SUPERNEWS

Macro

Money Funds Shift to Govt Securities, $500B Move Ahead of SEC Rules

$6 trillion US money market braces for SEC rule changes, shifting billions into government securities and reshaping investment strategies.

By Max Weldon

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5/8, 13:24 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
BlackRock, Inc.
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Key Takeaway

  • Money funds are shifting to government securities ahead of SEC rule changes, reducing demand for riskier assets like commercial paper.
  • Institutional prime fund balances expected to drop by 63% to 75% by October, boosting government-only fund balances by $400 billion to $500 billion.
  • Impact of the reforms anticipated to be less severe than in 2016 due to a more diversified buyer base and smaller share of institutional prime funds.

Money Market Shifts Ahead of SEC Rules

Funds are actively adjusting their strategies in the $6 trillion US money market in anticipation of new Securities and Exchange Commission rules set to take effect in October. These changes are expected to increase the cost of withdrawals during financial stress, prompting a significant shift towards government securities. Notably, five major funds, including the two largest, have announced plans to either convert to government-only holdings or shut down. This pivot is likely to elevate demand for Treasury bills, agency discount notes, and repurchase agreements, while diminishing interest in commercial paper and certificates of deposit. The impending rule adjustments could potentially lower short-term rates, making the Federal Reserve's overnight facility more attractive for cash investments.

Institutional Prime Fund Adjustments

The landscape of institutional prime funds is undergoing a transformation, with assets projected to drop significantly by October. Barclays estimates a 63% to 75% decrease in institutional prime fund balances, resulting in a shift of $400 billion to $500 billion into government-only funds. This reallocation will diversify demand across Treasuries, agency debt, and repo markets, potentially absorbing the net issuance in the latter half of the year. The transition is expected to be less disruptive than the 2016 reforms, thanks to a more diversified buyer base for commercial paper and a smaller proportion of the prime money-market space occupied by institutional prime funds.

BlackRock's Active ETF Strategy

BlackRock's adjustment to its model portfolio has spotlighted the U.S. Equity Factor Rotation ETF (DYNF), turning it into one of the market's fastest-growing active ETFs. This move aligns with the broader trends of rapid growth in model portfolios and active ETFs. DYNF's inclusion in BlackRock's target allocation model portfolio has attracted significant net inflows, showcasing the fund's performance and the strategic shift towards active management within model portfolios. Despite the higher costs associated with active strategies, DYNF has outperformed some of BlackRock’s index ETFs, highlighting the potential benefits of active fund management and factor rotation strategies.

Treasury Market's Neutral Stance Amid Fed Debate

The Treasury market is currently navigating a period of uncertainty, with traders adjusting their positions in response to evolving Federal Reserve rate hike debates. Recent soft US jobs data and comments from Jerome Powell have led to a more neutral market sentiment, with a notable shift away from bearish short positions on US two-year notes. Strategists from major banks are realigning their strategies, reflecting a divergence in expectations for the Fed's policy direction. The market's cautious stance is underscored by the recalibration of positions and sentiment, as participants prepare for various rate scenarios in the coming months.

Street Views

  • Joseph Abate, Barclays Plc (Neutral on US money market):

    "When this reshuffling occurs depends on two factors: the timing of planned conversions and how long institutional investors are willing to stay in soon-to-be converted funds. So far there are only a few signs of the shift from credit to government assets or fund outflows."

  • Teresa Ho, JPMorgan Chase & Co. (Neutral on prime money-market space):

    "The scale of the impact as a result of reforms will not be anywhere close to what we saw in 2016... That’s not to say the risk of wider spreads could not transpire in the coming months, but we believe they will be driven by other factors."