After years of deliberations and relentless scheming on how to make the multi-trillion money market funds less attractive, two weeks ago the SEC finally passed, with much industry pushback in a close 3 to 2 vote, regulation that among other things implemented gates on various money market funds [17], a move which both we and SEC commissioner Kara Stein explained [18]would accelerate the exodus of funds out of MMFs and increase the risk of financial instability in a rickety, house of cards, system. Of course, forcing money flows out of MMFs and into risky assets was the goal of "regulators" and the Fed all along - after all someone has to come in and pick up the baton from a Fed which is no longer in the business of injecting nearly $100 billion in the stock market every month: what better replacement than a forced reallocation out of the $2.6 trillion money market industry.
“We’re definitely worried about breaking the buck,” Verett Mims, assistant treasurer at Chicago-based Boeing, said in a telephone interview on July 30. “That’s our biggest problem, the notion of principal preservation.”
The state of Maryland may also refrain from investing in prime money-market funds as a result of the floating-price rule, according to its treasurer, Nancy Kopp.
The changes “make these money market funds less usable, if not usable at all as investment vehicles,” she said in a July 22 conference call organized by the Chamber of Conference.
Sadly for the central planners, while they succeeded in the first part of their plan, namely getting investors to flee from money market funds, they failed in getting the money to flow into the desired asset class: stocks. Instead, money market funds are rushing at an unprecedented pace into that other most hated by the Fed, after precious metals of course, asset: Treasurys. Most hated because declining yields disprove all the propaganda about an improving economy as they do, or at least did, imply deflation down the road: hardly the stuff robust 3%+ recoveries are made of.
As Bloomberg reports [19], "one of the biggest winners in the push to make money-market funds safer for investors is turning out to be none other than the U.S. government." Actually, no, because the fate of the US government is now far more closely linked to the stock market ponzi than it is to the bond market, which after all the Fed can monetize directly. Allowing Yellen to legally buy stocks in the open market (as opposed to through Citadel) however, would require changing the Fed's charter.
Rules adopted by regulators last month will require money funds that invest in riskier assets to abandon their traditional $1 share-price floor and disclose daily changes in value. For companies that use the funds like bank accounts, the prospect of prices falling below $1 may prompt them to shift their cash into the shortest-term Treasuries, creating as much as $500 billion of demand in two years, according to Bank of America Corp.
Some examples include Boeing and the state of Maryland who are already looking to make the switch to avoid the possibility of any potential losses. Bloomberg notes that "with the $1.39 trillion U.S. bill market accounting for the smallest share of Treasuries in six decades, the extra demand may help the world’s largest debtor nation contain its own funding costs as the Federal Reserve moves to raise interest rates." Well, yes: but that's not what the Fed wants - it would much prefer modestly rising rates if that means soaring stocks to keep the equity bubble inflated. After all pundit after pundit keeps pounding the table on the "bond bubble", which of course means that the real bubble is in stocks.
“Whether investors move into government institutional money-market funds or just buy securities themselves, there will be a large demand” for short-dated debt, Jim Lee, head of U.S. derivatives strategy at Royal Bank of Scotland Group Plc’s capital markets unit in Stamford, Connecticut, said in a telephone interview on July 28. “That will lower yields.”
He predicts investors may shift as much as $350 billion to money-market funds that invest only in government debt.
Bank of America, which also has hated Treasurys as an asset class since mid-2013, also chimes in:
Investors using prime funds to manage their idle cash may find floating prices an unnecessary risk when differences in fund rates are so minimal, said Brian Smedley, an interest-rate strategist at Bank of America in New York. He estimates about half the $964 billion held in institutional prime funds will flow into those that only invest in government debt and yield about 0.013 percentage point less, before the new rules become fully effective in 2016.
With demand set to surge, supply of high quality collateral, aka Treasurys, continues to decline:
As more companies opt for the safety of government debt, the supply of Treasury bills stands to decrease further. With the Obama administration projecting the deficit will narrow to a six-year low of $583 billion, the Treasury Department has pared its issuance of the short-term debt.
U.S. government securities due in four weeks to one year account for just 11.5 percent of the $12.1 trillion market for Treasuries, the smallest proportion in data compiled by Barclays Plc going back to 1952. As recently as 2008, bills accounted for more than third of the total.
This lack of supply, coupled with the money-market fund shift, mean short-term rates will remain low, Deborah Cunningham, the head of money-market funds at Pittsburgh-based Federated Investors Inc., which oversees $245 billion in short-term securities, said in a July 31 telephone interview.
It also means that the latest self-fulfilling prophecy, namely that MMF cash will flow into bond funds, will be actualized, much to the chagrin of the Princeton economics department.
Those curious what recent MMF regulation change means for various asset classes are encouraged to skim the following table from JPM:
[20]
But before we declare victory over central planning, don't forget that the "regulators", the Fed and the SEC, are already contemplating the next step: recall that as we reported in June [21], "the Fed is preparing to impose "exit fee" gates on bond funds, in what, the official narrative goes, is an attempt to prevent a panicked rush for the exits. Of course, this is diametrically opposite of what the truth is."
Here one should clearly ignore here what the Fed itself said about the "logic" behind such an action, and how that too will ultimately backfire.
Our results have broader policy signi cance. Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs. Much of the wider policy signi cance of that risk is beyond the scope of this paper, since our model does not incorporate the large negative externalities associated with runs on financial institutions, including MMFs. But one notable concern, given the similarity of MMF portfolios, is that a preemptive run on one fund might cause investors in other funds to reassess whether risks in their funds are indeed vanishingly small.
And why worry about "backfiring" when the Fed already knows it is all in and any diversion from the herding path will merely result in the systemic reset arriving that much faster.
The bottom line is simple: the Fed will continue herding investors as long as it takes: first out of the money market funds, then out of bond funds, until the only possible investment product remains triple digit P/E stocks, and everyone is all the biggest market ponzi bubble of all time.
[22]
