Daily Links Archives: August, 2010

London-based Treasury Management International published its "Treasurer's Guide to MMFs" last month. The description of the London-centric compiliation says, "TMI is delighted to welcome our readers to the 2010 edition of our popular Guide to Money Market Funds, published in association with the Institutional Money Market Funds Association. The supplement explores a broad range of topics related to money market funds (MMFs), such as credit and counterparty risk, the increasing demand for variable net asset value MMFs, and a succinct review of all the latest key regulatory updates by the IMMFA's Secretary General. Our readers will also discover a wealth of guidance within the supplement, ranging from a basic A-Z of the instruments purchased by a money market fund to more technical topics such as credit processes and amortised accounting."

Bloomberg writes "Jackson Hole Bubble Clash Shows Challenge for Central Bankers". It says, "Central bankers and economists at a Federal Reserve symposium clashed over how to best contain asset-price bubbles.... The disagreement highlights the challenges Fed Chairman Ben S. Bernanke and other central bankers face as they seek to sustain the global recovery through unprecedented stimulus measures while not encouraging investors to take excessive risks. Kansas City Fed President Thomas Hoenig, the conference's host, has warned this year that the Fed's near-zero rate policy risks creating new, potentially destructive price bubbles." In other news, see The Associated Press's (via The Seattle Times) "Money funds rise, yields are flat" and see Investment News' "Bond stampede turning mutual fund world on its head".

A release entitled, "Moody's assigns Aaa to HighMark Treasury Plus Money Market Fund" says, "Moody's Investors Service has assigned a money market fund rating of Aaa to HighMark Treasury Plus Money Market Fund. The rating reflects the high credit quality, strong liquidity profile and limited market risk exposure of the fund as well as the effective investment process and adequate risk management structure of the advisor. The fund seeks current income while preserving capital and liquidity. In line with its mandate, the fund invests in US Treasury securities or overnight repurchase agreements collateralized with treasury securities. In addition the fund may invest up to 20% in other securities that are issued or guaranteed by the US government.... The fund currently has approximately $200 million in assets under management which are largely sourced through relationships with the advisor's parent, Union Bank N.A.. Although this fund has had concentrated exposure to certain repurchase agreement counterparties and has some shareholder concentration given the small size of the fund, the high credit quality and the liquid nature of the securities that can be purchased by this fund combine to mitigate the resulting risk."

"More Cash Flows to Bond Funds" writes The Wall Street Journal. It says, "Long-term mutual funds had an estimated $5.08 billion of net investor buying in the latest week due to strength in bond funds, which more than offset outflows from equity and hybrid funds, according to the Investment Company Institute. Bond funds have thrived, as they typically do in a lower-interest-r ate environment, while stock funds have failed to consistently attract new investment for more than a year despite 2009's rally. ICI has now reported inflows for 12 consecutive weeks, totaling nearly $49 billion on an unrevised basis, and almost entirely due to money going into bond funds.... Separately, assets in money-market funds grew $11.07 billion in the week ended Tuesday, rebounding from the prior week's decline on strong inflows by institutional investors, according to iMoneyNet. Cash rushed from money funds the first half of the year as investors sought higher returns, but slowed substantially as stock-market volatility increased."

Bloomberg writes "U.S. Banks Pay Depositors Record Low Rates, Market Rates Says". The piece says, "U.S. banks, such as Citigroup Inc. and Bank of America Corp., are paying savers the lowest average rates on record amid elevated joblessness and weak loan demand, data collected by Market Rates Insight shows. Rates paid on interest checking, savings, money market and certificates of deposit fell in July to a national average of 0.99 percent, the San Anselmo, California-based data company said in a report released yesterday. That's a record low for available data, said Dan Geller, the firm's executive vice president." Bloomberg quotes Geller, "When lending is soft, there's less need for deposits. Banks usually don't say 'No' to deposits, but they will pay the minimum that they can."

