Daily Links Archives: February, 2021

Fitch Ratings' published, "Global Money Market Fund Flows Dashboard: 4Q20," which tells us, "Fitch Ratings estimates that global money market fund (MMF) assets under management (AUM) increased by about USD220 billion (3%) in 4Q20 to a total of USD7.3 trillion, nearly 20% more than at the start of 2020. The pickup was primarily driven by inflows in Chinese and European MMFs, while total assets for US onshore MMFs decreased slightly." The update continues, "US MMF AUM decreased by about USD70 billion (2%) to USD4.3 trillion at end-4Q20. AUM fell across prime and tax-free funds, while government funds' AUM remained broadly stable in 4Q20. US MMF assets were up overall at end-2020, but below the peak of USD4.7 trillion at end-May 2020. Inflows to government MMFs throughout 2020 more than offset the net outflows from prime (31%) and tax-free (24%) MMFs. Government, prime and tax-free MMFs represented 85%, 13% and 2% of US MMFs, respectively, at end-2020." Fitch explains, "European MMFs' AUM increased in 4Q20 by EUR102 billion (7%) to EUR1.5 trillion by end 2020. We estimate that variable net asset value (VNAV) MMFs in Europe, most of which are euro-denominated, were the main contributor to the increase, with a 16% growth in AUM in 4Q20 when measured in euros (EUR97 billion). French MMFs, which are primarily VNAV, increased by 7% to EUR0.4 trillion in 4Q20. The increase in 4Q20 led total AUM in European MMFs to a new peak at end-2020, marginally higher the prior peak at end-July 2020 when measured in euros. Euro-, sterling- and US dollar-denominated MMFs represented around 95% of total MMF assets in Europe at end-2020." They write, "Chinese MMFs had inflows in 4Q20 of CNY0.8 trillion (10%), with total assets at CNY8.1 trillion at end-2020. AUM remained below the 2020 peak of CNY8.6 trillion at end-April 2020 but above the end-2019 level of CNY7.1 trillion. The Chinese mutual fund industry had widespread inflows (CNY1.4 trillion) in 4Q20, which benefitted almost all asset classes amid money supply expansion and increased household saving." Lastly, they explain, "MMFs could undergo renewed asset flow volatility in 2021 as central banks' temporary facilities reduce. There is potential for further market disruption depending on vaccine rollout and efficacy. A resurgence of investor flight-to-quality, challenging non-government MMFs more than government MMFs, or sustained low policy rates leading to negative-yielding funds could pressure flows." Fitch also published "U.S. Money Market Funds: February 2021," where they comment, "Total taxable money market fund (MMF) assets increased by $25 billion from Jan. 11, 2020 to Feb. 11, 2021, according to iMoneyNet data. Prime MMFs lost $7 billion in assets during this period, offset by a $32 billion increase in government MMF assets.... Total MMF assets have declined to $4.15 trillion since peaking at $4.59 trillion on May 28, 2020, partially driven by the low rate environment." The brief concludes, "MMFs increased their daily and weekly liquid assets when they experienced extreme market volatility in March 2020 and maintained those elevated levels since. Average daily and weekly liquid assets increased from 31.6% and 44.3%, on Feb. 28, 2020, to 37.1% and 53% on Jan. 29, 2021, according to Crane Data. This sustained increase is partially driven by the outflows prime institutional MMFs experienced in March that challenged fund managers’ ability to manage liquidity."

J.P. Morgan Securities' most recent weekly "Short-Term Market Outlook and Strategy" contains a "Treasury bill holders update," which tells us, "Last year's surge in net T-bill issuance prompted a dramatic change to the investor composition of the market.... In years past, MMFs have often taken on the role of shock absorbers for T-bills, and last year was no different. However, the degree to which they took on T-bills was substantial, fueled by the growth in AUM as well as needs for liquidity." The brief continues, "Indeed, MMFs' allocation to T-bills increased by $1.38tn in 2020, effectively taking down over half of the $2.6tn additional T-bill supply, capping off a year that saw the largest annual increase on record. Of that amount, $367bn came from Treasury only funds, $889bn from government and agency funds, and $129bn from prime funds. As a result, MMFs now make up 41% of the market versus 28% at the start of the year." JPM explains, "In contrast, foreign investors (such as foreign official institutions, foreign banks, and offshore asset managers), who historically represented a large chunk of the T-bills market, have effectively been crowded out given their holdings only grew $321bn last year. They now make up 21% of the market, down from 29% at year-end 2019. The combination of the Fed, state and local governments, dealers, as well as corporations make up the remainder." They add, "The shift in T-bill investor composition underscores what is likely an intense period for MMFs in the coming weeks. With Treasury expected to reduce their net T-bill issuance next week (down ~$100bn) and limited alternative money market supply, this will likely exert significant downward pressure on T-bill yields and drag other money market rates down as well. Not helping matters is the still significantly elevated of MMF AUMs. Per Crane Data, there's $1.1tn in Treasury MMFs, $2.6tn in Government & Agency MMFs, and $921bn in Prime MMFs. In the absence of alternatives, MMFs will likely have to resort to the Fed ON RRP and as such, we would not be surprised if this facility gains more use. However, over the medium term ... the outlook looks less threatening assuming Congress passes another stimulus package, presumably in the $1.7tn ballpark sometime in March. All else equal, this should significantly boost T-bill supply in 2Q and alleviate some of the pressures confronting MMFs currently."

