4B (2.9%).
The GBP funds tracked by MFI International contain, on average (as of 6/30/23): 37% in CDs, 19% in CP, 25% in Other (Time Deposits), 17% in Repo, 2% in Treasury and 0% in Agency. Sterling funds have on average 38.2% of their portfolios maturing Overnight, 11.9% maturing in 2-7 Days, 9.6% maturing in 8-30 Days, 13.7% maturing in 31-60 Days, 10.1% maturing in 61-90 Days, 9.2% maturing in 91-180 Days and 7.3% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (18.1%), Canada (15.9%), Japan (15.5%), the U.K. (12.0%), Australia (7.0%), the U.S. (5.5%), the Netherlands (5.1%), Sweden (4.0%), Spain (3.2%) and Singapore (2.6%).
The 10 Largest Issuers to "offshore" GBP money funds include: Toronto-Dominion Bank with L10.7B (4.9%), Mitsubishi UFJ Financial Group Inc with L9.8B (4.6%), RBC with L8.6B (4.0%), BNP Paribas with L7.7B (3.6%), Sumitomo Mitsui Trust Bank with L7.5B (3.5%), BPCE SA with L7.1B (3.3%), Credit Agricole with L7.0B (3.3%), Banco Santander with L6.8B (3.2%), Mizuho Corporate Bank Ltd with L6.2B (2.9%) and Barclays PLC with L6.1B (2.8%).
The July issue of our Bond Fund Intelligence, which was sent to subscribers Monday morning, features the stories, "Worldwide BF Assets Hit $12.0 Trillion, Led by US, Lux, Ireland," which reviews the worldwide Bond Fund assets covered by ICI, and "Money Fund Symposium '23: Martucci & Weaver on Ultras," which excerpts from our most recent Money Fund Symposium that was held In Atlanta, Georgia last month. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns fell in June while yields inched higher. We excerpt from the new issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
Our lead article states, "Bond fund assets worldwide increased in the latest quarter to $12.0 trillion, led higher by the four largest bond fund markets -- the U.S., Luxembourg, Ireland and Brazil. ICI's 'Worldwide Open-End Fund Assets and Flows, First Quarter 2023' says, 'Worldwide regulated open-end fund assets increased 5.0% to $63.12 trillion at the end of the first quarter of 2023.... ICI compiles worldwide regulated open-end fund statistics on behalf of the International Investment Funds Association (IIFA).'"
It continues, "They explain, 'The growth rate of total regulated open-end fund assets reported in US dollars was increased by US dollar depreciation over [Q1] 2023.... Bond fund assets increased by 4.0% to $11.99 trillion in the first quarter. Balanced/mixed fund assets increased by 2.8% to $7.23 trillion in the first quarter, while money market fund assets increased by 6.9% globally to $9.46 trillion.'"
Our "Money Fund Symposium" piece states, "Crane Data recently hosted its big Money Fund Symposium show in Atlanta, where over 530 money market professionals discussed rates, pending reforms, asset inflows and a number of other hot topics in cash. There was some discussion further out the curve, though. The session, 'Ultra-Short Bond Funds & Beyond Cash,' featuring Dave Martucci of J.P. Morgan Asset Management and Jeff Weaver of Allspring Global, discussed the latest, while there was also a segment on 'Local Government Investment Pools & SMAs.' (Note: Conference materials and recordings are available in our Money Fund Symposium 2023 Download Center.)"
It continues, "Martucci comments, 'The only rule to be in the ultra-short category is 'one year and in duration.' Other than that, you're pretty much free to do what you want. Now, we have designed our [Managed Reserves] product as really a step outside of money market funds, leveraging our expertise in the money market fund space [and using those] best practices. But [the space] really goes from one step out of the money market fund to ... even high yield. So, there's a lot of structured product.'"
Our first News brief, "Returns and Yields Higher in June," says, "Bond fund returns rose and yields were mostly higher last month. Our BFI Total Index increased 0.36% over 1-month and is up 2.23% over 12 months. The BFI 100 rose 0.10% in June and rose 1.46% over 1-year. Our BFI Conservative Ultra-Short Index was up 0.39% over 1-month and is up 3.69% for 1-year; Ultra-Shorts also rose 0.39% and are up 3.43% over 12 mos. Short-Term fell 0.18% and rose 1.43%, and Intm-Term fell 0.25% and fell 0.26% over 1-year. BFI's Long-Term Index rose 0.05% and 0.01%. High Yield rose 1.56% in June but rose 7.89% over 1-year.
A second News brief, "Reuters Writes, 'US Bond Investors Eked Out Positive Returns.' The article says, 'U.S. government bond investors have racked up positive returns so far this year, with the higher income from bonds offering a buffer against market weakness if the Federal Reserve increases interest rates again.'"
Our next News brief, "The 'It's Time to be Bolder With Bonds' Says Barron's. They write, 'Holding cash and short-dated bonds has been a winning combination this year. [H]olding nearly risk-free government bonds in the first half of 2023 'was kind of a no-brainer,' says Lori Van Dusen, CEO and founder of LVW Advisors. It's tempting to stay in the perceived safety of cash and the short end, but financial advisors and bond market watchers say investors who have their liquidity needs covered should venture out on the yield curve into slightly longer-dated to intermediate-term bonds to lock in higher rates.... Janet Rilling, senior portfolio manager and head of the Plus Fixed Income team at Allspring Global Investments, says timing the 'Goldilocks moment' of buying longer-dated bonds just before the Fed cuts rates is hard. Investors who wait too long risk losing out when the rate cuts start.'"
Another brief, "ETF Trends, also writes, 'ETF Offers ESG Angle on Ultrashort Bonds,' which says, 'Morgan Stanley launched the actively managed Calvert Ultra-Short Investment Grade ETF (CVSB) along with five other environmental, social, and governance (ESG) funds under the Calvert brand earlier this year. Brian Ellis, an executive director with Morgan Stanley, is one of the portfolio managers for the ESG ultra-short bond fund. VettaFi spoke with him about the fund's management and how it incorporates ESG principles.
ETF Trends also published, 'Fixed Income ETFs Have Many Uses.' The piece, also written by VettiFi, tells us, ‘Fixed income ETFs continue to gain in popularity, but not all investors are taking the same approach.... During a late June webcast with John Hancock, VettaFi asked advisors to best describe how they used fixed income ETFs.... Just over one-third of respondents (35%) were using ETFs alongside core and core plus mutual funds. Meanwhile, just under one third (29%) were combining active and passive approaches. The remainder (15%) were building fixed income portfolios using individual F-I sectors.'"
A BFI sidebar, "Barron's Torn on Cash," says, "The Barron's article, 'Cash Isn't the Only Low-Risk Income Investment,' explains, 'These are the halcyon days of cash. Money-market funds and Treasury bills offer yields around 5% with virtually no credit or interest-rate risk. Long-term Treasuries yield less than short-term ones, a condition known as an inverted yield curve, so there is no immediate upside for venturing into later maturities. Plus, yield curve inversion is a remarkably prescient harbinger of a future recession, making corporate bonds unappealing.'"
Finally, another sidebar, "BlackRock on Bond ETFs," comments, "BlackRock writes, 'Put cash to work with bond ETFs.' They explain, 'Traditional savings accounts are top of mind these days at a time when financial advisors may be looking to get more out of their clients' savings and reducing concentration to any one financial institution. One possibility: short-term bonds, which are currently offering higher yields than any time in the past 15 years. Clients may be able to invest in short-term bonds with ETFs to potentially earn more income with cash they don't need in the near future.'"
We continue wading through the SEC's 424-page "Money Market Fund Reforms" final rules, which were published Wednesday, and we continue to like what we see. (See the MMF Reforms press release here and the Fact Sheet here.) The rule's summary explains, "The Securities and Exchange Commission is adopting amendments to certain rules that govern money market funds under the Investment Company Act of 1940. These amendments are designed to improve the resilience and transparency of money market funds. The amendments will revise the primary rule that governs money market funds to remove the ability for a fund board to temporarily suspend redemptions if the fund's liquidity falls below a threshold. In addition, the amendments will remove the tie between liquidity thresholds and the potential imposition of liquidity fees. The amendments will also require certain money market funds to implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors. In addition, the Commission is increasing the daily liquid asset and weekly liquid asset minimum requirements to 25% and 50%, respectively. "
It continues, "The Commission also is amending certain reporting requirements on Form N-MFP and Form N-CR and making certain conforming changes to Form N-1A to reflect amendments to the regulatory framework for money market funds. In addition, the Commission is addressing how money market funds with stable net asset values may handle a negative interest rate environment, including by adopting amendments that will permit these funds to use share cancellation, subject to certain conditions. Further, the Commission is adopting rule amendments to specify how funds must calculate weighted average maturity and weighted average life. In addition, the Commission is adopting amendments to Form PF concerning the information large liquidity fund advisers must report for the liquidity funds they advise. Finally, the Commission is adopting two technical amendments to Form N-CSR and Form N-1A to correct errors from recent Commission rulemakings."
