Daily Links Archives: February, 2022

J.P. Morgan "Mid-Week US Short Duration Update" features a brief entitled, "Net MMF yields: slow to rise," which discusses how fast money fund yields might follow the Fed funds rate higher in coming months. They write, "In a few weeks, the Fed is likely going to lift rates off of the zero bound -- a level that has been maintained since March 2020. In a couple months, the Fed is also likely going to begin reducing its reinvestments in Treasuries and mortgages. We have discussed previously that the interaction of these policies means that reserves will be much more sensitive to normalization of the Fed's balance sheet than RRP. As leverage continues to remain a binding constraint for the banking system, and as rising interest rates are likely going to push yields at MMFs higher versus deposits, we would expect MMF balances to remain elevated, thereby increasing demand for RRP." JPM continues, "To that end, the recent debate about whether the Fed will raise rates by 25bp or 50bp at liftoff has prompted some to consider the pace at which cash might shift from deposits to MMFs. In other words, could we see a faster drain in reserves, and correspondingly a further rise in RRP? At the heart of this is the assumption that the correlation between the fed funds rate and net yields of MMFs are very high. While this is generally the case, the relationship between market rates and MMF net yields is much weaker when rates are near the zero lower bound. This is because of MMF fee waivers. As a result, the rise in interest rates do not necessarily get passed on to the end shareholder until further along in the tightening cycle." The update adds, "[D]uring the 2015-2018 tightening cycle, the first rate hike almost entirely went to expanding the expense ratios of government and prime funds as MMFs sought to recapture fee waivers. It was not until the fourth rate hike when expense ratios began to stabilize, implying a resumption of the relationship between market rates and MMF net yields. Based on current market expectations, this would suggest that if cash were on the move to economically take advantage of MMF yields versus deposits, it's probably going to be more of a 2H event."

Kiplinger's "Investing for Income" column features a piece entitled, "Consider Short-Term Bond Funds," which tells us, "Savers craving substantial bank and money market interest rates courtesy of the Federal Reserve are still waiting. You might see 0.75% for six months by the second half of 2022, which I agree beats prolonged zero yields. But America's banks have more deposits than they can lend and thus need not scurry to augment their savings rates in concert with Fed rate actions.... Do not despair. The picture is brighter for fans of short-term bond mutual funds and exchange-traded funds (ETFs). Instead of being stuck with Treasury bills and puny bank rates, you can join the world of variable-rate corporate and real estate debt, taxable municipal bonds, packages of car loans and credit card bills, revolving equity credit lines, and the occasional soon-to-mature junk bond. The durations and maturities are only two or three years, but unlike savers, lenders here have pricing power. That suggests these funds' monthly dividends will rise, pushing yields beyond the current 1% to 1.5% and trending toward 2%-plus." The article tells us, "My favorite, FPA New Income Fund (FPNIX), is closed to most new accounts. But there are fine facsimiles, exemplified by Janus Henderson Short Duration Flexible Bond Fund (JASBX, expense ratio: 0.64%, yield: 0.82%), Thornburg Limited Term Income Fund (THIFX, 0.77%, 1.07%), T. Rowe Price Short Duration Income Fund (TSDLX, 0.40%, 1.90%) and USAA Short-Term Bond Fund (USSBX, 0.54%, 1.81%).... Any, or all, of these funds are positioned better for the year ahead than a plain-vanilla money market account or Treasury-focused ultra-short fund." Kiplinger's adds, "Ignore how these and similar funds shed some value in the opening weeks of this year. They own the kind of stuff that benefits from a healthy economy and can withstand Fed rate hikes.... Naysayers will note that in March 2020 many funds like these lost 5% of principal, negating three years of yield. But as long as consumers are in good shape to pay their debts in full and on time, and well-known businesses are solvent, the risk of loss from defaults or downgrades is nearly nil. And interest-rate gyrations allow the fund managers to take advantage of trading opportunities." (Note: Please join us for Crane Data's upcoming Bond Fund Symposium, March 28-29 in Newport Beach, Calif!)

CNBC writes "Investors pull billions of dollars from bond and money market funds at fastest pace in years," echoing the WSJ article earlier this week. (See our Feb. 23 LOTD, "WSJ Writes on Fund Flows.") The article states, "Investors are pulling money out of bond and money market funds at the fastest pace in years, as inflation and the specter of rising interest rates threaten returns in the short term. The outflow has been starkest for money market funds, which are cash-like funds with a low level of risk. Investors shifted $148 billion out of money market mutual funds and exchange-traded funds between Jan. 1 and Feb. 16, according to Morningstar Direct data." CNBC continues, "Taxable and municipal bond funds also saw a monthly outflow in January for the first time since March 2020, which occurred during the U.S. recession fueled by the Covid-19 pandemic, according to Morningstar. Prior to the pandemic, investors hadn't taken money out of these bond funds during any month dating back to 2018. Investors have withdrawn $9.8 billion from taxable bond funds and $3.4 billion out of municipal bond funds from Jan. 1 to Feb. 16, according to Morningstar.... Money market funds are conservative, and generally invest in cash, short-term U.S. government bonds and other safe securities. High levels of inflation are eating into the relatively low returns offered by such funds. The consumer price index increased 7.5% in January from a year earlier, the fastest rate since February 1982. The exodus from money market funds in January also was the largest on record to start a calendar year, according to Refinitiv Lipper data, which dates to 1992. Outflows this month are on pace to set a new record for February." It adds, "The Federal Reserve is expected to raise interest rates starting in March to cool down the economy and rein in inflation. However, bond prices move in the opposite direction of interest rates -- meaning investors in bond funds will likely lose money as the central bank raises rates."

The Wall Street Journal writes, "Exodus From Bond Funds Is Mitigating the Stock Market's Swoon," which discusses recent fund flows (but jumps to the wrong conclusion on MMFs). The page 1 (Tuesday) article explains, "The bad news in the bond market has been a rare boon for stocks. Investors pulled nearly $160 billion from money-market funds and $17.5 billion from bond mutual funds and exchange-traded funds in the first seven weeks of the year, according to Refinitiv Lipper. The exodus is already on pace to be the biggest in at least seven years. About $50 billion was funneled into stock funds over that period, including nearly $21 billion so far this month." It continues, "Investors typically use money-market funds as a relatively safe place to park cash. Now that inflation has returned, their purchasing power is sapped. 'There's not a whole lot of options for people,' said Jonathan Waite, a senior investment analyst at Frost Investment Advisors. He ... summed up the situation ...: 'TINA. There is no alternative' to stocks." The Journal adds, "Regardless of how investors divvy up their dollars among stocks, several analysts said the bonds market is in for a rough ride that could put its multidecade bull run on hold. The recent outflows mark a stark reversal from recent years. In each of the past three years, investors added hundreds of billions of dollars to bond funds, with flows peaking at $457.6 billion in 2021. Now, Deutsche Bank analysts compare the environment with 2013, when a large increase in rates around the taper tantrum led to more than $300 billion flowing into stock funds in the following 12 months and bond funds suffered outflows." (Note: Most money fund assets, and all of the outflows YTD, are Institutional, and thus not destined for the stock or bond fund markets. These flows are driven by rate and seasonal cash flow factors and not longer-term market issues.)

The website Tech-ish.com writes "Standard Chartered launches 'SC Shilingi' Money Market Fund." The piece explains, "The Standard Chartered Bank, in collaboration with Sanlam Investments East Africa, and Mangosteen BCC Pte Ltd, has launched the SC Shilingi fund, a low-ticket money markets fund which it will be proposition for its clientele. The 100% digital investment product available on the SC Mobile app allows clients to investment amounts of as low as KShs 1000, earn competitive interests and withdraw funds anytime.... With as low as 1000 Kenyan Shillings, customers will have access to an investment solution. The product is 100% digital and available 24/7 on SC Mobile app.... Standard Chartered says the product will enable one move money from your current account daily, weekly or monthly to the Money Market Fund managed by Sanlam." The story comments, "The platform will combine a customer current account with the local currency Money Market Fund investment to provide client with attractive returns, higher than they would ordinarily get from a current account and/or savings account while maintaining a relatively high level of liquidity." It adds, "Mr. Mark Mulatya, Chief Operating Officer at Sanlam Investments East Africa Limited noted that Sanlam Investments believes in improving people's lives by empowering them to be financially stable through wealth creation. 'We do this by responding to the needs of our customers across a variety of financial services and in a timely manner. This collaboration solidifies our shared commitment to promote a saving and investing culture through solutions such as the Sanlam Money Market Fund which offers capital preservation, high levels of investment returns and immediate access to money when requested.'"

