Daily Links Archives: July, 2010

"Total money market mutual fund assets increased by $3.57 billion to $2.802 trillion for the week ended Wednesday, July 28," the Investment Company Institute reported late yesterday. ICI's weekly report says, "Taxable government funds increased by $980 million, taxable non-government funds increased by $5.71 billion, and tax-exempt funds decreased by $3.12 billion." This is yet more evidence that the large outflows of 2009 and the first four months of 2010 may have ended. For July month-to-date, total money fund assets are down by just $11 billion, and over the past 6 weeks, money fund assets are down a mere $4 billion. However, since peaking at $3.92 trillion in January of 2009, money fund assets have declined by $1.1 trillion, a decline of 28.5 percent. But assets remain at the same level they were in September 2007, when the Subprime Liquidity Crisis commenced, and they remain $242 billion, or 9.8% above their level of 3 years ago and almost $1 trillion above their level of the last interest rate cycle low, in 2004.

The Columbus Dispatch wrote Sunday, "Ban on interest for business accounts lifted." The article said, "The new financial regulatory overhaul that President Barack Obama signed into law last week includes a plan that allows banks to offer interest-bearing checking accounts to businesses, ending a 77-year ban on the practice. The initiative, advanced by Rep. Scott Murphy, D-N.Y., does away with a Depression-era law that treated business and individual checking accounts differently.... Big banks generally helped businesses get around the ban with periodic 'sweeps' to move money from business checking accounts to interest-bearing products, such as money-market accounts. Smaller banks generally do not have the technology to offer sweeps. And even when they do, many small businesses lack the cash reserves that are generally required to maintain the specialized sweep accounts. Smaller firms also might not have the staffing to dedicate to closely monitoring financial transactions -- and moving money out of checking accounts into interest-bearing funds. Murphy's interest-checking plan would allow -- but not require -- banks to offer interest-bearing checking accounts to businesses one year from now."

A press release comments, "Fitch Ratings says today that European money market funds are facing continuing low interest rate and market challenges which have forced some fund managers to make fresh adjustments to the exposure and tenure of certain investments, particularly those in Spain and Portugal. Despite the view of many market participants that euro, sterling and US Dollar interest rates will remain on hold until at least the end of 2010, MMFs have not taken this opportunity to position themselves longer on the yield curve, Fitch says in its latest 'European Money Market Funds Quarterly' newsletter for Q210. As a result, the weighted average maturity of 'AAA'-rated European money market funds has been much lower than would be expected in such a stable rate environment." Roxana Mahboubian, Director in Fitch's Fund and Asset Manager Rating group, says, "Money market fund managers have had the opportunity to build additional yield into their funds, however, the risk-return trade-off has been deemed unattractive in the current market environment. The greater focus has been on managing a high level of liquidity, including overnight exposure, and managing credit risk through lower tenors. As uncertainty over the redemption activity of MMFs continues and liquidity risk is a concern, MMFs are building cash positions close to levels last seen at the height of the 2008 financial crisis."

"Federated Investors, Inc. Completes Reorganization of Money Market Assets from Hilliard-Lyons Government Fund", which says, "Federated Investors, Inc., one of the nation's largest investment managers, reorganized approximately $1.6 billion in assets from the Hilliard-Lyons Government Fund into the Federated Government Cash Series money market fund. The transaction was completed as of the close of business on Friday, July 23, 2010. Federated Government Cash Series is a money market fund that seeks to provide investors with current income consistent with the stability of principal and liquidity. The fund pursues its objective by investing primarily in a portfolio of short-term U.S. Treasury and government agency securities." See also, "Fitch says European money market funds face ongoing low interest rate, market challenges".

