A few days ago we pointed out that special repo rates are now negative. Fine. How big is special collateral after all - in the grand scheme of things it is a tiny market. Well, as of today, General Collateral just hit -0.002, the lowest rate in the history of the series, and in our humble opinion this is a far more troubling indication of broad liquidity developments than the 1 month bill touching on -0.001%. Simply said, this confirms our speculation that there is now a massive rolling of funding out from money markets and into any market that will accept the maturing short term funding without it being rolled due to European contagion concerns. We said: "this latest move has unpleasant implications for money market managers, who unable to find yield in repo (0.01%?) will now be forced to look for higher yielding assets, and thus expose them to even more contagion risk once the house of cards falls, facilitating the "breakage of the buck" once again just like what happened in the aftermath of the Lehman catastrophe, and snarling all global fund flows, forcing the Fed to become liquidity provider of last resort." As of today, this prediction is well en route to being confirmed.
After we have been pounding the table on this threat for over a week, finally this topic has gotten sufficiently relevant that Bloomberg decided to dedicate an article to it:
Institutional investors pulled out of U.S. prime money market funds at the fastest pace in 15 months as they shifted assets to funds that invest only in U.S. government-backed securities.
Institutional funds eligible to buy corporate debt lost $39 billion to net withdrawals in the week ended June 28 and $75 billion in the past two weeks, according to data from research firm iMoneyNet in Westborough, Massachusetts. Institutional money funds that buy only U.S. government-backed securities gathered $27 billion in net deposits
The logic for the scramble out of money funds is as expected: Europe.
The European sovereign debt crisis has raised concern that prime money market funds may suffer losses if sovereign defaults cause big banks to fail to meet obligations. Greek Prime Minister George Papandreou today clinched enough votes to pass the first part of an austerity plan aimed at meeting European Union aid requirements and staving off default for his debt- laden nation.
A Greek default would pose a potential threat to money funds because they have lent to European banks that, in turn, have lent to Greece and other heavily indebted European countries. U.S. money funds eligible to buy corporate debt had about $800 billion, or half their assets as of May 31, in securities issued by European banks, Fitch Ratings estimated.
And yes, it is a big move:
The $39 billion withdrawal was the most pulled from prime institutional funds in one week since investors took $42 billion out in the week ended March 16, 2010.
What is surprising is that in a closed-end liquidity system, the excess money market funds, which have certainly gone into repo, have so far not invested one cent into equity markets, and instead have pushed aggressively into general fixed income: the same product which for the past 2 weeks has seen dramatic pain courtesy of one after another worse auction and a general blowing out of the curve now that everyone is wondering how soon before Bill Gross is finally proven right.
Per ICI, domestic equity funds saw an outflow of $4.3 billion in the week ended June 22: the 9th consecutive week of outflows, during which time mutual funds were met with $27 billion of redemptions. Is there any wonder the Fed would do everything in its power to push the market higher at the end of the month and prevent a redemption-driven liquidation drop in the market, facilitated by near record NYSE margin debt?
Is it time to start guessing who will break the buck first?
For those asking, here is a long-term chart of GC: