The trying days continue for US money market funds.
They’re still attracting some haven-chasers for now, but the combination of complying with the SEC’s Rule 2a-7, increased credit risk from Europe and the endless low interest rate environment is making it difficult for them to cover costs. Read more
Yale University’s Gary Gorton and Guillermo Ordoñez have a new working paper out on the role of collateral in financial crises. This may not pass for exciting news in some places but FT Alphaville is not like other places. Gorton is renowned for his work on shadow banking and wrote an excellent short primer on the recent crisis.
(Update: He’s also, as our commenters point out, the man behind some of the AIG’s risk-management models. Take that as you will, we still think there are some interesting insights in the paper.) Read more
Via Fitch Rating’s latest report on US prime money market funds’ European bank exposure, and as reported by the FT on Friday:
The biggest US money market funds have slashed their exposure to Europe’s embattled banking sector to the lowest since at least 2006, the FT reports, underlining the spreading nervousness about the eurozone’s indebted periphery. The 10 largest US money market funds reduced their short-term lending to European banks to just $284.6bn by the end of August, or 42.1 per cent of their total assets, Fitch Ratings said in a report published on Thursday. That’s the lowest relative exposure since at least the second half of 2006, when Fitch’s records begin, and lower than the level reached during the nadir of the financial crisis. Since the end of June, these “prime” money market funds, which act as lubricants for the global financial system and invest mostly in highly-rated debt, have cut their European banking exposure by more than $55bn in absolute terms.
There’s been a lot of focus on US money market withdrawals from European banks adding to the current market stress in Europe. But could this be a bit of a red herring?
Kash Mansori at the Street Light blog has pulled data from the ECB’s data warehouse, showing a steep decline in deposits held by European monetary financial institutions (MFIs) — that is, banks and money market funds. Read more
A fortnight is a long time in short-term credit markets.
Reports of US money market funds pulling out of European banks in July abounded last month – and French banks appear to be particularly vulnerable due to their relatively high reliance on short-term funds and lower deposit ratios. Well, the trend continued in August, the FT reports: Read more
There’s been a lot of talk about how the US money market mutual funds are pulling their money out of the eurozone. And generally chopping and changing the nature of their investments.
But how exactly do the mechanics of that work, and what are the exposures? Read more
Rumours of funding problems at French banks have been rife this summer.
Without even getting into specific financial firms, you can see a potential issues. Read more
Worries about European banks’ US dollar funding have been growing lately, even though the latest Fed data show foreign banks still have huge piles of cash on an aggregate basis.
But that’s just one part of the funding story. Another concerns our old friends, the money market funds. Fitch Ratings on Monday published its latest monthly report on US MMF exposure to European banks. Read more
Anyone catch this from the New York Fed on Friday? It’s hugely important:
Beginning Monday, August 15, the New York Fed intends to conduct another series of small-scale reverse repurchase (repo) transactions using all eligible collateral types. The first operation will be conducted using only the expanded reverse repo counterparties announced on July 27, 2011. Subsequent operations in this series will be open to all eligible reverse repo counterparties. Read more
Bank of America Merril Lynch’s Shyam Rajan is one of our favourite repo market experts. He’s been following every twist and turn in this unique post-Lehman crisis repo environment.
And his view regarding the downgrade is clear. It will have little impact on the repo markets because most fund and index mandates will not change the way they treat US Treasury securities. They will, to all extent and purposes, remain invest-able. Read more
Money market funds invested in government bonds have increased cash available to meet short-term withdrawals to over two-thirds of their assets, building up liquidity in case of a United States sovereign default, the FT reports. Holdings had been just under half of assets at the end of March. Funds are also avoiding one-month Treasury notes which mature on August 4 and August 11, during the deadline period for raising the US debt ceiling. Corporate treasurers have also moved towards bolstering their cash reserves and hedging interest-rate risk ahead of expected volatility in the Treasury market, reports the WSJ.
US money market funds are stockpiling cash in case Congress fails to raise the debt ceiling, distorting the short-term market for US government debt and raising borrowing costs for banks and other financial institutions, the FT reports. While the funds will continue to hold US Treasuries in the event of a downgrade or default, they are building up liquidity and shunning certain securities due to fears that a failure to raise the debt ceiling could trigger client redemptions. Government-only money market funds have boosted the amount of cash available to meet redemptions within one week to 68 per cent of assets, from 48 per cent at the end of March, according to Barclays Capital. US banks are also bracing for a US default, by holding onto more cash and locking in longer-term financing, also in the FT. They are particularly concerned about the repo market, used for short-term funding.
The president of the Boston Fed has outlined potential reforms to the money market fund industry in new detail, Reuters reports. ”While several proposals have been suggested, some combination of capital buffers, floating rate NAVs and enhanced disclosure seems the best way forward,” Eric Rosengren said. Floating net asset values have proven controversial, with money market fund executives arguing a fixed $1-per-share NAV provides a bedrock of stability, despite the breaking of the buck by Reserve Primary in the 2008 crisis. Capital buffers rather than an industry-desired “liquidity bank” might be a solution, if they are accepted in place of switching to floating NAVs.
European banks have found far less credit available from US money market funds in the last few weeks, withdrawing a prime supply of short-term financing, the FT reports. Even French banks have seen funding opportunities decline. One banker said that one week or one month was the limit for term funding, down from six to nine months before the middle of June. Lending to Italian or Spanish banks has vanished altogether, one money market fund head said. Funds have been cutting exposure to the region for some time, but French banks were traditionally among the greatest sources of European paper for investment.