The Association for Financial Professionals posted "The 2a-7 Money Fund Changes: What it Means for Corporate Treasury", which says, "According to the 2010 AFP Liquidity Survey, money funds are the second-largest holding next to bank deposits. The new 2a-7 money fund changes that recently went into effect were designed to give money funds liquidity, transparency and more safety. As a result of these changes, yield will decrease since the portfolios will be shorter in maturity. From the survey, sponsored by Promontory Interfinancial Network, the majority of respondents indicated they are "comfortable" or "very comfortable" with most of the specifics associated with these specific rule changes to MMFs: 30 percent weekly liquidity requirement, 10 percent overnight liquidity requirement, Decrease from 10 percent to 5 percent of portfolio holdings for illiquid securities, Decrease WAM from 90 days or less to 60 days or less, Weighted average life of 120 days or less, 0.5 percent maximum concentration per issuer for Tier 2, and 3 percent portfolio investment in A2/P2 paper with at 45 day limit."

A release posted yesterday by the Association for Financial Professionals entitled, "AFP Warns Treasury and SEC Not to Adopt Variable NAV," says, "The Association for Financial Professions has co-signed a letter to U.S. Treasury Secretary Timothy Geithner and SEC Chairman Mary Schapiro restating its continued opposition to the concept of moving Money Market Funds (MMFs) from a stable net-asset-value (NAV) to a variable NAV. While no formal proposal has been introduced, it is AFP's understanding that both President Obama's Working Group on Financial Markets and the SEC are considering the idea as they continue to review ways to improve America's financial markets. AFP believes it would be a mistake to move to a variable NAV. Such a move would provide little benefit to investors while potentially posing great harm to U.S. businesses that utilize the short-term money markets as a safe and prudent funding tool.... The AFP supports enhancements that improve the safety and soundness of MMFs, but AFP members believe that moving to a variable NAV would do neither and, in fact, would actually cause significant harm." (Click here for the letter, which was signed by Agilent Technologies, AFP, Cadence Design Systems, Comcast Corporation, CVS Caremark Corporation, Devon Energy, Dominion Resources, FMR Corporation, NACT, PG&E, Safeway, and the U.S. Chamber of Commerce.) The letter adds, "We have supported appropriate steps taken by the Department of the Treasury and the SEC to preserve and strengthen this vital source of business financing, but believe this is one proposal that should be rejected outright. We urge your support for policies that promote the use of the stable NAV that has served American investors and businesses so well for decades." In other news, see "ICI Reports Money Market Mutual Fund Assets" and "ASF Welcomes SEC's Decision to Omit Ratings From Securities Registrations for Six Months."

A release entitled "SEC Proposes Measures to Improve Regulation of Fund Distribution Fees and Provide Better Disclosure for Investors" was posted yesterday. It says, "The Securities and Exchange Commission today voted unanimously to propose measures aimed to improve the regulation of mutual fund distribution fees and provide better disclosure for investors. The marketing and selling costs involved with running a mutual fund are commonly referred to as a fund's distribution costs. To cover these costs, the companies that run mutual funds are permitted to charge fees known as 12b-1 fees. These fees are deducted from a mutual fund to compensate securities professionals for sales efforts and services provided to the fund's investors.... These fees amounted to an aggregate of just a few million dollars in 1980 when they were first permitted, but that total has ballooned as the use of 12b-1 fees has evolved. These fees amounted to $9.5 billion in 2009." Crane Data estimates that money market mutual funds accounted for approximately $2.0 billion of this total. Temporary partial fee waivers on money fund expenses have hit 12b-1 fees and shareholder service fees particularly hard, likely accounting for as much as $1 billion in fee waivers over the past year. In other news, Northern Trust released earnings and showed more evidence that money fund fee waivers peaked in the first quarter of 2010 and began declining in Q2.

Moody's Investors Service assigned a `Aaa money market fund rating to FFI Institutional Tax-Exempt Fund, according to a press release. It says, "The rating reflects the high credit quality, strong liquidity profile and limited market risk exposure of the fund as well as the disciplined investment process and effective risk management structure of the advisor. In addition, the fund benefits from the adviser's strong research process where investment decisions are governed by credit quality and liquidity management considerations." The release continues, "The fund, launched in January 2002, is organized in master feeder structure and seeks current income exempt from federal income taxes while preserving capital and liquidity. Moody's anticipates that market risk will be mitigated by the fact that the investment adviser will maintain the weighted average credit quality of the fund in line with its expectations for Aaa-rated money market funds. The fund exhibits strong levels of liquidity, with over 73% of the securities either maturing or may be put back to a liquidity provider within seven days as of May 31, 2010. We expect that the advisor will manage and monitor its liquidity profile actively relative to the portfolio shareholder base and the fund will continue to be the sole feeder to the master portfolio.... The fund's shareholder base exhibits some concentration in terms of a single strategic, omnibus account relationship, which is partially offset by underlying granularity of shareholders. This reduces the likelihood of material unexpected redemptions. The relatively short credit WAM of the fund, 21 days as of end-May 2010, are indicative of its relatively limited exposure to market risk."

MarketWatch writes "Schwab shares jump after quarterly results top estimates", which is subtitled, "Costly money market fee waivers drop for first time in at least a year." The article says, "The company benefitted as short-term interest rates stopped falling recently, relieving pressure on its money market mutual fund business.... Schwab has been hit hard by low short-term interest rates, which have pressured returns offered by money-market funds. Rates have got so low that yields on these funds have dropped close to zero. Add in a layer of fees and returns on money market funds risked going negative, a worrying development for an investment product that's supposed to be ultra safe. Schwab and other companies that offer money market funds have waived fees to avoid returns going negative. That's hit profit in recent quarters. However, second-quarter results released Friday offered signs of hope on this front. Money market mutual fund fee waivers totaled $113 million in the period, down from $125 million in the previous quarter. Waivers had been rising steadily for at least a year. In the second quarter of 2009, fee waivers totaled $30 million, but jumped to $78 million in the next quarter and $110 million in the final three months of 2009. The drop in fee waivers in the most recent quarter suggests this painful trend may have turned."

AP writes "Money fund casualty to return most remaining cash", which says Reserve Primary Fund, which says, "A money-market mutual fund that once held more than $60 billion before it 'broke the buck' and collapsed due to its ties to the doomed Lehman Brothers is returning nearly all its remaining cash to investors. Reserve Management Co. said it will return about $215 million, perhaps as soon as Friday, to Reserve Primary Fund shareholders. It's the seventh of the partial payouts the fund has made since its September 2008 collapse. The fund disintegrated after announcing that the $785 million it held in Lehman debt had become worthless when the investment bank filed for bankruptcy protection. Money funds put clients' cash to work by investing in short-term debt and other safe investments so they can ensure clients can get back at least a dollar for each dollar put in. After the latest distribution, announced Friday, New York-based Reserve Management says 99 percent of what the fund held at the peak of the financial crisis will have been returned. About $108 million remains to cover legal and management costs."

The Investment Company Institute's weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets decreased by $13.12 billion to $2.816 trillion for the week ended Wednesday, July 14.... Taxable government funds decreased by $9.11 billion, taxable non-government funds decreased by $160 million, and tax-exempt funds decreased by $3.85 billion." See also, ignites, which writes about the liquidation of Western Asset Money Market Fund and a number of retail Western money funds. The SEC filing says, "The Board of Trustees of Western Asset Money Market Fund, Western Asset Municipal Money Market Fund, Western Asset California Municipal Money Market Fund, Western Asset New York Municipal Money Market Fund and Western Asset Massachusetts Municipal Money Market Fund has approved a plan to liquidate and terminate each of the funds. The plan of liquidation provides that each fund will cease its business, liquidate its assets and distribute its liquidation proceeds to all shareholders of record of that fund. Final liquidation of each fund will occur no later than June 30, 2012 and will be coordinated to coincide with the launch of alternate investment products for cash sweep clients and customers of Morgan Stanley Smith Barney, for which the funds currently serve as sweep vehicles. The liquidation of Western Asset Money Market Fund is expected to occur in multiple stages, commencing with Class I shares in August, 2010."

Wells Fargo Advantage Funds' latest "Fund Commentary" says, "From the perspective of money market funds, the most closely watched provisions of the [Restoring American Financial Stability Act of 2010] bill had to do with repurchase agreements. At one point, creators of the legislation contemplated increasing from one day to three days the time before a repurchase agreement investor could take possession of the underlying collateral in the event of a failure of the repo counterparty. It was speculated that such an increase might mean that repos could not be considered 'fully collateralized' under Securities and Exchange Commission (SEC) Rule 2a-7 and would be subject to the same issuer diversification limits as other investments.... With repos comprising over one-third of all investments eligible for purchase by money market funds, this would have put quite a ding in the supply side of the equation. In the end, the period of the stay does not appear to have been increased, and repos remain a safe and eligible investment for money funds." Wells also says, "Declining supply has been a problem plaguing the money market for almost three years now.... Money market participants are hopeful that `we may have hit a bottom in asset-backed commercial paper (ABCP) outstanding, with outstandings in that category increasing in June.... One sector that saw healthy growth in June was puttable bank paper, with more than $16 billion coming to market in the last two weeks of the month. As European banks especially struggled to access the longer-dated funding preferred by their regulators, they began offering securities with final maturities of six or 12 months, but which also allowed money market participants to demand payment with a notice period as short as seven days. [T]hese issues give money market funds the much needed shorter-dated paper that they need to be prepared for potential shareholder withdrawls and to meet the new liquidity requirements imposed by the amendments to SEC Rule 2a-7." Finally, Wells adds, "For European banks and sovereigns, the funding environment improved significantly during June."

Arab publication AMEInfo.com writes "EFG Hermes launches its fifth money market fund", which says, "EFG Hermes, the Arab world's leading investment bank, announced that it has successfully closed the initial subscription period for its newest money market fund, the Arab Investment Bank Money Market Fund." It quotes Khalil El Bawab, Director of Fixed Income at EFG Hermes Asset Management, "We are delighted to announce the close of our fifth Money Market Fund. EFG Hermes' management of the fund served as a strong selling point for clients searching for a safe and liquid investment in these challenging times. The successful launch solidifies our position in the market as the new fund joins the roaster of top performing money market funds managed by EFG and marks the beginning of our cooperation with AIB as they launch their first mutual fund." The piece adds, "EFG Hermes Asset Management currently manages five money market funds in Egypt, with Credit Agricole, Bank of Alexandria, National Societe Generale, Bank Audi, and Arab Investment Bank as sponsoring banks. After garnering the top two positions in the performance ranking of money market funds in Egypt during 2009, the firm's funds remained as 2010's best performing funds to date with Credit Agricole Money Market Fund and the Bank of Alexandria Money Market Fund as the first and second top performers respectively."

The Christian Science Monitor writes "The new buzz word: alternative yield". It asks, "Is alternative yield the answer to terminally low interest rates for those who are tired of being punished for high cash balances and risk aversion?" The article continues, "I happen to be hypersensitive to the coming and going of investment fads, themes and trends.... Right now I'm hearing and seeing a new investment trend developing in a major way, let's call it Alternative Yield. Alternative Yield is the answer to terminally low interest rates for those who are tired of being punished for high cash balances and risk aversion.... The pitch is always the same -- 'If you've got clients with cash on the sidelines, this is the perfect product to sweep that cash up, Mr. Brown.' ... The cover of Barron's this weekend features a picture of an investor with a ball-and-chain attached to his ankle with the common refrain that his bond funds are about to crush him. As most investment pros with more than one cycle under their belts know, bond funds are notoriously scary investments going into a higher interest rate environment."

