News Archives: October, 2008
Star-crossed money fund manager The Reserve said in a press release last night entitled, "Reserve Primary Fund Makes Initial Distribution of $26 Billion to Primary Fund Shareholders," that, "The Reserve is pleased to announce that it began the initial $26 billion distribution to Primary Fund shareholders today by mailing checks to retail direct shareholders; payments by wire to all other shareholders will be made tomorrow. See the press release and the "Reserve Primary Fund First Distribution Q&A."
Reserve says, "This represents approximately 50 percent of the total assets of the Fund as of the close of business on September 15, 2008. Approximately $25 billion in total assets remain in the Fund. This first distribution is being paid to all investors remaining in the Fund, including those who submitted redemption orders that had not been funded. The distribution is being made on a pro rata basis to all of those investors. Each investor is receiving approximately 50% of their current account balance."
It quotes Bruce R. Bent, president of Reserve Management Company and co-inventor of the money market mutual fund, "This distribution marks a significant step in the process of liquidating the Primary Fund and distributing money back to shareholders. We are committed to making future distributions when more cash becomes available."
Reserve adds, "The Fund's total assets have been approximately $51 billion since the close of business on September 15. The Fund's net asset value fell below $1.00 per share on September 16. All investors are being treated the same regardless of when or if they tendered redemption orders to the Fund. In the next several days, we expect to be posting a plan for the total liquidation of the Fund on our website. Under that plan, interim distributions will continue as cash accumulates either through the maturing of portfolio holdings or their sale."
The company continues, "Reserve Management Company, Inc. is focused on liquidating the fund's holdings at amortized cost as quickly as possible. You may have read about a new Money Market Investor Funding Facility program devised by the Federal Reserve Bank that will provide liquidity for certain commercial paper and bank certificates of financial institutions held by money market funds. We are carefully analyzing the terms of that program. Preserving the value of the Fund's assets and restoring cash to our investors are our top priorities during this process. We thank all of you for your patience and sincerely regret the inconvenience."
"In calculating each investor's pro rata share, we began with the number of shares each investor held as of the close of business on September 14. The September 14 account balance includes the balance from the end of day September 12 plus the accrued dividends from September 1 through September 14. Then, expressed simply, any funded redemption requests or exchanges were subtracted, any subscriptions from September 15 through September 16 were added, and any service transactions (customer cards, checks and ACH) processed through the last business day before the distribution were calculated. The resulting number, representing each investor's unfunded shares in the Primary Fund at the close of business, was then divided by the aggregated unfunded shares of all investors (approximately 51 billion shares), to arrive at an ownership percentage, which was used to calculate each investor's pro rata distribution. Interest income earned from September 1 through September 14, 2008, has been credited to each shareholder's account. The distribution of income after that date will be addressed in the Fund's Plan of Liquidation," explains the release.
The Investment Company Institute released its weekly money market mutual fund totals yesterday evening, showing assets grew for the 5th week in a row. Though the increase was a mere $1.35 billion this week, to $3.538 trillion, money funds have gained $138.49 billion over the past 4 weeks, recovering the bulk of the $182.35 billion in declines experienced from Sept. 11 through Oct. 1.
General Purpose ("Prime") Institutional money fund assets increased by $6.68 billion, the 3rd consecutive weekly increase for this category. Though the rebound has been modest, last week Prime Institutional funds retook the $1 trillion level. But their asset total remains slightly smaller than Government Institutional funds, which total $1.08 trillion after a $12.09 billion increase this week. Government Institutional funds, including Treasury Inst, broke above $1 trillion and became the single largest money fund category the first week of October.
ICI also released its September monthly asset figures yesterday, which showed money fund assets falling by $137 billion for the calendar month, down 3.9%. Overall mutual fund assets (including stock and bond funds) fell by almost $1 trillion, down a stunning $959.33 billion, or 8.3%. Money funds could take small solace in the fact that their share of the $10.63 trillion in total mutual fund assets thus rose to 31.8%.
ICI's monthly statistics also included their "Month-End Portfolio Holdings of Taxable Money Market Funds" report. Commercial paper remained the largest holding of taxable money funds at $587.05 billion, or 20.1% of assets. But CP holdings declined a stunning $151.25 billion, or 20.5%, in September. Repurchase agreements (repo) were the second largest holding with 20.0%, or $582.10 billion, up $59.00 billion, or 11.3% on the month.
Government agency securities represent the third largest taxable money fund holding with $435.53 billion, or 14.9%, of assets, while Treasury bills and securities rank fourth with $431.25 billion in money funds assets, or 14.8%. Agencies grew by $23.72 billion, or 5.8%, while Treasuries surged $133.57 billion, or 44.8%. Money fund investment in Certificates of Deposits (CDs), which now account for 9.6% of assets, fell by $58.52 billion, or 17.3%, to $280.44 billion, and Eurodollar CD holdings fell $25.49 billion, or 15.4%, to $140.36 billion.
The Average Maturity of money fund portfolios shortened substantially in September to 41 days from 48 days. ICI shows 33.74 million accounts outstanding at month-end September, down a dramatic 425.80 thousand accounts. Over the past year, taxable money fund accounts have declined by 1.37 million accounts.
While tensions continue to slowly ease among money market mutual funds, a new, big batch of "no-action" letters was just disclosed on the SEC's website. These disclosures document steps taken by advisors to protect their funds from the Lehman Brothers bankruptcy and from other tumultuous market events in September. Crane Data counts five new advisors disclosing support actions involving money market funds, bringing our running total of advisors "bailing out" their funds to 25, which is now greater than one-quarter of the 90 money fund advisors tracked by our Money Fund Intelligence.
As we discussed in our Sept. 16 article, "Lehman Support Actions Push Money Fund Bailouts to 20 Total," Columbia, Russell and others took steps to protect investors over their exposure to Lehman Brothers debt. Their "no action" letters have now been made public. (See Russell Investment Company and Columbia Funds Series Trust letters.) Russell's Sept. 15 letter explains, "Under the Capital Support Agreement, RIMCo would be obligated to provide a capital contribution to the Fund if, as a result of losses realized on the notes, the market-based NAV per share of the Fund otherwise would drop below $0.995 or such greater amount as may be specified."
Additional disclosures related to Lehman debt include: Mount Vernon Securities Lending Trust, which is affiliated with U.S. Bancorp and which also holds $557 million stuck in Reserve Primary Fund; RidgeWorth Funds, which filed to replace a $70 million Lehman medium-term note with a SunTrust note; and, finally, Dreyfus Cash Management Plus and Dreyfus Money Funds (Dreyfus Basic Money Market Fund, Dreyfus Liquid Assets, and Dreyfus Worldwide Dollar Money Market Fund) entered into capital support agreements with BNY Mellon over Lehman holdings.
Several additional filings, unrelated to Lehman Brothers, were also just posted. These include Legg Mason Partners Institutional Trust - Western Asset Institutional Money Market Fund, which entered into a capital support agreement to protect a $75 million holding in SIV Orion Financial USA LLC; Touchstone Variable Series Trust - Touchstone Money Market, which entered into capital support agreements to assuage valuation concerns over Morgan Stanley and Wachovia CP; and, Phoenix Opportunities Trust - Phoenix Money Market Fund, which disclosed a request to purchase investments in AIG subsidiary International Lease Financing Corporation.
Advantus Series Fund, Inc.- Advantus Series Money Market Portfolio, also filed for an AIG-related capital support agreement backed by parent Securian Financial Group. It says, "You state that as of September 17, 2008, approximately 1.48 percent of the Portfolio's total assets, or $2 million, consisted of commercial paper issued by American General Finance Corp, a subsidiary of American International Group, and approximately 1.85 percent of the Portfolio's total assets, or $2.5 million, consisted of commercial paper issued by AIG Funding, Inc. You state that as a result of recent market events related to the CP, the CP was determined to no longer present minimal credit risks for purposes of rule 2a-7."
Finally, J.P. Morgan Securities Inc. added a "no-action" letter, though it was unrelated to any money fund support actions. JPM sought clarification on issues involving the new Money Market Investor Funding Facility (MMIFF). The letter says, "[Y]ou request interpretive guidance and no-action relief ... [for] registered open-end investment companies that rely on rule 2a-7 under the Act sell certain commercial paper, bank notes and certificates of deposit having remaining maturities of 90 days or less at a price equal to their amortized cost, to certain special purpose vehicles that have entered into liquidity facilities with the Federal Reserve Bank of New York and for which J.P. Morgan Securities Inc. is the structuring and referral agent and JPMorgan Chase Bank, N.A. is the collateral agent, the depositary and issuing and paying agent, in exchange for cash and asset backed commercial paper of the SPVs for which JPMSI is the placement agent."
Tuesday, the Federal Reserve's Open Market Committee lowered its federal funds target rate by 50 basis points to 1.0%. It also cut its little used discount rate by 1/2 percent to 1.25%. (See the full Fed statement here.) This move marked the Fed's ninth rate cut since September 2007, when the Fed funds target stood at 5.25% (and our Crane 100 Money Fund Index stood at 5.05%) . Money market rates should move lower in coming weeks, though most money funds will not encounter any partial fee waiver issues due to the current much-higher-than-Fed-funds levels of prime money funds and commercial paper. (See yesterday' News "Funds Brace for Ultra-Low Rates; Treasury Funds Avoid Zero Yield".)
The Fed's statement says, "The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability."
It continues, "Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
We expect our Crane 100 Money Fund Index, the average 7-day annualized yield of the 100 largest taxable money funds, to move lower in coming weeks. The Crane 100 is currently 2.19%. It theoretically should move to 1.69% over the next 39 days (the average maturity of money funds), though abnormally high LIBOR, commercial paper and ABCP rates, and a recent rebound in Treasury yields, should delay or perhaps ignore the impact of this latest cut. Rates should come down slowly too as money funds moving back into higher-yielding options like CP.
Crane Data believes that the Federal Reserve will not cut rates below 1.0%, which we think is effectively the "floor" on the Fed funds target rate. The importance of this barrier was established from June 2003 through June 2004, the last time Fed funds hit 1.0%. Any cuts below this would force many of the highest expense money market funds to waive fees in order to avoid zero or negative yields. But the majority of assets wouldn't be impacted until rates sank below 0.5%. (The average expense ratio of money market mutual funds is currently 0.47%.) We have already seen sporadic fee waivers in selected Treasury funds over the last month, but we don't expect waiving to avoid negative yields to be a major issue for funds overall.
Federated Investors, the third largest manager of money funds with $247 billion, hosted its quarterly earnings conference call on Friday, and, as usual, President & CEO Chris Donahue held forth on a host of issues related to money market mutual funds. He says in the Q&A, "Nothing has changed in terms of people's fundamental need for the convenience that these funds have offered since we brought these out in the mid-1970's. In fact, they need them even more.... The outlook is still very strong."
Donahue says of the money markets, "Conditions have improved here in October and we expect further improvements as confidence returns to the system. Measures taken by the Treasury, the Fed, and the SEC are well designed, in our opinion, to address liquidity and have already helped considerably. The newly announced Fed Money Market Investor Funding Facility, combined with the previously announced asset-backed commercial paper program and the Treasury money market insurance program, are designed to improve market liquidity and promote investor confidence in money market fund investments during a period of unprecedented market stress."
The Federated CEO also says, "Money market funds depend on trust and confidence in the financial system in order to be able to function properly. These programs are designed to be temporary measures for extraordinary market conditions, and we anticipate that they will not be necessary when market conditions improve significantly.... Money market funds are a vital part of our capital markets."
