Here’s What A $1 Trillion Money Market Fund Exodus Looks Like

in Credit by

We’ve talked quite a bit about the money market fund reforms that go into effect next month.

If you aren’t familiar, it’s a pretty simple concept. If you’re a prime fund (i.e. not a fund that invests solely in government bonds but instead buys CDs and corporate commercial paper), you’re going to have to start reporting a floating NAV. From October 14 on, $1 no longer necessarily equals $1 in prime funds anymore. 

Needless to say, that’s led to a veritable exodus in favor of government MMFs – and it ain’t over yet. Have a look at the following chart from Citi which shows just how seismic of a shift this truly is:


(Chart: Citi)

So that’s almost $1 trillion in funds that won’t be available for unsecured lending. Which in turn means you can probably expect this to continue apace:



    • So-called prime funds are now becoming basically ultra short-term corporate bond funds with durations of around 7-30 days and bank “guarantees” of daily liquidity.

      So starting on October 14th, 2016, that “guarantee” is more explicitly the credit quality of our dear (zombie) banks.

      Something similar in muni money market funds: actual municipalities do issue floating rate bonds, but often with long maturities, up to 30 and 40 years, maybe even 50; the short-term (daily, 7-30 day) liquidity is “guaranteed” by our dear (zombie) banks through various instruments such as letters of credit or stand-by commitments, etc.

  1. They’re not.

    And, for fun, get a copy of your MMF’s investments, with names such as Tulip Funding.

    An excerpt from 2000 commentary by Prudent Bear:

    …We have recently been taking a closer look at a few money market funds and are alarmed by what we see. One fund from a major US brokerage had 40% of its assets in repurchase agreements. Repurchase agreements, or “Repos”, are a key financing arrangement used by the leveraged speculating community. Looking at another major brokerage’s money market fund, it had 37% of its assets in “Repos”, and 24% in commercial paper from the likes of Aegon Funding Corp, Old Line Funding Corp, Greenwich Funding Corp, Tulip Funding Corp, and several Wall Street firms. We looked at another large fund that held significant commercial paper holdings from a long list of “Funding Corps” including Central Capital Corp, Corporate Asset Funding, Amsterdam Funding Corp, Park Avenue Receivables Corp, Delaware Funding, Edison Asset Securitization, International Nederland Funding Corp, and General International Funding, to name a few. These funds also have large exposure to Fannie Mae, Freddie Mac, the Federal Home Loan Bank System, GE Capital and the major brokerage firms.

    Last week we made the case that the US financial sector is one massive and precarious interest rate arbitrage. Well, it is clear…

    If that’s changed for the better, it’s news to me.

  2. I keep seeing articles highlighting these outflows and talking about the MMF reforms; but nowhere have I seen a clear explanation of what the results could actually mean? Why is this so ominous?

    Is it that the short-term corporate paper market is about to become short on funds to lend and we’ll see some kind of liquidity crisis? Or will LIBOR have to keep rising… in which case, why are we so worried about that?


    • NG, please explain your broad brush denunciation of Obama. In our system of checks and balances, a federal administration is but one segment of the entire picture. Thanks…..

  3. NG- Really Obama? It’s all and I mean all parts of this screwed up mess .Nobody is to blame and everybody is to blame. $$$$$$ pure greed is only the symptom $$$$$ More,more,more and even some more $$$$$$. Honesty of any sort has left the building except The H-man of course.

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