"Bernanke Must Raise Benchmark 2 Points in Latest Rajan Warning" writes Bloomberg. It says, "Raghuram Rajan accurately warned central bankers in 2005 of a potential financial crisis if banks lost confidence in each other. Now the International Monetary Fund's former chief economist says the Federal Reserve should consider raising rates, even as almost 10 percent of the U.S. workforce remains unemployed. Interest rates near zero risk fanning asset bubbles or propping up inefficient companies, say Rajan and William White, former head of the Bank for International Settlements' monetary and economic department. After Europe's debt crisis recedes, Fed Chairman Ben S. Bernanke should start increasing his benchmark rate by as much as 2 percentage points so it's no longer negative in real terms, Rajan says." White says to Bloomberg, "Low rates are not a free lunch, but people are acting as though they are. There will be pressure on central banks to follow an expansionary monetary policy, and I worry that one can see the benefits, but what people inadequately appreciate are the downsides."

USA Today writes "Wall Street debates prospect of bond bubble". It asks, "Is a bubble brewing in the normally sedate U.S. government bond market? That's the big debate raging on Wall Street. Heavy buying of 10-year Treasury notes by investors in search of a safe place to park cash, as well as higher yields than available on certificates of deposit, is pushing prices of government-issued debt sharply higher -- and knocking yields down to levels last seen 17 months ago in the depths of the financial crisis. In early April, the 10-year note yielded nearly 4%. On Friday, it was 2.62%, and last week, it hit its lowest yield since March 2009. Its all-time low yield was 2.06% in December 2008, three months after the collapse of Lehman Bros. nearly sparked a global financial meltdown. Those warning of a bubble say the infatuation with U.S. Treasuries -- long considered one of the safest investments in turbulent times -- may be morphing into a fatal attraction." See also, Bloomberg's "Bond Funds Gain Cash Like Stocks in Dot-Com Era: Credit Markets".

India's "Peerless MF launches Short Term Fund" says Indian website MoneyControl. It says, "Peerless Mutual Fund has launched Peerless Short Term Fund, an open-ended debt scheme. The investment objective of the sacheme is to generate income and capital appreciation by investing in a diversified portfolio of debt and money market securities. The new fund offer (NFO) opens for subscription on August 17, 2010."

Reuters writes "Big U.S. funds named for Fed's reverse repos". It says, "Most of the biggest U.S. money market mutual funds were named on Wednesday as eligible parties to do business with the New York Federal Reserve to help the central bank implement its new monetary policy operations. These money market funds, which investors use to park their cash, are among the biggest in a $2.8 trillion industry, each with at least $20 billion in assets. The New York Federal Reserve will turn to 26 money market funds as eligible partners for reverse purchase agreements which aim to drain excess reserves from the banking system. The combined assets of these funds were approximately $900 billion at the end of July, according to Crane Data LLC."

The SEC added a second clarification on floating rate securities and WAL (weighted average life calculations) in a letter on demand features. (See Crane Data's August 12 News "Stradley's Swirsky on SEC No-Action Letter Regarding Floaters and WAL".) The letter says, "Based on the analysis set forth in your letter of August 10, 2010, we agree that for purposes of calculating a money market fund's weighted average portfolio maturity under rule 2a 7(c)(2)(iii) under the Investment Company Act of 1940, a money market fund may treat a short-term floating rate security that is subject to a demand feature as having a maturity equal to the period remaining until the principal can be recovered through demand." (See the original ICI letter here.) In other news, see the press release "BNY Mellon Asset Servicing and Investor Analytics to Provide Money Market Stress Test Service to OneAmerica Funds, Inc.", which says, "BNY Mellon Asset Servicing, the global leader in securities servicing, and Investor Analytics, a global leader in risk measurement and risk management solutions, have been selected by OneAmerica Funds to provide stress tests that model the impact of interest-rate shocks, credit risk shocks and liquidity risk shocks on its money market funds. This service will help money market funds comply with Rule 2a-7 issued by the U.S. Securities and Exchange Commission (SEC). The rule requires money market funds to examine combinations of potential stresses." (Note, though, that Crane Data is unaware of any money market fund provided by OneAmerica.)