US money market funds have sharply cut their exposure to banks in the eurozone over the past few weeks and reduced the availability of credit, even in stronger countries such as France, the FT reports. The money market funds, historically crucial providers of short term financing to European banks, have withdrawn from all but extremely short-term lending as concerns about sovereign debt have mounted. While the agreement of a second bail-out deal for Greece might ease nerves, the funds are also stockpiling cash in case US politicians fail to raise the federal debt ceiling, prompting withdrawals from investors.
Thursday’s New York Times article on Wall Street’s fallback plans for a technical US default and/or a downgrade of the US credit rating has generated a bit of buzz. Here’s the gist:
On Wall Street, Treasuries function like a currency, and investors often use these bonds, which are supposed to be virtually fail-proof, as security deposits in their trading in the markets. Now, banks are sifting through their holdings and their customers’ holdings to determine if these security deposits will retain their value. In addition, mutual funds — which own billions of dollars in Treasuries — are working on presentations to persuade their boards that they can hold the bonds even if the government debt is downgraded. And hedge funds are stockpiling cash so they can buy up United States debt if other investors flee. Read more
That the European Central Bank has stepped in to replace much of the eurosystem liquidity that used to be provided by the banks’ themselves is well-known. Did you know, however, that one measure of the ECB’s liquidity provision is now higher than in the depths of the 2008 financial crisis? Read more
Here’s an interesting chart from Société Générale compiled using data from EPFR Global.
It shows recent flows in and out of European money-market funds. Read more
Where “good” = yield from a nice Eonia trade.
Quite frankly, this looks to us like picking up pennies in front of a steamroller. Read more
US commercial paper issuance has rebounded to its highest level in nearly two years as companies and banks take advantage of low interest rates, says the FT. While the market for short-term debt issuance has grown, it is unlikely to reclaim the heights seen in 2007, when reliance on such funding was a key element in fuelling the pre-crisis credit bubble. US issuance has risen to $1,227bn, according to the latest weekly data. However, Bloomberg adds that the European debt crisis could pose a threat to money market funds if a rash of sovereign defaults caused big banks to fail to meet obligations within the next three months. Zero Hedge asks if general collateral is the next ‘buck-breaking” source of frozen liquidity.
US money market funds are struggling to make returns after short-term interest rates fell to record lows in the wake of regulatory changes and a big decline in Treasury bill issuance, the FT reports. The recent drop in rates has compounded the already low level of returns money market funds have made since the Federal Reserve set overnight rates in a band of zero to 0.25 per cent in December 2008. The low interest rate environment means a growing number of funds are losing business and coming under mounting pressure to consolidate. The Investment Companies Institute calculates that last year the industry waived $4.5bn of fees to maintain the fixed $1 per share net asset value of funds. See also FT Alphaville posts.
US money market funds are struggling to make returns after short-term interest rates fell to record lows in the wake of regulatory changes and a marked decline in Treasury bill issuance, reports the FT. The recent drop in rates has compounded the already low level of returns for money market funds since the Fed set overnight rates in a band of zero to 0.25% in December 2008. The low interest rate environment means an increasing number of funds are losing business and coming under pressure to consolidate. The yield on four-week bills has briefly traded at negative levels, while one-year bills recently touched a low of 0.13%.
The repo rate normally trades closely to money market rates. This is sometimes referred to as the general collateral rate. But sometimes a particular security is in demand for borrowing purposes. This is because there are many dealers who have gone short of that security.
In this situation the cost of borrowing the security increases and depending on supply and demand conditions the repo rate can fall significantly. It can end up several percentage points beneath the prevailing money market rates. And in extreme situations a negative repo rate can occur. Read more
It’s hard times for money market funds.
With the repo market broken, and new post-crisis regulation, they’re left to cope as best they can with what’s essentially a broken business model in an environment of extremely low interest rates. Read more
It’s money money everywhere and not that much to buy.
Citigroup credit strategist Matt King has a nice note out on Wednesday attempting to delve into the ‘cash on the sidelines‘ notion — or the idea that there’s a wall of money just waiting to be invested. (It’s true, of course. In the credit space, King points out that inflows to corporate credit have more than doubled since 2007, while net issuance has fallen. This means most new issues are oversubscribed and investors are left feeling they have to buy the market, regardless of whether they actually like it.) Read more
Hundreds of billions of dollars invested in money market funds face almost zero returns after sharp falls in short-term interest rates, according to the FT. The key interest rate for funding trades in US Treasuries fell to a tiny fraction of 1 per cent on Monday. Nearly a third of the $2,750bn that sits in US money market funds is invested in the repurchase or repo sector, trading in which has been hit by a new charge levied on banks at the start of the month by the FDIC. The plunge in short-term interest rates, to just 0.01 per cent, is also due to the temporary absence of some Treasury securities, after wrangling in Washington over the US debt ceiling, that would help soak up excess cash. Reuters asks whether the repo reaction to the FDIC fee change is starting to fade, with some analysts predicting rates will stabilise.
A piece of the Fed’s exit strategy in tatters because of Basel III? Perish the thought.
Yet RBC Capital Market’s Mike Cloherty certainly seems to think so in a short note published late on Thursday. And it’s worth remembering that the Fed’s variegated arsenal of exit mechanisms has been cited as one of the reasons (the Fed keeps saying) we shouldn’t worry about the US central bank’s ability to deal with inflation. Read more
And we thought the Mediterranean was nice this time of year.
Research released by Fitch on Friday shows how the ten largest US MMFs have eroded their exposure to banks in peripheral Europe during the last few years. Read more