The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows assets falling sharply for the third week in a row and for the 6th time in the past 7 weeks. Year-to-date, MMFs are down by $155 billion, or -3.3%. Over the past 52 weeks, money fund assets have increased by $217 billion, or 5.0%, with Retail MMFs falling by $47 billion (-3.1%) and Inst MMFs rising by $263 billion (9.4%). ICI's weekly release says, "Total money market fund assets decreased by $43.52 billion to $4.55 trillion for the week ended Wednesday, February 16, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $39.91 billion and prime funds decreased by $4.07 billion. Tax-exempt money market funds increased by $454 million." ICI's stats show Institutional MMFs decreasing $43.5 billion and Retail MMFs decreasing $2.9 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.028 trillion (88.5% of all money funds), while Total Prime MMFs were $435.1 billion (9.6%). Tax Exempt MMFs totaled $86.7 billion (1.9%). ICI explains, "Assets of retail money market funds decreased by $2.89 billion to $1.47 trillion. Among retail funds, government money market fund assets decreased by $2.25 billion to $1.20 trillion, prime money market fund assets decreased by $560 million to $200.43 billion, and tax-exempt fund assets decreased by $83 million to $76.49 billion." Retail assets account for just under a third of total assets, or 32.4%, and Government Retail assets make up 81.2% of all Retail MMFs. They add, "Assets of institutional money market funds decreased by $40.63 billion to $3.08 trillion. Among institutional funds, government money market fund assets decreased by $37.66 billion to $2.83 trillion, prime money market fund assets decreased by $3.51 billion to $234.70 billion, and tax-exempt fund assets increased by $536 million to $10.23 billion." Institutional assets accounted for 67.6% of all MMF assets, with Government Institutional assets making up 92.0% of all Institutional MMF totals. (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 Crane's asset series.)

Bloomberg posted an article entitled, "Battered Money-Market Industry Is Ready for Aggressive Fed." Written by Alexandra Harris, the piece tells us, "While the global financial system waits for the Federal Reserve to begin lifting interest rates, funds across the money-market industry are positioning their cash to take advantage of the higher yields to come. For some funds that means shortening exposure to interest-rate shifts in their portfolios. As of Feb. 14, more than 100 money markets funds had a weighted average maturity, or WAM, of 10 days or less, including some Federated Hermes funds at 1 day, according to money-market information provider Crane Data. That's up from 85 funds on Jan. 24 and 77 at the end of December." It explains, "Money-market funds have been hit hard by the central bank's easy monetary policy. When the Fed slashed its main interest-rate target to 0% to 0.25% in March 2020, the industry was forced to waive fees to preserve what little yield funds were earning on their investments, and some even shuttered after struggling to cover operating costs in the low-rate environment. Now with policy makers on the precipice of an aggressive series of rate increases, fund managers don't want to miss the window of higher rates." Bloomberg quotes Bank of America's Mark Cabana, "There's a lot of uncertainty about the Fed hiking path and as long as there is a very real risk they hike 50 basis points it makes sense that money funds remain short.... If you're a money fund, you don't want to take that risk." The piece adds, "For money funds, a 50 basis-point increase means a quicker return to more normal conditions, such as the reimposition of fees and the ability to offer more yield than bank deposits, which tend to lag money markets when it comes to adjusting to Fed rate increases.... Should the Fed's trajectory remain uncertain, or policy makers opt for the more conventional path of quarter-point hikes, money funds may continue to lean on the central bank's overnight reverse repurchase agreement facility, even pushing balances above $2 trillion, according to Cabana. Demand for the so-called RRP is around $1.64 trillion, off the all-time high of $1.91 trillion reached on Dec. 31."

A filing for the BMO Money Market Funds, including BMO Government Money Market Fund, BMO Prime Money Market Fund and BMO Tax-Free Money Market Fund announces their final demise, says, "On February 11, 2022, the BMO Money Market Funds were reorganized into corresponding series of Goldman Sachs Trust, as shown below, following shareholder approval of the Reorganizations and pursuant an agreement and plan of reorganization previously approved by the Board of Directors of BMO Funds, Inc." Assets of the BMO Prime Money Market Fund was merged into Goldman Sachs Investor Money Market Fund, the BMO Government Money Market Fund was merged into Goldman Sachs Financial Square Government Fund, and the BMO Tax-Free Money Market Fund merged into Goldman Sachs Investor Tax-Exempt Money Market Fund. For more, see our Oct. 25, 2021 Link of the Day, "BMO MMFs Merging Into Goldman." It says: A recent Prospectus Supplement for BMO Funds tells us, "On October 18, 2021, the Board of Directors of BMO Funds, Inc. approved an agreement and plan of reorganization providing for the reorganization of each of the BMO Government Money Market Fund, BMO Prime Money Market Fund and BMO Tax-Free Money Market Fund, each a series of the Corporation, into a corresponding series of Goldman Sachs Trust. BMO Asset Management Corp., investment adviser to each of the BMO Money Market Funds, recommended that the Board approve the Reorganizations in connection with its decision to exit the mutual fund investment advisory business in the United States." For more on mergers and liquidations in the money fund sector, see: "Western Files to Liquidate Tiny MMFs" (6/7/21), "AIG Govt MMF, MuniFund Liquidate" (8/3/21), "March MFI: Liquidations, Changes; Ameriprise's Chris Melin; Deposits" (3/5/21), "Delaware Liquidates Govt Cash Mgmt" (1/11/21), "BMO Liquidating Inst Prime MMF (11/17/20), "Franklin, Legg Mason Deal Signals More Consolidation; More Liquidations" (2/20/20), "TDAM Liquidating Money Funds" (10/15/18) and "Reich & Tang Announces Liquidation of Money Market Mutual Fund" (3/13/15).

Crane Data is making preparations for its next live event, Bond Fund Symposium, which will be held March 28-29, 2022, at the Hyatt Regency in Newport Beach, Calif. Bond Fund Symposium offers fixed income portfolio managers, bond investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent networking venue. Registration for BFS 2022 is $750. Sponsorships are $3,000 (which includes 2 tickets), $4K (3 tickets) and $5K (4 tickets). Our mission is to deliver the best possible conference content at an affordable price. Please let us know if you're interested in any sponsorship or speaking opportunities for 2022, or if you have any questions or feedback. We're also making plans for our next "big show," Money Fund Symposium, which will be held June 20-22, 2022, at the Hyatt Regency in Minneapolis. Finally, mark your calendars for our next European Money Fund Symposium, which will be held Sept. 27-28, 2022, in Paris, France and our next Money Fund University, which will be held Dec. 15-16, 2022, in Boston, Mass. Watch for more details on these shows in coming weeks and months, and note that the recordings and materials from our past events are available to Crane Data subscribers at the bottom of our "Content" page.

The Wall Street Journal published an odd piece, "It's Official: SPACs Are the New Money-Market Funds." It explains, "As markets sour on speculative assets, a new exchange-traded fund is offering a twist on investing in special-purpose acquisition companies. Sometimes called 'blank-check' vehicles, SPACs last year became Wall Street's favorite way to list flashy ventures with no profits. Many financial firms have unveiled products to grant investors easy access to this market. In late 2020, Defiance ETFs was the first to set up a fund with allocations to both blank-check vehicles themselves and the merged companies that emerge from them. Its top holding is electric-car startup Lucid Group.... The new ETF, launched last week by hedge fund Morgan Creek Capital Management and financial-technology company Exos Financial, completely shifts the focus: Now SPACs are all about making small returns for almost no risk, like a bank deposit or a money-market fund." It explains, "In a goldilocks scenario, 'our experience tells us we can add a few basis points over Treasury yields,' said Mark Yusko, Morgan Creek's chief executive, of his new Active SPAC Arbitrage ETF, which tellingly is trading under the 'CSH' ticker. SPACs can indeed play this role if bought at the right time, which may be counterintuitive but has long been known among hedge funds. It stems from the minutiae of how the vehicles work: Investors are allowed to demand their money back before a merger is completed, or once SPAC sponsors run out of time to find a target—often after two years. Meanwhile, the cash is placed in a trust that earns interest from ultrasafe securities. What is more, whenever negative market sentiment pushes SPAC stocks below the value of their share of the trust, investors who buy in are guaranteed extra returns at maturity -- and without ever holding a single share in an air-taxi company. 'I hate to say it's boring, but it's boring,' Mr. Yusko added." The Journal adds, "Morgan Creek's ETF charges 1.25% in fees, whereas many money-market funds stay below 0.1%. And because an ETF is forced to add to its portfolio when it receives inflows, arbitrage gains will tend to become smaller if it becomes too popular. Also, the SPAC discounts that underpin the strategy could dry up if there is another surge in their popularity -- though the fund also holds warrants on the post-combination SPAC firms, which would revalue a lot in this scenario. Whether SPAC arbitrage proves to be a lasting alternative to money-market funds remains to be seen. That it perfectly captures the zeitgeist of the current market, however, seems hard to deny."

