“Recently, the banks were forced to bulk-up on U.S. Treasuries, as a result of new liquidity regulations. Now, the money-market mutual funds are having to do the same, even though T-bills have NO current YIELD…
…I am thinking, its bad enough that the Federal Reserve is buying so much of our debt, but now we are also requiring our banks and money market funds to do the same? And many (if not all) of them seem to be doing it without regard to price/economics. I am not saying this is an intentional effort to force American financial institutions to buy U.S. sovereign debts (e.g. “monetize the debt”). I am saying this may be an un-intended consequence of financial regulations that are designed to provided financial market safety; maybe they end up distorting markets and making us less safe? Do we have any real, material, private market buyers of U.S. Treasury debt these days?”, Mike Perry, former Chairman and CEO, IndyMac Bank
October 19, 2015, Katy Burne, The Wall Street Journal
Money Funds Clamor for Short-Term Treasurys
Fidelity’s $115 billion Cash Reserves fund plans to convert its entire portfolio to U.S. government debt by Dec. 1
Fidelity’s Cash Reserves fund would become one of the first to get ahead of rules set to take effect next October that are designed to safeguard the money-fund industry. PHOTO: ERIC THAYER/REUTERS
By Katy Burne
Behind the epic hunger for government debt is a rule change that has Fidelity Investments and other money-fund managers hustling to snap up short-term Treasurys and related debt.
Fidelity’s $115 billion Cash Reserves fund, the world’s largest money fund, said it plans to convert its entire portfolio to U.S. government debt by Dec. 1, becoming one of the first to get ahead of rules slated to take effect next October that are designed to safeguard the money-fund industry.
The moves by the money funds, analysts say, are among several factors currently juicing demand for short-term government debt, driving some Treasury-bill yields to zero.
“You could hear a giant sucking sound of money moving into government securities” as several funds convert to all-government holdings to avoid the new restrictions, said Peter Crane, president of money-fund tracker Crane Data.
Money-market fund managers overseeing $200 billion in assets have already announced plans to convert, and as much as $1 trillion of money-market fund assets could be caught up in the conversions, said Mr. Crane.
Purchases by Fidelity’s fund, and funds like it, are intensifying the demand for short-term government-related debt at a time when weak economic growth and tighter banking-industry rules already have pushed Treasury-bill yields near zero and, in some recent cases, into negative territory.
The U.S. this month has auctioned one- and three-month Treasury bills at a zero yield, a rare development even in the low-inflation postfinancial-crisis world.
The search for Treasurys is also boosting the prices of the next best thing: debt backed by housing-finance firms Fannie Mae and Freddie Mac, known collectively as agency securities. Yields on Fannie Mae’s agency discount notes maturing Jan. 4 fell to 0.132% Friday, from 0.233% a month ago. Yields on notes with the same maturity issued by the Federal Home Loan Banks’ Office of Finance, created by Congress to facilitate mortgage lending, fell to 0.08% from 0.239%.
“There’s no yield to be had in [Treasury] bills,” said Bill Lista, head of U.S. macro product sales Guggenheim Securities in New York. Agency debt is “the only yield alternative.”
Fidelity is selling bank certificates of deposit, among other debt, and has been buying Treasury bills and government-agency debt in recent months, according to Crane Data. Agency debt was 41% of the Cash Reserves fund’s portfolio at Sept. 30, up from 19% in July.
The transition of the Cash Reserves fund “is progressing smoothly,” said Nancy Prior, president of Fidelity’s fixed income unit. She said “there continues to be sufficient supply of these instruments for the fund to purchase.”
The rules driving the changes aim to protect the $2.7 trillion money-fund industry from a repeat of the 2008 investor withdrawals that resulted in one fund “breaking the buck,” or reporting a net asset value below the full face value of their holdings.
The rule changes won’t apply to funds that invest only in the debt of the federal government and agencies such as Fannie Mae and Freddie Mac.
Demand from many corners is adding to structural factors also behind the yield declines. The supply of Treasury bills is already 30% below where it was in 2009, and constitutes just 11% of total marketable U.S. Treasury debt, a record low in Barclays PLC data going back to 1952.
The Treasury Department said in May it wanted to issue more Treasury bills to meet the demand, but the latest standoff in Congress over whether to raise the government’s borrowing limit has prevented it from doing so.
“The bill market is experiencing a temporary but nasty bout of turbulence: rising demand coinciding with a steep reduction in supply,” said Joseph Abate, money-markets analyst at Barclays.
Banks also are seeking high-quality liquid assets to cover projected deposit losses over 30 days, under new liquidity rules. Units of J.P. Morgan Chase & Co. and State Street Corp. have begun charging customers for holding some deposits, causing some to park their cash in money-market funds and other alternatives.
James Tabacchi, president of South Street Securities, which handles securities-repurchase transactions in which firms swap cash for Treasurys and other high-quality collateral, said he had seen a 30% increase in the volume of cash deposits flowing in from corporations in search of short-term investments collateralized by Treasurys and agency debt.
The hunger for government debt is a boon for the Treasury’s ability to finance the U.S. federal budget deficit, but is creating a bottleneck on Wall Street among those who need the assets to comply with new rules or as collateral to back trades.
Money-market funds can get Treasurys through the Fed’s overnight reverse-repurchase program. The Fed holds nearly $2.5 trillion of government bonds as a result of its postcrisis bond-buying programs.
Money-market funds, including Fidelity Cash Reserves, have piled into the Fed repo facility at a record pace. U.S. money-market funds’ lent a record $399.2 billion of cash into the Fed repo program as of Sept. 30, in part to get Treasurys. That was up from the previous record of $352.6 billion as of Dec. 1, 2014, according to Crane Data.
Some Fed officials have expressed concerns that, in times of tumult, money-market lenders could crowd into the Fed repo facility seeking safety and withdraw their funding from banks.
In a downswing, a shortage of high-quality assets intended under postcrisis regulations to make markets safer could be potentially destabilizing by “exacerbating asset price spirals,” said Anthony Carfang, partner at Treasury Strategies Inc., a Chicago consultant to corporations and financial firms.