Toronto's Globe and Mail writes "The cream of money market funds". It says, "Although they pay next to nothing these days as a result of low interest rates, money market funds remain a popular parking spot for cash. Here, we zero in on money market funds with high upfront investment requirements. What’s so special about these funds? Extra low fees, and higher than average returns." The article lists the largest funds in a table, which include: RBC Premium Money Market, TD Premium Money Market, and CIBC Canadian T-Bill Premium Class. See also, Bermuda's Royal Gazette, which writes "Bank paid out tens of millions to bail out money market fund". It says, "The Butterfield Money Market Fund (BMMF) consistently performed better than its peers during the mid-2000s under its award-winning managers at Butterfield Asset Management (BAM). At its peak its assets under management ballooned to $8 billion. But over the past two years, it hit problems. The bank has ploughed tens of millions of dollars into the fund in the form of credit agreements to ensure that investors did not lose money. The fallout appears in the company's 2009 audited financial results. The books show that in September last year, Butterfield Bank paid the fund $131.9 million for a type of fund called a Structured Investment Vehicle (SIV), reflecting its nominal value. But its estimated market value was just $52.8 million, the value at which the SIV was booked in its new home, the bank's available for sale portfolio."

Bloomberg writes "Google Leading a Revival in Commercial Paper" It says, "Google Inc., owner of the most popular Internet search engine, and Germany's Merck KGaA are leading a revival in commercial paper as nonfinancial companies grab the biggest share of the $1.1 trillion U.S. market from banks since 2002 amid lower borrowing costs. Industrial borrowers have $151 billion of debt typically due in 270 days or less, up 47 percent this year and 14 percent of the total outstanding, seasonally adjusted Federal Reserve data show. Google, based in Mountain View, California, started a CP program last month for as much as $3 billion, while Merck helped fund its acquisition of Millipore Corp. in July with the debt." The article quotes Barclays Capital's Chris Conetta, "There's a sense of confidence in the market. It's just so cheap for non-financial borrowers that it's attracting some back to the market." Bloomberg also writes, "Money-market investors are buying more CP because rates are double the 0.1 percent that the 100 biggest funds make on average across their holdings, according to Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts." The piece quotes Crane, "Any uptick in issuance is a sign of health. The demand side has firmed."

The Wall Street Journal writes "Foreign Bank Borrowing in Commercial-Paper Market Increases", which says, "Foreign banks are back as major borrowers in the short-term U.S. commercial-paper market, according to Federal Reserve data released Thursday, as investors resumed lending to them after European banks passed stress tests last month." (We're a little baffled by this conclusion after looking at the numbers.) In other news, we just learned about the Commercial Paper Executive Summit, a conference scheduled for Sept. 15-16 at the Hilton New York hosted by iiBig. While we don't expect to make it down to this year's event, the show does appear to attract a decent number of big names in the CP and asset-backed CP space. We also received a brochure in the mail today for IMN's ABS East, a huge asset-backed event which has a decent amount of ABCP content (and money fund investors).

A release entitled, "Retained Asset Accounts and FDIC Deposit Insurance Coverage," says in its summary, "FDIC Chairman Sheila C. Bair recently sent the attached letter to the National Association of Insurance Commissioners (NAIC) addressing the FDIC's concerns about the adequacy of disclosures provided by insurance companies when distributing insurance proceeds to consumers through Retained Asset Accounts (RAAs). Recent media reports indicate that many RAA recipients incorrectly think these products are deposit. Insured depository institutions that participate in any function relating to RAAs (participating banks) must be vigilant in minimizing consumer confusion about FDIC insurance coverage. Participating banks should work with the insurance companies offering RAAs to make sure that all documents provided to consumers appropriately reflect the participating banks' role in the transactions and disclose to policyholders and beneficiaries whether or not the RAAs are insured by the FDIC." The FDIC release lists as "Highlights": A retained asset account is an insurance company product in which the beneficiary of a life insurance policy receives proceeds in the form of an account provided by the insurance company in lieu of a lump sum payment.... Information provided to the FDIC indicates that RAAs generally are not FDIC insured.... To minimize confusion, participating banks should ensure that their role in RAA arrangements is properly disclosed in any materials that are provided to customers, even when these materials are distributed by another party. Participating banks should satisfy themselves that the insurance company is making clear disclosures to customers and beneficiaries regarding the FDIC insurance status of the RAA product."