The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows assets falling sharply for the second week in a row and for the 5th time in the past 6 weeks. Year-to-date, MMFs are down by $112 billion, or -2.4%. Over the past 52 weeks, money fund assets have increased by $276 billion, or 6.4%, with Retail MMFs falling by $46 billion (-3.0%) and Inst MMFs rising by $322 billion (11.5%). ICI's weekly release says, "Total money market fund assets decreased by $34.35 billion to $4.59 trillion for the week ended Wednesday, February 9, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $33.55 billion and prime funds decreased by $655 million. Tax-exempt money market funds decreased by $139 million." ICI's stats show Institutional MMFs decreasing $29.2 billion and Retail MMFs decreasing $5.1 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.068 trillion (88.6% of all money funds), while Total Prime MMFs were $439.2 billion (9.6%). Tax Exempt MMFs totaled $86.3 billion (1.9%). ICI explains, "Assets of retail money market funds decreased by $5.13 billion to $1.48 trillion. Among retail funds, government money market fund assets decreased by $4.82 billion to $1.20 trillion, prime money market fund assets decreased by $117 million to $200.99 billion, and tax-exempt fund assets decreased by $197 million to $76.57 billion." Retail assets account for just under a third of total assets, or 32.2%, and Government Retail assets make up 81.2% of all Retail MMFs. They add, "Assets of institutional money market funds decreased by $29.22 billion to $3.12 trillion. Among institutional funds, government money market fund assets decreased by $28.74 billion to $2.87 trillion, prime money market fund assets decreased by $538 million to $238.20 billion, and tax-exempt fund assets increased by $58 million to $9.69 billion." Institutional assets accounted for 67.8% of all MMF assets, with Government Institutional assets making up 92.0% of all Institutional MMF totals. (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 Crane's asset series.)

The Wall Street Journal writes "Don't Expect Rising Interest Rates to Boost Your Savings Account." The article explains, "Interest rates are about to rise. Savers shouldn't get their hopes up. The Federal Reserve has signaled it will raise rates in March, the first in what is expected to be a series of increases this year. Higher rates usually mean bank customers stand to make more on their deposits. Not so this time. Banks have little incentive to raise the interest they pay on deposits because they simply don't need the money. Government stimulus plumped up Americans' bank-account balances, and companies are flush with cash. Total deposits at U.S. commercial banks have swelled to about $18.1 trillion, up from about $13.3 trillion at the start of 2020." The piece explains, "The average rate on a savings account at the largest U.S. banks stood at roughly 0.06% at the end of last year, according to Bankrate.com. Many high-yield savings accounts, which offered 1.5% or more before rates headed toward zero in early 2020, now offer rates around 0.5%. On fourth-quarter earnings calls last month, bank executives said those rates aren't likely to move in tandem with Fed increases this time around. The 'overall rate paid will be lower in this next rising-rate cycle,' said Jenn LaClair, chief financial officer at Ally Financial Inc., which offers a high-yield savings account." The Journal quotes Pete Gilchrist of Curinos, "You're not going to see deposit rates jump with any sort of magnitude until banks have many more loans on the books than they do today." It adds, "Rising rates might nudge some deposit customers to move a chunk of their money into higher-yielding investments. That could prompt some banks to raise deposit rates."

Bloomberg writes "Billions Are Flowing to Cash-Like ETFs in 'Hunt' Before Fed Hike," which asks, "What's safer than short-duration bonds? Even shorter duration debt." (Note: Crane Data's upcoming Bond Fund Symposium, which is March 28-29 in Newport Beach, Calif, focuses on ultra-short bond funds and ETFs. Contact us for details.) Bloomberg's article tells us, "As investors brace for an increasingly aggressive Federal Reserve, money is flooding into cash-like ETFs -- which are seen as relatively less vulnerable to interest-rate risk. Traders have been piling into exchange-traded funds mostly focused on ultra-short instruments like Treasury bills, while offloading ETFs tracking longer-dated debt -- even those that are considered short-term bonds maturing in five years or less. The $14 billion PIMCO Enhanced Short Maturity Active ETF (ticker MINT) lured inflows of nearly $900 million in the best week since it started trading in 2009, according to data compiled by Bloomberg. Meantime, roughly $1.6 billion was pulled from the $39 billion Vanguard Short-Term Bond ETF (BSV) -- the biggest withdrawal in three years." It explains, "Bond yields have surged ... with an unexpectedly strong jobs report Friday reinforcing speculation the economy is at risk of overheating. That's making traders flock to ultra-short duration funds, which have emerged as a haven of sorts as volatility ripples across asset classes." They quote Mizuho's Peter Chatwell, "The hunt is on for anything that resembles a store of capital. What this flow shows is how the chain reaction of Fed hikes and quantitative easing will take liquidity out of 'duration' risk assets, into the short-duration products." Bloomberg's article says, "MINT has fallen less than 0.5% so far this year, while BSV has dropped 1.5%. In addition to MINT's influx, the $16 billion SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the $14 billion iShares Short Treasury Bond ETF (SHV) both posted their biggest weekly inflows since 2020, according to data compiled by Bloomberg. Meantime, the $13 billion Vanguard Short-Term Treasury ETF (VGSH) and the $8 billion Schwab Short-Term U.S. Treasury ETF (SCHO) -- which track Treasuries maturing in three years or less -- both bled the most cash since 2019." Finally, Chatwell adds, "Until there are higher policy rates and higher term premia in U.S. T-bills, commercial paper and other short-term credit products are likely to do well from these flows.... We expect this flow to become much more risk-averse after the March 16 Fed as by then, we should have higher and steeper T-bill curves."