The Introduction states, "The Commission is adopting amendments to rule 2a-7 under the Investment Company Act of 1940. Money market funds are a type of mutual fund registered under the Act and regulated pursuant to rule 2a-7. These funds are popular cash management vehicles for both retail and institutional investors because they seek to provide investors with principal stability and access to daily liquidity. In addition, money market funds serve as an important source of short-term financing for businesses, banks, and Federal, state, municipal, and Tribal governments. In March 2020, in connection with an economic shock from the onset of the COVID-19 pandemic, certain types of money market funds had significant outflows, contributing to stress on short-term funding markets that resulted in government intervention to enhance the liquidity of such markets. Our historical experience with these funds and the events of March 2020 have led us to re-evaluate certain aspects of the regulatory framework applicable to money market funds. Accordingly, the Commission is adopting amendments to rule 2a-7 and certain reporting forms that are designed to improve the resilience of money market funds during times of market stress while preserving the benefits that investors have come to expect from these funds."
The SEC writes, "In December 2021, the Commission proposed to amend rule 2a-7 to remove the tie between weekly liquid asset thresholds and the potential imposition of liquidity fees and redemption gates, since it appears these provisions contributed to investors' incentives to redeem from certain funds in March 2020 and affected fund managers' willingness to use available liquidity in their portfolios to meet redemptions. For funds that experienced the heaviest outflows in March 2020 and in prior periods of market stress, the proposal also included a new swing pricing requirement that was designed to mitigate the dilution and investor harm that can occur when other investors redeem -- and remove liquidity -- from these funds, particularly when certain markets in which the funds invest are under stress and effectively illiquid. The Commission also proposed to increase the minimum daily and weekly liquid asset requirements to better equip money market funds to manage significant and rapid investor redemptions. In addition, we proposed certain form amendments to improve transparency and facilitate Commission monitoring of money market funds. As part of the proposal, the Commission proposed to amend rule 2a-7 to prohibit a stable net asset value ('NAV') money market fund from using share cancellation or a reverse distribution mechanism in a negative interest rate environment."
The rule continues, "The Commission received comment letters on the proposal from a variety of commenters, including funds and investment advisers, law firms, other fund service providers, investor advocacy groups, professional and trade associations, and interested individuals. As discussed in greater detail throughout this release, these commenters expressed a diversity of views. Many commenters expressed support for aspects of the proposal, including removing the link between liquidity thresholds and the imposition of redemption gates and liquidity fees; increasing the minimum daily and weekly liquid asset requirements above current minimums; and clarifying the calculation of weighted average portfolio maturity and weighted average life maturity. Many commenters, however, expressed concern about the consequences of the proposed swing pricing requirement, suggesting, among other reasons, that it would be operationally difficult and may not effectively prevent destabilizing runs during periods of stress. Separately, several commenters expressed that the Commission should adopt more modest increases to the daily and weekly liquid asset requirements than proposed. Many commenters also generally opposed the proposed clarification of how stable net asset value money market funds should handle a negative interest rate environment, stating that the proposed prohibition from using share cancellation in certain negative interest environments could be operationally burdensome and costly without clear benefits for investors. Lastly, while some commenters were supportive of the proposed modifications to the fund reporting requirements, others expressed concern about the sensitivity or burdens of reporting certain information regarding money market fund investors or portfolios, as well as significant declines in liquidity."
They tell us, "After considering the comments on the proposal, we are adopting rule and form amendments to improve the resilience and transparency of money market funds, with certain modifications. As proposed, the final amendments will remove the redemption gate provision from rule 2a-7; increase the minimum daily and weekly liquid asset requirements to 25% and 50%, respectively; specify the weighted average portfolio maturity and weighted average life maturity calculations; and require public reporting of significant declines in liquidity on Form N-CR. However, we are not adopting the proposed swing pricing requirement. Rather, the final amendments will modify the current liquidity fee framework to require institutional prime and institutional tax-exempt money market funds to impose a liquidity fee when the fund experiences net redemptions that exceed 5% of net assets, while also allowing any non-government money market fund to impose a discretionary liquidity fee if the board determines a fee is in the best interest of the fund. Similar to the proposed swing pricing requirement, the liquidity fee framework is designed to better allocate liquidity costs associated with redemptions to the redeeming investors. In addition, in a change from the proposal, the final amendments will permit retail and government money market funds to use a reverse distribution mechanism if negative interest rates occur in the future with certain conditions, including appropriate disclosure to concisely and clearly describe to shareholders the fund's use of a reverse distribution mechanism and its effect on investors."
The SEC also says, "Moreover, while we are adopting the amended reporting requirements for Form N-MFP largely as proposed, we are making modifications to certain aspects of the requirements in response to commenter concerns about the sensitivity of publicly reporting certain investor and portfolio information. We are also adopting, largely as proposed in a January 2022 Proposing Release, amendments to Form PF reporting requirements for large liquidity fund advisers. The final amendments to Form PF generally are designed to align with relevant revisions we are making to Form N-MFP. Finally, we are adopting two technical amendments to Form N-CSR and Form N-1A to correct errors from recent Commission rulemakings."
Discussing the "Role of Money Market Funds and Existing Regulatory Framework," they explain, "Money market funds are managed with the goal of providing principal stability by investing in high-quality, short-term debt securities -- such as Treasury bills, repurchase agreements, or commercial paper -- whose value does not fluctuate significantly in normal market conditions. Money market fund investors receive dividends that reflect prevailing short-term interest rates and have access to daily liquidity, as money market fund shares are redeemable on demand. The combination of limited principal volatility, diversification of portfolio securities, payment of short-term yields, and liquidity has made money market funds popular cash management vehicles for retail and institutional investors. Money market funds also serve as an important source of short-term financing for businesses, banks, and governments."
The rule continues, "Different types of money market funds exist to meet differing investor needs. 'Prime money market funds' hold a variety of taxable short-term obligations issued by corporations and banks, as well as repurchase agreements and asset-backed commercial paper. 'Government money market funds,' which are currently the largest category of money market fund, almost exclusively hold obligations of the U.S. Government, including obligations of the U.S. Treasury and Federal agencies and instrumentalities, as well as repurchase agreements collateralized by government securities. Compared to prime funds, government money market funds generally offer greater safety of principal but historically have paid lower yields. 'Tax-exempt money market funds' (or 'municipal money market funds') primarily hold obligations of state and local governments and their instrumentalities, and pay interest that is generally exempt from Federal income tax for individual taxpayers. Within the prime and tax-exempt money market fund categories, some funds are 'retail' funds and others are 'institutional' funds. Retail money market funds are held only by natural persons, and institutional funds can be held by a wider range of investors, such as corporations, small businesses, and retirement plans."
The SEC comments, "To some extent, different types of money market funds are subject to different requirements under rule 2a-7. One primary example is a fund's approach to valuation and pricing. Government and retail money market funds can rely on valuation and pricing techniques that generally allow them to sell and redeem shares at a stable share price, typically $1.00, without regard to small variations in the value of the securities in their portfolios. If the fund's stable share price and market-based value per share deviate by more than one-half of 1%, the fund's board may determine to adjust the fund's share price below $1.00, which is also colloquially referred to as 'breaking the buck.' Institutional prime and institutional tax-exempt money market funds, however, are required to use a 'floating' NAV per share to sell and redeem their shares, based on the current market-based value of the securities in their underlying portfolios rounded to the fourth decimal place (e.g., $1.0000). These institutional funds are required to use a floating NAV because their investors have historically made the heaviest redemptions in times of market stress and are more likely to act on the incentive to redeem if a fund's stable price per share is higher than its market-based value."
The SEC tells us, "As of March 2023, there were approximately 294 money market funds registered with the Commission, and these funds collectively held over $5.7 trillion of assets. The vast majority of these assets are held by government money market funds ($4.4 trillion), followed by prime money market funds ($1 trillion) and tax-exempt money market funds ($119 billion). Of prime money market funds' assets, approximately 44% are held by retail prime money market funds, with the remaining assets almost evenly split between institutional prime money market funds that are offered to the public and institutional prime money market funds that are not offered to the public. The vast majority of tax-exempt money market fund assets are held by retail funds."
They add, "The Commission adopted rule 2a-7 in 1983 and has amended the rule several times over the years, including in 2010 and 2014, in response to market events that have highlighted money market fund vulnerabilities. Among other things, these past reforms introduced minimum daily and weekly liquid asset requirements, provided for redemption gates and liquidity fees as available tools when a fund's liquidity drops below a threshold, required institutional money market funds to use floating NAVs, and improved transparency through reporting and website posting requirements."
Finally, the rule says, "In addition to reforms for money market funds, in 2014 the Commission introduced new reporting requirements for large advisers of liquidity funds on Form PF to better align reporting obligations of advisers regarding private liquidity funds to those of money market funds, in order to help the Commission have a more complete picture of the broader short-term financing market. Liquidity funds follow similar investment strategies as money market funds, but investment advisers are not required to register liquidity funds as investment companies under the Act. Liquidity funds are a relatively small but important category of private funds due to the role they play along with money market funds as sources, and users, of liquidity in markets for short-term financing. Similar to money market funds, liquidity funds are managed with the goal of maintaining a stable net asset value or minimizing principal volatility for investors. However, liquidity funds are not required to comply with the risk-limiting conditions of rule 2a-7, such as the restrictions on the maturity, diversification, credit quality, and liquidity of investments. Consequently, liquidity funds may take on greater risks and, as a result, may be more sensitive to market stress relative to money market funds."
