The Day Has Arrived: As Of Today Prime Money Markets Can Suspend Withdrawals - Here Are The Implications

Tyler Durden's picture

The big day has finally arrived: starting today, as previewed repeatedly over the summer, the SEC's 2a-7 money fund reform adopted in 2014 officially requires many prime money market mutual funds (those that invest in non-government issued assets such as short-term corporate and municipal debt) to float their net asset value. More importantly, these prime MMFs are allowed to delay client withdrawals under adverse market conditions.

The rule aim to prevent the sort of chaos that hit the money market after Lehman Brothers Holdings Inc.’s 2008 bankruptcy, which helped spark the financial crisis. The goal is to give investors a way to monitor a fund’s health by tracking its fluctuating net asset value, and to contain the fallout that could be caused by many investors cashing out at once, the SEC wrote in the final rules.

 As as result, many Prime MMFs are and have been converting their assets to government funds, not buying CDs anymore and moving into Treasurys and agencies. As the chart below shows, nearly $1 trillion in assets have rotated out of prime money markets into government funds, as a result sending Libor rates through the roof, to the highest level since the financial crisis, with consequences that have yet to be determined

Average yields on government money funds are at 0.18%, according to Crane Data LLC. Prime money funds, by contrast returned on average 0.29%, while corporate bank deposits can earn anywhere from 0.15% to 0.30% at large U.S. banks, according to Mr. Klein, of Hightower Treasury Partners, cited by the WSJ.

While companies, pension funds and insurers have traditionally used prime funds as a place to park cash they need for routine purposes, such as paying bills, they are now looking at non-"prime" alternatives. The funds provided slightly better returns than a bank account with little risk.

“Historically corporate treasurers are tasked with investing in a way that they will preserve their principal,” said Jerry Klein, head of the corporate cash management group at Hightower Treasury Partners, an investment-management firm. “That’s one of their biggest concerns.”

As Wedbush's Scott Skyrm notes, while some large funds are likely converting this week, much of the impact has already been priced in by the markets. One thing that is not priced in is what happens to Libor in the future, and how it impacts the $7 trillions in debt that reference Libor.

Christina Kopec, head of retail-product strategy for global fixed income at Goldman, said the large move into government funds may be temporary, as corporate treasurers wait for things to settle down after the new rules take effect.

According to a Goldman report from last week, the trend toward higher LIBOR could eventually be partially reversed as banks develop alternative funding sources, but this process would likely take months to occur. Goldman expects short-end rates in general to be dragged up as the Federal Reserve resumes its hiking cycle and expects Fed Funds to reach 3.25%-3.50% by Q4 2019 pushing 3-month LIBOR to 3.6%, 275bp above current levels.

Others disagree, with banks such as DB and BofA both expecting Libor to decline in coming months as the rotation out of prime into government moderates, and as the recently profiled Japanese banks using CPs and CDs to fund themselves shift to alternative sources of funding, removing upward pressure from Libor.

To be sure, only time will tell if funding markets normalize and financial conditions ease for those who still rely on Libor rates as a benchmark for trillions in debt.

But aside from markets, and those who forecast and trade Libor, how are companies themselves responding to the new regulations?

According to the WSJ, the new money-market fund rules "have made life more difficult for corporate treasurers and chief financial officers" because they face a sometimes unfamiliar array of investment options as they seek both to preserve and earn some return on their collective trillions.

Take the case of Simon Gore, treasurer of budget carrier Spirit Airlines, who has had a relatively simple job over the past several years when he took tens of millions of dollars of company cash and parked it in money-market funds. Gore told the WSJ he has moved money out of some funds and is considering his options for depositing the more than $1 billion of cash and investments on Spirit’s balance sheet.

Gore had previously put almost all of Spirit’s cash in prime money-market funds. Now, he has shifted most of it to money funds that invest in debt issued by the federal government or agencies such as Fannie Mae and Freddie Mac, which aren’t affected by the new rules. He said the prospect of a floating net asset value - which also means client withdrawals can be delayed - caused him to think twice about prime funds. Besides facing the risk of losing money under the new rules, companies would have to record changes in the value of their cash, creating accounting headaches.

