Daily Links Archives: February, 2016

The Financial Times writes "Survival of Japanese money market funds in doubt." The article says, "Japan's money market fund industry faces an unprecedented crisis that threatens its survival, according to Moody's, the rating agency. Following the Bank of Japan's decision to introduce negative interest rates in January, it is feared that asset managers can no longer guarantee [sic] Japanese investors will get back the savings invested in money market funds. Yields have turned negative on many of the short-term assets held by these funds, forcing Japanese investment companies to stop taking new money from investors. Nomura, Nikko and Daiwa are among those that have turned clients away. "The ultimate survival of the Japanese money market fund industry is in jeopardy," says Vanessa Robert, senior credit officer at Moody's.... Japanese asset managers have appealed to the central bank for a special exemption from negative rates in order to overcome their problems. In the meantime, Ms Robert says, these fund companies will "quickly run out of viable options" to ensure that investors' capital remains secure. Around Y2tn ($17bn) is held in money market funds in Japan and a further $100bn is in similar money reserve funds, which can invest in higher-yielding foreign-currency securities." The FT adds, "Some are more optimistic about the fate of Japan's money funds. Jason Granet, head of international cash portfolio management at Goldman Sachs, the US bank, says: "Negative rates will not spell the end for Japanese money funds. But investors will recalibrate their expectations for returns on cash." Mr Granet points out that the Dublin-domiciled yen money market fund run by Goldman Sachs has operated with negative rates for more than a year and has continued to attract positive inflows from investors. He adds that Goldman has not weakened credit standards or attempted to hold riskier assets to boost the returns of its money funds. "Our focus remains on liquidity and the preservation of capital. Safety still rules at the end of the day," says Mr Granet."

CNBC.com posted an article, entitled, "The big risk looming in your money market fund," which says, "With more countries either introducing or talking about instating negative interest rates -- Japan was the latest to go minus, on Jan. 29 -- many Americans are concerned about what might happen here if the Federal Reserve has to reverse course and go the sub-zero route, too. One particular part of the investment industry is likely more nervous than most: the money market sector. These investments are generally thought of as safe haven investments. The goal of these funds is to never lose money and maintain a net asset value (NAV), or per share value at $1. But if rates go negative the fear is they may be in danger of "breaking the buck".... Over the last eight years, interest on money market funds has declined significantly. In 2007, rates were around 4.5 percent. Today they're at about 0.1 percent. If rates fall further, Americans will be lucky to even get a single basis point on their investment. "At this rate, your money will double in 6,000 years," said `Mike Geri, a Seattle-based financial advisor with RBC Wealth Management. "You're essentially earning zero. It's horrible." It continues, "While this is bad news for investors, it's even worse for the industry. Because rates are so low, money market providers have stopped charging fees, which means they make no money on these products. According to the Investment Company Institute, last year funds waived $5.5 billion in fees.... "If we saw 30-day, 60-day and 90-day paper at negative rates, then that would severely harm money market funds," said Jeff Tjornehoj, head of Americas research at fund data company Lipper. Fund flows have remained steady over the last couple of years, though the industry has seen a fairly significant contraction since those days of heady rates. At the end of 2008, there were $3.8 trillion in U.S. money market funds; today there's about $2.7 trillion in assets under management, according to Lipper.... If rates do go negative and investors actually have to pay to keep money stored in a fund, then you can bet that more firms will stop offering these products. In Europe, a number of companies are employing the "reverse distribution mechanism" in order to keep the fund's net asset value at $1 a share. This involves canceling shares in the fund in order keep the net asset value stable." It concludes, "As bad as things may get, some investors and institutions may still use money market funds, even though they may lose money, said `[Laurence] Booth, Chair of Structured finance at Toronto's Rotman School of Management. Why? Because, as the saying goes, the devil you know is better than the devil you don't. "What's the alternative?" he asked. "Is it better to put your money in an account and lose 0.5 percent year-over-year or invest in some other security and lose even more"?