Crane Data also published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of Feb. 19, 2021) includes Holdings information from 73 money funds (up 5 funds from a week ago), which represent $2.170 trillion (up from $1.947 trillion) of the $4.757 trillion (45.6%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.143 trillion (up from $1.042 trillion a week ago), or 52.7%, Repurchase Agreements (Repo) totaling $504.5 billion (up from $464.8 billion a week ago), or 23.2% and Government Agency securities totaling $269.4 billion (up from $251.0 billion), or 12.4%. Commercial Paper (CP) totaled $93.5 billion (up from $68.4 billion), or 4.3%. Certificates of Deposit (CDs) totaled $57.4 billion (up from $49.6 billion), or 4.3%. The Other category accounted for $72.7 billion or 3.4%, while VRDNs accounted for $29.3 billion, or 1.4%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.143 trillion (52.7% of total holdings), Federal Home Loan Bank with $141.3B (6.5%), BNP Paribas with $69.1B (3.2%), RBC with $53.7B (2.5%), Federal Farm Credit Bank with $49.3B (2.3%), Federal National Mortgage Association with $46.4B (2.1%), Fixed Income Clearing Corp with $43.9B (2.0%), Mitsubishi UFJ Financial Group Inc with $32.4B (1.5%), Federal Home Mortgage Corp with $30.4B (1.4%) and JP Morgan with $29.6B (1.4%). The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($202.1 billion), Goldman Sachs FS Govt ($157.8B), Wells Fargo Govt MM ($143.3B), Fidelity Inv MM: Govt Port ($134.6B), Morgan Stanley Inst Liq Govt ($114.4B), Federated Hermes Govt Obl ($102.9B), JPMorgan 100% US Treas MMkt ($95.1B), Dreyfus Govt Cash Mgmt ($94.9B), Goldman Sachs FS Treas Instruments ($87.8B) and First American Govt Oblg ($80.6B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

TheStreet highlights "near-cash" ETFs in its recent article, "5 ETFs That Are Great For An Emergency Fund." They write, "The COVID pandemic put the importance of having emergency savings squarely in the spotlight.... It's something that many people, unfortunately, were forced to deal with quickly and unexpectedly.... But I'm an ETF guy, so I'll be giving you a handful of options if you want to build your emergency fund through these products.... There are a lot of great low-risk, low-cost choices among ETFs. Here are a few of my favorites." The piece cites, "SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL): As far as ETFs go, this is about as conservative as you'll find. The 3 month and less maturity requirement means there's almost no interest rate risk involved. The fact that it's invested in Treasuries means there's almost no credit risk involved. As far as safety goes, you may not find a less volatile ETF around.... Given its overall profile, this is very similar to a traditional money market fund. Goldman Sachs Access Treasury 0-1 Year ETF (GBIL): The next step up would be investing in a T-bill ETF that allows maturities up to a full year. GBIL does that, but still has the majority of assets in Treasuries with maturities of 6 months and less. It has the same ultra low risk profile as BIL, but adds just a touch of higher risk and yield potential." TheStreet also mentions, "WisdomTree Floating Rate Treasury ETF (USFR): Floating rate Treasuries have a bit of a different structure than BIL and GBIL, but have a yield/risk profile that's substantially the same. USFR holds Treasuries with longer maturities (up to about 2 years out looking at the current portfolio), but because the interest rates reset on a regular basis, they end up behaving more like Treasury bills. USFR has just over $1 billion in assets, making it smaller than GBIL and significantly smaller than BIL. That could mean minimally higher trading costs, but USFR is still liquid and cheap. JPMorgan Ultra Short Income ETF (JPST): This is the first ETF on the list that focuses on ultra short-term investment grade corporate bonds instead of Treasuries. That means you're introducing credit risk into the equation, which tends to up the volatility a bit. Most of the portfolio is in the AA- to BBB-rated range, still safe enough to pose little default risk, but enough to make the portfolio modestly riskier. The current yield of around 0.3% means you get a little bit of income for your trouble, but JPST is simply an option for those wishing to increase their risk/return profile a bit without taking too much risk. It's worth noting that even ultra short-term corporate bond funds ran into trouble during the COVID bear market last year. JPST dropped more than 3% over the course of a few weeks back in March when investors abandoned anything with risk and share prices started disconnecting noticeably from their underlying NAVs, something that is very unusual with ETFs. In the vast majority of cases, risk here is low, but last year shows that things can still go sideways in the wrong conditions." Finally, the article highlights, "PIMCO Enhanced Short Maturity Active ETF (MINT): MINT actually combines Treasuries and investment-grade corporates into one portfolio (although it leans heavily towards corporate bonds currently). It's also actively managed, so it tries to pick and choose only the best opportunities within the fixed income landscape. From a risk perspective, it has the same story as JPST a year ago. Its share price dropped about 4% in short order, but was able to recover its losses by June once the market stabilized. Among short-term safer bond ETFs, MINT has been one of my favorites."

Federated Hermes posted an interview entitled, "Seeking Opportunities in a Low-Yield World ," which interviews Senior Portfolio Manager Randy Bauer. He explains, "The overwhelming presence of central monetary and fiscal intervention means, that even though credit spreads would appear to be tight by historical standards they will likely tighten more in the near future. Moreover, the continuation of that support means the potential for another correction of the type we saw on early 2020, would appear to be quite limited. And while fixed income yields are currently low by historical standards the lack of alternatives, means that investors will continue to seek yield wherever it can be found. The emergence of the global economy from the pandemic will only reinforce that." Bauer manages Federated's new Conservative Microshort Fund, its Short-Term Income Fund, Ultrashort Bond Fund, Active Cash Broad Fixed Income Strategy, Active Cash Moderate Fixed Income Strategy and Lower Duration Broad Fixed Income Strategy. (For more, see our Feb. 4 Link of the Day, "Federated Hermes Enters Conservative Ultra-Short BF Market; ICD;CAG.")

ICI's latest "Money Market Fund Assets" report shows MMFs increasing over the past week, their 5th gain in the last 6 weeks. Money fund assets are up $36 billion, or 1.0%, year-to-date, with Inst MMFs up $41 billion (1.8%) and Retail MMFs down $5 billion (-0.3%). Over the past 52 weeks, money fund assets have increased by $700 billion, or 19.3%, with Retail MMFs rising by $130 billion (9.4%) and Inst MMFs rising by $569 billion (25.4%). ICI says, "Total money market fund assets increased by $16.04 billion to $4.34 trillion for the week ended Wednesday, February 17.... Among taxable money market funds, government funds increased by $18.92 billion and prime funds decreased by $2.02 billion. Tax-exempt money market funds decreased by $857 million." ICI's stats show Institutional MMFs increasing $18.0 billion and Retail MMFs decreasing $1.9 billion. Total Government MMF assets, including Treasury funds, were $3.694 trillion (85.2% of all money funds), while Total Prime MMFs were $535.9 billion (12.4%). Tax Exempt MMFs totaled $103.6 billion (2.4%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than our asset series.) They explain, "Assets of retail money market funds decreased by $1.92 billion to $1.52 trillion. Among retail funds, government money market fund assets increased by $180 million to $1.17 trillion, prime money market fund assets decreased by $1.82 billion to $264.24 billion, and tax-exempt fund assets decreased by $275 million to $91.58 billion." Retail assets account for just over a third of total assets, or 35.1%, and Government Retail assets make up 76.6% of all Retail MMFs. ICI adds, "Assets of institutional money market funds increased by $17.96 billion to $2.81 trillion. Among institutional funds, government money market fund assets increased by $18.74 billion to $2.53 trillion, prime money market fund assets decreased by $205 million to $271.65 billion, and tax-exempt fund assets decreased by $582 million to $12.06 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 at the end of August, accounted for 64.9% of all MMF assets, with Government Institutional assets making up 89.9% of all Institutional MMF totals.

Barron's writes, "Short-Term Treasury Yields Could Go Negative. Here’s What That Means for Investors." The article tells us, "The steady rise in long-term Treasury yields has attracted plenty of investor attention. But short-term bills are starting to draw focus for the opposite reason: Some could fall below zero in coming weeks if policy makers don't act. Yields on some Treasury bills -- short-term securities that mature in a year or less -- could temporarily turn negative because of a coming supply crunch, experts say. While they won't be auctioned by the U.S. at rates below zero, as auction rules prevent that, bills could trade at negative yields in secondary markets." Barron's continues, "Still, while any negative rates would be the result of technical and likely temporary market pressures, they highlight how difficult it is for investors to earn returns in fixed-income markets. What's more, many investors are exposed to potential negative rates through money-market fund holdings that are still near record levels." They quote Northern Trust Asset Management's Peter Yi, "We expect these continuous [bill] paydowns to happen really until the middle of this year.... The magnitude of this paydown is really extreme." The piece adds, "Yi, of Northern Trust Asset Management, also believes that the Fed will take action to boost short-term rates if they fall below zero. 'This technical adjustment could be the tide that lifts all boats higher, and should even lift T-bill [yields] and prevent negative interest rates on those really short instruments.... That's just better for the market, in terms of its functioning.' But it isn't clear when either of those steps will occur. So until then, investors may want to be even more wary of cash than usual."