Others agree: that the treasurer for MGM Resorts International, Mike Carlotti who had previously put his company's cash into prime funds and bank accounts. The company, which had roughly $2.5 billion of cash at the end of June, has shifted out of the prime funds into government funds. “There’s no compelling reason to be in the prime funds,” he said. The yields on prime funds, while traditionally higher than government funds, are not big enough to justify staying in prime funds, given the hassles that the new rules introduced, he added.

* * *

But while from a fund allocation perspective Prime funds have become less attractive, issuers of LIBOR-referencing debt don't seem to mind. As Bloomberg points out this morning, companies are issuing U.S. leveraged loans at an increasing clip, despite the increase in Libor.

Bloomberg asks rhetorically why these companies would keep issuing Libor-linked debt if they thought they'd be paying a materially higher rate in the near term? "Yes, they may opt to hedge their floating-rate risks through derivatives, and yes, they want to diversify their financing sources, but that's not the whole story. "

The proposed answer: "In many cases, they're still receiving a competitive rate in the loan market, even with the rising floating rate. That's because a growing number of investors have piled into this debt, with the goal of capturing bigger yields as Libor rises. This has meant that the extra spread above the benchmark has narrowed materially over the past six months, offsetting Libor's rise."

It also notes that aside from shifting allocations, companies don't appear to be particularly worried about Libor surging much further. The Fed doesn't seem keen to raise its benchmark rate all that much, and there will probably be some reconciliation between Libor and the fed funds rates at some point.

Meanwhile, at some point companies and investors will take advantage of the arbitrage available between prime and government funds, and likely revert to some pre-Oct 14 state:

The outflows may continue. But at some point, investors will start to return to these funds, attracted by the now higher yields, especially if other rates don't increase.

But perhaps the biggest red light is that at least as of this moment, while the Fed has indicated it's paying attention to Libor's rise, "it appears to have concluded that Libor's wrecking ball has already done most of its damage."

We all know what happens next.

Meanwhile, keep an eye on Libor: now that all the foreplay "rotation" between prime and government funds have largely concluded, what happens next will be critical. Should the levitation continue, it will suggest that the recent blowout in funding costs was more than just a regulatory quirk, and the sleuthing for what is really behind the tightening in financial conditions can begin in earnest, making the Ted-spread meaningful once again

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Jethro's picture

Hmmmm, so...not-so-back-door, preemptive capital controls? Getting the sheep used to the fence, so they'll stay in the pen.

ParkAveFlasher's picture

The solution is to simply draw your money out right now.  The first one out of the burning theater is not panicking.

AlaricBalth's picture

Welcome to the Hotel California Bank. You can check out any time you like, but your money can never leave.

Last thing I remember, I was Running for the door...

 

It's Friday. Enjoy some Eagles.

https://www.youtube.com/watch?v=3394H9tGsoQ

brockhardman's picture

Good thing they cannot rehypothecate gold and silver.  Better stack up.  They also cannot rehypothecate ammo.  Better grab some of that too.

HopefulCynical's picture

How, exactly, is municipal debt a non-government issued asset?

DAFUQ, folks...

Countrybunkererd's picture

We will not be able to leave either.  Find your exit now and make sure it isn't slammed in your face, chained and locked before you use it.  These dirtbags are crazy.  One more thing, keep in mind that if a roundup occurs, we at ZH are high on a list somewhere.  Good luck and God Bless!

Antifaschistische's picture

Will this incentivize the mega corps to keep more money in electronic cash "in the bank" therefore more suseptible to being Cypressed?

Han Cholo's picture

"Man, come on. I had a rough night and I hate the f**kin' Eagles, man!"

        Jeffrey Lebowski

DC Beastie Boy's picture

He's not Lebowski, he's the Dude

Arnold's picture

When I look at the investments my annuities are rolling around, this is really going to screw their model , too.

 

I anticipate that in times of trouble, they will be ill liquid.

auricle's picture

If the boomers have left their money in this long, they don't care to know what is about to hit. 

ParkAveFlasher's picture

No worries, the Boomers mortgaged away their wealth a long time ago.

ToSoft4Truth's picture

What do we do with the cash - bury in batches of 10K and plant bushes on top? 