Bloomberg writes, "The $400 Billion Money-Fund Exodus With Banks in Its Crosshairs." It says, "Banks and other companies that have seen borrowing costs rise in the past year are about to feel more pressure in a $1 trillion market for short-term IOUs. Investors are poised to pull as much as $400 billion from U.S. money-market funds that buy such debt, known as commercial paper, JPMorgan Chase & Co. predicts.... The move by investors is the next big wave of cash to leave prime funds because of the new rules. It would come on top of about $250 billion of assets that U.S. money-fund companies have already converted over the last year from prime funds to those that only hold government securities like Treasury bills.... The money-market industry's changing landscape has already lifted companies' short-term borrowing costs: Rates on six-month commercial paper reached the highest above Treasury bills since 2012 this year as demand waned relative to government debt. The six-month Treasury bill rate was about 0.45 percent, compared with 0.82 percent on similar-maturity commercial paper. Financial firms' short-term debts, including commercial paper, certificates of deposit and time deposits, make up U.S. prime funds' biggest holdings. Bank of Tokyo-Mitsubishi UFJ Ltd., Credit Agricole SA, Sumitomo Mitsui Bank Corp., Royal Bank of Canada and DNB Bank ASA comprise the top five issuers of this debt held by the funds, according to Crane Data LLC. It adds, "With fund companies converting or closing prime offerings, the industry's holdings of government securities have swelled. Taxable money-funds' investments in government obligations rose to $1.47 trillion as of the end of January, from $1.18 billion in February 2015, according to Crane. Estimates vary for the size of the next wave, when investors yank cash from prime funds. JPMorgan projects it will reach about $400 billion this year, while Barclays anticipates about $300 billion. Peter Crane, president of the Westborough, Massachusetts-based firm that tracks the industry, expects that only about $250 billion will leave prime funds, because he predicts investors will still favor the higher rates on those products and given his expectation that net asset values of prime funds will remain stable. Institutional prime funds' seven-day yield was 0.21 percent as of Jan. 31, compared with 0.1 percent for government funds, Crane data show. Even at the lower amount that Crane predicts, the flow of funds may push up borrowing costs on commercial paper relative to Treasury bill rates, which have crept up from near zero after the Federal Reserve's December liftoff. "Government securities will be in high demand, depressing the yields there, and the demand for credit instruments will be smaller," said Peter Yi, Chicago-based director of short-term fixed income at Northern Trust Corp., which manages $875 billion. "As that happens, we're forecasting spreads between commercial paper rates and government securities to widen." The SEC joined the Fed and the Treasury Department in moving to buttress money funds following the collapse of the $62.5 billion Reserve Primary Fund.... The fund's failure triggered a run on other money funds and brought the market for commercial paper, worth $1.76 trillion at the time, to a standstill. `The market has since shrunk to about $1.1 trillion, with U.S. money funds holding about $380 billion, Crane data show.... The commercial paper market may shrivel by an additional 15 percent, according to Abate at Barclays. He had originally expected the migration of money to take place next quarter. But with global financial-market turmoil sparking concern over the health of banks and traders trimming bets on Fed rate increases, investors may have little reason to wait, he said. "The market is going to contract and yields are going to get higher," he said.

Fidelity Investments posted a new brief entitled, "New Year, Old Concerns." Authors Michael Morin and Kerry Pope write, "The Federal Open Market Committee (FOMC) left rates unchanged at its January meeting.... Based on its outlook, the committee maintained its target federal funds rate range at 0.25% to 0.50%.... At the end of January, fed funds futures ... indicated a very low probability of a March hike (11%) and reflected low expectations of just one increase in 2016 (52% probability for December 2016). This is in sharp contrast to the Fed's initial forward guidance of four rate hikes in 2016. We could see the Fed lower its guidance for the amount of rate increases at its March meeting." They continue, "While industry assets under management retreated slightly in January, flows into money market funds (MMF) have been trending higher in recent months thanks in part to larger banks' efforts to cost-justify their deposits given the enhanced regulations. In addition, prime MMFs continue to represent an attractive alternative to short-dated repos and bills. Masking the positive flows into prime MMFs have been the conversions of prime MMFs into government MMFs -- nearly $200 billion in the fourth quarter of 2015. As of January 29, total MMF assets under management in the industry stood at $2,716 billion, an increase of $124 billion from June 30, 2015. Although the Fed may be on hold in the near term, demand for floating-rate bank commercial paper and certificates of deposit has remained strong. This strong demand reflects the duration-shortening attributes of floating-rate securities. In terms of specific instruments, six-month floating issues seem to be the most attractive point along the curve, even though they trade a basis point or more rich compared with fixed rate paper. During the month, reverse repurchase agreement usage averaged $105 billion. The supply of money market instruments has been ample to meet growing demand. The increase in Treasury bill issuance to make refund payments ahead of April tax receipts has resulted in near record operating cash balances at the Treasury. This additional supply has supported yields in the front end of the market." Also, FIS's Vince Tolve wrote an article, "How Is Your Cash Being Impacted by Regulatory Change? Introducing the FIS Corporate Cash Investment Report 2015." It says, "Now in its fifth year, FIS (formerly SunGard)'s Corporate Cash Investment report is an in-depth study among corporate treasury professionals that explores corporate attitudes to cash investment, investment policies and transaction execution, particularly in the context of major regulatory change in the months ahead. Having now built up five years of data, this report uniquely presents not only the 2015 findings but also identifies trends and developments over time." (See our Nov. 9 News, "Sungard Survey Shows Majority of Corps Will Stick w/Prime; Portals.)

Dow Jones writes, "Use of Fed's Foreign Repo Program Grows -- Abreast of the Market." It says, "Foreign central banks have sharply increased their overnight deposits in a Federal Reserve program that pays more than some prevailing money-market rates, the latest shift to reverberate through short-term global lending markets. Use of the Fed program, known as the foreign repo pool, has doubled over the past year to $250.8 billion as of the week ended Feb. 17, central bank figures show, reflecting growing balances held by overseas government-related institutions. Analysts and traders said that a recent increase in one-month Treasury-bill rates was likely driven in part by increasing use of the program.... The influx is striking for a decades-old Fed facility -- run by the Federal Reserve Bank of New York -- that for years hovered in the tens of billions of dollars and captured little attention as foreign central banks used it to manage their daily investments." It continues, "The Fed keeps some details of the foreign repo program confidential, including users' identities, the daily market-based rate, and how that rate is derived, in part to protect activity by foreign official institutions.... "We would like to know how the rate is determined because we want to have a clearer understanding of how the program is interrelated with the demand for bills," said Joseph Abate, money markets analyst at Barclays PLC. Dow Jones adds, "The balances have also risen as use of a domestic overnight reverse repo facility maintained by the New York Fed is waning. Fed officials lifted a $300 billion cap on that program to around $2 trillion in December, but the domestic repo program took in only $35 billion on Tuesday, its lowest level since last April." It goes on, "Peter Yi, who oversees about $230 billion of short-term fixed income products at Northern Trust Asset Management, said central bank's use of the foreign repo pool has been contributing to higher Treasury bill rates." Also, in some of the craziest news we've ever heard, some 401k plans participants are suing over Vanguard's fees. Pensions & Investments writes, "Chevron 401(k) participants sue company over high fees, underperforming funds." The article says, "Participants in Chevron Corp.'s 401(k) plan have sued the company and plan executives, alleging breaches of fiduciary duty for, among other things, paying "unreasonable investment management fees," providing a money market fund instead of a stable value fund and offering underperforming mutual funds.... The complaint alleges the Chevron plan has offered a Vanguard Prime Money Market Fund as its sole capital preservation option since February 2010. Chevron "imprudently and disloyally ... failed to provide a stable value fund as the plan investment option" in violation of the plan's investment policy statement to "provide a high degree of safety and capital preservation," the complaint said." In January, Investment News also wrote, "New 401(k) suit targets Vanguard fund fees."

