Principal stability, one of the main objectives of money market funds, is easily identifiable through the Net Asset Value prints or NAVs.  Both Institutional Treasury and Agency Funds and Retail Funds continue to hold Stable NAVs, while Institutional Prime and Municipal Funds NAVs float around 1 dollar, rounded to the 4^th decimal place.

Since the inception of Floating NAVs or FNAVs, movements have generally been incremental and slow; if Overtime, we’ve seen the FNAVs of institutional prime funds deviate a few bps on either side of a dollar, but we ultimately view the natural state of Institutional Prime funds FNAV’s to reside +/- 1 bp on either side of 1 dollar given the short duration profile and general low price volatility of the underlying assets.

Over the last few months, due to increased market volatility related to COVID-19 and Fed related moves, the industry has seen peak to trough movements exceeding almost 30bps in some funds.  At the height of the volatility, the industry saw FNAVs in the low .9980’s, or about 20bps below the natural state of a dollar NAV.  With Prime FNAVs elevated leading into the shutdown, in some cases above 1.0010, the actual decline was larger.  It’s important to note that not all funds printed FNAVs in the 80’s, and not only did industry FNAVs quickly return to their natural state, but they have since rallied back above 1.0010 or 10 bps above a dollar, in some instances.

So, if historically FNAV movements have been incremental and slow, what drove this volatility?

During March, the Fed reduced rates 150bps to the lower bound of 0-25bps in response to the COVID-19 outbreak.  At the same time, redemptions were occurring in the prime money market space.  Remember-this was a liquidity driven event and was unrelated to specific credit concerns.  Institutions wanted to ensure they had enough cash to weather the shutdown.  With this in mind, and with a focus on liquidity, prime money markets were not adding to term positions.  However, because certain institutions still required term funding, term money market levels increased.  As yields widened relative to that of like securities held in money market portfolios, FNAVs began to fall, reaching their nadir around mid-March.

The Fed soon intervened with multiple facilities as a means to inject liquidity into the market.  One program, the money market mutual fund liquidity facility or MMLF, had the largest impact on the prime money market space.  This facility allowed banks or dealers to purchase U.S. Issued CP and CDs of highly rated issuers, and Tsys and GSE securities from 2a-7 funds, which they could then pledge as collateral to the fed for a non-recourse loan, or one that does not have any balance sheet implications.

Once the fed intervened, liquidity quickly returned to the market, assets began to flow back into the prime money market space, and prime money markets funds began to once again buy term securities out the curve.  The effect on the portfolio FNAVs was twofold.  As demand increased, yields decreased, which helped raise the funds FNAVs from their lows.  Ultimately, as yields narrowed relative to like securities held in portfolios, the pricing of those positions increased, and helped to raise the FNAV of the fund.   Additionally, as funds added term securities and yields continued to decline, those newly added positions were then quickly priced higher, resulting in an immediate upward impact on the FNAV of the underlying fund.

In the end, general market volatility did lead to some short-term relative volatility in the FNAVs of prime money market funds.  However, FNAVs quickly returned to pre-shutdown levels.  Overtime, as higher legacy positions roll off of portfolios and are reinvested closer to market levels, we anticipate Fund FNAVs to return to their natural state of a bp on either side of a dollar, thus continuing to realize one of their main objectives of principal stability.

Principal stability, one of the main objectives of money market funds, is easily identifiable through the Net Asset Value prints or NAVs.  Both Institutional Treasury and Agency Funds and Retail Funds continue to hold Stable NAVs, while Institutional Prime and Municipal Funds NAVs float around 1 dollar, rounded to the 4^th decimal place.

Since the inception of Floating NAVs or FNAVs, movements have generally been incremental and slow; if Overtime, we’ve seen the FNAVs of institutional prime funds deviate a few bps on either side of a dollar, but we ultimately view the natural state of Institutional Prime funds FNAV’s to reside +/- 1 bp on either side of 1 dollar given the short duration profile and general low price volatility of the underlying assets.

