Federal Reserve Gives Emergency Aid to Mutual Funds

Mark

From the NY Times

"WASHINGTON — The Federal Reserve said late Wednesday night that it would offer emergency loans to money market mutual funds, its latest in a series of steps to keep the financial system functioning and prop up the economy as it spirals toward recession during the coronavirus pandemic.

The Fed said in a release that it would establish a so-called Money Market Mutual Fund Liquidity Facility, which would be backed by $10 billion from the Treasury Department. That program joins a similar lending one for banks, established this week.

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msf

Here's the Fed PR release:
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200318a1.pdf

I'm surely in the minority here, but my reaction is: how dare they!

The federal government bailed out MMFs a decade ago and swore it would never do it again. Investors were warned that they were taking risks by investing in prime MMFs. Those who did use these MMFs were told clearly and pointedly that they risked redemption fees and/or delays on withdrawals that could be imposed to preserve the value of their funds.

At the very least, require the funds to pull these triggers before getting more nonrecourse loans, i.e. more guarantees from the Treasury.

Now we're being told that these Obama administration regulations were all a lie, all for show? Meanwhile, Congressional Republicans have worked repeatedly to get rid of Dodd-Frank.

Note that this lending program applies only to prime MMFs. That is, the ones that the new MMF regulations were supposed to safeguard.

Mark

Well a minority of 2 then for all the reasons you stated.

Mona

msf said:

Note that this lending program applies only to prime MMFs. That is, the ones that the new MMF regulations were supposed to safeguard.

msf, thanks for your post.

As I am a bit confused, would you please expound on this part of your post. I seem to get it that this program applies to a fund such as Vanguard Prime Money Market. Being it would not apply to a fund such as Vanguard Municipal Money Market, what is your opinion of its risk in these times?

Mona

msf

That's a good question. These days I haven't been paying too much attention to muni MMFs because they're paying less than online bank accounts (after tax). So it doesn't make much sense to take on their additional risk. (Aside from considerations like Medicare IRMAA where gross income is what matters.)

It's hard to read into the government announcement.

It could be that the wording was sloppy and the intent was to cover prime and muni MMFs. (I checked the N-MFP filing for VMSXX to verify that it is not considered a prime fund.)

It could be that the government doesn't consider muni MMFs to be at enough risk to offer this loan option.

It could be that the government does consider muni MMFs to be at higher risk but doesn't want to handle non-federal securities as collateral for its loans.

FWIW, the true NAV of VMSXX over the past six months has been consistently over $1, ranging between $1.0001 and $1.0004 until the past three days where it dropped to $0.9998, $0.9995, and $0.9992 as of yesterday. Fidelity's FMOXX has generally had a higher NAV ($1.0012 to $1.0017), but it too has fallen in the last week from $1.0014 to $1.0007, likewise below its normal range.

Perhaps it is time to start watching these figures more closely.

sma3

I assume the risk that municipal governments will fail is considered pretty unlikely now, as their tax revenues will take moths to decline. How many of them have revenue bonds for example on airports ? Hard to tell but maybe I should have kept those book like prospecti Vanguard sends me

Mona

This seems concerning for two reasons.

First, as msf points out, we see three straight days of a decline. The 16th, 17th, and yesterday. I can't find another date that the Daily Market Value fell below $1. Is this a trend?

Second, is it correct to say that if one sold yesterday you would get less than $1 per share (0.9992)?

The ER is 15 basis points. Can Vanguard prop up the fund by reducing the expense ratio?

Mona

Crash

As rono stated: this will be a DEPRESSION. I wonder: will all of this stuff serve--- eventually--- to bridge the divorce between Wall St. and Main St.? I will be pleasantly surprised if society pulls itself out of this black hole sooner than a few years from now. YEARS. Yes, we have the FDIC SIPC, government rescue-projects..... And the markets have for years already been disconnected from reality. "Fundamentals" is almost a dirty word. The whole enterprise has been a fragile balancing act. Are we going to be watching the slow-motion unwinding of it all?

Mona

msf said:

That's a good question. These days I haven't been paying too much attention to muni MMFs because they're paying less than online bank accounts (after tax). So it doesn't make much sense to take on their additional risk. (Aside from considerations like Medicare IRMAA where gross income is what matters.)

It's hard to read into the government announcement.

It could be that the wording was sloppy and the intent was to cover prime and muni MMFs. (I checked the N-MFP filing for VMSXX to verify that it is not considered a prime fund.)

It could be that the government doesn't consider muni MMFs to be at enough risk to offer this loan option.

It could be that the government does consider muni MMFs to be at higher risk but doesn't want to handle non-federal securities as collateral for its loans.

FWIW, the true NAV of VMSXX over the past six months has been consistently over $1, ranging between $1.0001 and $1.0004 until the past three days where it dropped to $0.9998, $0.9995, and $0.9992 as of yesterday. Fidelity's FMOXX has generally had a higher NAV ($1.0012 to $1.0017), but it too has fallen in the last week from $1.0014 to $1.0007, likewise below its normal range.

Perhaps it is time to start watching these figures more closely.

msf,

Will this support VMSXX?

https://www.cnbc.com/2020/03/20/the-federal-reserve-is-expanding-its-asset-purchases-to-include-municipal-bonds.html

Mona

Derf

@Mona; Nice catch ! +1
Derf

VintageFreak

I asked this question before. I've moved half my assets from "prime" into "treasury" MM funds. I would have moved all, but honestly I'm not even sure what's safe anymore. Everything is going to the dogs.

msf

Mona said:

https://www.cnbc.com/2020/03/20/the-federal-reserve-is-expanding-its-asset-purchases-to-include-municipal-bonds.html

Good find. Here's the Fed's PR piece and the actual term sheet.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200320b.htm
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200320b1.pdf

CNBC: "However, continued disruption in the markets for state and local government debt promoted the Fed to take further action in its efforts to combat coronavirus effects."

CNBC is saying that the reason for not having done this initially was door number 2 - that the government didn't think the muni market was sufficiently unstable. I'm not convinced, and think that doors one (poor communication) and three (reluctance to touch non-federal securities) are still possible explanations. Doesn't matter now, though.

A key difference between the way muni MMFs and everything else is being handled is that if a loan is made to anything else, the loan rate is set at prime plus 1%. For the muni MMFs, it's just prime plus 0.25%.