Crane Data's July Money Fund Portfolio Holdings, with data as of June 30, 2023, show that Treasury holdings jumped in June while Repo, Agencies and Time Deposits (Other) all declined. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $46.1 billion to a record $5.734 trillion, after increasing $92.6 billion in May, $81.2 billion in April and $390.5 billion in March. Repo dropped but continues to lead as the largest portfolio segment, falling by over $100 billion. Treasuries jumped by over $300 billion but remained in the No. 2 spot. The Federal Reserve Bank of New York's RRP issuance held by MMFs fell $135.8 billion to $1.900 trillion. Agencies were the third largest segment, CP remained fourth, ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Note: The SEC also passed its latest "Money Market Fund Reforms yesterday. See our "Link of the Day" for the release, and see the full final rule here. See also The Wall Street Journal's coverage, "U.S. Takes Third Shot at Shoring Up Money-Market Funds." Watch for more coverage in coming days as we publish excerpts and wade through the full 424 pages!)
Among taxable money funds, Repurchase Agreements (repo) decreased $146.4 billion (-4.4%) to $3.201 trillion, or 55.8% of holdings, in June, after increasing $111.8 billion in May, $33.1 billion in April and $276.3 billion in March. Treasury securities rose $355.7 billion (40.4%) to $1.237 trillion, or 21.6% of holdings, after decreasing $116.9 billion in May and $32.3 billion in April (but increasing $20.7 billion in March). Government Agency Debt was down $119.3 billion, or -14.0%, to $733.8 billion, or 12.8% of holdings. Agencies increased $58.8 billion in May, $18.5 billion in April and $188.8 billion in March. Repo, Treasuries and Agency holdings now total $5.172 trillion, representing a massive 90.2% of all taxable holdings.
Money fund holdings of CP decreased, but CDs increased in June. Commercial Paper (CP) decreased $2.3 billion (-0.9%) to $253.4 billion, or 4.4% of holdings. CP holdings increased $6.5 billion in May and $7.4 billion in April, but decreased $33.0 billion in March. Certificates of Deposit (CDs) increased $7.9 billion (4.6%) to $180.8 billion, or 3.2% of taxable assets. CDs increased $2.1 billion in May and $18.8 billion in April, but decreased $17.1 billion in March. Other holdings, primarily Time Deposits, decreased $49.8 billion (-29.8%) to $117.6 billion, or 2.1% of holdings, after increasing $30.4 billion in May and $35.0 billion in April (but decreasing $43.9 billion in March). VRDNs rose to $9.9 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will post our Tax Exempt MMF holdings separately Thursday around noon.)
Prime money fund assets tracked by Crane Data rose to $1.186 trillion, or 20.7% of taxable money funds' $5.734 trillion total. Among Prime money funds, CDs represent 15.3% (up from 14.7% a month ago), while Commercial Paper accounted for 21.5% (down from 21.8% in May). The CP totals are comprised of: Financial Company CP, which makes up 13.8% of total holdings, Asset-Backed CP, which accounts for 4.5%, and Non-Financial Company CP, which makes up 3.2%. Prime funds also hold 6.1% in US Govt Agency Debt, 3.5% in US Treasury Debt, 31.1% in US Treasury Repo, 0.7% in Other Instruments, 7.5% in Non-Negotiable Time Deposits, 5.2% in Other Repo, 7.1% in US Government Agency Repo and 0.6% in VRDNs.
Government money fund portfolios totaled $3.041 trillion (53.0% of all MMF assets), down from $3.082 trillion in May, while Treasury money fund assets totaled another $1.508 trillion (26.3%), up from $1.431 trillion the prior month. Government money fund portfolios were made up of 21.7% US Govt Agency Debt, 14.9% US Government Agency Repo, 13.2% US Treasury Debt, 49.9% in US Treasury Repo, 0.0% in Other Instruments. Treasury money funds were comprised of 52.7% US Treasury Debt and 47.3% in US Treasury Repo. Government and Treasury funds combined now total $4.548 trillion, or 79.3% of all taxable money fund assets.
European-affiliated holdings (including repo) decreased by $41.3 billion in June to $559.9 billion; their share of holdings fell to 9.8% from last month's 10.6%. Eurozone-affiliated holdings decreased to $375.5 billion from last month's $405.0 billion; they account for 6.6% of overall taxable money fund holdings. Asia & Pacific related holdings rose to $224.8 billion (3.9% of the total) from last month's $222.1 billion. Americas related holdings rose to $4.943 trillion from last month's $4.854 trillion, and now represent 86.2% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (down $167.1 billion, or -6.0%, to $2.600 trillion, or 45.3% of assets); US Government Agency Repurchase Agreements (up $13.4 billion, or 2.6%, to $539.2 billion, or 9.4% of total holdings), and Other Repurchase Agreements (up $7.2 billion, or 13.2%, from last month to $62.1 billion, or 1.1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $6.5 billion to $163.0 billion, or 2.8% of assets), Asset Backed Commercial Paper (up $6.3 billion to $52.8 billion, or 0.9%), and Non-Financial Company Commercial Paper (down $2.1 billion to $37.7 billion, or 0.7%).
The 20 largest Issuers to taxable money market funds as of June 30, 2023, include: the Federal Reserve Bank of New York ($1.900 trillion, or 33.1%), the US Treasury ($1.236T, 21.5%), Federal Home Loan Bank ($605.4B, 10.6%), Fixed Income Clearing Corp ($325.3B, 5.7%), RBC ($125.1B, 2.2%), JP Morgan ($103.3B, 1.8%), Federal Farm Credit Bank ($103.1B, 1.8%), BNP Paribas ($85.0B, 1.5%), Citi ($84.2B, 1.5%), Bank of America ($82.1B, 1.4%), Goldman Sachs ($80.1B, 1.4%), Barclays PLC ($72.9B, 1.3%), Sumitomo Mitsui Banking Corp ($51.7B, 0.9%), Mitsubishi UFJ Financial Group Inc ($50.4B, 0.9%), Societe Generale ($48.7B, 0.8%), Wells Fargo ($42.2B, 0.7%), ING Bank ($41.3B, 0.7%), Toronto-Dominion Bank ($40.3B, 0.7%), Canadian Imperial Bank of Commerce ($36.9B, 0.6%) and Bank of Montreal ($35.7B, 0.6%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($1.900T, 59.3%), Fixed Income Clearing Corp ($325.3B, 10.2%), RBC ($102.8B, 3.2%), JP Morgan ($95.0B, 3.0%), Goldman Sachs ($79.7B, 2.5%), Citi ($74.6B, 2.3%), BNP Paribas ($70.5B, 2.2%), Bank of America ($64.4B, 2.0%), Barclays PLC ($56.2B, 1.8%), and Sumitomo Mitsui Banking Corp ($40.3B, 1.3%). The largest users of the $2.036 trillion in Fed RRP include: Goldman Sachs FS Govt ($124.2B), Vanguard Federal Money Mkt Fund ($123.8B), JPMorgan US Govt MM ($112.3B), Fidelity Govt Money Market ($111.1B), Fidelity Inv MM: Govt Port ($88.8B), Fidelity Govt Cash Reserves ($88.1B), Morgan Stanley Inst Liq Govt ($62.0B), Northern Instit Treasury MMkt ($60.4B), Vanguard Cash Reserves Federal MM ($53.4B) and BlackRock Lq FedFund ($51.8B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Toronto-Dominion Bank ($24.7B, 5.1%), RBC ($22.3B, 4.6%), Mizuho Corporate Bank Ltd ($19.5B, 4.0%), Bank of America ($17.6B, 3.7%), Bank of Nova Scotia ($17.6B, 3.7%), Bank of Montreal ($17.6B, 3.6%), Mitsubishi UFJ Financial Group Inc ($16.8B, 3.5%), Barclays PLC ($16.7B, 3.5%), ING Bank ($16.5B, 3.4%) and Skandinaviska Enskilda Banken AB ($15.5B, 3.2%).
The 10 largest CD issuers include: Toronto-Dominion Bank ($12.5B, 6.9%), Mizuho Corporate Bank Ltd ($12.0B, 6.6%), Mitsubishi UFJ Financial Group Inc ($10.9B, 6.0%), Sumitomo Mitsui Trust Bank ($10.5B, 5.8%), Sumitomo Mitsui Banking Corp ($10.2B, 5.6%), Canadian Imperial Bank of Commerce ($9.3B, 5.1%), Bank of America ($8.5B, 4.7%), Mitsubishi UFJ Trust and Banking Corporation ($8.3B, 4.6%), Credit Agricole ($8.2B, 4.5%) and Barclays PLC ($7.0B, 3.9%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Bank of Montreal ($12.7B, 5.8%), Bank of Nova Scotia ($12.3B, 5.6%), Societe Generale ($10.3B, 4.7%), RBC ($10.2B, 4.6%), Barclays PLC ($9.2B, 4.2%), Toronto-Dominion Bank ($8.8B, 4.0%), JP Morgan ($8.3B, 3.8%), BPCE SA ($7.6B, 3.4%), UBS AG ($6.7B, 3.0%) and BNP Paribas ($6.6B, 3.0%).