Over the last few months, due to increased market volatility related to COVID-19 and Fed related moves, the industry has seen peak to trough movements exceeding almost 30bps in some funds.  At the height of the volatility, the industry saw FNAVs in the low .9980’s, or about 20bps below the natural state of a dollar NAV.  With Prime FNAVs elevated leading into the shutdown, in some cases above 1.0010, the actual decline was larger.  It’s important to note that not all funds printed FNAVs in the 80’s, and not only did industry FNAVs quickly return to their natural state, but they have since rallied back above 1.0010 or 10 bps above a dollar, in some instances.

So, if historically FNAV movements have been incremental and slow, what drove this volatility?

During March, the Fed reduced rates 150bps to the lower bound of 0-25bps in response to the COVID-19 outbreak.  At the same time, redemptions were occurring in the prime money market space.  Remember-this was a liquidity driven event and was unrelated to specific credit concerns.  Institutions wanted to ensure they had enough cash to weather the shutdown.  With this in mind, and with a focus on liquidity, prime money markets were not adding to term positions.  However, because certain institutions still required term funding, term money market levels increased.  As yields widened relative to that of like securities held in money market portfolios, FNAVs began to fall, reaching their nadir around mid-March.

The Fed soon intervened with multiple facilities as a means to inject liquidity into the market.  One program, the money market mutual fund liquidity facility or MMLF, had the largest impact on the prime money market space.  This facility allowed banks or dealers to purchase U.S. Issued CP and CDs of highly rated issuers, and Tsys and GSE securities from 2a-7 funds, which they could then pledge as collateral to the fed for a non-recourse loan, or one that does not have any balance sheet implications.

Once the fed intervened, liquidity quickly returned to the market, assets began to flow back into the prime money market space, and prime money markets funds began to once again buy term securities out the curve.  The effect on the portfolio FNAVs was twofold.  As demand increased, yields decreased, which helped raise the funds FNAVs from their lows.  Ultimately, as yields narrowed relative to like securities held in portfolios, the pricing of those positions increased, and helped to raise the FNAV of the fund.   Additionally, as funds added term securities and yields continued to decline, those newly added positions were then quickly priced higher, resulting in an immediate upward impact on the FNAV of the underlying fund.

In the end, general market volatility did lead to some short-term relative volatility in the FNAVs of prime money market funds.  However, FNAVs quickly returned to pre-shutdown levels.  Overtime, as higher legacy positions roll off of portfolios and are reinvested closer to market levels, we anticipate Fund FNAVs to return to their natural state of a bp on either side of a dollar, thus continuing to realize one of their main objectives of principal stability.

Principal stability, one of the main objectives of money market funds, is easily identifiable through the Net Asset Value prints or NAVs.  Both Institutional Treasury and Agency Funds and Retail Funds continue to hold Stable NAVs, while Institutional Prime and Municipal Funds NAVs float around 1 dollar, rounded to the 4^th decimal place.

Since the inception of Floating NAVs or FNAVs, movements have generally been incremental and slow; if Overtime, we’ve seen the FNAVs of institutional prime funds deviate a few bps on either side of a dollar, but we ultimately view the natural state of Institutional Prime funds FNAV’s to reside +/- 1 bp on either side of 1 dollar given the short duration profile and general low price volatility of the underlying assets.

Over the last few months, due to increased market volatility related to COVID-19 and Fed related moves, the industry has seen peak to trough movements exceeding almost 30bps in some funds.  At the height of the volatility, the industry saw FNAVs in the low .9980’s, or about 20bps below the natural state of a dollar NAV.  With Prime FNAVs elevated leading into the shutdown, in some cases above 1.0010, the actual decline was larger.  It’s important to note that not all funds printed FNAVs in the 80’s, and not only did industry FNAVs quickly return to their natural state, but they have since rallied back above 1.0010 or 10 bps above a dollar, in some instances.

So, if historically FNAV movements have been incremental and slow, what drove this volatility?

During March, the Fed reduced rates 150bps to the lower bound of 0-25bps in response to the COVID-19 outbreak.  At the same time, redemptions were occurring in the prime money market space.  Remember-this was a liquidity driven event and was unrelated to specific credit concerns.  Institutions wanted to ensure they had enough cash to weather the shutdown.  With this in mind, and with a focus on liquidity, prime money markets were not adding to term positions.  However, because certain institutions still required term funding, term money market levels increased.  As yields widened relative to that of like securities held in money market portfolios, FNAVs began to fall, reaching their nadir around mid-March.