SEC Chair Mary Jo White spoke Friday on "Beyond Disclosure at the SEC in 2016." She said, "There is much to report on all fronts, and I will try to capture at least the flavor of the volume and importance of what we accomplished in 2015 and what we are already advancing in 2016." White continued, "Importantly ... we have also continued our discretionary rulemaking in areas that are essential to our mission of protecting investors and the markets.... First, asset management. After adopting final rules for fundamental reforms to the money market fund industry, we turned to executing the broad-based program I outlined in December 2014 to address the increasingly complex portfolios and operations of mutual funds and ETFs.... In September 2015, the Commission proposed reforms designed to promote stronger and more effective liquidity risk management across open-end funds and limit the adverse effects that liquidity risk can have on investors and potentially the broader markets.... Finalizing these rules, as well as advancing proposals for transition planning and stress testing, are among our 2016 priorities for the asset management industry." She adds, "The money market fund reforms coming on line in October of this year go well beyond enhancing disclosure and require prime funds to float their NAV after years of a fixed NAV.... Looking ahead, a number of the Commission's outstanding proposals and initiatives also reflect the careful consideration of tools beyond disclosure. Aspects of our asset management proposals would impose minimum liquidity requirements and limits on derivatives in addition to greater and more standardized disclosures."

ICI's latest weekly "Money Market Fund Assets" report shows that MMF levels rose for the second straight week, breaking into the black year-to-date and rising to their highest level since January 2011. The release says, "Total money market fund assets increased by $7.53 billion to $2.76 trillion for the week ended Wednesday, February 17, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $13.40 billion and prime funds decreased by $6.88 billion. Tax-exempt money market funds increased by $1.00 billion." It continues, "Assets of retail money market funds increased by $2.94 billion to $1.02 trillion. Among retail funds, government money market fund assets increased by $3.87 billion to $374.77 billion, prime money market fund assets decreased by $370 million to $465.88 billion, and tax-exempt fund assets decreased by $560 million to $178.94 billion. Assets of institutional money market funds increased by $4.59 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $9.53 billion to $878.27 billion, prime money market fund assets decreased by $6.51 billion to $798.99 billion, and tax-exempt fund assets increased by $1.57 billion to $65.93 billion." ICI notes, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." Year-to-date through Feb. 17, MMF assets are up $4 billion. Prime assets total $1.265 trillion, just slightly more than Treasury/Government assets, which stand at $1.253 trillion. In other news, the FDIC issued a press release, entitled, "FDIC Board Approves Proposal on Deposit Account Recordkeeping Requirements to Facilitate Timely Access to Deposits in Large Bank Failures." It says, "The Federal Deposit Insurance Corporation (FDIC) today approved a proposal for recordkeeping requirements for FDIC-insured institutions with a large number of deposit accounts to facilitate rapid payment of insured deposits to customers if the institutions were to fail. The proposed rule would apply to insured depository institutions with more than 2 million deposit accounts. Under the proposal, these institutions would generally be required to maintain complete and accurate data on each depositor. Further, the institutions would be required to ensure that their information technology systems are capable of calculating the amount of insured money for each depositor within 24 hours of a failure."