Money market fund yields continue to bottom out just above zero, as our flagship Crane 100 remained unchanged in the last week to 0.02%. The Crane 100 Money Fund Index fell below the 1.0% level in mid-March and below the 0.5% level in late March 2020. It is unchanged in 2021, down from 1.46% at the start of 2020 and down from 2.23% at the beginning of 2019. Three-quarters of all money funds and just over half of MMF assets have since landed on the zero yield floor, though many continue to show some yield. According to our Money Fund Intelligence Daily, as of Friday, 1/12/21, 644 funds (out of 855 total) yield 0.00% or 0.01% with assets of $2.443 trillion, or 51.7% of the total $4.724 trillion. There are 199 funds yielding between 0.02% and 0.10%, totaling $1.960 trillion, or 41.5% of assets; 12 funds yielded between 0.11% and 0.20% with $321.9 billion, or 6.8% of assets. No funds yield over 0.20%. The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 678), shows a 7-day yield of 0.02%, unchanged in the week through Friday, 2/12. The Crane Money Fund Average is down 45 bps from 0.47% at the beginning of April. Prime Inst MFs were unchanged at 0.04% in the latest week, Government Inst MFs were flat at 0.02%, and Treasury Inst MFs were unchanged at 0.01%. Treasury Retail MFs currently yield 0.01%, (unchanged in the last week), Government Retail MFs yield 0.01% (unchanged in the last week), and Prime Retail MFs yield 0.02% (unchanged). Tax-exempt MF 7-day yields were also unchanged at 0.01%. (Let us know if you'd like to see our latest MFI Daily.) The latest Brokerage Sweep Intelligence, with data as of February 12, showed no changes in the last week. All major brokerages, with the exception of RW Baird, offer rates of 0.01% for balances of $100K. No brokerage sweep rates or money fund yields have gone negative to date, but this could become a distinct possibility in coming weeks or months. Crane's Brokerage Sweep Index has been flat for the last 43 weeks at 0.01% (for balances of $100K). Ameriprise, E*Trade, Fidelity, Merrill Lynch, Morgan Stanley, Raymond James, Schwab, TD Ameritrade, UBS and Wells Fargo all currently have rates of 0.01% for balances at the $100K tier level (and almost every other tier too). RW Baird offers a rate of 0.02% for its balances of $100K.

Please join us for Crane's Bond Fund Symposium 2021 (Online), which will be hosted virtually the afternoons of March 25-26, 2021. Bond Fund Symposium offers a concentrated and affordable educational experience for bond fund and fixed-income professionals with a focus on the ultra-short sector of the market. Registrations are $250 and "comp" and sponsor tickets are also available. (Ask us if you'd like more information.) See the latest agenda and details here. Portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of bond funds and fixed-income investing will benefit from our comprehensive program. E-mail us for the brochure and more details. To see the recordings and Powerpoints from our recent Money Fund University event, visit our "Money Fund University 2021 Download Center" (subscribers and attendees only). Finally, mark your calendars for our "big show," Money Fund Symposium, which is scheduled for June 23-25, 2021 in Philadelphia, and for our European Money Fund Symposium, which is scheduled for October 21-22, 2021 in Paris. We hope to see you in person later this year, and we hope to see you virtually in March!

ICI's latest "Money Market Fund Assets" report shows MMFs increasing over the past week, their 4th gain in the last 5 weeks. Money fund assets are up $20 billion, or 0.5%, year-to-date, with Inst MMFs up $23 billion (1.0%) and Retail MMFs up $3 billion (-0.2%). Over the past 52 weeks, money fund assets have increased by $692 billion, or 19.1%, with Retail MMFs rising by $137 billion (9.9%) and Inst MMFs rising by $555 billion (24.8%). ICI says, "Total money market fund assets increased by $6.21 billion to $4.32 trillion for the week ended Wednesday, February 10.... Among taxable money market funds, government funds increased by $11.68 billion and prime funds decreased by $3.89 billion. Tax-exempt money market funds decreased by $1.58 billion." ICI's stats show Institutional MMFs increasing $15.1 billion and Retail MMFs decreasing $8.9 billion. Total Government MMF assets, including Treasury funds, were $3.675 trillion (85.1% of all money funds), while Total Prime MMFs were $537.9 billion (12.5%). Tax Exempt MMFs totaled $104.5 billion (2.4%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than our asset series.) They explain, "Assets of retail money market funds decreased by $8.93 billion to $1.52 trillion. Among retail funds, government money market fund assets decreased by $3.15 billion to $1.17 trillion, prime money market fund assets decreased by $4.87 billion to $266.06 billion, and tax-exempt fund assets decreased by $918 million to $91.86 billion." Retail assets account for just over a third of total assets, or 35.3%, and Government Retail assets make up 76.5% of all Retail MMFs. ICI adds, "Assets of institutional money market funds increased by $15.14 billion to $2.79 trillion. Among institutional funds, government money market fund assets increased by $14.82 billion to $2.51 trillion, prime money market fund assets increased by $982 million to $271.85 billion, and tax-exempt fund assets decreased by $665 million to $12.65 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 at the end of August, accounted for 64.7% of all MMF assets, with Government Institutional assets making up 89.8% of all Institutional MMF totals.