The Fed soon intervened with multiple facilities as a means to inject liquidity into the market.  One program, the money market mutual fund liquidity facility or MMLF, had the largest impact on the prime money market space.  This facility allowed banks or dealers to purchase U.S. Issued CP and CDs of highly rated issuers, and Tsys and GSE securities from 2a-7 funds, which they could then pledge as collateral to the fed for a non-recourse loan, or one that does not have any balance sheet implications.

Once the fed intervened, liquidity quickly returned to the market, assets began to flow back into the prime money market space, and prime money markets funds began to once again buy term securities out the curve.  The effect on the portfolio FNAVs was twofold.  As demand increased, yields decreased, which helped raise the funds FNAVs from their lows.  Ultimately, as yields narrowed relative to like securities held in portfolios, the pricing of those positions increased, and helped to raise the FNAV of the fund.   Additionally, as funds added term securities and yields continued to decline, those newly added positions were then quickly priced higher, resulting in an immediate upward impact on the FNAV of the underlying fund.

In the end, general market volatility did lead to some short-term relative volatility in the FNAVs of prime money market funds.  However, FNAVs quickly returned to pre-shutdown levels.  Overtime, as higher legacy positions roll off of portfolios and are reinvested closer to market levels, we anticipate Fund FNAVs to return to their natural state of a bp on either side of a dollar, thus continuing to realize one of their main objectives of principal stability.

Principal stability, one of the main objectives of money market funds, is easily identifiable through the Net Asset Value prints or NAVs.  Both Institutional Treasury and Agency Funds and Retail Funds continue to hold Stable NAVs, while Institutional Prime and Municipal Funds NAVs float around 1 dollar, rounded to the 4^th decimal place.

Since the inception of Floating NAVs or FNAVs, movements have generally been incremental and slow; if Overtime, we’ve seen the FNAVs of institutional prime funds deviate a few bps on either side of a dollar, but we ultimately view the natural state of Institutional Prime funds FNAV’s to reside +/- 1 bp on either side of 1 dollar given the short duration profile and general low price volatility of the underlying assets.

Over the last few months, due to increased market volatility related to COVID-19 and Fed related moves, the industry has seen peak to trough movements exceeding almost 30bps in some funds.  At the height of the volatility, the industry saw FNAVs in the low .9980’s, or about 20bps below the natural state of a dollar NAV.  With Prime FNAVs elevated leading into the shutdown, in some cases above 1.0010, the actual decline was larger.  It’s important to note that not all funds printed FNAVs in the 80’s, and not only did industry FNAVs quickly return to their natural state, but they have since rallied back above 1.0010 or 10 bps above a dollar, in some instances.

So, if historically FNAV movements have been incremental and slow, what drove this volatility?

During March, the Fed reduced rates 150bps to the lower bound of 0-25bps in response to the COVID-19 outbreak.  At the same time, redemptions were occurring in the prime money market space.  Remember-this was a liquidity driven event and was unrelated to specific credit concerns.  Institutions wanted to ensure they had enough cash to weather the shutdown.  With this in mind, and with a focus on liquidity, prime money markets were not adding to term positions.  However, because certain institutions still required term funding, term money market levels increased.  As yields widened relative to that of like securities held in money market portfolios, FNAVs began to fall, reaching their nadir around mid-March.

The Fed soon intervened with multiple facilities as a means to inject liquidity into the market.  One program, the money market mutual fund liquidity facility or MMLF, had the largest impact on the prime money market space.  This facility allowed banks or dealers to purchase U.S. Issued CP and CDs of highly rated issuers, and Tsys and GSE securities from 2a-7 funds, which they could then pledge as collateral to the fed for a non-recourse loan, or one that does not have any balance sheet implications.