Sunday's New York Times writes "Volcker, Loud and Clear". The article contained just one small comment on money market funds and contained no indication that Paul Volcker has changing money market fund regulations high on his priority list. The Times article's only mention of money funds says, "There were other, earlier silences. Starting in the 1970s, ceilings came off the interest rates banks could place on most deposits and loans. A rising inflation rate made the ceilings impractical, and competition from unregulated money market funds was siphoning big chunks of deposits from the banks." It quotes Volcker, "The lifting of interest-rate ceilings was inevitable. I was for doing it more gradually, but it got such a momentum that we moved the limits more abruptly than I wanted to." In other news, see Reuters' "Fidelity reopens four money-market funds" (Crane Data's mention was a day earlier) and FT's "Big inflows into money market funds as double-dip fears rise", which says, "Investors have poured tens of billions of dollars this week into money market funds -- considered to be among the safest assets -- amid fears that a double-dip recession in the developed world could send financial markets tumbling. The global funds, which are seen as a proxy for cash, enjoyed their biggest weekly inflows in 18 months, absorbing $33.5bn, research group EPFR Global said yesterday." (Our figures show inflows, but we don't agree with the "largest in 18 months" statement.)

BlackRock announced "that it will report results for the second quarter of 2010 prior to the opening of the New York Stock Exchange on Wednesday, July 21, 2010. Chairman and Chief Executive Officer, Laurence D. Fink, and Chief Financial Officer, Ann Marie Petach, will host a teleconference call for investors and analysts at 9:00 a.m. (Eastern Time). BlackRock's second quarter earnings release will be available in the investor relations section of the Company’s website, www.blackrock.com, before the teleconference call begins. Federated Investors "will report financial and operating results for the quarter ended June 30, 2010 after the market closes on Thursday, July 22, 2010. A conference call for investors and analysts will be held at 9:00 a.m. Eastern on Friday, July 23, 2010. President and CEO J. Christopher Donahue and CFO Thomas R. Donahue will host the call."

We learned from Strategic Insight's SimFundFiling that Fidelity has reopened its Institutional Treasury money funds. The SEC EDGAR "497" (prospectus) filing says in a "Supplement to the Fidelity Institutional Money Market Funds for the Treasury Only Portfolio and Treasury Portfolio, "After the close of business on Wednesday, June 30, 2010, shares of Treasury Only Portfolio and Treasury Portfolio are available to new accounts. Accordingly, the first paragraph in the 'Fund Summary' sections under the heading 'Purchase and Sale of Shares' on pages 21 and 25, the first paragraph in the 'Shareholder Information' section on page 34 and the first paragraph under the heading 'Buying Shares' on page 35 are no longer applicable." The funds had originally closed on May 29, 2008. See the prior filing, which said, "Effective the close of business on December 23, 2008, new positions in Treasury Only Portfolio and Treasury Portfolio may no longer be opened. Shareholders of each fund on that date may continue to add to their fund positions existing on that date. Investors who did not own shares of the fund on December 23, 2008 generally will not be allowed to buy shares of the fund except that new fund positions may be opened...."

The New York Federal Reserve Bank's Exec. V.P. Joseph Tracy spoke last week on "What the Fed Did and Why". He commented on "The Panic of 2007," "I would like to look back over the events of the past several years and offer my perspective on what were the essential drivers of the financial crisis and the Federal Reserve’s interventions.... The first question to explore is the extent to which the financial system had evolved over the past several decades. Over this period, demand deposits lost their market share to money market mutual funds, which, while considered safe, are not guaranteed like deposits. This made it increasingly difficult and less profitable for banks to fund loans on their balance sheets using deposits. Securitization markets developed where loans could be funded through the market by investors. In addition, money market mutual funds, securities lenders, institutional investors and businesses needed a safe way to deposit funds where they would earn interest but retain ready access to their funds. Repurchase agreements or 'repos' developed to serve this need. A repo is a short-term collateralized loan that shares many characteristics with a demand deposit except that repos are not guaranteed. At the same time, large firms increasingly raised funds by issuing commercial paper in the market rather than relying on bank loans -- with the money market mutual funds being large investors in this paper. Large banks, as well, came to rely at the margin on non-deposit funding through the interbank funding market. The Fed acted as the lender of last resort for this market. This system of market-based credit intermediation has been called the 'shadow banking system.' The shadow banking system grew at a very fast rate over the past several decades.... A direct consequence of this growth was that the short-term liabilities associated with the shadow banking system -- repos and commercial paper -- exceeded the level of demand deposits.... Despite this rapid transformation of the financial system, the liquidity protections put in place for demand deposits (deposit insurance and access to the Fed's discount window) were not available to these new funding sources."

