Econintersect: Looking at ETF and mutual fund data, it is clear that investor enthusiasm for stock and money market mutual funds (and stock ETFs) has been waning. However, there still appears to be money flowing into bond accounts, even with all the talk about a "bond bubble".
With regard to money market funds the decline in investment totals may be driven by loss in confidence in credit markets and low interest rates. It also may be a result more recently from concern that the guarntee of principal that has been implicit for decades and the high liquidity of money market funds may both cease to exist, at least in the forms they have had in the past.
In order to make the money market industry "safer" and "more fair", the Federal Reserve Bank of NY recently announced its support to limit money market investors from being able to withdraw all of their funds at once. Investors should be required to have a "minimum balance at risk" when investing in money market funds. The funds would set aside these assets. Investors would have to give proper notification before withdrawing their minimum balance. In this case, 30 days.
These new rules, if enacted, would protect small investors and wild volitility in the money markets. Just this week money market mutual fund assets fell by an $12.25 billion to land at $2.53 trillion. Institutional investors withdrew $11.9 billion. The mutual fund industry opposes any changes to the current system.
These modifications are already included in a proposal currently being presented to the U.S. SEC and would be in addition to the 2010 SEC regulations which lifted liquidity requirements, shortened normal maturities and created new disclosure rules.
These rules would require money funds to:
- require notice before withdrawing all funds
- have minimum deposits
- create capital safety nets in case something happened
- create additional fund withdrawl requirements
Another proposal considering to allow the net asset values of each share to be able to oscillate on a daily basis. This would be a clear turn away from the present $1/share value which has been imbedded in the industry's workings. Limits on redemptions and capital buffers would most likely be considered in the second proposal. This would remove money market funds from the status they have enjoyed as "good as cash". Something is not "good as cash" if its value in cash is allowed to float and if its liquidity is restricted.
ICI, which represents the mutual fund industry's interest, does not like the ideas included in these proposals. In the view of Chief Executive Paul Schott Stevens, these proposals:
"will undermine the core features of money market funds that investors seek—stability, liquidity, and convenience."
"They will drive retail investors back to the fixed, low rates paid by banks…institutional investors to less regulated, higher-risk alternatives…and fund companies out of the business."
Stevens went on to argue these changes would hurt investors. The new requirements would take more life out of investors' yields.
"The cost of building or paying for capital buffers would come from investors' yields—yields that have been near zero for more than 30 months."
According to statistics gathered by ICI, the net assets of money market mutual funds have plunged 33.7% from the end of 2008 to yesterday. $3.83 trillion to $2.54 trillion. That is a compound anualized rate of decline of 10.8%.
The more recent decline (from o7 March to 18 July this year) is shown in the following graph:
The annualized rate of decline is 7.7%, significantly less than the average since the beginning of 2009. Thus, the current debate about the reformulation of money market mutual funds does not seem to have increased the withdrawal rate from money market mutual funds. The suggestions that they might becomes less liquid has not created a "run" on the funds. They just seem to be continuing a decline in assets like a chinese water torture.
Where are the funds going after they leave the money market funds? There are no tags that follow each dollar so we have to take a look on a macro scale.
First, they could be going to regular bank deposits, CDs and savings accounts. Checking the St. Louis Fed FRED data base indicates this is not the case. The total of commercial bank increases in loans and leases for the past five months is $127 billion, which, to first order approximation, creates that amount of additional deposits. But Total Savings Deposts at All Depository Institutions have declined by $88 billion. The total of all checkable deposits has increased by $12 billion. So the net change in bank deposits over the last five months is of the order of -$203 billion, after removing deposits created by new loans and leases.
They could be going into other mutual funds and ETFs. Those have increased by about $155 billion YTD through the end of May, see tables below. So that means we have something of the order of $48 billion (+/-) unaccounted for. These could have gone into individual stocks and bonds or CDs. maybe there have been more commodity account investments, or hedge funds.
The point is that about $330 billion has moved out of cash or near cash savings ($127 billion out of money market mutual funds) and $203 billion (effectively, when adjusted for new loans and leases) from bank deposits. Only about half of that amount has ended up in other classes of mutual funds and ETFs.
What is remarkable in the tables above is the continued massive shift of investment into bonds. U.S. investors have also moved their allocations significantly lower for non-U.S. equity ETFs.
- Securities Technology Monitor: Money Fund Industry Shrinks by One-Third
- Securities Technology Monitor: New York Fed Staff Backs Limit on Money Fund Withdrawls
- Financial IQ: New York Fed Backs Withdrawl Limit for Money Funds
- St. Louis Fed: FRED Data Base