The largest increases among Issuers include: US Treasury (up $354.3B to $1.236T), RBC (up $13.5B to $125.1B), Sumitomo Mitsui Trust Bank (up $6.5B to $20.7B), Goldman Sachs (up $6.3B to $80.1B), Canadian Imperial Bank of Commerce (up $5.2B to $36.9B), JP Morgan (up $4.3B to $103.3B), Standard Chartered Bank (up $3.9B to $19.1B), Mitsubishi UFJ Trust and Banking Corporation (up $3.6B to $12.4B), Mitsubishi UFJ Financial Group Inc (up $2.9B to $50.4B) and HSBC (up $2.6B to $12.3B).
The only decreases among Issuers of money market securities (including Repo) in June were shown by: Federal Reserve Bank of New York (down $135.8B to $1.900T), Federal Home Loan Bank (down $122.7B to $605.4B), Barclays PLC (down $17.3B to $72.9B), Bank of America (down $17.2B to $82.1B), Fixed Income Clearing Corp (down $16.7B to $325.3B), Credit Agricole (down $16.2B to $33.3B), BNP Paribas (down $5.0B to $85.0B), Natixis (down $3.0B to $22.0B), Landesbank Baden-Wurttemberg (down $2.9B to $7.6B) and Swedbank AB (down $2.9B to $6.1B).
The United States remained the largest segment of country-affiliations; it represents 81.4% of holdings, or $4.664 trillion. Canada (4.9%, $278.8B) was in second place, while France (3.7%, $213.3B) was No. 3. Japan (3.7%, $209.1B) occupied fourth place. The United Kingdom (2.1%, $121.5B) remained in fifth place. Netherlands (1.2%, $70.4B) was in sixth place, followed by Sweden (0.8%, $43.6B), Germany (0.7%, $42.2B), Australia (0.5%, $31.0B), and Spain (0.3%, $16.3B). (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of June 30, 2023, Taxable money funds held 68.1% (down from 73.5%) of their assets in securities maturing Overnight, and another 7.8% maturing in 2-7 days (up from 7.3%). Thus, 75.8% in total matures in 1-7 days. Another 6.4% matures in 8-30 days, while 6.3% matures in 31-60 days. Note that over three-quarters, or 88.6% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 3.8% of taxable securities, while 4.6% matures in 91-180 days, and just 2.9% matures beyond 181 days. (Visit our Content center to download, or contact us to request our latest Portfolio Holdings reports.)
Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be sent out Wednesday, and we'll be writing our regular monthly update on the new June 30 data for Thursday's News. But we also uploaded a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Tuesday. (We continue to merge the two series, and the N-MFP version is now available via our Portfolio Holdings file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of June 30, includes holdings information from 980 money funds (up 1 from last month), representing record assets of $5.919 trillion (up from $5.859 trillion). Prime MMFs now total $1.200 trillion, or 20.3% of the total. We review the new N-MFP data, and we also look at our revised MMF expense data, which shows charged expenses flat but money fund revenues hitting another record in June. (Note: Click here for the webcast on the SEC's Open Meeting on Money Market Fund Reform, which takes place Wednesday, July 12 at 10am EDT.)
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds totaling $3.233 trillion (down from $3.379 trillion), or 54.6% of all assets. Treasury holdings totaled $1.244 trillion (up from $886.1 billion), or 21.0% of all holdings, and Government Agency securities totaled $754.6 billion (down from $867.6 billion), or 12.7%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $5.231 trillion, or a massive 88.3% of all holdings.
Commercial paper (CP) totals $262.5 billion (down from $264.4 billion), or 4.4% of all holdings, and the Other category (primarily Time Deposits) totals $122.9 billion (down from $171.6 billion), or 2.1%. Certificates of Deposit (CDs) total $181.2 billion (up from $173.3 billion), 3.1%, and VRDNs account for $121.1 billion (up from $117.5 billion last month), or 2.0% of money fund securities.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $164.2 billion, or 2.8%, in Financial Company Commercial Paper; $53.4 billion or 0.9%, in Asset Backed Commercial Paper; and, $45.0 billion, or 0.8%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($2.614 trillion, or 44.2%), U.S. Govt Agency Repo ($552.5B, or 9.3%) and Other Repo ($66.2B, or 1.1%).
The N-MFP Holdings summary for the Prime Money Market Funds shows: CP holdings of $256.2 billion (down from $258.2 billion), or 21.3%; Repo holdings of $520.8 billion (up from $497.8 billion), or 43.4%; Treasury holdings of $45.4 billion (up from $17.4 billion), or 3.8%; CD holdings of $181.2 billion (up from $173.3 billion), or 15.1%; Other (primarily Time Deposits) holdings of $114.7 billion (down from $152.4 billion), or 9.6%; Government Agency holdings of $75.3 billion (down from $83.3 billion), or 6.3% and VRDN holdings of $6.9 billion (up from $6.7 billion), or 0.6%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $164.2 billion (down from $170.2 billion), or 13.7%, in Financial Company Commercial Paper; $53.4 billion (up from $47.0 billion), or 4.4%, in Asset Backed Commercial Paper; and $38.6 billion (down from $41.0 billion), or 3.2%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($374.1 billion, or 31.2%), U.S. Govt Agency Repo ($84.9 billion, or 7.1%), and Other Repo ($61.7 billion, or 5.1%).
In related news, money fund charged expense ratios (Exp%) were mostly flat in June. Our Crane 100 Money Fund Index and Crane Money Fund Average were 0.26% and 0.38%, respectively, as of June 30, 2023. Crane Data revises its monthly expense data and gross yield information after the SEC updates its latest Form N-MFP data the morning of the 6th business day of the new month. (They posted this info Tuesday morning, so we revised our monthly MFI XLS spreadsheet and historical craneindexes.xlsx averages file to reflect the latest expenses, gross yields, portfolio composition and maturity breakout, yesterday.) Visit our "Content" page for the latest files.
Our Crane 100 Money Fund Index, a simple average of the 100 largest taxable money funds, shows an average charged expense ratio of 0.26%, unchanged from last month's level (but 18 bps higher than 12/31/21's 0.08%). The average is close to back at the level (0.27%) it was on Dec. 31, 2019, so we estimate that funds are charging normal expenses (though they are waiving a minimal amount of fees for competitive purposes). The Crane Money Fund Average, a simple average of all taxable MMFs, showed a charged expense ratio of 0.38% as of June 30, 2023, unchanged from the month prior and now slightly below the 0.40% at year-end 2019.
Prime Inst MFs expense ratios (annualized) average 0.31% (unchanged from last month), Government Inst MFs expenses average 0.26% (unchanged from last month), Treasury Inst MFs expenses average 0.30% (unchanged from last month). Treasury Retail MFs expenses currently sit at 0.52%, (unchanged from last month), Government Retail MFs expenses yield 0.55% (unchanged from last month). Prime Retail MF expenses averaged 0.48% (unchanged from last month). Tax-exempt expenses were also unchanged at 0.40% on average.
Gross 7-day yields rose again during the month ended June 30, 2023. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 753), shows a 7-day gross yield of 5.10%, up 4 bps from the prior month. The Crane Money Fund Average was 1.72% at the end of 2019, 0.15% at the end of 2020 and 0.09% at the end of 2021. Our Crane 100's 7-day gross yield was up 3 bps, ending the month at 5.01%.
According to our revised MFI XLS and Crane Index numbers, we now estimate that annualized revenue for all money funds is a record $15.521 billion (as of 6/30/23). Our estimated annualized revenue totals increased from $15.403B last month and are up from $15.143B two months ago. Revenue levels are more than five times larger than May's 2021's record-low $2.927B level. Charged expenses and gross yields are driven by a number of variables, but revenues should continue their climb higher as money funds continue to rake in assets from uninsured bank deposits.
Crane Data's latest monthly Money Fund Market Share rankings show assets were slightly higher among the largest U.S. money fund complexes in June. Money market fund assets inched up by $9.2 billion, or 0.2%, last month to a record $5.863 trillion. Total MMF assets increased by $234.7 billion, or 4.2%, over the past 3 months, and they've increased by $875.9 billion, or 17.6%, over the past 12 months. The largest increases among the 25 largest managers last month were seen by Morgan Stanley, Schwab, Allspring, First American and Invesco, which grew assets by $11.3 billion, $10.7B, $9.4B, $8.4B and $5.6B, respectively. Declines in June were seen by American Funds and Goldman Sachs, which decreased by $19.4 billion and $13.0B, respectively. Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. The combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers. We review the latest market share totals, and look at money fund yields, which also inched higher in June, below. (Note: Please join us on July 27 at 2pm Eastern for a "Money Fund Wisdom Demo & Training" session, where we'll review Crane Data's product suite and database query system with a focus on our MFI Daily asset series.)