A Prospectus Supplement filing for Ready Assets Government Liquidity Fund, which was liquidated this week, tells us, "On November 10, 2020, the Board of Trustees of Ready Assets Government Liquidity Fund approved a proposal to liquidate and terminate the Fund subject to a Plan of Liquidation and Termination. The Plan of Liquidation and Termination will be presented to the shareholders of the Fund and must be approved by the requisite number of shares of the Fund before a liquidation and termination of the Fund can occur. A special meeting of shareholders of the Fund to consider the Plan of Liquidation and Termination is expected to be held on February 5, 2021. The record date for the special meeting is December 10, 2020. If approved by shareholders of the Fund, the liquidation date for the Fund is expected to be on or around February 9, 2021. Effective December 1, 2020, BlackRock Advisors, LLC will waive or reimburse all operating expenses of the Fund, including all management fees, administration fees and miscellaneous other expenses (excluding dividend expense, interest expense and acquired fund fees and expenses), as applicable. This waiver/reimbursement is voluntary and can be discontinued by BlackRock at any time without notice." The Supplement continues, "Also on November 10, 2020, the Board of Trustees of the Fund approved a proposal to reopen the Fund to share purchases. Accordingly, effective immediately, the Fund's Summary Prospectus, Prospectus and Statement of Additional Information are amended as follows: The section of the Fund's Summary Prospectus entitled 'Key Facts About Ready Assets Government Liquidity Fund -- Purchase and Sale of Fund Shares' and the section of the Fund's Prospectus entitled 'Fund Overview -- Key Facts About Ready Assets Government Liquidity Fund -- Purchase and Sale of Fund Shares' are amended to delete the last paragraph of each such section in its entirety." (For more on recent liquidations, see these CD News pieces: "Delaware Liquidates Govt Cash Mgmt" (1/11/21); "DWS Liquidating Govt CR (BIRXX)" (11/25/20); "BMO Liquidating Inst Prime MMF" (11/17/20); "Morgan Stanley NY Muni MM Gone" (10/5/20); and "SEC's Blass on Push for More MMF Reforms; Vanguard Liquidating PA, NJ" (9/28/20).)

The Wall Street Journal briefly discusses Euro money market funds and negative rates in its article, "Flood of Cash Pushes Borrowing Costs to Unusual Lows in Europe." They tell us, "Italy's Enel SpA, one of Europe's biggest electricity producers, has short-term commercial paper that recently offered an annualized yield of minus 0.61%, according to FactSet: That is 0.11 percentage point lower than the ECB's deposit rate of minus 0.5%.... For the lender, in this case the money-market funds that buy commercial paper, the opposite is true. They get back less money." The Journal quotes SSGA's Kim Hochfeld, "It took a couple of years for clients to get their heads around the idea that they'd have to pay to leave money in a safe spot." It says, "State Street's EUR Liquidity LVNAV Fund -- worth €6.6 billion, equivalent to $7.9 billion -- yields minus 0.68% after fees, but that compares with total costs on large bank deposits of up to 1%, she added." The piece continues, "The stop-start style of social and economic life has also curtailed spending by consumers and businesses, leading to a buildup of savings. European money-market funds, often used as an alternative to bank deposits, have hit record levels of €1.4 trillion, according to ECB data. Companies and banks don't need the cash these funds have to offer. A rolling four-week average of weekly commercial-paper issuance is down almost 40% since the start of 2020, according to CMDportal, a bond- and money-market data aggregator." The WSJ explains, "Average rates have plunged in response, to about minus 0.55% during January, according to David Callahan, money-market fund manager at Lombard Odier Investment Managers. 'There is a lot of liquidity sloshing around and rates are very low,' said Mr. Callahan. For investors who put their money in commercial paper, 'it feels a bit like death by a thousand cuts,' he said." The piece adds, "Enel is one of Europe's larger commercial-paper issuers and has more than €2 billion outstanding in different maturities. It has a short-term credit rating of A2 and a normal credit rating of BBB-plus, near the lower end of investment grade. An Enel spokesperson said the company would keep using commercial-paper markets when it is the most efficient source of funding. Bas van Geffen, quantitative analyst at Rabobank, said this is a sign that banks in particular just have too much cash and are shifting it around to wherever they can minimize the losses from negative rates. 'It's a bit like passing on the hot potato,' he said." (Note: Let us know if you'd like to see a copy of our Money Fund Intelligence International, which tracks European and Euro MMFs.)