The Associated Press writes "Moody's: Crisis left money fund industry reeling", which says, "At least three dozen money-market mutual funds were at risk of failing during the financial crisis, besides one that did end up collapsing, Moody's Investors Service said Tuesday. The report shows how shaky the nearly $3 trillion money-fund industry was after Lehman Brothers' September 2008 collapse. Around the time that a soured Lehman investment triggered the demise of the $64 billion Reserve Primary Fund, Moody's says at least 36 other U.S. money funds were also at risk of 'breaking the buck' -- failing to ensure clients could get back at least a dollar for each dollar they put in." The AP piece, written by Mark Jewell, adds, "A researcher with another firm tracking the money-fund industry, Peter Crane of Crane Data, said the $12.1 billion in pretax expenses cited by Moody's as having been spent to prop up funds far overstates the long-term costs. Many fund companies that tried to shield clients from losses by purchasing failed portfolio investments ended up selling those holdings later, sometimes without big losses, Crane noted. Money from those sales could eventually absorb some of the upfront costs to prop up a fund. Crane said fund companies typically have systems in place to quickly rescue a fund if one investment in its portfolio sours, and the value of the fund's assets is in danger of sinking below the $1-per-share safety benchmark. So it's unlikely many of the 36 funds that Moody's cited would have ultimately broken the buck, he said." "It was bad, but this makes it seem a lot worse than it really was," the AP quotes Crane, publisher of the newsletter Money Fund Intelligence.

Today's WSJ writes "'Breaking the Buck' Was Close for Many Money Funds". It says, "At least 36 of the 100-largest U.S. prime money-market funds had to be propped up in order to survive the financial crisis, according to a report from Moody's Investors Service.... The report shows how much the money-market world was rocked by the financial crisis. The chaos deepened in September 2008, when Reserve Primary fund's net-asset value dropped to 97 cents a share because of its holdings of battered Lehman Brothers Holdings Inc. debt.... Moody's warned that mutual-fund companies might be less willing to bail out troubled money-market funds next time. With rock-bottom interest rates putting severe pressure on management fees and profit margins, 'there's a lot less at stake' for firms that decide not to rescue imperiled money-market funds, Mr. Shilling said." The Journal quotes J.P. Morgan Asset Management Robert Deutsch, "For most large managers, this is a very good business and has acceptable profit margins even in this market. Most major money-fund managers 'see the long-term opportunity.'" The WSJ piece also adds, "Other money-fund experts said the new rules impose restrictions that should reduce the need for future bailouts." "The willingness to bail funds out likely will be restricted or reduced in the future, but the necessity should be reduced as well," it quotes Peter Crane, president of Crane Data LLC.

Schwab Reopens Treasury Money Fund The filing says, "Effective August 4, 2010, the Schwab U.S. Treasury Money Fund (the 'fund') will be reopened to new investors. Accordingly, the following changes are made to the Prospectus, effective August 4, 2010: On the cover page of the Prospectus and on page 8 in the fund's 'Fund Summary' section of the Prospectus, the phrase '(closed to new investors)' under the name of the fund is hereby deleted. The second paragraph under the heading 'Purchase and sale of fund shares' on page 10 in the fund's 'Fund Summary' section of the Prospectus is hereby deleted. The fourth and fifth paragraphs under the heading 'Buying/selling shares' on page 22 in the 'Investing in the funds' section of the Prospectus are hereby deleted."

ICI's weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $19.21 billion to $2.819 trillion for the week ended Wednesday, August 4, the Investment Company Institute reported today. Taxable government funds increased by $5.87 billion, taxable non-government funds increased by $10.24 billion, and tax-exempt funds increased by $3.10 billion." Money fund asset levels have retaken the $2.8 trillion level and they remain a touch above where they were six weeks ago. Following declines of 14.0% in 2009 (down $537 billion) and declines of 13.0% (down $421 billion) in the first four months of 2010, money fund assets have declined by less than 2% (down a "mere" $53 billion) over the past 3 months. Seasonally, money funds normally see a cash buildup towards the end of the summer as consumers get liquid ahead of the Labor Day Holiday, and as they prepare for big-ticket spending in the fall on things like college tuition and real estate transactions. While it's likely too early to declare an end to outflows, the evidence is mounting that substantial declines in money fund assets appear increasingly unlikely.

