Fitch: Prime Money Fund Liquidity Buffers Surge One Month Ahead of Reform
As of Sept. 9, prime institutional funds' weekly liquidity averaged 75.5%, up 3.6% from Aug. 31 and 11.4% from Aug. 15. Some prime money funds' weekly liquidity is at 100%, and others will likely reach similar levels in the month running up to reform.
"Fund managers are building significant buffers to weekly liquidity in excess of the 30% regulatory threshold that could trigger liquidity fees or redemption gates, and the high levels of liquidity indicate that fund managers are anticipating further outflows, despite the significant movement that has already taken place," said Greg Fayvilevich, Senior Director, Fitch.
Prime institutional money funds continue to experience significant asset outflows, declining $176 billion during the two weeks between Aug. 26 and Sept. 9, according to today's Dashboard. Meanwhile, government institutional funds' assets increased by $178 billion in the same period, reaching a total of approximately $1.3 trillion. Since Oct. 27, 2015, prime institutional money funds have lost approximately $532 billion in assets with total prime assets falling $733 billion, according to data from iMoneyNet.
Fitch expects continued outflows from prime funds driven by investors in the one month remaining before the reform compliance deadline of Oct. 14. This, in turn, has led to a widening of the yield spread between assets such as Tier 1 90-day commercial paper held by prime funds and the 30-day net yield on government institutional money market funds. At Sept. 12, this spread had widened to 72 basis points from 55 at June 30.
"Fitch believes that elevated liquidity levels, above historical averages, will remain the norm after the reform implementation date as well, since the liquidity fees and redemption gates features of the reform have added a new dimension to fund management," added Fayvilevich.
The presence of these features means that investors will be monitoring weekly liquidity closely, ready to pull cash out of prime money funds on indications of stress. To avoid even coming close to the regulatory threshold of 30%, fund managers will be maintaining buffers to weekly liquidity well above this level.
Ahead of the money fund reform coming Oct. 14, 2016, Fitch updated its rating criteria in December 2015 to address liquidity with new fees and gates. With over $450 billion of money still sitting in U. S institutional prime funds - often this is cash that CFOs and treasurers use to meet payroll, cover other operating costs, and meet capital expenditures - Fitch believes loss of access with the new fees and gates for five days or a haircut to its value is simply unacceptable for most cash managers and that ratings criteria should take timely liquidity into account. In June 2016 Fitch commented that not all rating agencies are placing sufficient emphasis on timely liquidity in their money fund criteria and we believe this could put investors' liquidity at risk.