Treasury Strategies writes "Corporations Pouring Money Into Banks" in recent press release. The statement says, "A desire for safety and liquidity led corporations to direct nearly $1.3 trillion into bank deposit and sweep vehicles in 2010, an 8.9% increase over last year, according to the 20th annual U.S. Deposit & Sweep Survey conducted by Treasury Strategies, Inc.... Expansive monetary policy, low interest rates and risk concerns led to the growth in commercial bank deposits, despite a decline in sweep balances. Below are several key survey conclusions: Deposits are on the rise across banks -- Commercial DDA balances grew significantly to $603 billion, a 14% increase. However, the value of bank deposits is at risk given excess liquidity and low interest rates.... Sweep accounts continue to decline at about 27% year-over-year -- Due to low rates, many corporates shut off sweeps and redirected those balances to deposit accounts." The survey also says, "Corporate cash levels broke the $6T level, reflecting recessionary pressures, expansive monetary policy and corporate liquidity concerns.... With less confidence in access to bank credit, many firms sought to increase cash balances on hand."

We wanted to give you a last reminder to register for our second annual Crane's Money Fund Symposium, July 26-28 at The InterContinental Boston. The conference, which has attracted over 20 sponsors and exhibitors -- including Bank of America Merrill Lynch, J.P. Morgan Securities, Barclays Capital, Federated Investors, Fidelity Investments, Wells Fargo Advantage Funds, Dreyfus, Western Asset, Bank of Ireland, Bloomberg, Capital Advisors Group, Citi, Credit Suisse, Invesco, J.M. Lummis, S&P, Tradeweb, Dexia, Fitch Ratings, Natixis and State Street's Fund Connect -- and over 200 registered attendees to date, is expected to be the largest gathering of money market professionals ever produced. We expect to sell out shortly, so register today to guarantee a spot! (Alas, our discounted hotel room block is already sold out, so we're recommending attendees make other arrangements. We suggest the Westin, Seaport Hotel, or Langham Hotel as nearby alternates.) We hope you have a wonderful Fourth of July weekend, and we hope to see you in Boston at the end of this month!

Federated Investors' Month in Cash features "Gloomier economic data sends short rates lower." They write, "Most short-term interest rates declined and the cash yield curve flattened in June as a host of weaker than expected economic statistics persuaded investors that the Federal Reserve was unlikely to raise benchmark interest rates this year. The overnight London interbank offered rate (Libor) dropped from 0.298% to 0.294%, while one-month Libor fell from 0.351% to 0.345%, three-month Libor declined from 0.536% to 0.533%, six-month Libor eased from 0.751% to 0.750%, and one-year Libor dropped from 1.204% to 1.174%. Meanwhile, three-month Treasury bill yields rose one basis points to 0.17%, six-month bills were unchanged at 0.22%, one-year bills eased four basis points to 0.28%, and two-year notes plunged a whopping 17 basis points to 0.59%, an all-time low.... Though we continue to believe that the Fed will take the first baby steps towards tightening policy earlier than many investors believe, it seems virtually certain that the first tightening will not occur until November or December at the earliest. Still, we remain convinced that the Fed is anxious to scale back its balance sheet and normalize monetary policy as quickly as possible."

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