Fidelity Investments published, "Get More Yield on Your Cash," subtitled, "CDs and short-duration bonds may offer higher yields but more risk than savings accounts." The article explains, "In early February, average rates on savings accounts nationally were around 0.11%. That's not nothing, but it sure is close. The bad news for savers is that there isn't a lot of yield to be found, at least not from investments that are safe enough to be considered as a home for your cash. But even if you can't earn a lot on your cash, that doesn't mean you can't do significantly better. "There are a range of income options that can offer a meaningful increase in income; you could potentially increase the yield on your savings by a significant amount," says Richard Carter, a vice president of fixed-income products and services at Fidelity. "The key is to understand what you need the money for, and then find an option that makes sense for your situation."" The piece reviews high-yield savings accounts, CDs, money markets, and short-duration bond funds. On money market funds, it says, "The good news: Money market funds offer easy access to your investment and very little risk. Held in your brokerage account, they come with check-writing and ATM card access similar to a savings account, and making these investments a good option for funds you may need in a hurry. And, if interest rates rise, those higher rates will pass through to money market funds quickly. Some prime and government money market funds have seen yields tick up with the Fed's year-end move, with yields on some prime funds at 0.20%-0.30%, and the average prime fund offering about 0.12%. The bad news: The yields offered by the types of securities in which money market funds invest have been stubbornly low in recent years.... So you may find security and easy access to your funds, but you won’t find much yield unless the interest-rate environment continues to change. You should also note some regulatory changes taking place for prime and municipal money market funds. In a time of market stress, these non-government types of funds could be subject to a fee or temporary halt on withdrawals. So they may no longer be as liquid as U.S. Treasury or government money market funds." In other news, "The Federal Reserve released the Minutes from its January 26-27 FOMC meeting. On the Reverse Repo Program they said, "The Committee then resumed its consideration of matters related to the System's reverse repurchase agreement (RRP) facilities, focusing in particular on the appropriate aggregate capacity of the ON RRP facility going forward.... [P]articipants reiterated that the Committee expects to phase out the facility when it is no longer needed to help control the federal funds rate, and they unanimously expressed the view that it would be appropriate to reintroduce an aggregate cap on ON RRP operations at some point."

The Financial Times published, "US money market funds reinstate fees." It says, "Money market funds have begun reinstating fees for investors, after the end of zero interest rate policy in the US has led to rising yields and improving returns.... After the Federal Reserve's historic December increase in the policy rate to a floor of 25 basis points, short-dated instruments have followed, with "t-bills" trading at 28 basis points on Tuesday morning, after peaking earlier this year at 34 basis points. An average of fees charged by money market funds, compiled by Crane Data, dipped to a low of 11 basis points in November 2014. Between the end of November 2015 and the end of January 2016 the average has jumped from 16 to 21 basis points. "Every basis point counts," said Peter Crane, who runs Crane Data. "For money market funds it's a godsend. They have been running on fumes for a number of years. They appear to still be waiving some fees and gingerly returning to normal levels. But no doubt they are bringing in more revenue due to the fed hike." The FT piece continues, "Increasing yields in government securities could also amplify an expected shift in assets out of prime money market funds into government-only funds. New regulation for prime funds, that invest in a broad array of short-dated securities, which comes into force in October, is expected to push some investors over to funds that invest solely in government assets.... The seven-day average yield for money market funds, before fees are deducted, has increased from 18 basis points at the end of November 2015 to 30 basis points at the end of January 2016, according to Crane Data. That increase has been higher for prime funds. Institutional prime funds have increased returns from 27 basis points at the end of November 2015 to 45 basis points at the end of January 2016, compared to a jump from 15 to 28 basis points for institutional government funds. An analyst at one European bank said: "The spread between prime and government will be critical to how much money leaves prime." In other news, Morgan Stanley recently issued commentary, "First Fed Rate Hike in Nine Years – What does it mean for you?" It says, "In volatile rate markets, active management of interest rate risk plays an increased role in money market fund performance. Leading up to this point, the Morgan Stanley U.S. Dollar denominated money market funds had been managed with shorter duration profiles and higher levels of liquidity than the industry averages. Our strategic portfolio positioning was influenced by our belief that we were not being properly compensated to extend our maturity structure and invest further out the curve. As yields adjusted higher in anticipation of the impending rate hike, we began to feel comfortable that interest rates properly reflected our market expectations.... [O]ur positioning entering this tightening cycle allowed us to be opportunistic and take advantage of higher yields, something that would not be possible to the same extent in funds with less liquidity or longer duration profiles. These actions resulted in strong performance, while still operating within the spirit of our overall defensive portfolio management framework. Despite these adjustments in portfolio positioning, we still maintain much higher levels of daily and weekly liquidity than required."

Reuters published, "Fed's Dudley dismisses negative US rates, sees economic momentum, which covered a speech Friday by NY Fed President William Dudley. They write, "While recently tighter U.S. financial conditions will factor into the Federal Reserve's upcoming policy decisions, it is "extraordinarily premature" to even talk about using negative interest rates to stimulate the economy, a top Fed official said on Friday. "To me, that's not something that should be part of the conversation right now," New York Fed President William Dudley told reporters at a news conference, when asked about possible use of negative rates. The U.S. economy has "quite a bit" of momentum that will help offset weakness from abroad, he said." The article continues, "I view that what we have been observing is not really reflecting developments so much in the United States as developments abroad." Reuters says, "Several European central banks have pushed rates into negative territory to give an added boost to their economies, and the Bank of Japan recently followed suit. Dudley threw cold water on the idea of the Fed doing the same. "I just find that an extraordinarily premature conversation to be having," he said." Barclays' strategist Joseph Abate also discussed negative rates in his "US Weekly Money Market Update," writing, "We continue to expect two rate hikes this year. That said, and following the recent testimony of Fed Chair Yellen, we outline some of the theoretical and practical issues facing the front end if the Fed were to "go negative".... Given the dislocations, we think that the Fed has other, more effective ways to stimulate the economy -- in particular, QE -- with which they have empirical evidence. Our sense is the Fed would re-adopt QE well before pushing IOER and the RRP rates below zero. Alternatively, it could consider another round of Twist purchases as the Fed has just over $400bn in Treasuries set to mature in its portfolio between now and the end of 2017. It could agree to sell all its holdings that mature through December 2017 -- over say, a year -- and replace them with longer-duration Treasuries in an effort to bring long-term rates lower. With 10y rates already at 1.65%, a medium-sized $400bn Twist program at $33bn/month could generate more stimulus, without as much disruption of negative interest rates."