Crane Data wrote in its July 20 News that "BlackRock Makes The Case Against Floating the Net Asset Value". But we hadn't included a link to the full piece since the paper wasn't available online at that time. BlackRock has now posted the full 4-page "ViewPoint: Money Market Mutual Funds, The Case Against Floating the Net Asset Value" white paper. The company had sent this out to clients earlier in July, and encouraged investors to send letters to Secretary of the Treasury Tim Geithner and SEC Chair Mary Shapiro objecting to the possibility of a floating NAV money fund. The BlackRock article asks, "What changes, if any, should be made to reduce risk while maintaining the integrity of the product? The SEC Money Market Reform rules, effective in May 2010, together with the Dodd-Frank Wall Street Reform and Consumer Protection Act, have already gone a long way toward addressing some of the issues, but additional proposals remain on the table. Among them is a recommendation that money market funds -- known and appreciated for their stable net asset value (NAV) -- assume a floating NAV structure. In this paper, we make the case that such a change would not simply alter the nature of a single investment vehicle, but would have far-reaching implications and negative consequences for the entire financial system." See also, WSJ's "Money Funds Turn to European Bank Debt".

The Federal Reserve Bank of New York issued a "Statement Regarding Reverse Repurchase Agreements" yesterday, which says, "As noted in the October 19, 2009 Statement Regarding Reverse Repurchase Agreements, the Federal Reserve Bank of New York (New York Fed) has been working internally and with market participants on operational aspects of triparty reverse repurchase agreements to ensure that this tool will be ready if the Federal Open Market Committee decides it should be used. In the November 30, 2009 statement, the New York Fed announced a series of small-scale, real-value transactions with primary dealers using U.S. Treasury and direct agency debt securities from the System Open Market Account (SOMA) portfolio as collateral. Beginning tomorrow, the New York Fed intends to conduct a similar series of small-scale, real-value reverse repurchase transactions with primary dealers using all eligible collateral types, including, for the first time, agency mortgage-backed securities (MBS) from the SOMA portfolio.... Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. It does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future."

Yesterday, USA Today wrote "$1.1 trillion pours out of low-yielding money market funds", which said, "Money fund assets have fallen by $1.1 trillion since January 2009, leading to two questions: Where did it go? And why hasn't more left? The exodus from money market mutual funds isn't surprising. The average money fund yields 0.04%, according to iMoneyNet, which tracks the funds. At that rate, a $10,000 investment in the average fund will return just $4 in a year. A quarter of the nation's 1,643 funds -- 415 -- yield zero, iMoneyNet says. Where did the $1.1 trillion go? It's tough to trace money fund assets, which can be used for anything from corporate checking to short-term investments to tuition payments. But experts have a few ideas." (These include: bond funds, Treasury securities, and bank accounts.) Also, on CNBC yesterday, Vanguard CEO Bill McNabb commented on the story, "I think the exodus is a result of the extraordinarily low yields.... Most has moved into longer-dated bond funds."

Friday's Bond Buyer featured, "The Return of Money Fund Fees". It says, "Money market funds are taking advantage of higher short-term interest rates the past few months to reclaim some of the management fees they have been waiving to avoid negative yields. The $2.8 trillion money fund industry is generating more cash via the types of short-term instruments it invests in, from variable-rate demand debt to floating-rate paper tied to the London Interbank Offered Rate. While nearly all funds continue to waive some portion of their fees, thanks to higher yields those portions are getting smaller. The average money fund now charges fees of 0.27% of assets, compared with 0.23% in the first quarter, according to iMoneyNet." The piece quotes Thomas Gibbons, CFO of Bank of New York Mellon, from a recent conference call, "There's actually a little more yield in money market funds, and therefore a little more fees for us." (See Crane Data's July 26 News "Light at the End of Tunnel? Fee Waivers Retreating, Outflows Halting".) Bond Buyer explains, "In reporting their results for the second quarter, many of the biggest money fund complexes indicated that the boost in short-term yields had allowed them to restore some of their management fees. Federated, Schwab, Northern Trust, and BNY Mellon all mentioned lower fee waivers in their second-quarter reports."

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