Money market fund assets fell for the fourth week in a row, their 12th decrease over the past 15 weeks, breaking below the $4.5 trillion level for the first time since April 15. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $45.22 billion to $4.49 trillion for the week ended Wednesday, September 2, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $38.87 billion and prime funds decreased by $4.24 billion. Tax-exempt money market funds decreased by $2.11 billion." ICI's stats show Institutional MMFs decreasing $39.1 billion and Retail MMFs decreasing $6.1 billion. Total Government MMF assets, including Treasury funds, were $3.628 trillion (80.7% of all money funds), while Total Prime MMFs were $747.4 billion (16.6%). Tax Exempt MMFs totaled $118.9 billion (2.6%).

ICI shows Money fund assets up a still massive $863 billion, or 23.8%, year-to-date in 2020, with Inst MMFs up $706 billion (31.2%) and Retail MMFs up $157 billion (11.4%). Over the past 52 weeks, ICI's money fund asset series has increased by $1.114 trillion, or 33.0%, with Retail MMFs rising by $238 billion (18.4%) and Inst MMFs rising by $876 billion (41.9%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets were down $47.6 billion in August to $4.881 trillion.)

They explain, "Assets of retail money market funds decreased by $6.14 billion to $1.53 trillion. Among retail funds, government money market fund assets decreased by $2.04 billion to $983.26 billion, prime money market fund assets decreased by $2.59 billion to $436.54 billion, and tax-exempt fund assets decreased by $1.51 billion to $106.89 billion." Retail assets account for just over a third of total assets, or 33.4%, and Government Retail assets make up 64.4% of all Retail MMFs.

ICI adds, "Assets of institutional money market funds decreased by $39.08 billion to $2.97 trillion. Among institutional funds, government money market fund assets decreased by $36.83 billion to $2.65 trillion, prime money market fund assets decreased by $1.65 billion to $310.83 billion, and tax-exempt fund assets decreased by $603 million to $12.02 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22, accounted for 66.0% of all MMF assets, with Government Institutional assets making up 89.1% of all Institutional MMF totals.

In other news, J.P. Morgan Securities writes in a "Mid-Week US Short Duration Update" about the recent Vanguard retreat from Prime. (See our August 28 Crane Data News, "Vanguard Prime Money Market Fund Going Government," and yesterday's "Moody's on Vanguard Prime Conversion.") They say, "We noted last week that Vanguard's planned conversion of its $125bn prime retail MMF to a government fund should not result in any significant negative funding pressures in the CP/CD markets, as over 75% of the funds' holdings are already in rates products and very little in credit."

JPM explains, "With market participants wondering if other managers might follow suit, this raises the question of how other funds compare.... Among large complexes, Vanguard’s funds currently have by far the lowest exposure to 'credit' (assets other than Treasuries, Agencies or Tsy/Agency repo), at 22%. Still, a number of fund complexes have significant allocations to repo and/or Treasuries and Agencies, and in aggregate only 55% of prime fund assets are invested in credit. The bulk of this exposure is to Yankee banks (42% of all prime fund assets), though some complexes have lower Yankee exposures."

The update continues, "Although Vanguard has always managed its prime funds relatively conservatively, looking at the data over time shows that their current low exposure to credit is the result of a steady decrease in recent months, from a peak of 68% credit at the end of February.... Vanguard was not alone: the data show something of a bifurcation in strategy, with the very largest fund families reducing their credit exposure this year while many others kept them relatively unchanged. Overall, the aggregate credit exposure across all funds fell from 72% at the end of February to 54% in June before ticking up slightly in July."

It adds, "Given the sizeable non-credit allocations of many large prime funds, it seems likely that short-term credit markets could weather the loss of some more prime funds without too much disruption. If the trickle of prime fund conversions turns into a flood, though, the impact on markets could be more severe. While this is not our base case, consolidation among the prime MMF sponsors creates headwinds. For credit issuers, fewer large buyers means less funding diversity."

Finally, Federated Hermes posted, "Encouraging elements of new Fed framework" as its latest monthly commentary. Deborah Cunningham writes, "Like so many derailed plans in 2020, the Federal Reserve intended its major revision of its 'Statement on Longer-Run Goals and Monetary Policy Strategy' to be its momentous policy announcement of the year. Unlike the calibrations that happen in Federal Open Market Committee (FOMC) meetings, this document frames everything U.S. policymakers do. The only thing more fundamental is the Federal Reserve Act that established the central bank in 1913. And it isn't updated often -- the last overhaul happened in 2012."

She asks, "So, what in the document pertains to cash management? On the surface it seems dire, but it really isn't. The unfortunate news is the Fed essentially adopted a lower-for-longer stance. It won't raise rates when the economy is getting better -- like it did under Janet Yellen (and Powell) -- only when conditions are robust. But this approach simultaneously is the good side of the new framework for the liquidity space.... My position is this, combined with the other Fed moves this year, might spur inflation sooner than many think after the pandemic ends, meaning the FOMC could raise rates sooner and yields in the liquidity space should rise."

Cunningham also says, "The race to replace the London interbank offered rate (Libor) heated up in August. Lately, the Fed's Secured Overnight Financing Rate (SOFR) isn't looking like a perfect replacement. SOFR certainly will be the new benchmark, but it has yet to establish a term yield curve and doesn't have a credit component. Other indexes are being considered as viable alternatives to some lending transactions. The other issue is that Libor is a benchmark across different currencies, while SOFR is based only on U.S. securities. This is all a little troubling with only a year and a half to go. We continue to provide feedback to the Fed's Alternative Reference Rates Committee and various street firms to address these concerns."

She adds, "Industry flows in the cash space were sideways in August, ending the month not much different than from where they started. We kept the weighted average maturities of our funds in target ranges of 35-45 days for government and 40-50 days for prime and municipals."

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