ICI's latest weekly "Money Market Fund Assets" report shows that MMF levels rose slightly in the latest week. The release says, "Total money market fund assets increased by $3.16 billion to $2.76 trillion for the week ended Wednesday, February 10, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $5.31 billion and prime funds increased by $2.75 billion. Tax-exempt money market funds decreased by $4.90 billion." It continues, "Assets of retail money market funds decreased by $1.44 billion to $1.02 trillion. Among retail funds, government money market fund assets increased by $2.21 billion to $369.87 billion, prime money market fund assets decreased by $1.16 billion to $467.28 billion, and tax-exempt fund assets decreased by $2.49 billion to $179.50 billion. Assets of institutional money market funds increased by $4.60 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $3.10 billion to $868.73 billion, prime money market fund assets increased by $3.91 billion to $805.51 billion, and tax-exempt fund assets decreased by $2.41 billion to $64.36 billion." ICI notes, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." Year-to-date through Feb. 10, MMF assets are down $4 billion. In other news, Wells Fargo Money Market Funds released its February "Overview, Strategy, and Outlook" portfolio manager commentary. They write, "While the equity markets sold off in sympathy with overseas markets' concerns about the state of the Chinese economy, doubt about the transitory nature of the decline in commodities prices brought into question not only the timing but also the likelihood that inflation will return to the targeted 2% rate over the near term, or even medium term. And, as a result, relatively safe assets such as U.S. Treasury obligations were in great demand, leaving liftoff a distant image in the rearview mirror."

MassMutual filed with the SEC to convert its $450 million MassMutual Premier Money Market Fund from Prime to Government, we learned from mutual fund publication Fund Action. The filing says, "At a meeting held on August 13-14, 2015, the Board of Trustees of the MassMutual Premier Funds approved the following changes in response to amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, which is the primary rule governing money market funds, including the Fund. The Prospectus and Summary Prospectus are being updated as described below to reflect that the Fund will operate as a "government money market fund," as defined in the Amendments. The changes, all of which are effective on or about May 1, 2016, will bring the Fund into conformance with the requirements of the Amendments.... On or about May 1, 2016, the name of the Fund will be changed to the MassMutual Premier U.S. Government Money Market Fund." In other news, Cavanal Hill posted details about its prime-to-government money market fund conversion plans, which we initially reported in our Dec. 22, 2015 News, "More Funds Jump on Prime to Govt Conversion Bandwagon; Mergers." Cavanal Hill's post says, "In response to the reforms, we have spent significant time reviewing the rules and listening to our investors' preferences and will be making certain changes, in advance of the deadline, as discussed below.... Many investors have indicated a preference for money market funds with a stable NAV that will not be subject to liquidity fees or redemption gates, which would restrict the use of the funds. As a result, the Board of Trustees for the Cavanal Hill Funds has approved the operation of each of its Money Market Funds as either government or retail and will continue to offer shares at a stable share price, without requiring liquidity fees or gates."

A press release entitled, "ICD and PIMCO Announce Strategic Product Distribution Partnership," reads, "ICD, the world's largest independent SaaS portal for institutional trading and investment risk management and PIMCO, a leading global investment management firm, have entered into an agreement for distribution of PIMCO Short Asset Investment Fund (PAMSX) and Government Money Market Fund (PGFXX) on ICD PORTAL, increasing product options and diversification alternatives for ICD clients' short-term liquidity portfolio strategies. Jeffrey Jellison, ICD CEO North America said, "We are excited to offer the PIMCO Government Money Market Fund and Short Asset Investment Fund on ICD PORTAL. PIMCO's macroeconomic outlook, extensive global resources and expertise in managing short-duration fixed income portfolios are recognized and highly respected by investors worldwide. PIMCO's products are excellent additions to our liquidity line up." The Government Money Market Fund is PIMCO's most conservative cash/liquidity vehicle. The fund offers among the highest 30-day and 7-Day yields in the Institutional Government MMF category. PIMCO's Short Asset Investment Fund focus is delivering returns in excess of money market strategies with an explicit emphasis on capital preservation. PIMCO's global liquidity platform offers both the benefits of large scale and market access. "PIMCO has the expertise for delivering low volatility while seeking higher returns over money market funds," said Jerome Schneider, PIMCO Managing Director, Head of Short-Term Funds and 2015 US Morningstar Fixed-Income Manager of the Year said. The ICD/PIMCO product distribution agreement continues the steady product expansion on ICD PORTAL as regulatory reform nears finalization in October 2016." Jellison adds, "2016 has ushered in a new era of investment and risk management. PIMCO's focus on preserving and enhancing investor assets with innovative institutional funds will be a welcomed addition by our global clients." Note: PIMCO Govt MMF currently holds $207 million while PIMCO Short Asset Inv Fund Inst holds $425 million in assets.

