(Bloomberg) – In a global financial environment dominated by negative interest rates and central banks that signal even more accommodating policies, the US money market industry is booming.
Normally seen as a place to park money in times of uncertainty, taxable funds have seen around $ 136 billion of inflows this year, even with US stock markets rising and bond posting positive returns, the Investment Company Institute data show. Total assets have swelled to more than $ 3 trillion, the highest level since the financial crisis.
Demand is partly supported by attractive US short-term returns over bank deposits – aided by the three-year Federal Reserve interest rate hike, a reversed yield curve, and financial market volatility. Total assets in government funds are at a record high level, and investments in primary funds have been most since September 2016, before the industrial reforms came into force.
While the spectrum of Fed interest rates is not perceived as an imminent threat, Crane's Money Fund Symposium participants will be a subject in Boston at the beginning of Monday. Other issues that are likely to arise are, among other things, the decline in returns and narrowing of the spread between government and primary money market funds, as well as the aftermarket growth of the repurchase agreements market and the popularity of sponsored repos.
"Money changes are still over 2 percent, whether it's government or prime," said Pia McCusker, the world-famous global head of cash management in Boston at State Street Global Advisors Trust Co. "It's still attractive to investors today. People look for a safe haven, cash is still a great place. "The yield on two-year government bonds has fallen nearly 74 basis points to 1.75% this year.
Now that the Fed has scraped the use of "patient" when describing its approach to monetary policy changes, derivatives markets are pricing more than 25 basis points of relief at the next federal open market committee in July. Nevertheless, fund managers are non-plus given that money money is still more attractive than bank deposits. Historically, the money tends to expire one to two years after the Fed cutter rates, according to Alex Roever, head of US betting strategies at JPMorgan Chase & Co..
Following a number of risk factors in 2007-2008, investors pushed for funds, the Fed cut interest rates to zero, as shattered money market rates and investors drew money in search of higher return capital. "It wasn't the fact that they had to cut prices," Roever said. "It's that the general interest rate level was so low in that scenario."
Another problem that may arise is whether the Fed decides to introduce a tool to keep the money market rate under more control. Repurchase agreement rates – a key component of short-term financing markets – have recently shown a tendency to spike around the end of the month, which has helped to pull the fed-up share price higher. Fed chairman Jerome Powell said at the press conference after last month's meeting that the central bank will look at the idea of a so-called standing repo at a future meeting.
Even as funds continue to be attractive investment vehicles, drop in dividends will be a topic of discussion. Having peaked between 30 and 35 basis points in December, the spread between primary funds – mainly investing in commercial paper, certificates or deposits and time deposits – and state funds has collapsed to around 20 basis points, according to State Streets McCusker.
Part of this is related to commercial paper issuance and where financial institutions choose to issue. So far this year there have been on average 21 issues of AA rated CP longer than 81 days on a typical day, Fed data show. It's down from an average of 28 editions in the same period in 2018. This lack of supply "bleeds through to the Libor settings is lower and overall returns are lower on top-notch funds," Roever said.
The growth of government money funds after the 2016 reforms was adopted, the repo market has expanded to keep pace with the increased demand. The dealership repo with money market funds has risen to $ 1.2 trillion by the end of May, the Office of Financial Research data show. It is because of the growth of sponsored repos, which are transactions where retailers sponsor non-reseller counterparties to the Fixed Income Clearing Corporation (FICC) cleared repo platform. Last year, cash repositories in trusted repos jumped to a record $ 154 billion, according to the OFR, up from around $ 5 billion in June 2017 when funds first began to participate.
Barclays Plc strategist Joseph Abate expects sponsored repo volumes to grow, but "it's hard to project how popular the program will be," he wrote in a note published on June 19. "How much counterparty exposure to the FICC does a monetary £ 25%, 50% or more want?"
(Adding a 2-year bond dividend to the sixth graph. An earlier version of this story was corrected due to a mislabelling in the chart legend.)
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