Over the past year through June 30, 2023, Schwab (up $233.7B, or 146.7%), Fidelity (up $212.4B, or 23.3%), JPMorgan (up $133.1B, or 30.0%), Vanguard (up $69.5B, or 15.5%) and Invesco (up $65.8B, or 63.1%) were the `largest gainers. JPMorgan, Schwab, Fidelity, Allspring and Invesco had the largest asset increases over the past 3 months, rising by $57.5B, $35.1B, $24.4B, $20.0B and $13.4B, respectively. The largest declines over 12 months were seen by: Morgan Stanley (down $38.0B), American Funds (down $22.1B), HSBC (down $19.0B), Northern (down $11.1B) and SSGA (down $10.3B). The largest decliners over 3 months included: Goldman Sachs (down $11.9B) and Western (down $6.0B).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $1.126 trillion, or 19.2% of all assets. Fidelity was down $3.0B in June, up $24.4 billion over 3 mos., and up $212.4B over 12 months. JPMorgan ranked second with $576.7 billion, or 9.8% market share (up $592M, up $57.5B and up $133.1B for the past 1-month, 3-mos. and 12-mos., respectively). Vanguard ranked in third place with $517.9 billion, or 8.8% of assets (up $2.1B, up $12.4B and up $69.5B). BlackRock ranked fourth with $498.9 billion, or 8.5% market share (down $2.5B, up $12.7B and down $3.9B), while Goldman Sachs was the fifth largest MMF manager with $430.1 billion, or 7.3% of assets (down $13.0B, down $11.9B and up $54.9B for the past 1-month, 3-mos. and 12-mos.).
Federated Hermes was in sixth place with $394.3 billion, or 6.7% (up $2.6B, up $5.6B and up $61.0B), while Schwab was in seventh place with $392.9 billion, or 6.7% of assets (up $10.7B, up $35.1B and up $233.7B). Morgan Stanley ($263.2B, or 4.5%) was in eighth place (up $11.3B, up $13.0B and down $38.0B), followed by Dreyfus ($257.7B, or 4.4%; down $2.1B, down $3.6B and up $22.8B). American Funds was in 10th place ($175.7B, or 3.0%; down $19.4B, up $8.2B and down $22.1B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Allspring (formerly Wells Fargo) ($170.4B, or 2.9%), Invesco ($170.0B, or 2.9%), SSGA ($161.3B, or 2.8%), Northern ($157.2B, or 2.7%), First American ($133.9B, or 2.3%), UBS ($87.4B, or 1.5%), T. Rowe Price ($51.7B, or 0.9%), HSBC ($35.5B, or 0.6%), DWS ($34.7B, or 0.6%) and Western ($28.1B, or 0.5%). Crane Data currently tracks 60 U.S. MMF managers, unchanged from last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg and the Cayman Islands -- are included, the top 10 managers are the same as the domestic list, except: BlackRock moves up to the No. 3 spot, Goldman Sachs moves up to No. 4 and Vanguard moves down to the No. 5 spot. Also, SSGA replaces American Funds at the No. 10 spot. Global Money Fund Manager Rankings include the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products.
The largest Global money market fund families include: Fidelity ($1.136 trillion), JP Morgan ($788.6B), BlackRock ($711.4B), Goldman Sachs ($573.7B) and Vanguard ($517.9B). Federated Hermes ($403.0B) was in sixth, Schwab ($392.9B) was seventh, followed by Morgan Stanley ($332.1B), Dreyfus/BNY Mellon ($278.6B) and SSGA ($198.3B), which round out the top 10. These totals include "offshore" U.S. Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into U.S. dollar totals.
The July issue of our Money Fund Intelligence and MFI XLS, with data as of 6/30/23, shows that yields increased again in June across the Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 753), rose to 4.81% (up 4 bps) for the 7-Day Yield (annualized, net) Average, the 30-Day Yield increased to 4.79% (up 8 bps). The MFA's Gross 7-Day Yield rose to 5.10% (up 4 bps), and the Gross 30-Day Yield also moved up to 5.08% (up 8 bps). (Gross yields will be revised Tuesday at noon, though, once we download the SEC's Form N-MFP data for 6/30/23.)
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 4.94% (up 4 bps) and an average 30-Day Yield at 4.91% (up 8 bps). The Crane 100 shows a Gross 7-Day Yield of 5.02% (up 4 bps), and a Gross 30-Day Yield of 5.00% (up 7 bps). Our Prime Institutional MF Index (7-day) yielded 4.99% (up 3 bps) as of June 30. The Crane Govt Inst Index was at 4.89% (up 2 bps) and the Treasury Inst Index was at 4.86% (up 7 bps). Thus, the spread between Prime funds and Treasury funds is 13 basis points, and the spread between Prime funds and Govt funds is 10 basis points. The Crane Prime Retail Index yielded 4.84% (up 4 bps), while the Govt Retail Index was 4.60% (up 3 bps), the Treasury Retail Index was 4.64% (up 7 bps from the month prior). The Crane Tax Exempt MF Index yielded 3.55% (up 49 bps) as of June.
Gross 7-Day Yields for these indexes to end June were: Prime Inst 5.21% (up 3 bps), Govt Inst 5.12% (up 2 bps), Treasury Inst 5.11% (up 7 bps), Prime Retail 5.16% (up 5 bps), Govt Retail 5.07% (up 3 bps) and Treasury Retail 4.89% (up 7 bps). The Crane Tax Exempt Index rose to 2.79% (up 34 bps). The Crane 100 MF Index returned on average 0.40% over 1-month, 1.19% over 3-months, 2.17% YTD, 3.54% over the past 1-year, 1.22% over 3-years (annualized), 1.41% over 5-years, and 0.88% over 10-years.
The total number of funds, including taxable and tax-exempt, was unchanged in June at 883. There are currently 753 taxable funds, unchanged from the previous month, and 130 tax-exempt money funds (unchanged from last month). (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The July issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Monday morning, features the articles: "AFP's 2023 Liquidity Survey: Deposits Plunge, MMFs Jump," which discusses the annual survey of corporate treasurers; "Money Fund Symposium '23: Funds Party Like 1999," which quotes highlights from our recent big show in Atlanta; and, "ICI Worldwide: MFs Jump in Q1 Led by US, China, France," which reviews money fund markets outside the U.S. We also sent out our MFI XLS spreadsheet Monday a.m., and we've updated our Money Fund Wisdom database with 6/30/23 data. Our July Money Fund Portfolio Holdings are scheduled to ship on Wednesday, July 12, and our July Bond Fund Intelligence is scheduled to go out on Monday, July 17. (Reminder: Please join us on July 27 at 2pm Eastern for a "Money Fund Wisdom Demo & Training" session, where we'll review Crane Data's product suite and database query system with a focus on our MFI Daily asset series.)
MFI's "Liquidity Survey" article says, "The Association for Financial Professionals, a group representing corporate treasurers, published its '2023 AFP Liquidity Survey' last month. The cover letter explains, 'Invesco is very proud to partner once again with the Association for Financial Professionals (AFP) to sponsor the 2023 AFP Liquidity Survey Report, the 18th annual exploration of current and emerging corporate cash management trends.... [L]iquidity investors once again continued to face a remarkable -- and quickly changing -- investment landscape, from aggressive monetary tightening by central banks around the globe to sharply higher stock and bond market volatility to the collapse of several high-profile banks.'"
The introduction states, "This year's survey identifies a number of interesting, high-level themes: Corporate liquidity reserves remain near record highs, taking advantage of rapidly rising yields and principal safety in the uncertain market environment. Cash allocations have been shifting from bank deposits to money market funds in response to the 2023 banking crisis, [and] Caution remains a dominant theme, as companies continue to navigate inflationary pressures, slowing global economies and elevated uncertainties around macro risks."
We write in our MF Symposium recap, "Crane Data recently hosted its big Money Fund Symposium show in Atlanta, where over 530 money market professionals discussed rates, pending reforms, asset inflows and a number of other hot topics in cash. The opening session, 'Keynote: The Elevation of Money Funds II,' featured Invesco's Laurie Brignac and Tony Wong. Brignac comments, 'There was a difference in flows. When you started to see the Fed raise rates as quickly as they did, obviously, we know the storyline around bank deposits. But also, the volatility in the market spiked, and you also saw retail investors turn more risk-off. That's when you saw the retail flows. So, yeah, it has been a story of two sets of flows for different reasons.' (Note: Conference materials and recordings are available in our 'Money Fund Symposium 2023 Download Center.')"
It continues, "Asked about fears over bank deposits and money funds, Wong tells us, 'I think the fear factor was very high. From folks that were in money market liquidity products, we certainly had a number of calls. I personally went and had conversations with policymakers, regulators in this period.... We need a healthy and strong banking sector to impact credit creation and economic [growth].... I think it's manageable, but if we continue to see tightening by the Fed.... We all have years of experience and when you see tightening ... things usually break.... Something tells me maybe that's [SVB and Credit Suisse] not the final chapter of the movie. It's something we're watching carefully.'"
Our "Worldwide" piece states, "ICI's 'Worldwide Regulated Open-Fund Assets and Flows, First Quarter 2023' shows that money fund assets globally jumped by $610.0 billion, or 6.9%, in Q1'23 to $9.461 trillion. The jump was led by gains in the U.S., China, France and Luxembourg. Money funds in Ireland were lower. MMF assets worldwide increased by $825.6 billion, or 9.6%, in the 12 months through 3/31/22, and money funds in the U.S. now represent 55.4% of worldwide assets."