Invesco published "US Money Fund Reform Proposals, A Quick Look" recently, which tells us, "The US Securities and Exchange Commission (SEC), on December 15, 2021, proposed amendments to certain rules that govern US money market funds (MMFs) under the Investment Company Act of 1940 (1940 Act). These proposed changes to SEC Rule 2a-7, if adopted, are designed to improve the resiliency and transparency of US money market funds and will impact the manner in which US money market funds operate. These proposed reforms are a consequence of market events in March 2020 when growing concerns about the impact of the COVID-19 pandemic led investors to reallocate their assets into cash and short-term government securities. Specifically, heavy outflows from US institutional prime and tax-exempt MMFs placed stress in the short-term funding markets, which became 'frozen,' making it difficult for these funds to sell investments." Invesco lists the "Proposed amendments: Remove the liquidity fee and redemption gate provisions from SEC Rule 2a-7; Increase the daily liquid asset and weekly liquid asset requirements for all MMFs to 25% and 50%, respectively; Implement swing pricing policies and procedures for US institutional prime and institutional tax-exempt MMFs; Address how money market funds should handle a negative interest rate environment; Specify how funds calculate weighted average maturity (WAM) and weighted average life (WAL); and, Amend certain reporting requirements on Forms N-MFP and N-CR." They add, "There will be a 60-day comment period following publication of the proposed amendments in the US Federal Register. The proposed amendments have not yet been posted in the Federal Register. When the amendments are finalized/adopted and published in the US Federal Register, the SEC has proposed implementation in stages to include (a) immediate changes, (b) 6-month changes, and (c) 12-month changes. Immediate changes will focus on the removal of liquidity fee and redemption gate provisions including related disclosures. At 6 months, funds must be in compliance with the increased daily liquid asset and weekly liquid asset requirements and all other aspects of proposal. In the final stage at 12 months, funds must be in compliance with swing pricing requirements and the requirements that address how money market funds should handle a negative interest rate environment."

The Financial Stability Oversight Council hosted a meeting on Friday, and money fund reform was one of the main topics on the agenda. SEC Chair Gary Gensler's "Statement before the Financial Stability Oversight Council on Money Market Funds, Open-End Bond Funds, and Hedge Funds" says, "Thank you, Secretary Yellen, for focusing the Council's attention on financial resiliency with regard to three key parts of our capital markets -- particularly money market funds, open-end bond funds, and hedge funds. The fund industry gives retail and institutional investors the opportunity to pool their assets, get investment advice, and attain diversification and efficiency. These pools of assets have become a significant part of our markets. There's $5 trillion in money market funds, nearly $7 trillion in open-end bond funds, and $9 trillion in gross assets under management in hedge funds." He explains, "The nature, scale, and interconnectedness of these fund sectors, though, also pose issues for financial stability. This is not just based on financial economic theory, but also upon the practical lessons of the past. We've seen such risks emanate from these sectors during the 2008 financial crisis, at the start of the COVID crisis in March 2020, and in 1998, when the hedge fund Long-Term Capital Management failed. Money market funds and open-end bond funds, by their design, have a potential liquidity mismatch -- between investors' ability to redeem daily on the one hand, and funds' securities that may have lower liquidity. While this might not be as significant a concern in normal markets, we've seen that in stress times, these funds' liquidity mismatches can raise systemic issues." Gensler comments, "I think the Securities and Exchange Commission has a responsibility to help protect for financial stability, which maps onto many parts of our statutes, but particularly onto the 'orderly' part of our mission. Thus, I've asked SEC staff to make recommendations for the Commission's consideration with regard to bolstering the resiliency of each of these fund sectors. The Commission recently voted to propose amendments to rules that govern money market funds. I'd like to thank William Birdthistle and Sarah ten Siethoff for their work and today's presentation on the SEC's proposal. With respect to open-end bond funds, I've asked staff whether there are improvements we can consider regarding the fund liquidity rule or through other reforms to enhance fund liquidity, pricing, and resiliency in possible future stress events. With respect to hedge funds, in January, the Commission voted to propose amendments to Form PF -- a form first adopted after the financial crisis that provides certain private fund information to the SEC and other financial regulators. Among other things, the proposed amendments would require certain advisers to hedge funds to provide current reporting of events that could be relevant to financial stability." He adds, "I support the FSOC Statement on Nonbank Financial Intermediation today and welcome FSOC members' input on the SEC's ongoing consideration on how to best enhance resiliency in these critical fund sectors." See more on the Feb. 4 FSOC Meeting here, see the recording here and see the FSOC's Statement on Money Market Fund Reform here.

