The latest edition of Overview, Strategy, and Outlook, the monthly Portfolio Manager Commentary that includes the latest updates and views from Wells Fargo Asset Management’s money market investment team, led by Jeff Weaver, is now available.

Money market overview

If the end of the first quarter of 2020 felt like deja vu all over again, the second quarter positively felt like a renaissance. As we watched the tremendous risk-off trades and liquidity raising taking place in March, we couldn’t help but flash back to 2016 and the implementation of money market reform, which saw institutional prime funds shrink by over 86%, bottoming out that year at just north of $119 billion.

While that was clearly a regulatory-driven event, the pandemic-related selling we saw in the prime funds was prompted by a confluence of a few different factors: investors raising cash to meet liquidity needs, shareholders conducting precautionary cash raises in case fees and/or gates were implemented, falling net asset values (NAVs) in institutional floating NAV (FNAV) funds due to market dislocations, and a general flight to perceived safety in the face of the uncertain effects of the coronavirus on the economy.

Some funds were hit harder than others—institutional versus retail—as were different fund families. But by and large, with only one exception, funds were able to manage their liquidity in excess of the 30% regulatory requirement, and all funds avoided implementing fees and gates. The Federal Reserve (Fed) played a vital role in ensuring this outcome and helping calm the financial markets with the implementation of its Money Market Mutual Fund Liquidity Facility (MMLF), which went operational on March 23, and outflows from prime funds ceased by the end of March. At the end of the day, so to speak, prime funds ended down over 15% on the month, with institutional prime funds down almost 19%.

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