ICI's release says, "Worldwide regulated open-end fund assets increased 5.0% to $63.12 trillion at the end of the first quarter of 2023, excluding funds of funds. Worldwide net cash inflow to all funds was $706 billion in the first quarter, compared with $122 billion of net inflows in the fourth quarter of 2022. The Investment Company Institute compiles worldwide regulated open-end fund statistics on behalf of the International Investment Funds Association (IIFA), the organization of national fund associations. The collection for the first quarter of 2023 contains statistics from 46 jurisdictions.'"
MFI also includes the News brief, "SEC to Vote on MMF Reforms 7/12." It states, "The SEC meets on Money Market Fund Reforms, Wed., July 12 at 10am. Their notice says, 'The Commission will consider whether to adopt amendments to certain rules that govern money market funds and related form amendments.'"
Another News brief, "Assets & Yields Grind Higher in June," tells readers, "Assets rose $6.9 billion to (eke out) a record $5.861 trillion according to our MFI XLS. Over 12 months, assets have increased by $875.9 billion, or 17.6%. (ICI's latest weekly series shows MMF assets rebounding to a record $5.47 trillion following 3 weeks of declines.) Yields inched higher; our Crane 100 rose to 4.94%."
A third News brief, "MarketWatch on $6 Trillion Pile of Cash." says, "The article, 'Why this $6 trillion pile of cash isn't heading for stocks any time soon,' explains, 'Even with U.S. stocks in a new bull market, investors aren't showing many signs of backing away from money-market funds and other cash-like investments offering yields of about 5%, the highest in about 15 years. Money-market funds hit a record of $5.9 trillion in assets as of Tuesday [6/13], signaling a continuing drain out of bank deposits into higher-yielding 'cash-like' investments, according to Peter Crane.... He expects the tally soon to eclipse $6 trillion and then to stay elevated, even though money-market assets already grew almost 18% in May from a year ago. 'It's clear that bank deposits have sprung a leak,' Crane said.'"
A sidebar, "Fed Z1 Shows Household Jump," states, "The Federal Reserve's latest quarterly 'Z.1 Financial Accounts of the United States' statistical survey (a.k.a. 'Flow of Funds') for the First Quarter 2023, which includes 4 tables on money market mutual funds, shows that Total MMF Assets increased by $470 billion to $5.693 trillion in Q1'23. The Household Sector, by far the largest investor segment with $3.366 trillion, saw the biggest asset increase in Q1, followed by Nonfinancial Corporate Businesses. The Fed's latest Z.1 numbers, which contain one of the few looks at money fund investor segments available, also showed noticeable increases for the Other Financial Business (formerly Funding Corps), the Rest of World and the Mutual Fund categories in Q1 2023."
Our July MFI XLS, with June 30 data, shows total assets increased $6.9 billion to a (barely) record $5.861 trillion, after increasing $152.7 billion in May, $56.5 billion in April, $345.1 billion in March, $56.0 billion in February, $22.5 billion in January, $70.2 billion in December and $55.4 billion in November. MMFs rose $42.2 billion in October, $1.7 billion in September, $2.3 billion in August, $26.0 billion in July and $31.9 billion in June. They decreased $10.7 billion in May 2022.
Our broad Crane Money Fund Average 7-Day Yield was up 6 bps to 4.81%, and our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 4 bps to 4.94% in June. On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA and the Crane 100 both were both higher at 5.10% and 5.02%, respectively. Charged Expenses averaged 0.38% and 0.26% for the Crane MFA and the Crane 100. (We'll revise expenses on Tuesday once we upload the SEC's Form N-MFP data for 6/30/23.) The average WAM (weighted average maturity) for the Crane MFA was 24 days (up 2 days from previous month) while the Crane 100 WAM was up 3 at 23 days. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Below, we highlight yet another session from our big Money Fund Symposium conference, which took place 2 weeks ago in Atlanta. (See our June 29 News, "`Highlights of Money Fund Symposium: Invesco's Brignac, Wong Keynote," our July 3 News, "`Highlights of Money Fund Symposium: Invesco's Brignac, Wong Keynote and yesterday's "SEC to Meet/Vote on MF Reforms July 12; Major Issues at MF Symposium.") Today, we quote from the segment, "Senior Portfolio Manager Perspectives," which was moderated by Robert Callagy of Moody's Investors Service and featured Deborah Cunningham of Federated Hermes, Doris Grillo of J.P. Morgan Asset Management and Nafis Smith of Vanguard. (Note: For those that missed the news yesterday, the SEC posted a "Sunshine Act Notice" which says, "The Securities and Exchange Commission will hold an Open Meeting on Wednesday, July 12, 2023 at 10:00 a.m." to "consider whether to adopt amendments to certain rules that govern money market funds." Stay tuned!)
Smith tells MFS, "Supply is still increasing [following the] debt ceiling resolution. We've renewed our buying in Treasuries.... The issuance has been front-loaded, two-months and in, which from a money fund perspective, is kind of the sweet spot. It allows us to ... get some of the cash out of our faces that sort of built up going into the debt ceiling. So [we're moving] a little bit out the curve, but ... subject to valuations. We sort of anchor to what we think the Fed is going to do. I think, like many others, [we'll see] one more rate hike this year, possibly two. You look at valuations, two months and in, and you seem to be, mostly getting compensated for that view. So, we've been comfortable with a toe-dip, if you will, from a Treasury perspective."
He explains, "If you look over the past year or so, however, we've had very little Treasuries in the portfolio. If you go back a couple of years and you look at bill supply kind of from peak to trough, you know, bill supply, has fallen quite a bit and valuations overall have gone down with it. So from our perspective, we had very little Treasuries in the portfolio until recently, which is part of the reason why I guess I'm a little more optimistic than Mark [Cabana of BofA] was from a from a valuation perspective. There's just been this dearth of supply really over the past three years while money market fund assets have steadily increased." [Cabana had urged investors in an earlier session to "Stop!" and "Be patient" when buying Treasuries.]
Smith continues, "If you take a longer view of history, agency supply has also come down. Obviously, it ticked up in March. So I'm a little more optimistic from a valuation perspective on a go-forward basis, at least in the short-term. I'm not anticipating that the market will have significant issues digesting the $1 trillion or so that we're expecting to see between now and yearend. I mean, I guess it's possible that valuations could cheapen a little bit.... [But] when you look at what we're seeing right now, it's hard to envision a scenario where valuations come completely undone."
He comments, "Over the past year, like many in this room, we've had a lot of agency floaters in the portfolios, which in a rate-hiking cycle make a lot of sense for a money fund. With the risk to the upside from a rate perspective, agency floaters still make some sense for some strategies. From an issuance perspective, it feels like things are drying up at this point, and perhaps that's the case for the next few months. But agency floaters still make sense. I don't really see any real risk of valuations becoming undone there in the agency space. Then obviously, like many in this room, [we're putting] a ton of repo into the portfolios. Fed RRP for the better part of a year or more has made a lot of sense, to help us stay short and add value at the same time."
Cunningham then comments, "We definitely think that Treasury supply is the topic of the day. But we also think there are other [ways] Treasury securities and issuance can be absorbed -- not just necessarily in the direct market [but in] repo. The RRP continues to be a pretty good fallback. There are reasons why it's gone from, sort of its peak of $2.3 trillion down to a little under $2 trillion in two days.... But the size of it is still substantial and it's still obviously an important component."
She tells us, "There are some drawbacks to it, though, from a timing perspective. The Fed trade with the RRP is done at 1:00pm. Most funds are open till 5:00pm, so you have four more hours and you can't just depend on that.... We think that the increased Treasury supply from an issuance standpoint [will] help provide collateral for other aspects of the repo market to grow. So traditional tri-party, and additional counterparties taking on additional collateral and providing better rates than the RRP, I think will continue to drive the utilization of RRP from a money fund perspective lower, and ultimately, provide better diversification for the money funds that are investing in them."
Cunningham states, "Nontraditional is another area that we think is also improving from a repo perspective. It seems as though there's a broader willingness for counterparties mostly, and some dealers, to take on not only Treasurys and agencies from a supply perspective, but additional types of nontraditional collateral in order to bring that in an increasing form into the marketplace. [This] again provides better rates than what you're getting from either the RRP or traditional tri-party."
She adds, "Then ultimately, sponsored repo has been really a great innovation over the last several years where new sources of collateral. So ... firms that had not been traditional suppliers or money funds necessarily couldn't deal with ... are now being brought in through `bank sponsors and DTCC. [This gives us] a really improved balance of supply … with rates that are a little bit more favorable. Some of the more standardized legal contracts that are now associated with that business are also likely helping fuel the expansion of that particular product. With over $1 trillion in assets flowing into funds over the last 12 months, [that] has been beneficial, and I think they will continue to grow."