In just the second real posting to the SEC's "Comments on Money Market Fund Reform" page, Professors Stephen Cecchetti of Brandeis International Business School and Kermit Schoenholtz of NYU's Stern School of Business post yet another wacky academic response to the SEC. They write, "Thank you for the opportunity to comment on the SEC's proposed Money Market Fund Reforms. Below is a revised version of comments that previously appeared on our blog at: https://www.moneyandbanking.com/commentary/2022/1/28/sec-money-market-fund-reform-proposals-fall-far-short-again. In announcing publication of the SEC's most recent proposed amendments to the rules governing money market funds, Chair Gary Gensler said: [H]ere we are again. `The events of March 2020 suggest that more can be done to improve the resiliency of money market funds.... This is about systemic risk. Those of us at the SEC have an obligation to the public to once again come back and see if we can shore up this system a bit more.' We couldn't agree more. As the principal regulator of U.S. money market funds (MMFs), the SEC has a duty to end the market distortions and moral hazard that repeated public rescues create. There have been two MMF bailouts, so far. The first came at the height of the Great Financial Crisis of 2008, while the second followed in the March 2020 COVID crisis. While the Treasury provided guarantees only once, the Federal Reserve offered emergency liquidity assistance both times." The professors speculate, "These repeated government interventions encourage MMF managers to behave in ways that make future financial crises more likely. In effect, the authorities are subsidizing liquidity even when there is no direct cost to taxpayers. Moreover, there is no credible way for the Fed to promise not to intervene should a systemic disruption again loom in short-term funding markets. Indeed, Paul Tucker suggests requiring 'the issuers of assets treated as safe, regardless of their legal form, to have access to the central bank's discount window.' The only realistic means to end the subsidies created by the implicit promise of future bailouts is to force MMFs to be far more resilient than they are today." The letter continues, "Not surprisingly, everyone knows that MMF regulation needs reform. In December 2020, the President's Working Group on Financial Markets (PWG) proposed a set of possible MMF reforms. The SEC then sought public comments on this list of proposals. Last June, the Hutchins Center-Chicago Booth Task Force on Financial Stability's proposed reforms included several aimed at MMFs. And, a few months ago, the Financial Stability Board released its own proposals for strengthening the global MMF industry. Against this background, the SEC's December 2021 reform proposals are seriously disappointing. As SEC Chair Gensler suggests, they probably 'shore up this system a bit more.'" They add, "We would go much farther. The proposals are woefully inadequate on several fronts: Ignoring the functional equivalence between banks and MMFs, and without providing a quantitative assessment of costs and benefits, the SEC rejects a role for capital requirements; In calibrating the need for additional MMF liquidity, the SEC implicitly assumes the continued presence of a Fed liquidity backstop; The SEC misses the opportunity to require that MMF stress tests (which have been compulsory for over a decade) meet fundamental principles of transparency, severity and flexibility; [and] Even the SEC's most promising proposal -- to require swing pricing for selected MMFs -- is operationally difficult to implement, so (like most useful reforms), it already faces strong resistance from the industry. In the remainder of this letter, we start with basic facts about the scale and mix of MMFs today. We then describe the SEC's proposals, before focusing on their key shortcomings. We hope that the public comments that the SEC receives will motivate it, at the very least, to conduct a serious quantitative assessment of introducing capital requirements for the most vulnerable MMFs, to re-assess the scale of additional liquid assets needed for MMF resilience in the absence of a Fed backstop, and to propose ways to enhance the effectiveness and utility of MMF stress tests."