He continues, "We believe the core structure of the money market mutual fund has been, and will remain, essential to their use by investors. Core features, including, of course, dollar in, dollar out, maintenance of $1 NAV as a primary goal, diligent, independent credit work to avoid securities that do not meet the standards of minimal credit risk and other key components of 2a-7 related to quality and duration that are essential to the success of these products."
Finally, Donahue says, "We have played a critical role in the development of this $3.5 trillion industry, including the development of its regulatory and operating framework.... These investment products enable fund shareholders to access the benefits of a large, high quality money market fund, including daily liquidity at par, diversification, credit analysis, competitive yields, and convenience. This is the core value proposition of the money market mutual fund, and we believe it will transcend the difficult market conditions that we've experienced.... The game in the money fund will remain the same -- get the credit right."
Some of the lowest-yielding Treasury money market mutual funds have been forced to waive some fees at the margin to keep their yields positive over the past month. As the market prepares for another potential rate reduction in the benchmark Federal funds target rate, the rest of the money fund universe is preparing for the possibility of a protracted stay at ultra-low rate levels, ala 2003-2004. However, the rebound in Treasury yields and the far-above-Fed-funds levels in Prime money funds make any serious loss of revenues or any threat of negative yields remote for now. (Our Crane 100 is currently at 2.19% vs. a Fed funds target of 1.5%.)
According to our Money Fund Intelligence Daily, Treasury fund yields continued rising over the past week. They also rose yesterday. Our Crane Treasury Institutional Money Fund Index rose 0.08% yesterday to 0.71% (7-day yield), while the Crane Treasury Individual MF Index rose 0.05% to 0.44% (7-day). On Oct. 17 and 20 our daily Inst Treas Index dropped as low as 0.41% while the Indiv Treas Index touched 0.27%. Though the Treasury yields likely won't follow the Fed lower, the threat of near-zero yields and partial fee waivers remains here.
Our latest monthly Money Fund Intelligence listed 14 Treasury funds, out of 106 Treasury Institutional funds and 105 Treasury Individual (retail) funds, yielding 0.05% or lower, normally a sign of partial fee waivers in place. These included (along with assets and 7-day yields as of Sept. 30): American Perform US Treas Adm ($858, 0.01%); Neuberger Berman ILF Treas Prem ($251, 0.01%); Neuberger Berman ILF Treas Serv ($13, 0.01%); State Street Inst Treasury Plus Inv ($495, 0.03%); Goldman Sachs ILA Trs Obl CM ($220, 0.04%); JPMorgan US Trs Plus MM B ($1, 0.04%); JPMorgan US Trs Plus MM C ($131, 0.04%); JPMorgan US Trs Plus MM Res ($2,200, 0.04%); Evergreen Treasury MMF S ($599, 0.05%); Daily Income Treas ST ($175, 0.05%); Dreyfus General Treasury Prime B ($1,541, 0.05%); Dreyfus Tr&Ag Cash Mgmt Select ($38, 0.05%); Goldman Sachs ILA Trs Obl Ser ($368, 0.05%); and, Highmark 100% USTr MMF Swp ($177, 0.05%).
Among $1 billion-plus funds (tracked by our MFI Daily), just five have yields under 0.20% currently (among 94 Treasury funds). They are (along with assets and 7-day yields as of Oct. 27): Dreyfus General Treasury Prime B ($2,021, 0.05%); Federated Treasury Cash Ser ($2,216, 0.07%); Columbia Treasury Reserves Daily ($2,035, 0.13%); JPMorgan US Trs Plus MM Res ($2,340, 0.14%); and, Fidelity Treasury Daily Mon ($4,340, 0.16%).
Money funds will be watching the possibility of negative yields closely, of course, and many have filed prospectus amendments recently to expand their flexibility to voluntarily reimburse or waive fees. (See Strategic Insight's latest Simfund Filing weekly for more; they cite Hartford Money Market, Fidelity Prime, Tax-Exempt and Advisor as some that have amended.) But as we saw in 2003-2004, the vast majority of money fund assets have expense ratios that are under 1%, so a Fed funds target of 1% -- and gross money market yields of 1% -- are not a serious threat to money fund revenues.
The Federal Reserve Board's Commercial Paper Funding Facility, announced October 7 to provide a backstop to CP markets, goes live today. The New York Fed, which administers the program, says, "The purpose of the CPFF is to enhance the liquidity of the commercial paper market by increasing the availability of term commercial paper funding to issuers and by providing greater assurance to both issuers and investors that firms will be able to roll over their maturing commercial paper."
The Commercial Paper Issuers Working Group (CPIWG), a group representing direct issuers of CP, and General Electric, one of the largest issuers of CP, have expressed their intentions to participate. We expect almost all the major market participants to follow, and we expect tensions in the money markets to continue easing this week as the CP program goes live.
The CPIWG says they "applaud the Federal Reserve for their steadfast actions related to the implementation of various programs, including the Commercial Paper Funding Facility (CPFF), designed to help unlock the U.S. credit markets.... [W]e believe the CPFF addresses two fundamental necessities to support a liquid, and functioning, commercial paper market: (1) the facility mitigates maturity 'rollover' risk by providing eligible issuers of commercial paper access to 3-month funding; and (2) in turn, investors in commercial paper should have restored confidence in their ability to obtain liquidity should they need to request an early redemption prior to the original maturity date." CPIWG adds, "[W]e intend to update the CPIWG web site with a list of member issuers of commercial paper that have publicly announced their registration with the CPFF."
GE Deputy Treasurer and spokesman Mark Barber shared a letter sent to CP investors late last week. It says, "We join with commercial paper issuers and investors in applauding the launch of the Commercial Paper Funding Facility by the Federal Reserve. The CPFF adds a liquidity backstop to this $1.5 trillion market, helping to reduce rollover risk for participating issuers and providing support for a more active secondary market. We believe the CPFF will strengthen confidence in the prime commercial paper market and encourage more term buying." He tells Crane Data, "It's all about liquidity in the market.... It's the best back-up there is."
Barber continues, "As of today, all of the U.S. issuers of commercial paper in the GE family are registered and approved to access the facility, which goes live on October 27. Each of these issuers is rated A-1+ by Standard and Poor's and P-1 by Moody's Investors Service." These include: General Electric Company, General Electric Capital Services, Inc., and General Electric Capital Corporation. GE adds, "We plan to use the CPFF primarily to support our CP investors who may need liquidity. To ensure access and operability and to demonstrate our support for the Fed's action, we plan to test the facility on October 27.... We appreciate your continued support."
The Fed said when it announced the program, "The Board authorized the CPFF on October 7, 2008 under Section 13(3) of the Federal Reserve Act to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit for businesses and households. Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of unsecured and asset-backed commercial paper from eligible issuers through its primary dealers. The CPFF will finance only highly rated, U.S. dollar-denominated, three-month commercial paper."
See also, Bloomberg's "GE to Sell CP to Fed to Help Unlock Credit Markets".
Money market mutual fund assets continued their recovery in the week ended Wednesday, October 22, rising $18.56 billion to $3.536 trillion. ICI's series shows assets growing for the third straight week following increases of $60.80 billion last week and $57.57 billion the week prior. Money fund assets have recovered 75% ($136.92 billion) of their overall asset declines ($182.35 billion) that occurred in the 3 weeks following Sept. 11, which includes the Sept. 16 "breaking of the buck" of The Reserve Fund.
Though Government funds (including Treasury) continue to account for the bulk of the inflows, Prime Institutional assets rose for the second straight week. Prime Inst MMFs increased by $5.94 billion in the latest week to $1.005 trillion, following a $6.95 billion increase last week. Prime (or "General Purpose") Institutional money funds declined by $461.6 billion over the 4-week period starting Sept. 11, with 80% of the declines ($371.79 billion) occurring in the two weeks ended Sept. 24. (These numbers include The Reserve's $65 billion Prime total meltdown.) Two weeks ago Prime Inst assets fell below the $1 trillion level and saw Govt Inst funds surpass them in assets (now at $1.067 trillion).
Tax Exempt money funds increased assets for the third straight week, rising $1.93 billion on the Institutional side (to $188.40 billion) and $2.09 billion on the Retail side (to $301.72 billion). Tax Exempt money funds declined sharply in the 3 weeks including the "break the buck" event, falling $17.49 billion (Retail) and $23.36 billion (Inst), respectively. Over the past 3 weeks, Retail T-E funds have rebounded by $13.01 billion and Institutional T-E MMFs have increased by $9.62 billion.
Year-to-date, money fund assets remain solidly in the black. Assets have grown by $391.5 billion, or 12.4%. Institutions still account for the bulk of the growth ($277.0 billion, or 14%) vs. $114.5 billion (9.9%) for Retail funds. Over 52 weeks, overall money fund totals have increased by $551 billion, or 18.5%. Institutional fund assets have increased by 19.5% over the past year, while Retail assets have grown by 11.9%.
Yields on money market funds continued climbing among Taxable funds and continue falling among Tax-Exempt funds in the latest week. For the week through Wednesday, our Crane Money Fund Average 7-Day Yield rose 0.05% to 1.71% while our Crane Tax-Exempt Index fell 0.76% to 2.36%. Sharply rising Treasury yields driven by the unwinding of the flight to safety have overwhelmed a decline in commercial paper and LIBOR-based rates.
Check back later today for news on the Federal Reserve's Commercial Paper Funding Facility, which goes live on Monday.
The Reserve has posted "Reserve Primary and Government Funds Disbursement Update," which says, "The Reserve is pleased to announce that the Primary Fund's initial distribution will be approximately $25 billion plus cash accumulated through the distribution date, rather than $20 billion as previously announced. The Fund has been accumulating cash for this purpose and will continue doing so for future distributions.... We are making every effort to return investors' money as quickly as possible. Some final trade reconciliations remain. Based on work already completed, it's now our best estimate that the initial distribution will be made at the end of next week. The Government Fund has accumulated approximately $3 billion for its initial distribution. While not set in stone, we currently expect the initial Government Fund distribution will occur relatively soon after the initial Primary Fund distribution.... [T]he initial Government Fund distribution will be made approximately seven to 10 days after the initial Primary Fund distribution.... Once again, we thank all of our investors for their patience."
In other news, the ICI has posted a "Frequently Asked Questions about the Money Market Investor Funding Facility". Its Q&A's include: "Q: What is the Money Market Investor Funding Facility? A: The Federal Reserve Board created the Money Market Investor Funding Facility on October 21 to support a private-sector initiative to provide liquidity to U.S. money markets. The MMIFF and the initiative are designed to help restore confidence and active trading in the money markets, which are vital to the short-term financing needs of American businesses." It also asks, "Q: What problems will the MMIFF address? A: Short-term credit markets have been under considerable strain in recent weeks. Investors, including money market mutual funds, have had difficulty selling assets into the secondary market. As a result, investors have favored extremely short-term commercial paper (CP) or certificates of deposit (CDs) maturing in seven days or less. The tight markets in longer-dated commercial paper have in turn made it difficult for financial institutions and businesses to raise funds to finance inventory, payroll, and other needs."
ICI also says, "The Fed has already announced two facilities to add liquidity to the money markets. How does the MMIFF fit with those?" ICI explains, "The MMIFF complements two previously announced facilities: The Commercial Paper Funding Facility (CPFF), which on October 27 will begin funding purchases of highly rated, U.S.-dollar denominated, three-month, unsecured and asset-backed commercial paper issued by U.S. issuers; and The Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), announced on September 19, 2008, which extends loans to banking organizations to purchase asset backed commercial paper from money market mutual funds. The AMLF focused on asset-backed commercial paper, and the CPFF will purchase CP directly from issuers. Neither covers purchases of existing unsecured money market instruments, which is the focus of the MMIFF. All three facilities are intended to improve liquidity in short-term debt markets and thereby increase the availability of credit."