Grillo comments on the credit markets, "In terms of supply year-to-date, we've seen about $406 billion in floating-rate product that's been issued, and year-to-date last year it was $415B. So, definitely, supply has not been an issue.... Last year, there were some supply-demand issue dynamics.... Obviously, it's the same banks, the Canadians are typically ones to issue, ... Scandinavian, Japanese banks.... Most of the supply that has been issued, because of the interest rate cycle that we are in, has been mostly in floating. In fixed, [it's been] typically on the shorter end, FOMC date to FOMC date."
Cunningham adds, "We're still buying floaters. Doris mentioning the supply of floaters has been good. That means spreads have been a little bit wider. There are more variations of them. They're not just issued with one-year finals. ABCP, regular CD products are issuing them with 3-month, 6-month-type finals. That goes along with [the] 'higher for longer' trend, and that's how we're investing as a general strategy for our portfolios at this point. I would say it's very tough to call a peak; we think it's easier to call a plateau. And Mark, we're not jumping, so don't tell me to stop. I would say we're 'waddling' a little bit towards that plateau and staying in the game ... investing in the fixed-rate sector, 6 to 12 months, more strategically in our non-government products than our government products."
She also says, "However, on occasion when there is a bill or a note that gets cheap enough in the government space as well. We also think on the government side some of the more recent issuance, cash management bills certainly provide a nice sort of gap-filling space for some of some of the portfolios. [T]he supply that we've seen in all markets ... has been good for ... keeping a positive trend in the yield curve, so that when we're doing relative value decision-making on a daily basis more options pop up as possibilities that seem to make sense."
Finally, Grillo adds, "We all know that this has been a very challenging cycle to try to manage through. In terms of positioning, I should call Mark a little more frequently and have him yell at me.... For the most part, we remain very defensive, keeping our powder dry, obviously short WAMs, mid-range on the WALs, focusing more on floating-rate product. It was easy during the past year when we knew where the Fed was headed.... Now we are at the pause, hike, whatever.... So currently we think because of the uncertainty around the Fed, it ... encourages us to focus on floaters and ... fixed for the next FOMC." (Note: Conference materials are available in our "Money Fund Symposium 2023 Download Center.")
We learned from attorneys at both Dechert and Stradley Ronon that the SEC has scheduled a meeting to discuss (and presumably vote on) Money Market Fund Reform, next Wednesday, July 12 at 10am. The "Sunshine Act Notice" says, "Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Pub. L. 94-409, that the Securities and Exchange Commission will hold an Open Meeting on Wednesday, July 12, 2023 at 10:00 a.m.... The meeting will be webcast on the Commission's website at www.sec.gov.... The Commission will consider whether to adopt amendments to certain rules that govern money market funds and related form amendments. The Commission will also consider whether to adopt amendments to Form PF to revise reporting requirements for large liquidity fund advisers, as well as certain technical amendments to other forms. The Commission will consider whether to propose amendments to the broker-dealer customer protection rule to require certain broker-dealers to compute their customer and broker-dealer reserve deposit requirements daily rather than weekly."
Next week's "Open Meeting Agenda" lists, "Item 1: Money Market Fund Reform; Form PF Reporting Requirements for Large Liquidity Fund Advisers; Technical Amendments to Form N-CSR and Form N-1A. Office: Division of Investment Management. Staff: William A. Birdthistle, Sarah ten Siethoff, Brian M. Johnson, Angela Mokodean, Blair Burnett, Christian Corkery, and David Driscoll."
In other news, we've been writing over the past week about our Money Fund Symposium conference, which took place 2 weeks ago in Atlanta. (See our June 29 News, "Highlights of Money Fund Symposium: Invesco's Brignac, Wong Keynote," and our July 3 News, "More Symposium Highlights: Regulations & Money Fund Reforms Coming.") Today, we quote from the segment, "Major Money Fund Issues 2023," which included Pete Henshaw from Dreyfus, Linda Klingman from Charles Schwab Investment Management and Dan LaRocco from Northern Trust Asset Management. (Note: Conference materials are available in our "Money Fund Symposium 2023 Download Center.")
Klingman comments, "I think we'll pretty much deal with what happens when it comes. We're in a little bit of a different situation. We have a retail customer base. [S]wing pricing, primarily if adopted as presently proposed, will really apply to institutional funds. So unless it's taken broadly to all mutual funds, swing pricing won't so much apply to us. However, ... I think that swing pricing will be a little confusing for investors.... So I think there's going to be a lot of education that's going be needed to explain how it's applied and who it's applied to."
She continues, "I think that it would be a lot easier for them to understand redemption fees. So I think we would support having some sort of a fee imposed, versus swing pricing. Fees and gates, I think that makes sense to eliminate those. That bright line attached to the fees and gates, I think we've seen that that didn't really work so well. So, I think that that was a good change. As far as negative rates, it's going to be impactful on intermediaries and I think on some sweep funds, that's a challenge."
On "Liquidity requirements," Klingman says, "I think we can deal with those. We're already running high levels of liquidity. Of course, that's kind of situationally dependent. But you know, that is something that we can get behind. The one thing that I think wasn't really mentioned was the timeline for implementation -- it's pretty short. I think 6 to 12 months is what was proposed on most of those items.... That's a really quick turnaround if that's the case. So, I would say that's one of the things that we would hope would have a little bit longer timeline."
Henshaw tells us, "I was encouraged by the robust debate that seems to still exist back and forth, particularly around comment letters, hearing that there are still many comment letters going back and forth and explanations on the challenges around swing pricing. What I really would just add to that is again, ... it would be extremely challenging to implement and ultimately unwelcome to investors.... The bright line between WLA and fees and gates, that's really what drove the behavior of certain investors as they saw weekly liquidity fall closer to that 30% threshold. So, ultimately, we think that's the reform [that's needed]."
LaRocco states, "I've been in fewer project planning meetings that I'd otherwise have been in if we were still in the institutional prime space. But it's clearly something we continue to watch. The last panel did a great job of laying out where the impact will be around negative rates with respect to intermediaries, and Pete made some great comments around daily and weekly liquid assets, and we can handle that. The big concern is that there might be some drag on yield in some interest rate environments."
He also says, "One thing that we're watching [is] recommendations around the enhancements to Form N-MFP, in particular the more frequent disclosure of greater than 5% holders. We take a slightly different view there, thinking that that information should only [be] going to the staff of the Commission rather than the public. We would hate to have one of our clients have their name inadvertently given up." (For more on the Proposed SEC Reforms, see our Dec. 16, 2021 News, "SEC Proposes MMF Reforms: More Liquidity, No Gates/Fees, Swing Pricing.")
Asked about the big asset inflows of 2023, Klingman response, "So we've had substantial growth this year. I think at the end of 2022, we had I think about $280 billion or so. We're now close to $390 billion just over the span of about four or five months. Most of the growth really has been organic and net new assets.... We really saw the dollars and the cash coming in when the Fed was [hiking] aggressively, 75 basis points at a clip, and increasing interest rates at a rapid pace. I would say the velocity has probably slowed a little bit, but we're still getting assets.... As far as the growth in prime, I think it's the yield differential in large part.... I [also] think it was just ... working with our clients to do the right thing for them and their liquidity needs, and to be able to secure a little bit higher yield in this environment."
Finally, LaRocco says, "I think there's plenty of evidence to support that it's coming out of bank deposits, whether that's aggregate AUM levels or aggregate deposit [numbers].... It seems like, when you talk to clients, there was a shift in behavior in March. We talked about it a little bit in Boston at Crane Bond [Fund Symposium] back in March. There is concern around what the health of those [bank] balance sheets look like. The longer that lingers, the higher the hurdle to reversing that trend.... The trend has slowed but the flows are still coming in. Reversing it is not just as easy as having a higher deposit beta and catching up on the yield.... I think there's a pretty solid consensus that inflows will continue."
Money fund yields were mostly flat over the past week, though they inched higher by another basis point. Our Crane 100 Money Fund Index (7-Day Yield) was up 1 bp to 4.94% in the week ended Friday, 6/30, after also increasing by 1 bp the week prior too. Yields are up from 4.90% on May 31, 4.64% on April 30, 4.61% on March 31, 4.39% on Feb. 28, 4.15% on Jan. 31 and 4.05% on 12/31/22. They've increased from 3.59% on Nov. 30, from 2.88% on Oct. 31 and from 2.66% on Sept. 30. Over half of money market fund assets now yield above the 5.0% level. Assets of money market funds rose by $29.0 billion last week to $5.846 trillion; they rose by $20.7 billion during the month of June, according to Crane Data's Money Fund Intelligence Daily. Weighted average maturities were flat on the week at 23 days (Crane 100), but they rose by 3 days during June.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 694), shows a 7-day yield of 4.83%, up 1 bp in the week through Friday. Prime Inst MFs were up 1 bp at 5.01% in the latest week. Government Inst MFs were up 1 bp at 4.90%. Treasury Inst MFs up 1 bp for the week at 4.87%. Treasury Retail MFs currently yield 4.65%, Government Retail MFs yield 4.60%, and Prime Retail MFs yield 4.86%, Tax-exempt MF 7-day yields were up 27 bps at 3.56%.