Once the fed intervened, liquidity quickly returned to the market, assets began to flow back into the prime money market space, and prime money markets funds began to once again buy term securities out the curve.  The effect on the portfolio FNAVs was twofold.  As demand increased, yields decreased, which helped raise the funds FNAVs from their lows.  Ultimately, as yields narrowed relative to like securities held in portfolios, the pricing of those positions increased, and helped to raise the FNAV of the fund.   Additionally, as funds added term securities and yields continued to decline, those newly added positions were then quickly priced higher, resulting in an immediate upward impact on the FNAV of the underlying fund.

In the end, general market volatility did lead to some short-term relative volatility in the FNAVs of prime money market funds.  However, FNAVs quickly returned to pre-shutdown levels.  Overtime, as higher legacy positions roll off of portfolios and are reinvested closer to market levels, we anticipate Fund FNAVs to return to their natural state of a bp on either side of a dollar, thus continuing to realize one of their main objectives of principal stability.

Principal stability, one of the main objectives of money market funds, is easily identifiable through the Net Asset Value prints or NAVs.  Both Institutional Treasury and Agency Funds and Retail Funds continue to hold Stable NAVs, while Institutional Prime and Municipal Funds NAVs float around 1 dollar, rounded to the 4^th decimal place.

Since the inception of Floating NAVs or FNAVs, movements have generally been incremental and slow; if Overtime, we’ve seen the FNAVs of institutional prime funds deviate a few bps on either side of a dollar, but we ultimately view the natural state of Institutional Prime funds FNAV’s to reside +/- 1 bp on either side of 1 dollar given the short duration profile and general low price volatility of the underlying assets.

Over the last few months, due to increased market volatility related to COVID-19 and Fed related moves, the industry has seen peak to trough movements exceeding almost 30bps in some funds.  At the height of the volatility, the industry saw FNAVs in the low .9980’s, or about 20bps below the natural state of a dollar NAV.  With Prime FNAVs elevated leading into the shutdown, in some cases above 1.0010, the actual decline was larger.  It’s important to note that not all funds printed FNAVs in the 80’s, and not only did industry FNAVs quickly return to their natural state, but they have since rallied back above 1.0010 or 10 bps above a dollar, in some instances.

So, if historically FNAV movements have been incremental and slow, what drove this volatility?

During March, the Fed reduced rates 150bps to the lower bound of 0-25bps in response to the COVID-19 outbreak.  At the same time, redemptions were occurring in the prime money market space.  Remember-this was a liquidity driven event and was unrelated to specific credit concerns.  Institutions wanted to ensure they had enough cash to weather the shutdown.  With this in mind, and with a focus on liquidity, prime money markets were not adding to term positions.  However, because certain institutions still required term funding, term money market levels increased.  As yields widened relative to that of like securities held in money market portfolios, FNAVs began to fall, reaching their nadir around mid-March.

The Fed soon intervened with multiple facilities as a means to inject liquidity into the market.  One program, the money market mutual fund liquidity facility or MMLF, had the largest impact on the prime money market space.  This facility allowed banks or dealers to purchase U.S. Issued CP and CDs of highly rated issuers, and Tsys and GSE securities from 2a-7 funds, which they could then pledge as collateral to the fed for a non-recourse loan, or one that does not have any balance sheet implications.

Once the fed intervened, liquidity quickly returned to the market, assets began to flow back into the prime money market space, and prime money markets funds began to once again buy term securities out the curve.  The effect on the portfolio FNAVs was twofold.  As demand increased, yields decreased, which helped raise the funds FNAVs from their lows.  Ultimately, as yields narrowed relative to like securities held in portfolios, the pricing of those positions increased, and helped to raise the FNAV of the fund.   Additionally, as funds added term securities and yields continued to decline, those newly added positions were then quickly priced higher, resulting in an immediate upward impact on the FNAV of the underlying fund.

In the end, general market volatility did lead to some short-term relative volatility in the FNAVs of prime money market funds.  However, FNAVs quickly returned to pre-shutdown levels.  Overtime, as higher legacy positions roll off of portfolios and are reinvested closer to market levels, we anticipate Fund FNAVs to return to their natural state of a bp on either side of a dollar, thus continuing to realize one of their main objectives of principal stability.