Prime money market fund assets increased over the past week, offering brief respite to an industry that has suffered sizeable outflows over the past six months, with impending regulatory reform expected to drive more money out.
For the week ending April 27, prime money market funds, which have the freedom to invest in a broader range of short-dated securities than their government counterparts, saw inflows of $6.82bn, taking their total assets to $1.21tn, according to data from the Investment Company Institute. Government funds also saw an increase, of $7.24bn, taking total assets to $1.28tn, reports Joe Rennison in New York.
Government funds surpassed prime funds by total assets for the first time in February this year, driven by impending regulatory changes that come into effect on October 14 and that are pushing investors out of prime funds.
Since the end of October 2015, prime money market funds have experienced consistent month-on-month outflows, falling from $1.46tn to $1.21tn. Despite this week’s uptick, money market funds are still down for the month of April, from $1.25tn on March 30.
Moody’s Investors Service warned on Thursday that outflows from prime money market funds “will pick up steam” in the current quarter:
Total assets in the 10 largest Moody’s-rated US Prime MMFs held steady in 1Q 2016, but we now estimate that up to 50% of remaining investor assets will leave funds between now and 14 October. Investor-directed outflows are likely to pick up pace towards the end of 2Q 2016 and be lumpy, since money fund investors tend to act together. Total assets in the 10 largest Moody’s-rated offshore US Dollar Prime funds fell 10% in 1Q 2016 as investors sought out higher-yielding opportunities for their cash following year-end.
US Prime MMFs will limit maturities past October ahead of major regulatory reforms. While the timing of the next rate hikes by the US Federal Reserve remains uncertain, US Prime MMF weighted average maturities (WAMs) will remain short and likely tighten further. Prime fund managers will shorten WAMs in anticipation of a potential Fed action in June, but more importantly to remain liquid in anticipation of a big wave of investor outflows heading into 3Q 2016. We expect prime fund managers to limit investments in securities with maturities past October as they proceed cautiously given the uncertainty of how the transition to the new prime fund structure will go.
Liquidity balances in US Prime MMFs will balloon in 3Q 2016. While we recently increased our estimates for reform-related outflows, we expect prime fund managers will ratchet up liquidity balances as we move closer to October to avoid the need to go into the secondary market to raise liquidity to meet investor redemptions. We would expect most US Prime MMFs will be operating with weekly liquid asset levels well above 40% of total assets come 3Q 2016. The recent implementation of the daily and weekly liquid asset disclosure, as part of the July 2014 reforms, also provides more transparency around funds’ liquidity positions, which should lead to more conservative liquidity management.