A communication entitled, "Registration of UBS (Irl) Select Money Market Fund - EUR, GBP, USD Sustainable to SFDR Article 8" from UBS Asset Management and subtitled, "Sustainability Focused funds under the SFDR," explains "On March 10, 2021 the European Union put the Sustainable Finance Disclosure Regulation (SFDR) into force for EU countries, which brings our Luxembourg and Irish Domiciled funds in scope. This regulation is in accordance with the UN Sustainable Development Goals and Paris Agreement. The SFDR taxonomy aims to make the sustainability profile of funds across the EU more comparable, and systematically integrate sustainability aspects into the financial services market. Please find below a short review." A Q&A asks, "Why now?" They write, "UBS-AM has reviewed the overall fund range to align with the new SFDR taxonomy (classification) which has been implemented in 2021. In so doing a number of Funds have been re-categorized as Article 8, including the UBS (Irl) Select Money Market Funds in EUR, GBP and USD (US Treasury is out of scope of this exercise). SFDR has been put in place to harmonise Environmental, Social and Governance (ESG) categorisation of funds and provide investors with better transparency in comparing ESG characteristics across funds." The brief also asks, "To what extent is ESG analysis being integrated in these funds?" UBS answers, "ESG analysis across most of UBS-AM's Fixed Income and Liquidity capabilities has been integrated in the investment process for many years, with issuer-level ESG analysis as guided by UBS-AM's approach to ESG research and evaluation methodology. This has involved developing a proprietary ESG risk dashboard that combines scores and data points from several external research providers together with our internal ESG score. Our credit research teams continually monitor individual issuers to assure high credit quality, and partner closely with our dedicated Sustainable and Impact Investing Research team to maintain focused ESG integration in the research process. This formal re-categorisation brings our existing ESG integrated funds within the SFDR regulation." The update asks, "What's changed in the UBS (Irl) Select Money Market Funds?" They explain, "The most visible change is to the name where the fund names in EUR, GBP and USD have updated to UBS (Irl) Select Money Market Fund – Sustainable; No changes to the Total Expense Ratios of the share classes of the fund in the prospectus; No change in how active portfolio managers incorporate analyst recommendations into portfolio construction; No impact to liquidity of the funds; No current impact to yields; and, The UBS (Irl) Select Money Market Funds – Sustainable continue to be managed with the objective, seeking to maximise current income consistent with the preservation of principal, high levels of liquidity whilst now promoting environmental, social and governance characteristics." (Note: Ask us if you'd like to see our latest Money Fund Intelligence International, which tracks European and "offshore" money market funds denominated in USD, EUR and GBP, or our MFI International Portfolio Holdings dataset. These funds are not available to U.S. investors.)

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. 28) includes Holdings information from 65 money funds (down from 70 a week ago), which represent $2.268 trillion (down from $2.378 trillion) of the $5.086 trillion (44.6%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our Jan. 12 News, "Jan. MF Portfolio Holdings: Repo Soars to Almost 50%, Led by Fed RRP," for more.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.068 trillion (down from $1.109 trillion a week ago), or 47.1%; Treasuries totaling $876.5 billion (down from $916.7 billion a week ago), or 38.6%, and Government Agency securities totaling $138.2 billion (up from $136.8 billion), or 6.1%. Commercial Paper (CP) totaled $61.7 billion (down from a week ago at $71.6 billion), or 2.7%. Certificates of Deposit (CDs) totaled $43.1 billion (down from $47.5 billion a week ago), or 1.9%. The Other category accounted for $58.5 billion or 2.6%, while VRDNs accounted for $22.3 billion, or 1.0%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $876.5 billion (38.6% of total holdings), the Federal Reserve Bank of New York with $666.6B (29.4%), Federal Home Loan Bank with $61.0B (2.7%), Fixed Income Clearing Corp with $57.9B (2.6%), BNP Paribas with $54.9B (2.4%), Federal Farm Credit Bank with $44.3B (2.0%), RBC with $35.9B (1.6%), Societe Generale with $23.4B (1.0%), Federal National Mortgage Association with $21.7B (1.0%) and Barclays PLC with $21.5B (0.9%). The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($254.2B), BlackRock Lq FedFund ($172.8B), Morgan Stanley Inst Liq Govt ($147.6B), Allspring Govt MM ($133.7B), Fidelity Inv MM: Govt Port ($127.0B), Dreyfus Govt Cash Mgmt ($125.4B), BlackRock Lq T-Fund ($121.2B), Blackrock Lq Treas Tr ($117.0B), JPMorgan 100% US Treas MMkt ($99.0B) and First American Govt Oblg ($95.4B). (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.)

Fitch Ratings published the brief, "U.S. Money Market Funds: January 2022," which tells us, "Total taxable money market fund (MMF) assets increased by $140 billion from Nov. 30, to Dec. 31, 2021, according to iMoneyNet data. Government MMFs gained $144 billion in assets during this period, and prime MMF assets decreased by $4 billion, continuing their gradual decline." They explain, "Taxable MMFs continue to increase their exposure to repos while decreasing Treasury holdings. U.S. Treasury holdings increased by $20 billion, while those of repos increased by $229 billion, from Nov. 30, to Dec. 31, 2021, according to Crane Data. Repos remain the largest portfolio segment, with the majority of the allocations continuing to migrate to the U.S. Fed's Reserve Repo Program." Fitch adds, "As of Dec. 31, 2021, institutional government and prime MMF net yields were 0.02% and 0.03%, respectively, per iMoneyNet, unchanged from the end of November. MMF managers continue to wave fees to maintain minimum net yields but expect some of the waivers to halt with the first increase in the federal funds rate."

Daily Link Archive