The Bond Buyer writes, "Issuers hope SEC will roll back Obama-era money market rules," which explains, "Issuers hope the Securities and Exchange Commission's decision to open a comment window on potential money market fund reforms will provide a chance to revive stable net asset values that make it easier for local governments to invest. On Thursday, the SEC requested comment from market participants on potential reform measures to make MMFs more resilient following the intense market volatility that defined the early days of the pandemic lockdown last year. The Government Finance Officers Association plans to ask for a partial rollback of 2016 reforms that would allow institutional MMFs to return to a fixed net asset value." They quote Emily Brock, director of GFOA's federal liaison center, "We have to make sure that as users of these money market funds, as potential investors of these money market funds, that they're available for working capital uses, especially right now.... It's especially important for municipal governments to be able to have access to short-term working capital so we can weather this pandemic." The article continues, "Many governments have policies that require them to invest in financial products with a stable NAV. Governments both invest in and borrow from MMFs and use them to pay for short term costs, such as payroll." The Bond Buyer continues, "At the beginning of the pandemic in March 2020, prime and tax-exempt MMFs had significant outflows. The report found that MMFs experienced and contributed to general stress in the short-term funding markets before the Federal Reserve created backstop programs that helped the markets return to normalcy.... Brock said it makes sense for the SEC to look at market volatility in March and want to make reforms.... 'It makes perfect sense that the SEC would like to say something like let's not put in preventative measures to respond to this, but let's put in preventative measures so this doesn't happen again.'" For more, see these Crane Data News articles: "SEC Wants Comments on PWG Report" (2/8/21); "More on PWG's Grab Bag of Zany MMF Reform Options: WLAs, MBR, LEB?" (12/30/20); and, "PWG Paper Discusses Potential Reform Options for Money Market Funds" (12/24/20).

As we mentioned Friday, a press release entitled, "SEC Requests Comment on Potential Money Market Fund Reform Options Highlighted in President's Working Group Report," tells us, "The Securities and Exchange Commission today published a request for public comment on potential reform measures to improve the resilience of money market funds as highlighted in a report of the President's Working Group on Financial Markets issued in December 2020. The report noted that certain short-term funding markets experienced stress in March 2020 amid economic concerns related to the onset of the COVID-19 pandemic." SEC Acting Chair Allison Herren Lee tells us, "Money market funds play a significant role in our short-term funding markets, and they are utilized by both large institutions and individual retail investors.... Comments received will assist the SEC and other relevant financial regulators in further analysis of potential reforms." The release continues, "The report also discusses prior money market fund reforms, the evolution of different types of money market funds since the 2008 financial crisis, and events in certain short-term funding markets in March 2020. The report concludes that more work is needed to reduce the risk that structural vulnerabilities in prime and tax-exempt money market funds will lead to or exacerbate stresses in short-term funding markets. The report also discusses various reform measures that policymakers could consider." It adds, "The SEC is requesting public comment on the report, including the effectiveness of the previously-enacted money market fund reforms and of implementing the potential policy measures described in the report. Commenters also are invited to discuss other topics that are relevant to potential money market fund reforms, including other approaches to reform. The SEC encourages commenters to submit empirical data and other information in support of their comments. The public comment period will remain open for 60 days following publication of the comment request in the Federal Register." (Submit comments here: https://www.sec.gov/cgi-bin/ruling-comments.)

ICI's "Money Market Fund Assets" report shows MMFs falling in the latest week after increasing in 3 of the previous 4 weeks. Money fund assets are up $16 billion, or 0.4%, year-to-date, with Inst MMFs up $10 billion (0.4%) and Retail MMFs up $6 billion (0.5%). Over the past 52 weeks, money fund assets have increased by $696 billion, or 19.8%, with Retail MMFs rising by $148 billion (11.0%) and Inst MMFs rising by $448 billion (20.6%). ICI says, "Total money market fund assets decreased by $13.34 billion to $4.31 trillion for the week ended Wednesday, February 3.... Among taxable money market funds, government funds decreased by $9.12 billion and prime funds decreased by $4.16 billion. Tax-exempt money market funds decreased by $55 million." ICI's stats show Institutional MMFs decreasing $20.2 billion and Retail MMFs increasing $6.9 billion. Total Government MMF assets, including Treasury funds, were $3.665 trillion (85.0% of all money funds), while Total Prime MMFs were $541.8 billion (12.6%). Tax Exempt MMFs totaled $106.1 billion (2.5%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than our asset series.) They explain, "Assets of retail money market funds increased by $6.89 billion to $1.53 trillion. Among retail funds, government money market fund assets increased by $9.27 billion to $1.17 trillion, prime money market fund assets decreased by $2.22 billion to $270.93 billion, and tax-exempt fund assets decreased by $153 million to $92.77 billion." Retail assets account for just over a third of total assets, or 35.5%, and Government Retail assets make up 76.3% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $20.23 billion to $2.78 trillion. Among institutional funds, government money market fund assets decreased by $18.39 billion to $2.50 trillion, prime money market fund assets decreased by $1.94 billion to $270.87 billion, and tax-exempt fund assets increased by $97 million to $13.31 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 at the end of August, accounted for 64.5% of all MMF assets, with Government Institutional assets making up 89.8% of all Institutional MMF totals.