JP Morgan Securities published a comment late last week entitled, "Fed Funds: New and Improved?" on a new formula for calculating the Fed funds rate. It says, "Next month the Federal Reserve will alter the way it calculates the Fed funds effective rate (FFE). The new methodology captures a wider variety of overnight interbank transactions, and should result in a more robust benchmark. However, the Fed expects the resulting rate should be similar to the classic Fed funds formulation. As part of the roll-out, the Fed will release more information about the Fed funds market than current practice. It will publish statistics summarizing the distribution of volumes each day, including the total dollar amount of transactions used to calculate the rate. However, even with this new information, the market will remain opaque in some ways.... In order to get a better understanding of market participants, we took an in-depth look at quarterly bank call reports filed by US banks and foreign banks in the US. In these reports, each bank is required to disclose the amount of Fed funds sold and purchased, as of the end of each measurement period." It continues, "In aggregate, we estimate that as of 3Q15 (the most recent data available) the size of the Fed funds market was around $52bn, which is about 40% smaller than it was at year-end 2012. We suspect that, like the repo markets, changes in regulation have created an incentive for some banks to reduce participation in Fed funds at quarter-ends, and as a result, intra-quarter balances are likely somewhat higher than what is reflected in call reports. Foreign banking organizations (FBOs) in the US are the predominate borrowers of Fed funds. As of 3Q15, we estimate that FBOs represented about 52% (or $27bn) of all Fed funds purchased. Large and small US banks comprised 23% ($12bn) and 26% ($13bn) respectively. A closer look into the domiciles of FBOs reveals that the most consistent and largest borrowers of Fed funds have been non Japanese Asian banks. This is followed by German banks, Canadian banks, Japanese banks, and French banks. Fed funds purchased volumes are concentrated among a small subset of banks.... While Fed normalization hasn't significantly altered the dynamics of trading in the Fed funds market, there are some notable changes in the near future that may. However, we believe new US regulations that target large foreign banks should have only limited impact on FFE."

Bloomberg writes, "BOJ Roils $14.1 Billion Money Market Industry as Nomura Suspends." The article says, "Nomura Asset Management Co. stopped accepting investments into some money-market funds, joining 10 other managers in suspending such accounts as the $14.1 billion industry grapples with the negative interest rates introduced by the Bank of Japan last week. The brokerage said Friday it will suspend orders for its Money Management Fund and Free Financial Fund from Feb. 9 following the BOJ decision to set the rate on some excess reserves held by financial institutions at the central bank at minus 0.1 percent. Ten firms including Daiwa Asset Management Co., Mitsubishi UFJ Financial Group Inc., Mizuho Asset Management Co. and Resona Bank Ltd. have made similar announcements. The BOJ joined monetary authorities around Europe on Jan. 29 in betting setting rates below zero will reduce borrowing costs for companies and households, drive demand for loans and encourage investment in higher-yielding assets. Yields on Japanese government bonds with maturities as long as eight years have turned negative, while the level for the benchmark 10-year security dropped to a record 0.035 percent on Friday in Tokyo. The Ministry of Finance this week scrapped a sale of 10-year fixed-rate notes aimed at individual investors. "Money that would have been invested in MMFs would probably flow into deposits," said Yusuke Ikawa, a Tokyo-based strategist at UBS Group AG. "Banks who receive that money in deposit accounts will probably invest it into longer-term bonds such as 10- and 20-year notes that offer positive interest rates. That means it won't be long before we see negative yields on 10-year government securities." Bloomberg adds, "Assets held by money-market funds dropped to a record 1.643 trillion yen ($14.1 billion) in December, down 4.3 percent from November, according to data from the Investment Trusts Association of Japan. The Nomura Money Management Fund has 474.5 billion yen in assets and Free Financial Fund holds 560 billion yen, figures on Nomura's website show. "Although the negative rate is applicable only to a part of current accounts that financial institutions hold at the Bank of Japan, yields are falling in the domestic short-term market, which is the main investment of the funds," Nomura said in a statement. Daiwa's suspended orders for three funds Monday, with MUFG halting applications for a total of five funds from the following day." At the end of Q3'15, Japan was the 17th largest money fund market worldwide with $15.8 billion, according to data compiled by the ICI and analyzed by Crane Data, putting it behind Canada and ahead of Chile, Germany, and the U.K. Note that Japan's current $14.1 billion in money market funds is tiny on a global scale -- 55 money funds in the U.S. are larger than Japan's entire industry.

ICI's latest "Money Market Fund Assets" report shows money fund assets down slightly in the latest week. The release says, "Total money market fund assets decreased by $4.18 billion to $2.75 trillion for the week ended Wednesday, February 3, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $7.11 billion and prime funds increased by $2.67 billion. Tax-exempt money market funds increased by $260 million." It explains, "Assets of retail money market funds decreased by $870 million to $1.02 trillion. Among retail funds, government money market fund assets increased by $390 million to $367.66 billion, prime money market fund assets decreased by $1.12 billion to $468.44 billion, and tax-exempt fund assets decreased by $140 million to $181.99 billion. Assets of institutional money market funds decreased by $3.31 billion to $1.73 trillion. Among institutional funds, government money market fund assets decreased by $7.50 billion to $865.65 billion, prime money market fund assets increased by $3.79 billion to $801.58 billion, and tax-exempt fund assets increased by $400 million to $66.77 billion." Year-to-date through Feb 3, MMF assets are down $7 billion. In other news, the Cato Institute posted a blog entry entitled, "Can Money-Market Mutual Funds Reliably Avoid the Problem of Runs?" Author Lawrence White concludes, "In summary, we learned in August 2008 that MMMFs using certain accounting rules are not run-proof For 24 hours The Reserve Primary Fund carried a diminished asset portfolio without either topping it up or diminishing the claims against it, and consequently was rationally run upon. We did not learn that MMMFs are inherently fragile, but rather that run-proneness depends on the accounting practices that a fund uses. From this diagnosis, no policy intervention is indicated. What follows is rather that in a market where losses remain private, investors can be expected to consider the relative fragility under certain circumstance of funds that opt to use potentially run-incentivizing accounting practices. Such funds, if they do not offer some fully compensating advantage, should be expected to lose their market share. Money-market mutual funds that instead credibly bind themselves to thoroughgoing mark-to-market accounting and other run-proofing practices (such as perhaps a pre-funded commitment by the parent company to shelter shareholders from losses), and advertise that fact, should be expected to flourish in the marketplace. Such MMMFs remain an available payment mechanism that is not susceptible to runs and therefore has no need for guarantees at taxpayer expense."