See also the SEC's recent "no-action" letter on the program.
"Financial professionals believe that government action over the past three weeks have stabilized the credit markets. Over 1,000 attendees at the Annual Conference of the Association for Financial Professionals (AFP) indicated that various government action, including the U.S. Treasury plan to purchase an equity stake in key financial institutions and guarantee money market funds, along with the Federal Reserve's plan to purchase Commercial Paper, has improved the outlook for credit availability."
"While the economy appears to be shaken, credit looks to be stabilizing," said Jim Kaitz, President and CEO of AFP. "More than three weeks ago, we said that the most pressing issue for business is access to credit. Actions by policymakers have in recent days brought some measure of confidence back to the markets."
AFP says that survey respondents "indicate overwhelmingly (97%) they think the U.S. economy is in recession. One-third (34%) believe that the recent turmoil in the credit markets precipitated the recession, while nearly two-thirds (63%) believe that the U.S. was already in recession prior to September's events. Despite belief that access to credit has stabilized in the last two weeks (75%), many companies are still experiencing difficulties. More than one quarter (25%) report that their access to new or additional short-term credit is very limited. A nearly similar percentage of survey respondents (22%) report that the tight credit markets over the past month have stalled growth opportunities."
Overall, financial professionals are more positive about the outlook for short-term credit. 69% indicate that the Treasury's purchase of preferred shares in U.S. financial institutions will improve corporate access to short-term credit. 81% cite the Federal Reserve's plan to purchase Commercial Paper and guarantee money market funds as improving access.
The recent government actions have led some organizations to be more comfortable in investing outside of ultra-safe Treasury securities. Thirty-one percent of survey respondents indicate that they are more comfortable with re-allocating at least some of their short-term investment portfolio into other high-quality investment vehicles that offer higher yields. On Monday, Oct. 21, AFP surveyed attendees at its Annual Conference on the current state of the short-term credit market.
Today, the "Federal Reserve Board on Tuesday announced the creation of the Money Market Investor Funding Facility (MMIFF), which will support a private-sector initiative designed to provide liquidity to U.S. money market investors." The Fed's release says, "Under the MMIFF, authorized by the Board under Section 13(3) of the Federal Reserve Act, the Federal Reserve Bank of New York (FRBNY) will provide senior secured funding to a series of special purpose vehicles to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. Eligible assets will include U.S. dollar-denominated certificates of deposit and commercial paper issued by highly rated financial institutions and having remaining maturities of 90 days or less. Eligible investors will include U.S. money market mutual funds and over time may include other U.S. money market investors."
The Fed continues, "The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs. By facilitating the sales of money market instruments in the secondary market, the MMIFF should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments. Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households."
Investment Company Institute President and CEO Paul Schott Stevens commented in response to the Federal Reserve's announcement of creation of the Money Market Investor Funding Facility, "We commend the Federal Reserve Board for the actions just announced, which will enhance the liquidity of the markets for commercial paper and other short-term financing. This initiative by the Federal Reserve will be of great benefit to all investors in this market, including money market mutual funds. More generally, it will help restore normal functioning to the credit market, an objective of highest importance to assist small and large businesses and financial institutions that depend on this market for financing."
Yesterday, Federal Reserve Chairman Ben S. Bernanke gave an "Economic outlook and financial markets" update before the U.S. House of Representatives Committee on the Budget. The testimony contained several mentions of money market mutual funds and a review of the comprehensive actions taken to date to thaw the temporary freeze in the credit markets, which began when the bankruptcy of Lehman Brothers caused Reserve Primary Fund to "break the buck".
Bernanke says, "The financial turmoil intensified in recent weeks, as investors' confidence in banks and other financial institutions eroded and risk aversion heightened. Conditions in the interbank lending market have worsened, with term funding essentially unavailable. Withdrawals from prime money market mutual funds, which are important suppliers of credit to the commercial paper market, severely disrupted that market; and short-term credit, when available, has become much more costly for virtually all firms."
He continues, "To address ongoing pressures in interbank funding markets, the Federal Reserve significantly increased the quantity of term funds it auctions to banks and accommodated heightened demands for funding from banks and primary dealers.... To address illiquidity and impaired functioning in the market for commercial paper, the Treasury implemented a temporary guarantee program for balances held in money market mutual funds, helping to stem the outflows from these funds. The Federal Reserve put in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds, thus providing some relief for money market funds that have needed to sell their holdings to meet redemptions. Moreover, we soon will be implementing a new Commercial Paper Funding Facility that will provide a backstop to commercial paper markets by purchasing highly rated commercial paper from issuers at a term of three months."
"Taken together, these measures should help rebuild confidence in the financial system, increase the liquidity of financial markets, and improve the ability of financial institutions to raise capital from private sources.... [T]he act also temporarily raised the limit on the deposit insurance coverage provided by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration from $100,000 to $250,000 per account, effective immediately.... [T]he FDIC was able to use its authority `to provide, for a specified period, unlimited insurance coverage of funds held in non-interest-bearing transactions accounts, such as payroll accounts <b:>`_. In addition, the FDIC announced that it would guarantee the senior unsecured debt of FDIC-insured depository institutions and their associated holding companies."
Finally, he says, "These measures were announced less than a week ago, and, although there have been some encouraging signs, it is too early to assess their full effects. However, I am confident that these initiatives, together with other actions by the Treasury, the Federal Reserve, and other regulators, will help restore trust in our financial system and allow the resumption of more-normal flows of credit to households and firms."
In a previous Crane Data News (Oct. 9) article, we said, "Virtually All Money Fund Families Now Covered by Treasury Guaranty." We've since found at least two funds that have declined to apply for the Treasury's Temporary Guarantee Program for Money Market Funds. But both are tiny Treasury funds not tracked by Crane Data. Also, at least two fund complexes have now had their guaranty applications approved by Treasury, and we expect almost all others to be approved within the week.
Of the two funds that declined the coverage, Weiss Treasury Only Money Market Fund is one. Its website says, "On behalf of the Weiss Treasury Only Money Market Fund, Weiss Capital Securities president Sharon Daniels said, 'While many funds may choose to participate in this temporary money market fund guarantee offered by the Treasury, the Weiss Treasury Only Money Market Fund is unique in that it invests almost entirely in U.S. Treasury securities, which benefit from the DIRECT full faith and credit guarantee of the U.S. government.'"
The $133 million Sentinel U.S. Treasury Money Market Fund (SNTXX) also declined coverage (and is not covered by Crane Data). The company says of its decision, "The Sentinel Group Funds' Board of Directors have carefully evaluated the details of the U.S. Treasury program and the portfolio holdings of the Sentinel U.S. Treasury Money Market Fund. Based on this review, they have determined the program's costs outweigh its benefits, particularly in light of the fact that the majority of the funds' assets (listed below) are already backed by the full faith and credit of the U.S. government or its implicit government guarantee."
Regarding acceptance of the Treasury's guaranty program, Oppenheimer Funds said, "On September 19, 2008, the U.S. Treasury Department announced the establishment of a 'Temporary Guarantee Program for Money Market Mutual Funds', to assist participating money market funds that 'break the buck' to pay certain shareholders $1.00 upon the liquidation of the funds. We are pleased to report that the Oppenheimer and Centennial money market funds have been accepted to participate in the Guarantee Program." The guaranty agreements are not effective until funds receive an agreement countersigned by the Treasury Department; Oppenheimer confirmed that its funds received their acceptance notice via email with a "countersigned Guarantee Agreement".
The other fund group we found confirming acceptance is the RidgeWorth Funds, formerly Trusco's STI Classic Funds. Its website says, "On October 6, five of the RidgeWorth Money Market Funds applied to participate in the U.S. Treasury's Temporary Guarantee Program for Money Market Funds. We are pleased to announce that on October 16, the U.S. Treasury notified us that our applications were accepted. The RidgeWorth Funds that will participate in the Program are: Institutional Cash Management Money Market Fund, Institutional Municipal Cash Reserve Money Market Fund, Prime Quality Money Market Fund, Tax-Exempt Money Market Fund, Virginia Tax-Free Money Market Fund."
Following their near-death experience in September after The Reserve's Primary Fund "broke the buck," the $2.2 trillion Institutional money market mutual fund industry has stabilized and will be gathering in Los Angeles this week to lick its wounds at the AFP Annual Conference, produced by the Association of Financial Professionals. Money fund salespeople will be out in force at the world's largest gathering of cash investors to try and talk some of the thousands of coporate treasurers who control hundreds of billions in assets back in "off the ledge". It will be a tough and a long sell, but the "just-happy-to-still-be-here" money funds have been heartended by the market's recent response to the U.S. Government's barrage of support actions.
While actual session content on cash investments, money funds and money markets is sparse, money fund and money market exhibitors will be out in force. And the cash manager, assistant treasurer and CFO crowd will undoubtedly have money markets on their mind. Though the ranks have been thinned somewhat, there will still be over 30 companies promoting money funds and cash investment "portals" in the expansive exhibit hall at the LA Convention Center. Large sponsors of the 4-day event (which starts Sunday) include: Bank of New York Mellon, BlackRock, Citi, Deutsche Bank, Fidelity, HSBC, Northern Trust, PNC, SunTrust, Wachovia, and Wells Fargo.
Alas, there are just two sessions that involve money market mutual funds, and both are money fund "portal" talks. Monday's agenda contains a 10:30 a.m. talk by Institutional Cash Distributors' Tom Knight and Clearwater Analytics' Courtlandt Gates entitled, "Do You Know What Your Cash is Buying? A Glimpse Into Total Fund Transparency and the Future of Money Market Technology." The other is Monday afternoon at 4:00 p.m., the prematurely-titled, "Safeguarding Global Cash: Investing in the Post-Crisis Environment." Barclays Global head of cash Dave Lonergan will join Citi Online Investments' John Carter to discuss "safe harbors for investing global cash." (We hope the AFP includes some money market mutual fund managers next year!)
Crane Data President & Publisher Peter Crane will be roaming the halls reporting on the money market-related news and discussions. Please feel free to call or e-mail Pete if you have any information of interest to the broader money fund community, or if you'd like to arrange an on-site discussion. (You can also e-mail to request Pete's Powerpoint presentation from last week's Treasury Management of New York, or TMANY, lunch meeting entitled, "`Money Market Mutual Funds: What You Need to Know Today ... 'Breaking the Buck' & Aftermath.") We hope to see you in LA!
Money market mutual fund assets rebounded strongly in the latest week, rising $60.83 billion to $3.519 trillion, according to the Investment Company Institute's weekly series. For the week ended Oct. 16, Retail money fund assets increased by $26.83 billion to $1.285 trillion and Institutional assets increased by $34.01 billion to $2.234 billion. ICI tracks 2,029 funds in their weekly survey.
This marks the third week in a row that overall assets have increased and the first week that General Purpose ("Prime") Institutional assets have increased since Reserve Primary "broke the buck". Overall money fund assets have recovered $120.8 billion over the past three weeks, recouping almost two-thirds of the declines suffered in the weeks ended Sept. 17 and Sept. 24. Year-to-date, money fund assets have increased by $250.7 billion, or 11.9%, and over 52 weeks they have increased by $577 billion, or 19.6%.
