For the second week in a row, tax-free money market funds showed signs of slow but steady recovery, demonstrated by the arrival of $6.12 billion in new cash, which caused assets to inch up to $490.86 billion for the week ending Oct. 13, according to the Money Fund Report, a service of iMoneyNet.com.
The continued rebound came on the heels of $4.90 billion of inflows last week, which brought total assets to $484.74 billion after the market was buoyed by the Federal Reserve Board joining central banks around the world to lower interest rates last Wednesday. It marked the first time the tax-exempt money funds had seen positive inflows in nearly a month as a result of the nation's ongoing fiscal turmoil.
The prior week, tax-free funds lost $6.59 billion and ended the week of Sept. 29 with $479.84 billion amid tensions over the anticipated passage of the $700 million federal bailout package by the House and overall market uncertainty.
The short-term market saw the institutional pricing of a $5 billion California revenue anticipation note deal yesterday following a two-day retail order period during which retail investors devoured a large chunk of the deal.
The $1.2 billion of notes due on May 20, 2009, were priced to yield 3.75%, while the $3.8 billion of notes due on June 22, 2009, were priced to yield 4.25%. Both carried 51/2% coupons.
Meanwhile, a short-term trader in New York said although money funds received cash over the last week, they are putting it to work mostly on daily variable-rate demand notes with seven- to 30-day resets in an effort to remain as short and defensive as possible until they see a solid turnaround of the current landscape.
Inflows into the larger universe of taxable funds were more pronounced, as the 1,285 funds in the report gained $52.27 billion to end the week of Oct. 14 with $2.955 trillion. That compares with inflows of $44.49 billion the prior week, which brought total assets to $2.90 trillion.
Overall, both tax-exempt and taxable money funds were buoyed by some renewed investor confidence over the last couple of weeks, and that led to combined inflows of $58.38 billion for the 1,818 funds in the report and accounted for $3.45 trillion in total assets for the week ending Oct. 14. Last week, by comparison, all money funds saw inflows of $49.39 billion and $3.38 trillion in total assets.
However, there is still room for much more improvement, according to one manager of a short-term trading desk in New York.
"Overall, the daily market has a much firmer tone, and weeklies may be starting" to get firmer, he said yesterday. "There are some inflows into the money funds, and the stock market is not agreeing with us now, hopefully the inflows will continue."
The Securities Industry and Financial Markets Association's weekly swap index, which tracks seven-day tax-exempt variable-rate demand obligations, was at 4.82% last Wednesday compared with 5.74% on Oct. 1. The index has made a noticeable retraction from its recent highs of 7.96% back on Sept. 24.
In addition, daily and weekly floater rates also continued to decline over the last week as money market funds continue to devour daily floaters to stay as short and safe as possible.
The yields on daily VRDOs dropped to 2.04%, down from 2.46% last Thursday, and 3.69% the prior week, while the yields on weekly VRDOs fell to 3.89% from 5.07% last Thursday, and 6.01% the week before, according to Municipal Market Data.
During the height of the market turmoil in recent weeks, daily rates for VRDOs had jumped to as high as 9.20% on Sept. 22, while weekly VRDOs hovered at 8.10% on Sept. 23, according to MMD.
While rates on general market dailies and weeklies are falling, the California variable-rate note market rose to 2.12% yesterday from 1.87% previously due to the presence of the $4 billion state of California Ran deal, which clogged the short-term market with an enormous amount of supply, the short-term trader added.
Meanwhile, the ratio of 30-day tax-exempt commercial paper to taxable commercial paper declined slightly to 61.7% as of Wednesday, according to MMD, compared with 75.9% last Thursday, but remains attractive, participants said.
The yields on money market funds overall are also moving back toward a more typical range after being plagued by massive outflows for most of September as investors embarked on a massive flight to quality in the Treasury market.
This week, tax-exempt funds remain attractive compared to taxable funds as the yield on the 533 tax-free and municipal funds in the report dropped to 3.36% from 4.33% last week. However, taxable money market funds remained at 1.47% for the second week in a row. The average maturity of the tax-free funds remained at 32 days, while the average maturity of the taxable funds decreased to 40 days from 41 days.