Charles Schwab Investment Management published a new Schwab Money Funds Commentary, which explains, "During the fourth quarter, Government, Prime and Municipal money market funds experienced industry wide outflows, as short-term rates remained at historic lows and equity markets set record highs. Uncertainty over the timing and size of additional fiscal stimulus in the U.S. led to a decline in Treasury bill supply, putting downward pressure on short-term government rates. Prime and Municipal money market fund managers were cautious around the presidential election, temporarily boosting liquidity levels. All of these factors led to a continued decline in money market fund yields during the quarter." They write, "According to Crane Data's Money Fund Intelligence reports, the money market fund industry finished the fourth quarter with moderately fewer assets under management, as domestic balances decreased by approximately $45 billion to $4.73 trillion. The Prime money market fund sector experienced the largest outflows during this quarter, followed by the Municipal money market fund sector, while the Government/Treasury money market fund sector saw slight inflows. Despite this overall decline in quarterly assets, demand remained strong for the year, with inflows of approximately $750B across all sectors, a 19% increase for 2020. Finally, Crane Data also noted that industry wide fee waivers for 2020 totaled more than $3 Billion. With no clear indication of a change in policy direction from the Federal Reserve, we expect fee waivers to continue in 2021." Schwab comments on its market outlook, "Although 2020 presented a different set of challenges from the last financial crisis, the weight of COVID-19 on the money fund industry led regulators to revisit liquidity facilities to maintain order and to regain investor confidence. As a result of these developments, regulators also indicated that money market fund rules may come under further examination in the near future. This notion has gained traction recently, as evidenced by the December release of the President's Working Group on Financial Markets (PWG) report titled 'Overview of Recent Events and Potential Reform Options for Money Market Funds and the Investment Company Institute's (ICI) November release of their own report titled, 'Experiences of US Money Market Funds During the COVID-19 Crisis.'" Schwab writes, "Yields are expected to remain at low levels for 2021 and the Federal Reserve has made no indication of changing course until material, sustained improvements to the economy are observed. Money market funds will likely continue to waive at least some portion of their operating expense ratios and show no immediate signs of reversing course. ICI data, for example, reflects that 94% of all money market fund share classes were waiving some portion of their fees at the end of Q4 2020, up from 68% in January of the same year." They add, "Additionally, we are closely monitoring policy developments out of Washington and how they could influence broader financial markets given the recent outcomes of the presidential election in November. And finally, continued diligence is merited regarding the ongoing effects of COVID-19 on investor behavior and how any potential stimulus could be funded."

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of Jan. 29, 2021) includes Holdings information from 78 money funds (down 7 funds from a week ago), which represent $2.312 trillion (down from $2.530 trillion) of the $4.623 trillion (50.0%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.275 trillion (down from $1.362 trillion a week ago), or 55.1%, Repurchase Agreements (Repo) totaling $556.5 billion (down from $578.5 billion a week ago), or 24.1% and Government Agency securities totaling $281.7 billion (down from $306.2 billion), or 12.2%. Commercial Paper (CP) totaled $70.5 billion (down from $99.1 billion), or 3.0%, and Certificates of Deposit (CDs) totaled $55.0 billion (down from $66.9 billion), or 2.4%. The Other category accounted for $44.4 billion or 1.9%, while VRDNs accounted for $29.2 billion, or 1.3%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.280 trillion (55.3% of total holdings), Federal Home Loan Bank with $139.0B (6.0%), Fixed Income Clearing Corp with $73.0B (3.2%), BNP Paribas with $69.8B (3.0%), Federal Farm Credit Bank with $59.1B (2.6%), Federal National Mortgage Association with $50.8B (2.2%), RBC with $47.6B (2.1%), Mitsubishi UFJ Financial Group Inc with $31.1B (1.3%), Federal Home Mortgage Corp with $30.8B (1.3%) and Barclays PLC with $29.9B (1.3%). The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($191.4 billion), Goldman Sachs FS Govt ($157.3B), Wells Fargo Govt MM ($145.6B), Fidelity Inv MM: Govt Port ($139.9B), BlackRock Lq FedFund ($130.7B), Morgan Stanley Inst Liq Govt ($108.1B), BlackRock Lq T-Fund ($101.4B), Dreyfus Govt Cash Mgmt ($92.2B), JPMorgan 100% US Treas MMkt ($91.6B) and Goldman Sachs FS Treas Instruments ($85.3B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

Former FDIC Chair Sheila Bair posted an editorial on Yahoo Finance entitled, "Biden-led regulators need to crack down on nonbank risks — or let them fail." She writes, "There are many important issues requiring President Joe Biden's attention. I regret to say that 12 years after the Great Financial Crisis (GFC), financial instability remains one of them. This instability was laid bare by the market disruptions of last March when once again, the Federal Reserve felt compelled to inject a massive amount of liquidity to calm tumultuous financial markets. And once again, these bailouts rewarded and reinforced irresponsible risk-taking and unstable business models, instead of letting market discipline impose its will. This is not to say that some level of Fed intervention wasn't warranted. But most of the disruptions occurred in segments of the financial system that were known to be fragile -- and had been identified by financial experts and regulators as sources of past instability. These include money market funds, corporate bond ETFs, and hedge funds speculating in U.S. Treasury markets. Notably, these are entities outside of the regulated banking sector which, because of reforms enacted pursuant to the 2010 Dodd-Frank financial reform law, have remained stable." She explains, "[N]ot all nonbank credit providers were sources of instability in March. Money market funds that only invested in federally backed securities performed well. But so-called 'prime funds,' invested in more volatile corporate debt suffered substantial outflows by institutional investors, required liquidity support from the Fed.... Unless we want to tolerate a financial system reliant on Fed bailouts to function, we need to start providing some level of prudential oversight over entities that exhibit these vulnerabilities -- or let them fail.... Some measures to address shadow bank instability do not seem complicated. For instance, why not impose higher margin requirements on U.S. Treasury and derivatives trading to reduce volatility? Similarly, if money market funds want to create expectations among investors of liquidity and the protection of principal, why not require that they only invest in liquid assets where principal is actually protected (i.e. US government-backed securities), or that they hold capital against this implicit guarantee (as does a bank?)" Bair adds, "Government interventions in financial markets may sometimes be necessary, but they have well-known negative side effects. They reward bad behavior and perpetuate instability. They provide clear benefits to Wall Street, with little demonstrated benefits to Main Street. They should be avoided at all costs -- and narrowly tailored when used."

An update written by Dechert LLP and published on website JDSupra, entitled, "President's Working Group on Financial Markets Issues Report on Money Market Fund Reform Options," explains, "The President's Working Group on Financial Markets (PWG) on December 22, 2020 released a report on potential reform options for money market funds (Report). The Report states that the significant outflows experienced by prime and tax-exempt money market funds (MMFs), as well as the stress experienced in the short-term funding markets beginning in March 2020, underscores the need for further improvements to the regulation of MMFs beyond the reforms enacted following the 2008 financial market crisis. The Report acknowledges that there have been several iterations of reforms since the 2008 crisis, designed to improve MMF resiliency to credit and liquidity stresses. However, the Report recommends that more should be done to address systemic risks and the structural vulnerabilities of MMFs to large-scale redemptions." (See Crane Data's Dec. 24 News, "PWG Paper Discusses Potential Reform Options for Money Market Funds," and our Dec. 30 News, "More on PWG'​s Grab Bag of Zany MMF Reform Options: WLAs, MBR, LEB?") Dechert writes, "To that end, the Report presents several possible reform options for prime and tax-exempt MMFs to facilitate discussion among regulators, including the Securities and Exchange Commission. Following the publication of the Report, the staff of the SEC's Division of Investment Management (Division) requested feedback on the Report's recommendations. While it is unclear whether the SEC and other regulators will adopt any of the Report's recommendations in light of the change in Administrations, the Report may serve as a blueprint for those regulators in considering future MMF reforms. Below are the 10 MMF reforms proposed by the Report, each of which is discussed in more detail in this OnPoint." The options include: "Removal of the tie between MMF liquidity and fee and gate thresholds; Reform of the conditions for imposing redemption gates; Imposition of a minimum balance-at-risk (MBR); MMF liquidity management changes; Countercyclical weekly liquid asset requirements; Floating net asset value (NAV) requirements for all prime and tax-exempt MMFs; Swing pricing requirement; Capital buffer requirements; Requirement for liquidity exchange bank (LEB) membership; and New requirements governing sponsor support." Dechert's "Onpoint" update adds, "Although the Report discusses various reform measures, the PWG does not recommend any particular reform. Rather, the Report discusses potential benefits and drawbacks of each option, with the overarching goals that any future reforms should: (i) 'effectively address the MMF structural vulnerabilities that contributed to stress in short-term funding markets'; (ii) 'improve the resilience and functioning of short-term funding markets'; and (iii) 'reduce the likelihood that official sector interventions and taxpayer support will be needed to halt future MMF runs or address stresses in short-term funding markets more generally.'"