Editor's note. The Fed on Monday, March 23, expanded its efforts to support credit markets, including establishing several new credit facilities, as well as signaling its intent to buy an unlimited amount of Treasury and mortgage-backed bonds.
The Money Market Mutual Fund Liquidity Facility the Fed launched last week provided some good news to nervous fund managers who were preparing to dump short-term commercial loans so they could meet redemptions, money market specialist Peter Crane says. That should help CFOs of companies that rely on commercial paper to help fund their payroll and other short-term operating costs.
Mutual funds saw daily outflows jump to $21 billion and then to $24 billion last week before the Fed took action, forcing fund managers to consider selling their commercial paper in advance of worsening conditions, said Crane, president of Crane Data, which tracks money market mutual funds.
"We were reaching the point where it was getting a little dangerous," Crane said in an Association of Finance Professionals (AFP) webcast on Friday. "Had outflows from prime funds continued or gotten heavier, it would have been very dangerous and we were starting to pass into that zone."
As a result of the quick action, fund managers have a source of credit to meet redemptions without having to sell the debt comprising their mutual funds. Had they started dumping that commercial paper, companies that rely on the funds for short-term financing to meet payroll and other operating costs could have faced a cash crunch just as they were navigating the uncertain business environment caused by the novel coronavirus outbreak.
One of the immediate effects of the Fed action was to bring the outflow from money market funds back down to $21 billion, and Crane said it likely will keep falling. "I would expect them [going forward] to be less than $21 billion and that’s all good news," he said.
The facility gives the Fed authority to provide up to $10 billion in non-recourse credit protection until the end of September. It’s open to funds affiliated with banks, bank holding companies, U.S. branches of foreign banks, and brokers and dealers of the funds. But, Crane says, funds affiliated with non-bank investment companies like Invesco and Federated Hermes should be able to tap into it too by transacting with a bank partner intermediary.
"Instead of a letter of credit, [non-bank affiliated funds] will be able to, in effect, use the Fed shield to be able to give money to the fund to hold on to the security,” he said. “So, I believe the non-bank affiliated funds will be able to access this."
Even if they can’t, he said, they benefit because of the stabilizing effect the facility is having on the market.
"If the vast majority of money fund providers are bank affiliated, that will loosen the market and raise prices for everyone,” he said. “So, this should rest them easy. It’s a little bit of release across the board, and that’s all they need to let the portfolios roll."
The Fed facility only applies to prime, A1/P1/F1-rated funds, which are not as liquid as government money funds but are close.
Crane said he expects data to be released later this week that will show record amounts of money moving into government funds as investors look for a safe haven. Now that the Fed has shored up money market mutual funds, that inflow into government funds should ease, which will help stop the slide in yields the market was seeing, although that won’t be reflected right away.
"You’re going to see yields on those [government funds] pushed down towards zero," he said. "You may even — we’re that outflow [from money market funds] to continue — you might even see the government fund shutting their doors or threatening to go negative" [on yields].
The Money Market Mutual Fund Liquidity Facility is the second of two facilities the Fed established last week. The first, the Commercial Paper Funding Facility, creates a special purpose vehicle to buy both unsecured and asset-backed commercial paper companies issue to help fund their operations. Like the Money Market Fund Facility, it's limited to investment-grade paper, so smaller or otherwise unrated companies won't benefit. That can be considered a weak point to the Fed's actions if a company that sells its paper to the Fed vehicle partners with smaller companies that don't have access to a similar lifeline.
That concern notwithstanding, the two liquidity facilities can help ease some uncertainty among CFOs about the market for their commercial paper to cover their short-term costs.