According to Monday's Money Fund Intelligence Daily, with data as of Friday (6/30), zero money funds (out of 824 total) yield under 2.0%; 9 funds yield between 2.00% and 2.99% with $3.7 billion, or 0.1%; 119 funds yield between 3.00% and 3.99% ($109.1 billion, or 1.9%), 485 funds yield between 4.0% and 4.99% ($2.637 trillion, or 45.1%) and 211 funds now yield 5.0% or more ($3.097 trillion, or 53.0%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.59% after rising 3 bps seven weeks ago. The latest Brokerage Sweep Intelligence, with data as of June 30, shows that there were no changes over the past week. Three of the 11 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
In other news, Federated Hermes' Deborah Cunningham writes "Falling in line: The markets have finally listened to hawkish Fed speak." She explains, "The Federal Reserve touts its diverse set of tools for crafting monetary policy, but since March 2022 it has mostly used the hammer. After 10 straight swings at the economy in the form of rate hikes, in June it dropped it back into the toolbox by not raising the fed funds target range. Instead, the Fed updated its blueprint for the tightening cycle, the Summary of Economic Projections (SEP), to suggest more hikes to come."
Cunningham continues, "This was a shrewd move. Policymakers not only bought time to assess the economic impact of those 500 basis points of hikes and the effect of the debt ceiling debacle, but also they reset market expectations. The latter is crucial. Even though the Fed hiked in March and continued to talk tough about inflation, investors didn't buy it. In April and May, they forecast rate cuts in the second half of this year. It didn't make much sense to us, but it distorted the shape of the Treasury yield curve. Longer-dated government securities weren't paying enough, compelling cash managers to stay short."
She explains, "In the new SEP 'dot plot,' Fed policymakers forecast the median fed funds rate to climb to 5.6% by year-end. That would require at least two more 25 basis-point hikes -- an expectation shared by 12 of 18 voters -- with one likely to come at July's meeting. The markets finally relented. The short end of the curve is returning to normality, with 6-month Treasuries yielding more than 1- or 3-month. Contributing to the normalization is the Treasury Department's flood of issuance to refill its tank after running on fumes."
Federated's monthly tells us, "Another sign of financial health comes with the decreased use of the Fed's Reverse Repo Facility (RRP). The $2.3 trillion level it reached in spring is now looking like a peak, as participants tapped it for under $2 trillion in late June. Traditional counterparties -- firms that create reverse repo markets -- are stepping up to the plate with rates above the RRP."
It also says, "The broad market of non-Treasury/agency instruments, such as commercial and bank paper, largely brushed off the potential for government default, and yields have been strong. This is one reason retail -- that is, non-institutional -- clients have been pouring assets into prime money market funds and similar liquidity products industry wide, even as assets under management in government funds have decreased slightly. The environment has us slightly increasing Weighted Average Maturities franchise-wide, but we have not raised our target ranges from 25-35 days."
Lastly, Cunningham writes, "The biggest news of all this month could be that the dollar-dominated London interbank offered rate (LIBOR) officially ended and no one cared. As of June 30, the Intercontinental Exchange Benchmark Administration will no longer publish it. This benchmark was a stalwart of setting short-term interest rates between major global banks for decades, until it was revealed it had been manipulated during the Global Financial Crisis. In the U.S., the approved benchmark rate is the Secured Overnight Financing Rate (SOFR). The change has been three years coming, so anyone who missed it had to be clueless."
We wrote last week on the Keynote session from our recent Money Fund Symposium conference in Atlanta. (See our June 29 News, "`Highlights of Money Fund Symposium: Invesco's Brignac, Wong Keynote.") In today's news, we summarize the session, "Regulations: Money Fund Reforms Round III," which featured Brenden Carroll of Dechert LLP, Jon-Luc Dupuy of K&L Gates LLP and Jamie Gershkow of Stradley Ronon. Carroll comments, "I am shocked that the first word on this slide is 'proposed'. If you were to have asked us last year, ... we all gave predictions and we were all incredibly wrong.... We are going to talk a little bit about some of the ongoing policy debate that I think is leading to some of the delays here. Sometimes I feel that money market funds are caught between the SEC and bank regulators, and they have a different outlook on how best to regulate things, including investment products." (Note: Conference materials are available in our "Money Fund Symposium 2023 Download Center." Watch for more highlights in coming days and in our next Money Fund Intelligence newsletter, and have a great Fourth of July!)
He continues, "We're also going to talk about the final rulemaking and what our expected timeline is; I think it's still unclear. But I will say it is a short-term priority for the SEC. It was recently added to the SEC's rulemaking agenda. It's listed for this fall. You shouldn't pay too much attention to the dates on those regulatory agendas. It's either October or April, and that doesn't really mean anything other than it is a short-term priority or long-term priority. The fact that it's on the October [agenda] suggests it is a short-term priority."
Carroll says, "But I also think the delay can be attributable in part to what I think is sort of the incredible engagement of a number of the money market fund sponsors in this room. Typically, when the SEC proposes this rulemaking, there's a lot of thought at the front end that goes into what the rulemaking should look like and why they're proposing it and the cost benefit analysis. I think during this comment process, there is an incredible scholarship in what was posted on the SEC's comment file, and the SEC has to consider that. And I think that that has caused them to at least reassess some assumptions in part."
He adds, "The other thing that I think is leading to some of this delay is … the SEC has a lot of other things going on right now. Chairman Gensler has a very aggressive regulatory agenda. One of the other items is swing pricing for mutual funds, or I should say non-money market mutual funds. Obviously, these investment products are completely different animals. But what the SEC does in one of these rulemakings will probably influence what it does in another. Not necessarily with a common approach. But at least with how it describes the remedy for what it sees as the problem."
Gershkow then tells MFS, "There isn't really one set reason why we don't have the rulemaking [yet] -- there are a handful of different factors at play. You'll see on this first slide, we have a list of some of the key U.S. regulatory players. So the SEC is the primary regulator for money market funds. They have a 3-part mission that they're seeking to achieve: protecting investors, maintaining fair and efficient markets and facilitating capital formation. But they're not the only regulatory player when it comes to money market funds. `There's a lot of cooks in the kitchen here, and all of them have an interest in money market fund reform and regulation. They also have different missions than the SEC does."
She continues, "I'll highlight one of them on here. FSOC, they were established under Dodd-Frank in 2010, and their mission, different from the SEC, [is] really centered on financial stability. If you recall from the last round of reforms, FSOC actually kind of stepped more into the fray here and had put forth some proposed recommendations to the SEC. As Brenden had referenced earlier, there's kind of this push pull between bank-like regulations for money market funds and some of the more market driven reforms. In those proposed recommendations back in 2012, FSOC had a lot of those bank-like policies…. This go-around, they haven't put forth those proposed recommendations. They've said that they're supportive of the SEC's ongoing efforts in this area, but they'll continue to monitor what comes in this area."
Gershkow states, "This slide really kind of highlights some of the views that we've seen from the different regulatory players in the industry…. [We have] Yellen talking about these clear-cut vulnerabilities in money market funds and highlighting that unlike the banking sector, money funds aren't subject to a lot of the additional requirements that banks are subject to. Therefore, there's financial stability risks that are presented by money market funds that just have not been addressed and need to be addressed."
She also says, "Then we also have Gensler continuing with his 'bear' analogy. For those of you that haven't read any of his recent speeches, he's been explaining 'first mover advantage' as if you are a camper in the wilderness with a bear chasing you. You don't have to outrun the bear, you just have to outrun your fellow campers. So the takeaway is not to go camping with Chair Gensler.... But he has been highlighting this first mover advantage is still real. There's liquidity risk in money market funds and we need an anti-delusion mechanism in order to address that. So out of the SEC, we got the policy proposals last December 2021, but there is still this ongoing debate among the different regulatory players, as to where this will take a final landing point."
Gershkow continues, "There's a handful of events that happened since December of 2021 that are also likely to have an impact on the pace of rulemaking for money market funds. Brenden highlighted before, after we got some pricing proposal for money market funds, we then got a pricing proposal for other types of mutual funds, and the comment file on that is even more robust than the comment file on money market reform. There were nearly 3,000 letters submitted on the open-end funds swing pricing proposal, the very, very large majority of which were in opposition…. So as the SEC is considering that very large comment file, there’s an interest to see what impact that has on swing pricing for money market funds."
She adds, "Then we of course also saw the regional bank failures in March 2023. We think that the regulatory players here are also taking that into consideration in a lot of the speeches that we've seen [since March]. We've really seen a focus on this financial stability aspect of reforms and having to improve the overall stability of the system, even though these were bank failures, not money market failures…. And if you look at that comment file on money market fund reform, you'll see the comments continue coming in."
Finally, Dupuy comments, "As for timing, … the SEC October agenda [posting] is merely a sort of suggestion.... There's really no certainty. With respect to that, it could be before or after, but there certainly is a considerable backlog of rules that have been proposed that need to be the final implementation. So I guess to pick a date, I'm thinking that something will happen this year. I can't say that it's going to be August, October or December. But I do think or I’m pretty sure [it will happen]." Gershkow adds, "I also think sometime this year, but I've given that same answer last year and a half, so take that with grain of salt. But I do still think this is a priority of this commission and they are working to get this done in short order."