Brown Brothers Harriman published a new report as part of its "2016 Regulatory Field Guide," entitled "Liquidity Management: Get Fluid." Author Pranay Sammera writes, "Almost eight years after the Reserve Primary Fund infamously "broke the buck"; the dust is beginning to settle around a new institutional liquidity landscape. It is clear that this new landscape is significantly different than the one we have known and requires purposeful navigation. The effects of the rules enacted following the financial crisis are now taking shape. New US money market fund rules go live this autumn. Basel 3 is a reality and, after almost a decade, the Fed in the US has raised interest rates. The institutional liquidity management landscape is filled with an array of choices and access points. Cash professionals are re-emerging from a hiatus with new perspectives and tools -- in addition to their old scars -- to lead the way. Short-term investment products such as money market funds, repurchase agreements, and other traditional outlets for liquidity management have been scrutinized by regulators. In addition, product offerings are being re-examined by manufacturers for long-term strategic viability. Bank of America, for example, sold its money market fund business to BlackRock in November 2015. At banks, non-operating deposits have become anathema as they are subject to the most severe run-off assumption of 100% when calculating relevant leverage ratios. The upside in 2016 is that there is far more clarity for cash investors around the impact from changes, and paths through the new landscape are becoming clearer." The piece adds, "The prime institutional money fund space represents $875 billion of the $2.7 trillion money fund market in the US. Approximately 40 to 60% of prime institutional money fund assets are expected to move into other products this year. In preparation for the new US money fund regulation many fund manufacturers have segregated institutional investors from retail and in some cases, have morphed their prime funds into government funds, allowing them to retain a steady $1 per share net asset value (NAV). Institutional cash professionals opting to stick with government funds therefore face a trade-off: sacrifice yield, in exchange for the convenience, ease, and comfort of sticking with established models and practices based on the $1 constant NAV principle." Sammera concludes, "The post-crisis period has been a period of upheaval. As interest rates tick higher, there will be a greater opportunity cost inherent in idle, un-invested cash. In this new landscape, there is the opportunity for cash professionals to take a leadership role in defining the optimal model. As cash takes its rightful place among actively managed asset classes, the challenges are real but the reward and opportunities are great." In other news, Federated Investors CIO Debbie Cunningham released her latest "Month in Cash commentary, "Can't Blame the Fed This Time." She writes, "In December, the Federal Reserve took its customary two days to deliberate before releasing its decision to lift rates off near zero for the first time in seven years. But for the market, the verdict is still out. With the recent volatility, some are questioning if the hike was the correct move. We think it was and that the market turbulence has more to do with significant overseas economic issues and oil prices than a small, 25 basis-point increase in rates."

We learned through mutual fund publication Fund Action that Putnam Investments has decided to liquidate its $39 million Putnam Tax-Exempt Money Market Fund. The SEC filing says, "At a meeting held on January 29, 2016, the Board of Trustees of Putnam Tax Exempt Money Market Fund approved a plan to liquidate the Fund upon recommendation by Putnam Investment Management, LLC, the Fund's investment adviser. The liquidation of the Fund is expected to occur on or about March 23, 2016. Effective as of February 12, 2016, the Fund will be closed to new purchases, other than the reinvestment of dividends, in anticipation of the liquidation. Shareholders can redeem their shares from the Fund at any time on or before the close of business on March 23, 2016 at the then-current net asset value. On the Liquidation Date, the Fund will liquidate its remaining assets and distribute cash pro rata to all remaining shareholders as of the Record Date, after the payment of (or provision for) all charges, taxes, expenses and liabilities, whether due or accrued or anticipated of the Fund, who have not previously redeemed all of their shares or exchanged their Fund shares of another Putnam fund." Also, two share classes of Milestone Treasury Obligations Fund will be merged into the fund's Institutional share class, according to a separate SEC filing. It explains, "On October 15, 2015, the Board of Trustees of AdvisorOne Funds approved the conversion of all outstanding Premium Class and Financial Class Shares of the Milestone Treasury Obligations Fund to Institutional Class shares of the Fund on December 1, 2015. On the Conversion Date, each holder of Premium Class or Financial Class shares will receive a number of Institutional Class shares equal in value to the Premium Class or Financial Class shares owned by that shareholder, and all outstanding Premium Institutional Class and Financial Class shares will be canceled. Premium Class or Financial Class shareholders who become Institutional Class shareholders as a result of the Conversion will maintain their investment in the Fund. Premium Class shareholders' shareholder servicing fees will decrease from a maximum of 0.25% to a maximum of 0.10% as a result of the Conversion. Financial Class shareholders’ shareholder servicing fees will increase from a maximum of 0.05% to a maximum of 0.10% as a result of the Conversion." Finally, in other news, the Federal Reserve Bank of New York updated its "Reverse Repo Counterparties List" to include HSBC Prime Money Market Fund and HSBC US Government Money Market Fund managed by HSBC Global Asset Management. The additions are added to the list of reverse repo counterparties, effective February 2.