 

 

stacking12321's picture

no, just hold on to it and wait.

i know, hard for an instant-gratification american to do, but sometime it's the best thing that can be done.

when bonds start failing en masse and the deflationary crash happens and "banking holidays" make it impossible for most people to get cash, your cash will be highly in demand and you'll be able to buy real assets then at a large discount.

there will be a time to deploy dry powder, we are getting close.

Paul John Smith's picture

I cashed out of my "money market" account in 2012 - bought a revolver.

(people deserve what is coming - they've been warned)

https://youtu.be/Pn0WdJx-Wkw

Michigander's picture

I cashed out of my "money market" account in 2012 - bought a revolver.

 

Hope you had some money left after buying that revolver!

dynomutt's picture

Why a revolver?  That'll only take out the first few.

It's important to have capacity.

If the local municipality won't allow high capacity mags, a New York Reload is in order.

Paul John Smith's picture

I did my bi-monthly checking account draining today - I haven't left more than $300 in my checking account since 2012.

SomethingSomethingDarkSide's picture

That's not a bad idea and I will start to do this.  Will help with my non-stacking at the moment, surely.

Yes We Can. But Lets Not.'s picture

Out of the checking account, and into _________?

Kina's picture

I need to start changing all my 50s in to smaller notes.

roadhazard's picture

I wouldn't a fifty is going to buy a lot less in the future.

Seasmoke's picture

They are always 3 moves ahead on the chessboard. Bail ins coming in 2017 

max_leering's picture

yep, just like Putin vs. Odumbo in Syria

Arnold's picture

They are the board, rules and 2/3 the playing pieces.

Calvin Ball.

SpanishGoop's picture

So other people decide if and when i can have my own money at my disposal if i did not put it in my mattress ?

So, what else is new in the world.

 

overmedicatedundersexed's picture

sooo, buy us debt, cause?? short term corp debt funds might look good here.

Ban KKiller's picture

Got very lucky in the past, divorce forced sale of "internet" stocks right before crash. No, I did not see it coming, just FUCKINGDUMBLUCK.  Since then lead, food, monetary metals. Found a great gal on match.com....ok, slight plug so sue me. 

MEANWHILE....             Capital controls are in place and they ARE going to pull the trigger. Timing? Ummm....later. 

artvandalai's picture

Fannie mae and Freddie mac excepted from the rules. Still playing Weekend at Bernie's games with those two.

cowdiddly's picture

The Simmonds Beauty Rest mattress:

"A great night's sleep on the perfect mattress, and you'll be ready for anything."
Vinividivinci's picture

"Adverse monetary conditions"...words.mean.nothing.anymore.

SpanishGoop's picture

"...to float their net asset value"

Tried that too with mine but it sunk to the bottom of the lake.

Don't worry, i remeber where.


meco1999's picture

"Goldman expects...Fed Funds to reach 3.25%-3.50% by Q4 2019"

I guess this means it's peaked and headed for -1% by Q4 2019.

RusBear's picture

Here is whats coming:

An RBS spokesman said: "We are aware that some customers are experiencing issues using their debit card.
"We are working on resolving this issue and apologise for any inconvenience."

BBC news

MrBoompi's picture

These people don't want the rabble to be able to withdraw their funds before the insiders have cashed out.  Whatever the fund, investment, or market, it will be rigged to favor certain people at the expense of others.  If you look at who writes these new rules, you will see who is being protected and who is being exposed to greater losses.  You may believe the SEC themselves came up with these rules.  That's a laugh.  

bookofenoch's picture

Gates slammed shut.  The sheeple are penned.

We Are The Priests's picture

This really should have been the headline of the article

meco1999's picture

Goldman prefers the affectionate term "muppets."

Cardinal Fang's picture

I didn't see the part about express liquidity for donations to The Clinton Foundation / Clinton Global Initiative / DNC.

Scooby Doo's picture

It is so routine that no one thought it necessary to state the obvious.

Vinividivinci's picture

"...suspend withdrawls..."..."here are the implications"...
Don't worry, THIS "deplorable" understands full well the implications...

Apocalicious's picture

Idiots. Let's "fix" the money market sector (which isn't even broken) by totally destroying it! Sounds good! 

numapepi's picture

Regulation is always and everywhere designed to give some politically favored market participant an advantage in an otherwise fair exchange.

http://incapp.org/blog/?p=2170

LawsofPhysics's picture

Define "money"...

Don't overthink this sheeple.