Prime Institutional assets grew by $6.95 billion to $998.9 billion in the latest week, but they remain down sharply from their Sept. 10 record of $1.453 trillion. Government Institutional funds, including Treasury funds, continue raking in assets, though the rate slowed in the latest week. Govt Inst funds increased by $25.11 billion to $1.048 trillion. (They broke above the $1 trillion level last week.) Prime Retail funds increased by $12.4 billion to $710.81 billion and Government Retail funds increased by $9.41 billion to $274.43 billion.
Tax-Exempt money funds continued their rebound for the second week in a row. T-E Institutional funds increased by $1.95 billion to $186.47 billion and T-E Retail funds increased by $4.99 billion to $299.63 billion. Tax-exempt yields have declined sharply of late, following their surge to unprecedented levels vis-a-vis taxable funds. Our Crane Tax-Exempt Money Fund Index has fallen from a 5.25% yield as of Sept. 30 to a 2.80% yield as of Wednesday.
Yesterday afternoon, Federated Investors, the third largest manager of money funds, published an update on current events entitled, "Plain talk about money market funds in today's markets. The Q&A with Federated money fund guru Debbie Cunningham says, "The money market fund industry has not been immune to the turmoil in the credit markets," and discusses the subprime crisis, liquidity, CP, the muni market and the Treasury Department's insurance program.
Cunningham says, "The Treasury, Federal Reserve and overseas central banks are working furiously to calm global credit markets amid widespread fear and volatility. We saw yields on Treasury bills drop to near zero in mid-September as investors rushed to their relative safety, while rates on normally stable commercial paper and other short-term instruments soared as buyers shunned them. The spreads between Treasurys and other sources of short-term debt have remained high."
She continues, "There have been signs of a turnabout this month, aided by the Fed's landmark decision to buy companies' commercial paper and, in conjunction with moves by other central banks, to lower the Federal Funds rate half a point. The Treasury's extension of its $700 billion rescue package to include direct purchases of stock in banks -- and similar actions by governments in Europe -- also helped boost liquidity. But it remains unclear how long it will take for credit markets to return to more normal behavior."
"Some money market funds have owned problematic securities related to subprime mortgages. The collapse of the subprime mortgage market spilled over into several major financial institutions that either directly held mortgage-backed securities or insured them, causing some of those institutions to fail and others to receive government assistance to stay afloat. This impacted some non-Federated money funds that were invested in these institutions. In this environment, we continue to manage Federated money market funds with an unrelenting focus on credit analysis to minimize risk and we continue to maximize liquidity," says Cunningham.
She adds, "Our money market funds, and all money market funds, always work to maintain a $1 net asset value. But additional liquidity has been what our clients have sought over the past several weeks. We need to comfort and assure our shareholders that they will have a $1 NAV and liquidity at any point that they need it. While yield might suffer slightly, our goal, because of what is happening in the marketplace, is managing for liquidity within the portfolios. Federated's portfolios continue to buy overnight instruments to provide more daily liquidity for shareholders."
On CP, she says, "From a quality perspective and from a diversification perspective, asset-backed commercial paper has always been one of the desired asset classes for Federated's prime money market funds. This is still the case. Across the industry, money market funds are the biggest buyer of commercial paper, but in the first two weeks of September, money market funds shied away from commercial paper due to a greater focus on maintaining liquidity within a portfolio. The Oct. 7 announcement by the Fed that it would begin to purchase commercial paper from U.S. issuers should help to restore more normal behavior toward commercial paper."
For the entire Q&A, visit Federated's website.
The October issue of our Money Fund Intelligence reflected an unprecedented number of changes in the money market mutual fund industry during September. The dramatic moves weren't just reflected in asset flows. Several fund complexes changed their name, a number were merged, and of course some were removed or footnoted to reflect the fact that they either "broke the buck" or were put into liquidation mode.
One large shift involved the BNY Hamilton Funds being shifted into new Dreyfus Institutional Reserves Funds. BNY Hamilton MF - Agency (BMAXX), Classic (BHCXX), Hamilton (BNHXX), Instit (BHIXX), and Premier (BNPXX) are now Dreyfus Institutional Reserves Money Fund - Agency (DRGXX), Classic (DLSXX), Hamilton (DSHXX), Instit (DSVXX), and Premier (DERXX), respectively. BNY Hamilton Treasury MF Classic (BYCXX), Hamilton (BYNXX), Inst (BHRXX), and Premium (BHTXX) are now Dreyfus Institutional Reserves Treasury Fund (DRRXX, DSSXX, DHLXX, and DNSXX). Fitch also recently assigned AAA/V1+ ratings to the new Dreyfus Institutional Reserves Government, Treasury, Treasury Prime and Money Fund.
Among fund families changing their names are: Lehman Brothers, which switch to Neuberger Berman on all its funds, ABN Amro/Aston, which is now Fortis, and Phoenix Insight, which is now Virtus Insight. The Neuberger change reflects the company's separation from Lehman, while the Fortis label reflects the new parentage of the former ABN Amro funds. The symbols on all these families' funds remain unchanged.
In other ratings news, Moody's downgraded a couple more ultra-short funds. The NRSRO dropped RidgeWorth Ultra-Short Bond Fund's rating to A/MR3 from Aa/MR1. The release says, "The fund is a bond fund and as such it is not eligible for the US Treasury's Temporary Guarantee Program for Money Market Funds. The downgrade of the fund rating to A was prompted by the fund's exposure to bonds issued by Lehman Brothers Holdings Inc., which filed for Chapter 11 bankruptcy protection. On a par value basis, the fund's Lehman holdings are approximately 1% of the fund's total par value."
Moody's Investors Service also downgraded the ratings of three very small "enhanced yield funds managed by JP Morgan Asset Management". `The release says that the "credit risk rating of one fund was downgraded to reflect its exposure to a defaulted security, while the market risk ratings of all three funds have been downgraded due to declining valuations in the asset-backed sector, increasing shareholder concentration, and substantial outflows. The following fund ratings were downgraded: US Dollar Enhanced Yield fund, whose asset size is $37 million: to Ba/MR5 from Aa/MR3; Euro Enhanced Yield fund, whose asset size is E40 million: to Aa/MR5 from Aa/MR2; and, Sterling Enhanced Yield fund, whose asset size is GBP53 million: to Aa/MR5 from Aa/MR1." Moody's also put NGA Institutional LIBOR Fund on review for downgrade.
Following actions by Europe over the weekend to support its banking system, the U.S. Treasury and Federal Reserve announced a series of additional support measures aimed at stabilizing the banking system and breaking a credit logjam in the money markets. The Treasury statement says, "Today we are taking decisive actions to protect the U.S. economy, to strengthen public confidence in our financial institutions, and to foster the robust functioning of our credit markets."
Actions include, "First, Treasury is announcing a voluntary capital purchase program ... selling preferred shares to the U.S. government on attractive terms that protect the taxpayer." Next, they've allowed the "FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts." And, third, "to further increase access to funding for businesses in all sectors of our economy, the Federal Reserve has announced further details of its Commercial Paper Funding Facility (CPFF) program."
The Fed's statement on the CPFF says, "The Federal Reserve Board on Tuesday announced additional details regarding the Commercial Paper Funding Facility (CPFF), including that it would begin funding purchases of commercial paper on October 27, 2008. The Board authorized the CPFF on October 7, 2008 under Section 13(3) of the Federal Reserve Act to provide a liquidity backstop to U.S. issuers of commercial paper. The CPFF is intended to improve liquidity in short-term funding markets and thereby increase the availability of credit for businesses and households."
It adds, "Under the CPFF, the Federal Reserve Bank of New York will finance the purchase of unsecured and asset-backed commercial paper from eligible issuers through its primary dealers. The CPFF will finance only highly rated, U.S. dollar-denominated, three-month commercial paper."
For more information, see: "Commercial Paper Funding Facility: Frequently Asked Questions" and "Commercial Paper Funding Facility: Program Terms and Conditions". Under the Q&A, the New York Fed says, "The purpose of the CPFF is to enhance the liquidity of the commercial paper market by increasing the availability of term commercial paper funding to issuers and by providing greater assurance to both issuers and investors that firms will be able to roll over their maturing commercial paper. These steps should contribute to an overall improvement of conditions in credit markets."
This month in our flagship Money Fund Intelligence we interviewed Eduardo Prado, President & CEO of Irvine, Calif.-based Finacorp Securities, which launched the proprietary money fund trading portal Tradefunds earlier this year. We asked Ed about competing in the portal marketplace, about the government agency market, and about recent events in the money markets.
First we asked, "What led you to the money fund portal business?" Prado responded, "As a broker/dealer with institutional clients that invest in short term instruments, we saw the fund portal business as a natural extension of what we currently offer. We were also enlightened by many of our state, municipal and larger corporate accounts on the need to invest in money funds through a Minority Owned Broker Dealer. To date we are the only Hispanic Owned Broker Dealer to provide such a portal."
Q: What has been the key to the success of online money fund portals? He says, "The major key to online money fund portals is the efficiency that portals offer to investors in virtually every aspect of fund investing--research, execution, processing and reporting. Portals allow investors to efficiently research funds, for ratings, holdings, yield, etc. They offer the ability to easily diversify ones holdings. Now more than ever this has become a critical need in this very turbulent market. Portal investors typically have one wire, and one consolidated statement. In addition, a sound capable custodian is critical in the deployment of a money fund portal."
Q: What makes your portal different from others? Prado says, "For starters Tradefunds is unique in that it allows our clients' Treasury team to meaningfully contribute to enterprise diversity goals with a value-added, best practice investment solution--and via a product that they are (almost always) already using. By this I mean that our portal is owned and operated by Finacorp Securities, a certified MBE/DBE brokerage firm, as such our clients can gain related credits by using the platform. Our platform also offers a vast amount of funds; 25 different fund families and 80 different funds and is very easy to use. We are also the only portal that offers a short term money fund investment desk so that if you wish to invest in securities you can do so by communicating with our trading desk."
Finally, we asked, "Have portals contributed to the recent market volatility?" He tells us, "No. I believe that the money fund market will continue to evolve and become much more transparent and commoditized; portals are just part of this process. Q: Do you sell things other than money funds? Absolutely. For one thing, we're very active in the 2a-7 space across all taxable markets. Finacorp is the No. 1-ranked minority underwriter of agency securities, and many of our underwritings--both fixed rate and floating--are structured for the funds." See the October issue of MFI for the full interview.
On Friday night, the SEC released a "no action" letter allowing money market mutual funds to "shadow price" certain securities use the "amortized cost" method of accounting valuation rather than market value quotations for securities with less than 60 days to maturity. The SEC responded to a letter from the Investment Company Institute, "Based on these representations and in light of the current conditions in the market for short-term securities, the Division of Investment Management would not recommend enforcement action to the Commission ... if, for purposes of shadow pricing under their monitoring procedures through January 12, 2009, money market mutual funds comply with rule 2a-7 by using the amortized cost method of valuing certain of their portfolio securities ... unless the particular circumstances, i.e. the impairment of the creditworthiness of the issuer, suggest that amortized cost is no longer appropriate."
The SEC letter says, "You have requested that the staff provide assurances that it would not recommend enforcement action to the Commission under section 2(a)(41) of the Investment Company Act of 1940 and rules 2a-4 and 22c-l thereunder, if a money market fund complies with rule 2a-7 by "shadow pricing" certain ofits portfolio securities by reference to their amortized cost value rather than using available market quotations (or an appropriate substitute that reflects current market conditions)."
It explains, "Open-end management investment companies (mutual funds) must calculate their current net asset value by reference to (i) the market values of their securities or (</