State Street Global Advisors released white paper last week entitled, "2016 Cash Outlook, A Playbook for the New Cash World." The piece says, "2016 will be a watershed year for cash management. New rules and market developments continue to dramatically reshape the short-end market. SSGA is urging investors to consider reviewing their cash allocations and adapting to the new realities as soon as possible -- well before the implementation deadlines.... These developments -- coupled with Fed tightening and yield spreads that are poised to expand -- mean cash management decisions are more important than ever in determining priorities for liquidity vs. yield.... Given the seismic shifts in so many stalwart cash strategies -- money market funds, repos, commercial paper and even wholesale bank deposits — playing by the old rules is no longer the best option." SSGA's paper continues, "By October 14, 2016, every institutional prime and institutional municipal MMF will be valued at a floating (or variable) NAV, rather than the fixed $1 per share that they have long used.... Because this change doesn't apply to government MMFs, many investors -- accustomed to the convenience and security of the fixed NAV -- are expected to move cash into government MMFs. If this happens, yield spreads are likely to expand. In SSGA's view, there are compelling reasons to look beyond government funds, particularly for cash not needed for near-term operations. State Street funds that will still feature a fixed NAV include the Institutional US Treasury Fund (TRIXX), US Treasury Fund (SVTXX), and Institutional US Government Fund (GVMXX). In addition to the government MMFs, State Street is offering new money fund options [sic] that don't conform with Rule 2a-7, and therefore are not subject to redemption gates and liquidity fees. These include the Current Yield Fund (SSYDX), Conservative Income Fund (SSKGX) and Ultra Short Term Bond Fund (SSTUX)." Furthermore, the paper says, "These changes will drive many investors out of institutional prime and muni funds and into government funds. This flood of cash will position government funds to satisfy two of the criteria for optimal cash management -- security and liquidity -- but will likely drive yields down, particularly while interest rates remain low and the shortage persists in securities underlying government MMFs. On the flipside, as funds flow out of the floating NAV prime funds, yield spreads are poised to increase, rewarding investors able to accept marginally higher risk." It continues, "SSGA has long urged clients to partition cash amongst operational, core and strategic segments, and optimize each with investments featuring an appropriate balance of liquidity, security and yield. Under the new cash rules, this is more imperative than ever, particularly with new rules that will impose a variable NAV on institutional prime strategies and the potential for gates and fees on all prime MMF strategies. Moreover, spread gaps between Treasury bills and prime money market funds could rise to as much as 20 to 50 bps. For most investors, the days when a single investment fit all of your needs are coming to an end." The paper concludes by detailing the funds that might fall into the three buckets" Operational funds include Treasury and Government funds, as well as SSGA's new 60-day maximum maturity fund; Core funds would include SSGAs prime funds and the new Current Yield fund; and, Strategic funds include the new Ultra-Short Bond and Conservative Income funds, as well as SMAs.

Fidelity Investments released a new white paper entitled, "Money Markets 2016 Outlook After Notable 2015." Co-authors Michael Morin and Kerry Pope write, "Investors had to wait until the very end of 2015 to see the Federal Reserve introduce its first interest rate increase in nine years.... The Fed's latest economic projections suggest there will be four additional rate hikes in 2016, consistent with the message in the December statement that this tightening cycle will be "gradual".... The market remains somewhat skeptical, as year-end fed funds futures suggested only two rate hikes are expected next year." It continues, "In the final weeks of 2015, the yield spread between prime and government MMFs widened. Behind this move was a desire by many foreign banks to issue debt in longer maturities for regulatory reasons. As a result, banks were willing to pay higher yields to borrow in the longer term. Prime fund purchases were concentrated in three- to six-month maturities in both fixed and floating-rate instruments. Given the elevated demand, we expect three-month LIBOR to remain high in the coming weeks, potentially causing spreads between prime and government MMFs to widen even further. Over the course of the year, yield spreads may further diverge as demand for government MMFs ramps up in front of the October 14, 2016, regulatory reform implementation." They add, "According to money fund tracker Crane Data, nearly $173 billion of prime MMFs converted to government MMFs in November and December 2015. Crane expects that approximately $262 billion in prime MMF assets will eventually join the government category, suggesting that about $90 billion of prime MMFs are awaiting conversion. Additional demand for government MMFs may come from institutional prime MMF clients seeking a stable net asset value and from depositors being encouraged to withdraw money from banks, which view institutional deposits as increasingly costly from a regulatory perspective. While the increased demand for government MMFs may be substantial, supply should be adequate based on increases to the Fed's RRP from $300 billion to $2 trillion and expected increases in T-bill supply." In other news, the FT writes "China tightens money market regulation", which says, "Regulators in China are planning to impose tighter rules on the rapidly expanding money market fund industry -- an industry that has transformed the way millions of Chinese invest their savings." (See yesterday's "Link of the Day" and our Jan. 20 News, "Ignites: MMF Fee Waivers Drop in 2015; Fitch on MMF Reform in China" for more on China.)

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